Right Mix Of Developed And Emerging Markets Helps Colgate Post Solid Growth
Colgate-Palmolive ( CL )posted promising results in Q3 2013, despite facing emerging market headwinds. Organic sales (net sales excluding foreign exchange, acquisitions and divestments) grew 6.0% y-o-y as volumes and prices increased by 5% and 1%, respectively. The oral care giant managed to grow net sales to $4.4 billion, up by 1.5% y-o-y, as foreign exchange losses offset the impact of organic sales growth by 4.5%.
Colgate's key emerging markets including India, Brazil and South Africa have been suffering from currency weaknesses. Rapid currency depreciation in these markets has created inflationary pressures on buyers, thereby reducing demand. In addition, the unfavorable exchange rates have adversely impacted revenues of companies that have high exposure to emerging markets.
Last week, Colgate's close rival Unilever ( UL ) also released its third quarter results. The company saw underlying sales (sales from continuing operations excluding acquisitions, disposals and currency movements) growth fall to 3.2% y-o-y from 5% in the first half of the year, mainly due to sluggish growth in the emerging markets. Currency headwinds in these markets also took a toll on revenue. Unilever's Q3 2013 revenue declined 6.5% y-o-y due to unfavorable exchange rates. Although its performance in the developed markets improved, underlying sales growth in these markets was still negative.
In the past several quarters, balancing the business mix between developed and emerging markets has helped Colgate achieve above market growth and experience only a moderate impact on net sales from currency devaluations. Moreover, gross margin improvement has allowed it to increase advertising support behind its products while also increasing the operating profit. With innovations, new product launches, savings and heavy marketing activity expected to continue in Q4 2013 and beyond, we believe that Colgate-Palmolive will continue to outperform its peers.
Our current price estimate of $56 for Colgate-Palmolive stands at a discount of about 10% to the market price.
New Product Activity And Cost Savings Will Continue To Pay-Off
Emerging markets contribute about 53% to Colgate's total revenues, the remainder coming from developed economies. Increasing penetration of its products through continuous innovation, new product launches and a robust distribution channel, has allowed Colgate to build a strong foothold in its markets. Despite slower growth in the global economy, the company delivered well in both the emerging, as well as the developed economies.
Colgate's gross margin stood near 60% in Q3 2013. The company has seen expansion in its gross margin through the year owing to its funding-the-growth program. Gross margin improvement, via company-wide initiatives to lower input costs and increase asset utilization, has allowed the company to increase the advertising spend for its products.. This in turn has helped it to protect its market share amid rising competition in some of its important markets including the U.S., India and Mexico.
Colgate launched several new products, backed by innovations and marketing campaigns, across its markets in Q3 2013. It also increased its advertising spend by 6% y-o-y to ~$480 million. The company intends to continue launching new products in Q4 2013 and beyond. Additionally, its savings program is on track, which should allow it to further increase advertising support. We believe that these factors position the company well for above market growth in the future.
Hill's Pet Nutrition Recovery Speeds Up
Net sales at Colgate's pet nutrition division declined 0.5% in 2012 and 1.5% in Q1 2013, mainly due to lower volume sales. The company managed to turnaround the business in Q2 2013 on the back of strong innovation, and effective communication with customers through a widespread marketing campaign. The turnaround occurred a quarter ahead of schedule due to faster execution from the company's retail partners, PETCO and PetSmart.
Colgate continued to focus on Hill's and also reap the benefits of the same in Q3 2013. Its integrated marketing campaign for Science Diet line of products is successfully communicating the benefits of natural ingredients to pet owners. Its distribution strength in Ideal Balance is also building on the back of strong support from the largest pet retailers. Consequently, the management expects mid single-digit organic sales growth in 2013, compared to 1.5% growth in 2012.
With rising awareness about pets' problems, new additions to the Science Diet and the Ideal Balance range of products, and effective communication between Colgate and pet owners, we believe that Hill's will be able to sustain its growth that it picked in Q2 2013.
We are in the process of updating our $56 price estimate for Colgate-Palmolive based on the Q3 2013 earnings results.