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Colgate-Palmolive (NYSE: CL ) is one of the biggest consumer goods corporations in the world. It has a market-leading position in Oral care, with a 45.4% market share in toothpaste and a 33.3% share of the manual toothbrush market. There is certainly a moat around the business, which includes huge economies of scale, distribution efficiencies and established brand names. However, its market valuation seems quite rich in absolute terms at more than 20.3 times its forward earnings. Should investors get into Colgate-Palmolive at its current price?
Oral care is the core operating business
Oral care is Colgate-Palmolive's core business, and it accounts for around 44% of its total revenue. The personal care segment and the home care segment represented 22% and 21%, respectively, of total revenue in 2012. Thus, Colgate-Palmolive's business is definitely more concentrated than its peers Unilever (NYSE: UN ) and Procter & Gamble (NYSE: PG ) .
Procter & Gamble is much more diversified, with around nine big business units. The largest business segment is fabric care, which represented about 20% of total net sales in fiscal 2013. The oral care segment provided only 6% of total revenue.
For Unilever, the two biggest categories are personal care and foods, which accounted for 35.2% and 28.1%, respectively, of total 2012 turnover. Many investors might be worried about Colgate-Palmolive's business concentration. However, I personally think that the concentration has helped the company enhance its global market-leading position in oral care.
Cost savings and efficiency enhancement program
Colgate-Palmolive has been looking for ways to drive operating efficiency with its global growth and efficiency program, which is intended to reduce costs in order to improve both gross and operating margins. With a $1.1-$1.25 billion pre-tax investment, Colgate-Palmolive expects to save around $365-$435 million annually. This program was implemented to enhance Colgate-Palmolive's capabilities through commercial hub expansion, streamlining global functions, and optimizing the company's global supply chain.
Currently, the company has around 54 facilities. It expects that its number of facilities will decrease by an additional 10% in the next four years, making the operation more efficient and speeding up its access to both markets and consumers.
Cost-savings programs seem to be the common theme across global consumer goods companies, including P&G and Unilever. P&G also expects to enhance its profitability with its $10 billion cost-reduction program. Most of the savings, around $6 billion, will be in cost of goods sold. The other $4 billion will be in overheads, market efficiencies, and operating leverage. Under the leadership of returning CEO A.G. Lafley, as a part of the cost-saving program P&G has cut 7,000 office jobs and shrunk its factories in the U.S. and Eastern Europe.
Unilever is also in the process of restructuring, eliminating the least profitable SKUs and divesting unprofitable businesses. Moreover, Unilever has been successfully applying low-cost business models to two categories: ice cream and laundry. The models have helped its gross margin increase by 120 basis points and its core operating margin rise by 40 basis points to 14% in the first half of the year.
Foolish bottom line
Colgate-Palmolive seems quite expensively valued on an absolute basis. However, the company's margin will definitely improve because of its ongoing global growth and efficiency plan which will drive up both its earnings and its share price. Moreover, with innovative products such as Colgate MaxFresh Cool Scrub and Colgate Sensitive SmartFoam with Whitening, I expect that the company will expand its share in the global oral care market. In the meantime, investors get a decent 2.10% dividend yield at its current stock price.
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