Surviving The Recession: Colgate-Palmolive

Print ArticleEmail Article

The Recession has hit a lot of businesses pretty hard over the past year, but through AFG’s Economic Margin Framework, we are starting to see that Colgate looks able to overcome most market conditions and is extremely recession resistant. With most people cutting down on expenses and trying to spend conservatively, investing in a consumer stock would usually seem like the wrong way to go, (especially companies that catered to big spenders) but that’s not always the case. By taking a closer look into Colgate, we see that they have recession-proof characteristics, which is great news for the company and their investors. Even in the hardest of economic times, people will always strive to stay fed, stay healthy, and thankfully for companies like Colgate, keep good hygiene.

Even in this economy, Colgate's got a few things going in their favor. Hygiene is usually near the top of most people’s list for things they want to take care of, and with an entire company devoted to personal care Colgate’s sales have stayed steady. Generally Colgate's products sell at a lower price when compared to competing brands, attracting consumers by providing more value for their dollar. Another favorable characteristic is the company's balance of domestic and international sales, with 55% of their sales coming from outside the U.S.

By looking at Colgate's Wealth Creation chart we can see that since 1995 the company has consistently earned well above its cost of capital, with Economic Margins in the 15-20% range. If we look at the secondary chart, we can see that Colgate has been able to grow its asset base, thus utilizing the positive EMs they are currently enjoying.

If we take a look at the chart below, it is important to notice that the company's intrinsic value is well above its current stock price, which leads us to believe that Colgate is undervalued right now. 

Source: EconomicMargin.com

Looking into the future, management is confident gross margin for the whole year will increase in 2009 from LFY’s level, as the benefits of easing commodity and oil prices should become more pronounced in the second half of 2009. The company has a full new product pipeline for the balance of the year, which is expected to contribute to positive unit volume growth for the full year. Colgate expects its organic sales growth to continue, driven by both positive volume and higher pricing. Our model suggests a target price over $100 and we continue to recommend CL as a Buy for the AFG50 model portfolio. Along with being attractively priced, CL is a solid staple in our everyday lives and has positioned itself as an attractive potential investment to consider.

How to interpret AFG’s Intrinsic Value Chart: identifies how far a stock’s intrinsic value (target price assuming immediate decay) deviates from its trading range, which helps you recognize potentially mispriced stocks and pursue long and short opportunities.

• The blue bars represent the high and low trading range for a stock for 1 year.
• The red dotted line represents AFG’s historical Intrinsic Value through time.
• When the red line (Intrinsic Value) is above the blue bars (trading range), the company looks to be undervalued.
• When the red line (Intrinsic Value) is below the blue bars (trading range), the company looks to be overvalued.

AFG’s Intrinsic Value Chart also contains a company’s Value Score (ranked valuation attractiveness), Economic Margin Change (expected increase/decrease in economic profitability), and Accuracy score (how well AFG’s default valuation has tracked the company).

Wealth Creation Report: displays a company’s Economic Margins (what a company earns above or below its cost of capital) through time as well as a projection of their expected future levels. The second graph shows how a company has grown their assets over time and also contains a projection of how they will grow their assets next year. AFG’s view on wealth creation starts by looking for profitable companies that are also growing their assets to make the most of that profitability.
CL has maintained extremely high economic margins over the past few years, and is expected to improve its profitability in the coming year. Along with maintaining high EMs, CL has continued to grow their assets taking advantage of their profitability levels.

Investment Insights from your peers, Professional Investors - The Applied Finance Group would like to invite professional investors to join AFG’s Market Forecast Project so you can better understand what your peers currently think about the market and cultivate the “wisdom of Crowds” into actionable investment ideas and themes. 
Click here to learn more