Consumer products company Colgate-Palmolive (NYSE:CL) reported Q3 FY2023 results exceeding Wall Street analysts' expectations, with revenue up 10.3% year on year to $4.9 billion. Turning to EPS, Colgate-Palmolive made a non-GAAP profit of $0.86 per share, improving from its profit of $0.74 per share in the same quarter last year.
Colgate-Palmolive (CL) Q3 FY2023 Highlights:
- Revenue: $4.9 billion vs analyst estimates of $4.8 billion (2.1% beat)
- EPS (non-GAAP): $0.86 vs analyst estimates of $0.80 (7.3% beat)
- Free Cash Flow of $991 million, up 84.2% from the previous quarter
- Gross Margin (GAAP): 58.6%, up from 57.2% in the same quarter last year
- Organic Revenue was up 9% year on year
- Sales Volumes were down 0.5% year on year
Formed after the 1928 combination between toothpaste maker Colgate and soap maker Palmolive-Peet, Colgate-Palmolive (NYSE:CL) is a consumer products company that focuses on personal, household, and pet products.
Following the merger, Colgate-Palmolive engaged in further acquisitions and divestitures to build out and optimize its brand portfolio. In addition to the namesake brands, the company also goes to market with Irish Spring (soap), Softsoap (soap), Speed Stick (deodorant), Ajax (household cleaner), and Hill’s (pet food) among other brands.
Colgate-Palmolve primarily targets middle-income shoppers. These consumers are looking for trusted brands since the products will be used on themselves, their family members, and in their own homes. They also want cost-effective products, although many are willing to pay a reasonable premium to buy established brands rather than lesser-known or private-label brands.
It’s not hard to find (or smell your way to) Colgate-Palmolive’s products in stores. Places such as grocery stores, mass retailers, drug stores, and specialty stores are the most common sellers of the company’s products. Given Colgate-Palmolive’s scale and traffic-driving brands, the company often enjoys prominent placement on retailers' shelves.
Household products companies engage in the manufacturing, distribution, and sale of goods that maintain and enhance the home environment. This includes cleaning supplies, home improvement tools, kitchenware, small appliances, and home decor items. Companies within this sector must focus on product quality, innovation, and cost efficiency to remain competitive. Household products stocks are generally stable investments, as many of the industry's products are essential for a comfortable and functional living space. Recently, there's been a growing emphasis on eco-friendly and sustainable offerings, reflecting the evolving consumer preferences for environmentally conscious options.Competitors that offer a wide range of household and personal care products include Proctor & Gamble (NYSE:PG), Unilever (LSE:ULVR), and Church & Dwight (NYSE:CHD).
Colgate-Palmolive is one of the most widely recognized consumer staples companies in the world. Its influence over consumers gives it extremely high negotiating leverage with distributors, enabling it to pick and choose where it sells its products (a luxury many don't have).
As you can see below, the company's annualized revenue growth rate of 5.8% over the last three years was mediocre as consumers bought less of its products. We'll explore what this means in the "Volume Growth" section.
This quarter, Colgate-Palmolive reported robust year-on-year revenue growth of 10.3%, and its $4.9 billion in revenue exceeded Wall Street's estimates by 2.1%. Looking ahead, analysts expect sales to grow 2.5% over the next 12 months.
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
To analyze whether Colgate-Palmolive generated its growth from changes in price or volume, we can compare its volume growth to its organic revenue growth, which excludes non-fundamental impacts on company financials like mergers and currency fluctuations.
Over the last two years, Colgate-Palmolive's average quarterly sales volumes have shrunk by 1.9%. This decrease isn't ideal as the quantity demanded for consumer staples products is typically stable. Luckily, Colgate-Palmolive was able to offset fewer customers purchasing its products by charging higher prices, enabling it to generate 7.5% average organic revenue growth. We hope the company can grow its volumes soon, however, as consistent price increases (on top of inflation) aren't sustainable over the long term.
In Colgate-Palmolive's Q3 2023, year on year sales volumes were flat. This result was a well-appreciated turnaround from the 4.5% year-on-year decline it posted 12 months ago, showing the company is heading in the right direction.
Gross Margin & Pricing Power
All else equal, we prefer higher gross margins. They make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.
This quarter, Colgate-Palmolive's gross profit margin was 58.6%. up 1.4 percentage points year on year. That means for every $1 in revenue, $0.41 went towards paying for raw materials, production of goods, and distribution expenses.
Colgate-Palmolive has best-in-class unit economics for a consumer staples company, enabling it to invest in areas such as marketing and talent to stay one step ahead of the competition. As you can see above, it's averaged an exceptional 57.4% gross margin over the last two years. Its margin has also been consistent over the last year, suggesting it has stable input costs (such as raw materials).
Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.
In Q3, Colgate-Palmolive generated an operating profit margin of 20.7%, in line with the same quarter last year. This indicates the company's costs have been relatively stable.Zooming out, Colgate-Palmolive has been a well-managed company over the last two years. It's demonstrated elite profitability for a consumer staples business, boasting an average operating margin of 20%. On top of that, its margin has remained more or less the same, highlighting the consistency of its business.
These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.
In Q3, Colgate-Palmolive reported EPS at $0.86, up from $0.74 in the same quarter a year ago. This print beat Wall Street's estimates by 7.3%.
Between FY2020 and FY2023, Colgate-Palmolive's adjusted diluted EPS grew 3.9%, translating into an unimpressive 1.3% average annual growth rate.
On the bright side, Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 6.7% year-on-year increase in EPS.
Cash Is King
If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.
Colgate-Palmolive's free cash flow came in at $991 million in Q3, up 24.8% year on year. This result represents a 20.2% margin.
Over the last eight quarters, Colgate-Palmolive has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining a robust cash balance. The company's free cash flow margin has been among the best in the consumer staples sector, averaging 13.2%. Furthermore, its margin has been flat, showing that the company's cash flows are relatively stable.
Return on Invested Capital (ROIC)
Colgate-Palmolive has a strong competitive position and its management team has a stellar track record of successfully investing in profitable growth initiatives. Its five-year average return on invested capital (ROIC) is 42.1%, placing it among the best consumer staples companies.
We like to track a company's long-term ROIC in addition to its recent results because it gives a big-picture view of a business's past performance. It also sheds light on its management team's decision-making prowess and is a helpful tool for benchmarking against peers.
Key Takeaways from Colgate-Palmolive's Q3 Results
With a market capitalization of $62.1 billion, a $1.2 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Colgate-Palmolive has the resources needed to pursue a high-growth business strategy.
It was good to see Colgate-Palmolive beat analysts' revenue expectations this quarter. That stood out as a positive in these results. On the other hand, its EPS missed analysts' expectations and its operating margin missed Wall Street's estimates. Overall, this was a mixed quarter for Colgate-Palmolive. The stock is flat after reporting and currently trades at $75.93 per share.
Is Now The Time?
When considering an investment in Colgate-Palmolive, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
We think Colgate-Palmolive is a solid business. First off, its revenue growth has been decent over the last three years. And while its mediocre sales volumes have been a headwind, its impressive operating margins show it has a highly efficient business model. On top of that, its stellar ROIC suggests it has been a well-run company historically.
Colgate-Palmolive's price-to-earnings ratio based on the next 12 months is 22.6x. There are definitely things to like about Colgate-Palmolive, and looking at the consumer staples landscape right now, it seems to be trading at a pretty interesting price.
Wall Street analysts covering the company had a one-year price target of $81.7 per share right before these results, implying that they saw upside in buying Colgate-Palmolive even in the short term.
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