Credit: Colgate-Palmolive
Colgate-Palmolive (CL 1.37%) is a global leader in household consumer goods, and it looks like that "global" bit -- the source of strong growth for years -- is turning into a problem right now. In its just-released third quarter earnings report, earnings per share, or EPS, fell about 16% from a year ago, when factoring in a number of one-time charges. This continues a streak of falling profits that has included four quarters out of the past six.
With much of the falling earnings being tied to the company's international business -- which accounts for two-thirds of total sales -- what is the outlook for investors? Let's take a deeper look at the earnings release and see what we find.
Just the numbers
Colgate-Palmolive's sales for the quarter came in at $4.38 billion, down 0.5% from a year ago. Product volume grew 2%, pricing was up 1.5%, but the effects of a strengthening dollar -- or more accurately weakening foreign currencies -- led to -4% foreign exchange.
EPS fell to $0.59, but this included $159 million in one-time charges (versus only $24 million in one-time charges last year) that took $0.17 out of EPS. Adjusted for the one-time charges, and EPS would have been $0.76, an 4% increase versus last year.
Organic sales growth or sales that doesn't include acquisitions or divestments, increased 3.5%, and even stronger 4.5% in emerging markets. This is a positive result, especially considering than much of the company's emerging market business is in countries that are dealing with economic struggles.
Let's take a look at that next.
Long-term opportunity driving short-term struggles
Asia is a mixed bag for Colgate-Palmolive right now. Source: Colgate-Palmolive
Much of what Colgate-Palmolive faces is the result of years of international growth, especially in Latin America and Asia. As Brazil's economy continues to struggle, slipping into what looks like inevitable recession, and China's incredible rate of growth over the past 20 years begins to slow significantly, Colgate-Palmolive faces a double-whammy of slowing demand growth, and the profit-eroding impact of a strengthening dollar against international currencies in its largest markets.
So even as the company grows its international business, currency pressures will continue to weigh on its profitability. The company reduced its profit growth outlook for the full year largely based on this one thing, to between 3% and 4%.
The currency weakness is almost entirely in Latin America, which makes up 27% of sales. Unit volume increased a small amount, and the company was able to increase local prices, but a -11% foreign exchange drove net sales down 4.5% in the quarter, which was largely behind the 8% drop in operating profit in the region.
Asia -- 15% of current sales and by far the most populous market -- saw unit sales in India be offset by declines in China, as the Chinese economy continues to slow its pace of expansion.
Looking ahead
The reality is, Colgate-Palmolive's business is going to face currency and economic headwinds for the near term. Unfortunately, this is largely out of the company's control. While it can work to lower its costs, macroeconomic conditions are complex, and take time to correct.
With that said, the company has a number of advantages, namely its scale, brand power, and the fact that many of its products are consumer staples, and not items that consumers won't purchase during a poor economy. In many ways, it's a decent defensive stock: A company with a dependable dividend, sustainable competitive advantages,and a strong and stable capital position.
Eventually, the market will recover, and until then, Colgate Palmolive will be fine, even if it's not growing very much. However, it's unclear how long it will take for those international markets where Colgate is most exposed to weakness, to recover.
Buy, sell, or hold?
Frankly, Colgate-Palmolive stock is relatively expensive on a price-to-earnings basis, and only yields a 2.2% dividend based on recent prices. This is after increasing the payout earlier this year. The company is likely to increase it again in early 2015, but I think there are probably better places for new money today, whether you're looking for dividend income, or a defensive investment to preserve your capital.
Looking out a decade and more, the potential is strong, with the global middle class set to grow by 1 billion by 2035. Today's price is just too much of a premium for growth that far in the future.
