No Sign of Decay in Competitive Edge at Colgate
Fourth-quarter performance at the wide-moat firm wasn't as dire as the share response would suggest.
Despite the mid-single-digit erosion in the share price following Colgate's (CL) fourth-quarter results (which included a 2% uptick in underlying sales and a 190-basis-point degradation in adjusted operating margins to 26%), we neither believe performance was as dire as the share response would suggest, nor do results portend its competitive edge is showing signs of decay. For one, we view the sequential improvement (up from 1.5% in the third quarter) in organic sales as a positive, particularly in light of the intense competitive dynamics plaguing consumer product firms around the globe. Further, we attribute the downdraft in operating margin partly to the decision to boost ad spend by around 24% (9.5% of sales, up from 8% last year), which we believe stands to support the firm’s leading brand mix and its value-added innovation. In our view, the success of these efforts is evidenced in that it held and even gained share in several of the markets in which it plays, including Brazil (73% share) and Mexico (83%).
In response to sluggish category prospects, though, management trimmed its long-term sales target to 3%-5% growth annually, versus its previous 4%-7% outlook. As such, we will likely reduce our long-term sales outlook, which currently calls for 5% top-line growth each year, a touch. We do posit that additional cash generated since our last update--as well as a slightly lower tax rate than we modeled to reflect recently enacted corporate tax reform in the U.S.--are likely to offset the impact, leaving our $77 fair value estimate largely unchanged. Overall, we continue to believe Colgate is focused on growing the business for the long term, and that the combination of its leading brands and entrenched relationships with retailers and professionals (dentists, veterinarians, and dermatologists) should ensure it boasts economic profits for the next 20 years. At a slightly larger discount, long-term investors would be wise to stock up on this wide-moat name.
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Erin Lash does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.