When it comes to consumer staples, Colgate-Palmolive
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
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 |
16.0 |
13.8 |
8% |
75% |
Church & Dwight |
19.7 |
14.8 |
11.6% |
28% |
Energizer |
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.