Is Colgate-Palmolive a Buy?

When it comes to consumer staples, Colgate-Palmolive (NYSE: CL  ) is definitely a sector leader. Even so, for a couple quarters now, I've advised investors to remain cautious until shares drifted down into the $70s.

Thanks to general market uncertainty and what I assume to be currency-related concerns, shares of Colgate-Palmolive are now changing hands below $78.

So, is it time to buy? And if so, should you load up the cart, or just nibble?

Brushing up on valuation
First and foremost, let's recall that Colgate-Palmolive trades at a premium valuation versus peers . Now, the company’s performance does indeed warrant extra love from investors. In 2008 and 2009, for example, when consumers were mostly running for the hills, Colgate-Palmolive grew organic volume by 4% and 0.5%, respectively. Major competitors Procter & Gamble (NYSE: PG  ) and Kimberly-Clark (NYSE: KMB  ) didn’t fare as well. Organic volume for Procter & Gamble  was up 5% in 2008 and down 2% in 2009, while for Kimberly-Clark, it was up 1%, down 1% on that basis (P&G's figures are based on company fiscal year).

Nonetheless, the macro outlook these days remains murky at best, and if Colgate-Palmolive should slip up even modestly in coming years, that premium could quickly vanish.

Just how much of a loss are we talking? See the table below, which includes a handful of companies that compete in the personal- and household-care categories.

Company

5-year Average P/E*

Forward P/E**

2011 Estimated EPS Growth**

Forward P/E-to-Growth Premium**

Colgate-Palmolive

22.2

14.6

9.2%

59%

Procter & Gamble

17.9

15.2

(2.7%)

N/A

Kimberly-Clark

16.6

11.6

8.1%

43%

Clorox (NYSE: CLX  )

16.0

13.8

8%

75%

Church & Dwight (NYSE: CHD  )

19.7

14.8

11.6%

28%

Energizer (NYSE: ENR  )

16.1

9.6

8.3%

16%

*Data from Forbes.com.

**Figures based on analyst estimates listed at Yahoo! Finance.

A good -- but perhaps not great -- deal
Clearly, the above comparisons span a wide range, which complicates any straightforward analysis. That said, my first thought is that Colgate-Palmolive and Church & Dwight are the two names best suited to ongoing consumer frugality: the former's products tap the heart of consumer loyalty, while Church & Dwight's portfolio is strong on value. In that light, the price-to-earnings-to-growth divergence is striking, but I believe that has to do with Church & Dwight being undervalued more than it does Colgate-Palmolive being overvalued.

On the other hand, Colgate-Palmolive carries a good deal of currency risk -- the company's three largest category segments derive more than 75% of sales from non-North American markets -- and ongoing macro volatility could be a headwind in the regard (note that Colgate-Palmolive does hedge portions of its currency risk).

Accordingly, one could argue that shares deserve no more than a below-industry average 40% P/E-to-growth premium, which would imply a price on Colgate shares of about $69 -- almost $9 below today's actual trading level.

Ultimately, I believe that cautious, conservative investors would do best to begin building a position below $78 or so, purchasing perhaps one-third of a target allocation. As for those with iron guts and a strictly long-term focus, I see nothing reckless with loading up right here. Odds are good that in three years you'll be flashing your pearly whites.

Energizer Holdings is a Motley Fool Stock Advisor recommendation. Clorox, Kimberly-Clark, and Procter & Gamble are Income Investor selections. The Fool owns shares of Procter & Gamble. Try any of our Foolish newsletters free for 30 days.

Fool contributor Mike Pienciak owns shares of Church & Dwight but holds no financial interest in any other company mentioned in this article. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (13)

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  • Report this Comment On June 04, 2010, at 9:07 PM, HectorLemans wrote:

    Church & Dwight is an incredibly stable stock to own - just look at their chart over on google finance http://www.google.com/finance?q=chd

    Nice stable returns, year after year, a small dividend, and bounce back from every recession

  • Report this Comment On June 05, 2010, at 1:11 PM, PeyDaFool wrote:

    Go CHD!

  • Report this Comment On June 07, 2010, at 8:38 PM, SteveTheInvestor wrote:

    Given it's paltry yield, Church & Dwight is not a dividend stock. Therefore it has to be viewed as a growth stock. In that light, I see it as overpriced. It's performing well at the current time but when/if the economy recovers, the sellers will come out of the woodwork and put their money to work elsewhere.

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