I had some feedback from a reader asking about Colgate stock’s current valuation. Until I pulled up the data I didn’t quite realize what a boring five years it has been for Colgate. Back in late-2013 the toothpaste giant’s share price was a shade over $65. Today it is actually around 10% lower at just under 60. Not only that but headline earnings have gone pretty much the same way. Back in its 2013 fiscal year Colgate made around $2.80 per share in normalized net income. This year it should make around $3.00 per share. Assuming that last figure correct then it puts the stock at a 5% earnings yield right now. Good deal? I’m inclined to say yes, even though at first glance it does not appear so.
One of the most important things to bear in mind right now is that Colgate makes most of its cash overseas. In fact in the last quarter of results (Q3 2018) the company reported that just 22% of sales were attributed to North America. One of the upshots to that is that foreign exchange effects can be quite severe. Take the most recent quarter of company figures as a good example. In Latin America – responsible for 20% of company revenue – headline sales tanked 13%. Now at first glance that performance looks more than a little alarming, but break it down and things are not quite as bad as they appear. Of that 13%, the company actually gained 2.5% from increased pricing. It then lost 6% from a decline in unit volume. Throw those three numbers together leaves a whopping 9.5% as the foreign currency hit.
The other non-US regions tell a similar story. In Europe, net sales dropped 0.5% even though pricing and volume growth was a combined positive 0.5%. In Africa/Eurasia net sales decreased 6% even though combined pricing and volume growth clocked in at positive 3.5%. The headline sales figure in Asia also looks a lot worse because of the strong dollar. In North America, the only region not affected by currency issues (or not really anyway), organic sales and volume did okay. They were up 2% and 1.5% respectively on the equivalent period in 2017.
To be clear there are other problems going on with the underlying business. Even after you strip out currency issues some of the sales and margin declines are eye-opening. That said, the strong dollar makes the business underperformance look worse than it is. On top of that, it also makes the stock look slightly more expensive that it otherwise would be if Colgate were not based in the United States.
From here that means we’re probably looking at mid-single digit earnings-per-share growth assuming you were expecting double digit shareholder returns. Given the avenues available to the company to achieve this – think population growth, rising global middle class, share buybacks, acquisitors, price increases and so on – it doesn’t seem too big a stretch to me. In any case the best thing about Colgate is a product that doesn’t come with the baggage of some other consumer defensives. You can say with a certainty that applies to few other businesses that it will still be selling its product fifty years down the line. For me that’s easily worth the risk of some short-term stagnation.