Colgate Earnings: An Uncertain Economic Backdrop Not Enough to Derail Prudent Brand Investments

Concerns abound around the financial health of the consumer and ultimately their willingness to pay up for the essential goods that make up Colgate’s CL portfolio. But if third-quarter marks are a guide, we think recent resilience is still holding, with organic sales up 9% in the quarter (on top of 7% growth a year ago). In its largest market, Latin America, where Colgate derives nearly one fourth of its total sales, this was particularly striking, with organic sales up 15%, driven by a 9.5% jump in prices and a 5.5% increase in volumes.

Importantly, we don’t believe Colgate is chasing volumes and market share gains, as adjusted gross and operating margins popped 140 and 30 basis points, respectively, even as advertising spending was up 23% in the quarter. We think this illustrates management isn’t just playing lip service to the need to invest behind its brands to ensure that it stands out in this intensely competitive industry. This aligns with our forecast for Colgate to expend around 13% of sales on research, development, and marketing on average annually the next 10 years. We view this spending as helping keep its brands top of mind with consumers and retail partners, thus supporting the firm’s wide economic moat.

With the close of fiscal 2023 approaching, management edged up its full-year organic sales growth outlook to 7%-8% (from 5%-7% prior), while holding the line on its high-single-digit adjusted EPS forecast. We’ll tweak our current year estimates to align with year-to-date performance, and when combined with the benefit from time value, our $76 fair value estimate should see a low- to mid-single-digit percentage rise. Shares trade a touch below our intrinsic valuation, but for investors looking to build a position in the household and personal care space, we’d point to wide-moat Clorox as offering an attractive opportunity, trading at a nearly a 30% discount to our $162 fair value estimate, while boasting a nearly 4% dividend yield.