When Colgate-Palmolive (NYSE:CL) reported earnings in October, management said the consumer products giant would continue to feel the impacts of global economic weakness, and that the relative strength of the U.S. dollar would also weigh on earnings in the short term. However, management also discussed some long-term initiatives and trends, with three key topics coming up repeatedly on the earnings call.
Based on that call, here are the three things management clearly wants you to know.
1. Investments in efficiency will pay off soon
The company's "Global Growth and Efficiency" program has been expanded, and will now cost upward of $1 billion when completed in late 2016. However, management also expects to achieve a three- to four-year payback on this investment. CEO Ian Cook had this to say on the matter:
As a result of the expansion, cumulative after-tax charges related to the 2012 restructuring program, once all phases are approved and implemented, are now estimated to increase by $175 million, to $950 million to $1,050 million. After-tax charges for 2014 are now expected to increase by $25 million, to approximately $225 million to $255 million. Savings are also projected to increase by $65 million, to $340 million to $390 million after tax annually by the fourth year of the program. The expected savings continue to represent a three to four year cash payback, on average, with a targeted after-tax rate of return of 30%. Implementation of the 2012 restructuring program is still expected to be substantially completed by Dec. 31, 2016.
In short, the $1 billion investments should deliver almost $400 million in annual savings going forward.
1. Market shares are strong and growing
This is one of Colgate-Palmolive's strengths. The company's products are often No. 1 in market share, or near the top. From Delia Thompson, senior vice president of investor relations:
Our overall U.S. toothpaste share is now 35.8% for the past four weeks, up one full point versus the year-ago period. This 35.8% share is also ahead of our year-to-date share of 35%. ... Our overall mouthwash share in the U.S. is now at 6.5% year to date, up 120 basis points.
[The Europe/South Pacific] region delivered solid results. ... Organic sales have increased every quarter this year and this despite ongoing macroeconomic pressures. Our oral care market shares are strong. In toothpaste, our regional share is at 35.3% year to date, up almost a full point from the year-ago period, with the most recent reading at 35.4%. The results were broad-based, with increases in virtually every hub. Our regional manual toothbrush shares are up a full point year to date to 23.5%, with the most recent reading at 23.8%. Mouthwash is at 17.9% year to date, up from 17.8% in the year-ago period."
These are just two examples. The market share trend continues in the very important Latin American market, even in the face of economic uncertainty in many countries there.
3. Working through weakness in China with new products
China, one of the world's largest consumer goods markets, has been a weak spot for Colgate-Palmolive this year. Much of the weakness is tied to large inventory levels at retailers, but management has projected that would work itself out soon. As Thompson put it:
As noted earlier, we've experienced slowing category growth in inventory correction in China, which has affected overall growth despite a very strong performance in other markets. However, this situation appears to be improving, as we said it would on our last call. ... Looking forward, we have more innovation to come. One interesting new product planned for launch in China in the fourth quarter is Colgate 360° Gold Charcoal toothbrush. As you know, some consumers are very interested in charcoal as an ingredient, but a new trend, which has also emerged with the Chinese consumer is gold.
As inventory levels normalize, the company is also making an effort to develop products that appeal to each market. While a gold-bristled toothbrush might not have mass appeal in the U.S., it could be a big seller in China. Only time will tell how this plays out, but the company's success with a similar strategy in other markets bodes well.
While these aren't the only things the company wants you to know, these are three matters investors should pay close attention to. Reducing costs by almost $400 million is significant -- and worth more than 25% of the company's annual dividend expense. Continuing to innovate to maintain and even grow market share is also important for the company, and focusing on this in China is absolutely critical to the Colgate-Palmolive's long-term prospects.
While Colgate-Palmolive is a solid company, the stock looks a little expensive today, with a trailing price-to-earnings ratio above 30 and a forward P/E above 23. The company's business prospects are sound, but that's quite a premium to pay for a company with many short-term macro headwinds. I think it's worth keeping the stock on your watchlist, but there are at least a few better values to be had right now.