Colgate-Palmolive Company (NYSE:CL) recently expressed enthusiasm about its opportunities in Asia, and management said that the company is planning to reenter Indonesia, the world's fourth most populous country with a population of approximately 255 million. The worldwide population is expected to reach 8.4 billion by 2030, and in Asia, the population is expected to reach 4.9 billion, a 14% increase over its current estimated levels. So what is Colgate's potential market share in Asia, and how will it affect revenue and earnings for the company? Let's find out.
A billion tubes of toothpaste
According to the 2015 annual report, net sales in Asia of approximately $2.5 billion represented just over 15% of the company's top line. As of 2014, Colgate-Palmolive held an approximate 86% market share in the oral care (toothpaste) business in Asia.
Given these numbers, the current Asian per capita spend on Colgate-Palmolive products is approximately $0.58. If the population increases to 4.9 billion, and if Colgate merely holds its market share, then this will translate to roughly $2.85 billion in Asian net sales for the company, a $350 million increase over 2015 levels. Note that the company will also benefit from inflation, which isn't factored in here, as a tube of toothpaste in 1965 cost just $0.55 but retails for around $3 today.
Furthermore, if the company can maintain its margins, which stand at a trailing 12-month figure of 58.6% and 8.6% for gross and net, respectively, it should realize an additional $30 million in net income. Based on outstanding shares of 910 million, this will translate into approximately $0.03 per share, or 2% earnings growth. That might not sound like much, but keep in mind the company has repurchased approximately 15.5% of its outstanding shares since 2006, and its board authorized a $5 billion buyback program in February 2015. These repurchases will further boost earnings for the consumer products company.
A spring of scaled margins
For company margins, it is important to note that, in addition to a valuable portfolio of brands, including Colgate, Palmolive, and Irish Spring, the economic moat of the company is also defined by its low-cost operating structure. The trailing 12-month gross margin for Colgate is 58.6%, compared to an industry average of 51.8%, and its operating margin is 25.1%, far above the industry average of 20.2%. These margins are facilitated by large economies of scale that allow the company to maintain lower unit costs, and management is diligent about keeping them in line. As a result, it is likely these margins will stay in place or improve over the coming years.
Current Asian headwinds
Although these population growth numbers sound promising, the Asian market is not without its own headwinds. In Colgate-Palmolive's most recent quarterly report, net sales in Asia declined 5%. This underperformance was due largely to foreign exchange headwinds, which are intense, as characterized by CEO Ian Cook at the 2016 CAGNY conference:
Perhaps the most significant headwind in 2015 was foreign exchange. I don't recall in my time with the company seeing on an annual basis foreign exchange headwinds of nearly 12%, and of course you know well that hits you directly from a translation point of view, but it also impacts you from a transaction point of view in terms of material cost headwinds that you have to deal with.
The good news surrounding the decrease in Asian sales dollars is that unit volume increased by 2.5% in Asia, and once adjusted for foreign translation, sales actually grew 2% for the quarter.
Don't forget to add toothpaste to the shopping list
Colgate-Palmolive is eyeing the future of its Asian market, and management sees that it is pock-marked with waves of beneficial population growth. As these numbers come to bear on the company's results, shareholders will benefit if the company can maintain its margins and market share. The toothpaste maker comes complete with a solid moat of brands, economies of scale, and broad global reach with more than 80% of sales generated outside North America. This moat has effectuated solid results over the past decade in the form of consistent earnings that have grown at a 10-year average rate of 3.47%, a return on equity that has averaged an unheard-of 126%, and a sound balance sheet with long-term debt that could be retired in under five years using 2015 net income.
Although the stock is not priced for value with a trailing 12-month price-to-earnings ratio of 25, future opportunities make this is a company that investors should consider for their shopping list.