Colgate-Palmolive Stock: No Smiles Yet (NYSE:CL)

Colgate-Palmolive To Cut Staff By 12 Percent

Justin Sullivan

In this environment, one of increased uncertainty on the global economy, investors are looking for inflation protection hedges amidst higher interest rates. In such an environment, it is interesting to look at consumer staples to see how they fare. One of such names is Colgate-Palmolive (NYSE:NYSE:CL) as my former take on the company dates back to the summer of 2019, at a time when the company acquired some French skincare business to drive growth.

A Look Back

When Colgate spent $1.7 billion in order to acquire skin care company Laboratories Filorga Cosmetiques in the summer of 2019, I was somewhat surprised to see the company making such a deal, yet this is also part of personal care, adding exposure to Asia as well. Despite this strategic rationale, the deal appeared to take place at a premium price, although no revenue contribution was announced at the time.

Pegging the revenue contribution around $150 million, the deal would add less than one percent to sales, hardly making a dent given the size of the operations. This came after the company itself posted $15.5 billion in revenues at the time (2018 results) on which earnings of $2.4 billion, or $2.75 per share were reported.

I pegged pro forma net debt at around $7.5 billion yet with EBITDA trending at $4.2 billion, leverage was very manageable at 1.8 times, as a realistic roadmap for $3 in earnings per share existed. With 863 million shares trading at $74, the valuation looked steep at around 25 times earnings, as the bolt-on deal came at a steep price. That said, Colgate was and is a truly global player which is well positioned to benefit from long term demographic trends. Still holding a small position at the time, I was not convinced to re-add more again, as the 4% earnings yield was moving towards the lower end of my limit, even as Colgate has been a solid performer.

Stagnation – At Least The Shares

Since voicing a long term positive, and tactical cautious tone on Colgate in the summer of 2019, shares have been largely trading range bound in a relative tight range between $70 and $80 per share, with exception to small trading action outside these ranges. Right now shares have fallen to the lower end of the range, likely in a response to an environment in which interest rates have moved higher.

Despite the stagnation in the share price, Colgate has seen solid organic growth in the meantime. The company grew 2020 sales to $16.5 billion and 2021 sales to $17.4 billion. Adjusted earnings came in at $3.06 per share and $3.21 per share for the years 2020 and 2021, respectively. This came as the share count has gradually been reduced to 848 million shares, down nearly 2 percentage points from 2019. In the meantime, net debt is down to $6.4 billion, very comforting with EBITDA posted around $4.4 billion, translating into modest leverage ratios.

The company issued a guidance which called for very modest sales and earnings growth in 2022. On the back of this strong positioning, Colgate hiked the quarterly dividend payout to $0.47 per share, a two penny increase from the year before as it renewed and extended its share buyback program.

2022 has proven to be a tough year so far with first quarter sales up 1.5% on a reported basis to $4.4 billion. Organic sales were up 4% with the strong dollar hurting reported sales growth. Inflationary pressures hurt the business quite a bit, with adjusted earnings per share down 6 cents to $0.74 per share.

Similar trends are seen for the year, with organic sales growth seen between 4 and 6%, with adjusted earnings per share seen down mid single digits. Similar trends were seen in the second quarter. This time sales were up 5.5% to $4.5 billion, as adjusted earnings were down 8 cents to $0.72 per share, as net debt inched up to $7.0 billion. Even if earnings are down a bit, and EBITDA moves towards the $4.0 billion mark, leverage remains very much under control.

To ignite some further growth, Colgate announced the purchase of three dry pet food manufacturing plants in the US in a $700 million deal to grow its Hill’s Pet nutrition business, albeit that limited impact of the transaction will be seen to the earnings. That said, this is an interesting deal as Colgate needs to grow non-dental related growth drivers, including pet food.

What Now?

With earnings trending around $3 per share, now actually stuck around this level for a few years after current difficulties, and some risks being seen to that number, valuation are still demanding at around 23-24 times earnings. This makes that the earnings yield just surpasses 4%, which is still demanding given where interest rates have moved. On the other hand, Colgate has seen solid growth and appears to be a decent inflation hedge, with leverage being very manageable, and long term growth (on a per share basis) clearly being visible.

That said shares have been flattish for the better part of a decade already as very steep valuations have come down a bit already. It must be said that the earnings yield remains quite low on a relative basis to near term interest rates yield which can be achieved, yet current lower margins offer potential as well (if they can rebound) to historical levels. While I am happy to still hold a small position, I do not feel comfortable yet to add to this modest position.

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