Wednesday, January 26, 2011

Colgate-Palmolive - Part 1

There should always be an investment thesis behind every investment. An investment thesis is a statement to describe in a few words why you bought the stock.

The investment thesis for Colgate would be something like this:

Colgate-Palmolive is the biggest player in the oral care industry with a dominant market share in toothpaste globally. Colgate enjoys the stable growth of the consumer staples sector but has significant exposure to the growing emerging markets (Latam and Asia). Earnings is likely to grow at double digit for the next 3 to 5 years.

After writing the investment thesis, it is usual practice to put down a few positives, risks, valuation, snapshot of the financials and other relevant details.

First let's look at Colgate's geographical breakdown


As you can see, most of Colgate's profits are coming from outside developed markets (US and Europe). There is a segment called Pet Nutrition, although it's probably exposed to developed markets, it's a growing segment with a respectable 15-20% growth. So just roughly calculating, around 65 to 70% of Colgate's business is actually growing fast, ie double digit growth. From there, we can then think of the overall co. blended growth, which would be roughly 8-10% at the topline or revenue level.

At the operating level, margin is at a high 25%. Colgate is a very well-run firm, it's operating margin or OPM has been expanding for the last 7-8 years. However we cannot assume that this would go on indefinitely, maybe 28% would be a peak. There are a few supporting factors:

(a) Emerging markets has higher margins
(b) There is some success launch in high end toothbrushes
(c) Colgate has come up with toothpaste for sensitive teeth, which is grabbing share in developed markets

So, for 8-10% topline growth, with some margin expansion, Colgate can actually grow its earnings at teens for the next few years. In fact, that is exactly what Colgate had achieve for the last 10 or even 15 years, with even lesser topline growth.

Colgate's tremendous but yet stable growth is demonstrated by its dividend track record. Colgate has increased its dividend for the last 47 years! Needless to say, it's one of those admired Dividend Arisocrat and it's just going to keep growing!

Next post, we look in detail at its dominance in oral care!
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