Colgate Works to Fortify Competitive Edge

Erin Lash: We think investors wanting exposure to the household and personal care realm should look to wide-moat Colgate, which trades at a 15% discount to our $70 fair value estimate and 18 times our fiscal 2019 earnings forecast. Despite concerns surrounding the competitive landscape and its lagging top-line performance, we posit that Colgate is proactively taking steps to ensure its competitive edge proves unwavering.

For one, management is opting to extract more than $500 million in costs from its operations by the end of 2019, which we view as attainable. The firm's efforts to cull costs are already yielding pronounced savings, but we see little to suggest Colgate will artificially boost profits by pulling back brand spend. Rather, we surmise it will direct around 12% of sales (or about $2 billion annually) to research, development, and marketing, in line with its repeated references to the importance of bringing consumer-valued innovation to market (even that which comes with a higher price tag) as a means to ensure the brand equity in the business, as well as its entrenched retail relationships, aren't tainted. From our vantage point, it is these factors that have enabled Colgate's global toothpaste market share to hold around the mid-40s for the better part of the last decade, and we don't expect its share position will be permanently eroded.

Management has also suggested it intends to raise prices to offset these higher costs, a prudent decision from where we sit, as it shows an unwillingness to chase short-term volumes and share to protect its brand-intangible asset long term. Overall, we maintain that 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 (including dentists, veterinarians, and dermatologists) should ensure it boasts economic profits for the next 20 years.