Colgate-Palmolive (CL) Equity Research Real Estate – UAE
th
April 19 , 2007
Equity Research Consumer Goods Sept 30th 2009
Initiation of coverage Recommendation relative to:
Consumer Goods
Overweight
Target Price
USD 83.4
CMP USD 73.3
as on 29th Sept. 2009
SYMBOL: PRICE SEPT. 29, 2009):
CL 73.3
RATING:
AA-
TARGET PRICE: MARKET CAP (MM):
38,020.04
SHARES OUT. (MM):
497.19
52-WEEK RANGE:
76.76 - 54.77
AVG. DAILY VOLUME (,000):
3,683
We initiate coverage on Colgate Palmolive (CL) with an overweight recommendation and a fair 12 months price target of USD 83.4. Sound fundamentals, large and growing market share, strong brand loyalty and cost efficiency justify the premium valuation to the company. We expect the company to continue growing strongly given its presence in the highgrowth emerging economies. The company enjoys an industry-best return on capital in the HPC industry, and the strategic changes incorporated by the company are expected to further improve its resource utilization.
Investment Highlights Colgate to continue to register robust organic growth. The high-growth regions—Latin America and Asia—should help the company continue to register mid-to-high single-digit organic revenue growth. About 50% of the company’s revenue is derived from developing and emerging economies where the company commands a dominant market share. These regions are also characterized by low per capita consumption of oral care and hygienic products and entail a significant market expansion possibility. We believe that its geographic presence can enable the company to achieve an EPS growth of 10%, as indicated by the management.
Performance (%)
Absolute
Rel. to sector
4.9% 7.8% 1.2% 54.77 76.76
0% 4% -15%
1m 3m 12m 12m low 12m high 2point
110
S&P 500
CL
100
Margins expected to remain robust. The company has the best margins in the industry with an adjusted ROIC of about 26% in FY08, which is ahead of the industry average of about 23% and much higher than that of its closest competitor P&G’s 10%. The various cost rationalization steps taken by the company are expected to further enhance its returns. The multiyear restructuring programme completed in FY08 along with the ongoing business planning initiatives should help management achieve gross margin of about 60%. Currency fluctuation remains a concern. Colgate derives more than 80% of its revenue from outside the US, which makes it highly susceptible to currency fluctuations. Any significant dollar appreciation can weigh heavily on the company’s revenue growth and margin.
90 80 70 60 50 Sep08
Nov- J an08 09
Mar- M ay09 09
Jul09
Attractive valuation. At the current price, the dividend yield stands at 2.34%. At USD 73.3, the company is trading at 18.7 times its TTM earnings and 17.0 times FY09 earnings. . We place per share fair value at USD 83.4 representing a 13.8% upside potential.
Document
Classification:
Confidential