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It's tough out there for consumer-products makers. In fact, an industry veteran recently told The Wall Street Journal that it has been about 20 years since promotional activity among competing companies last reached current levels. Even so, the routinely outperforming Colgate-Palmolive (NYSE: CL ) delivered yet another solid performance.
First-quarter sales gained 9.5%, to notch $3.83 billion. Overall product prices were flat versus the year-ago period, even though management discounted North American goods by 3.5%.
Meanwhile, organic sales, which exclude the impact of currency movements and acquisitions and divestitures, gained 6%. That figure bests the first-quarter results posted by peers Procter & Gamble (NYSE: PG ) , Kimberly-Clark (NYSE: KMB ) , Unilever (NYSE: UL ) , and Energizer (NYSE: ENR ) .
Consistent with the previous metrics, product volume jumped 6%. That's particularly impressive growth, given that volume declined only slightly in the year-ago quarter, so it wasn't a particularly easy comparison.
There was also plenty of sparkly white in earnings per share. Stripping out mostly non-cash adjustments related to hyperinflationary events in Venezuela, EPS advanced roughly 20%, to $1.16. For the record, sans such adjustments, earnings fell almost 30%.
As with many of its peers, Colgate-Palmolive ramped up advertising activities, and associated costs rose as a percentage of sales. Nonetheless, thanks to lower input and packaging costs, along with gains in efficiency, operating margin expanded (when excluding the Venezuelan-related items). Combine the margin growth with tighter working capital management and a lower share count, and Colgate-Palmolive's quarter emerges as quite a pretty picture. Plus, we can frame things with free cash flow growth of nearly 6%, to $652 million.
But all was not perfect. Once again, the Hill's pet food segment was something of a, well, dog. Volume decreased 2% and pricing was slightly down. Nonetheless, that improves upon the prior quarter's performance, and lower costs and favorable foreign exchange drove segment operating profit higher by 8%.
Also, investors should not overlook the challenges of the competitive pricing environment, particularly in the U.S. Wal-Mart (NYSE: WMT ) -- whose influence looms large -- is urging suppliers to lower prices in exchange for prime shelf space and inclusion in marketing efforts. Also, retailer Rite Aid (NYSE: RAD ) has reported that more manufacturers are pursuing in-store promotions.
I expect that the core categories in which Colgate-Palmolive competes will prove relatively immune to these headwinds. Its market share in toothpaste and manual toothbrushes continues to grow, while company profitability remains high.
That said, shares trade at a substantial premium to competitors', as measured by price-to-sales and PEG ratios. Over the next several quarters, that premium could erode, especially if Colgate's companywide pricing fails to grow. And that's the primary reason that I like shares in the $70s much more than I do in the $80s.
But let me know in the comments section below -- would you buy Colgate-Palmolive at today's prices?