Krause Fund Research Spring 2020
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Krause Fund Research Spring 2020 Colgate-Palmolive (NYSE:CL) April 17, 2020 Consumer Staples Stock Rating: No Action Research Analysts: Kasey Costa Sheldon Fox Current Price $69 [email protected] [email protected] DCF & EP Intrinsic Value $86 Matt Richards Target Price $70-$90 [email protected] We are suggesting a NO ACTION recommendation for Colgate- Stock Performance Highlights Palmolive (CL). CL is near their 52-week high due to the increase in 52-week high $77.41 product demand during the COVID-19 outbreak, and it is reasonable to 52-week low $58.49 expect the price to decrease as we emerge from the pandemic. CL is also DCF/EP Intrinsic Value $85.72 a mature company in a highly competitive industry making it difficult DDM Implied Value $60.89 to grow at any significant rate. Their product lines include oral, personal, and home care and pet nutrition, which do not see the same rapid product Share Highlights development taking place in other industries. Market Cap (B) 61.873 Drivers of Thesis Shares Outstanding (M) 854.7 • CL operates in an extremely congested marketplace with no Beta 0.6 concrete plan to deal with the increased level of competition. Dividend Yield 2.5% By focusing almost entirely on strenghtening their existing EPS 2.83 brands, they will potentially miss profitable opportunities that P/E 24.3 arise in the future. • Being such a large company, CL must manage many different facets of their business and are slow to adjust to new consumer Company Performance trends, most notably in the rise of eCommerce sites. Gross Margin 59.12% • With 70% of their profits coming from outside the U.S., CL Operating Margin 23.97% conducts business with many subsidiaries and 3rd parties that Profit Margin 15.08% could damage their reputation. ROA 15.74% • CL is nearing its 52-week high and with the uncertainty Revenue (B) 15.693 currently surrounding the market we believe CL stock is overvalued due to the extreme circumstances we are experiencing. Financial Ratios Risk of Thesis. Current Ratio 0.24 • The harmful economic effects of the COVID-19 pandemic Debt Ratio 0.52 may continue longer than anticipated, resulting in more uncertainty surrounding CL’s future performance whether it be positive or negative. Company Description Earnings Per Share Colgate-Palmolive Company (CL) is an 2019 2020E 2021E 2022E 2023E 2024E American multinational consumer products $2.89 $2.31 $2.30 $2.35 $2.38 $2.41 company headquartered in Manhattan, New York City. Colgate-Palmolive was founded in 1806 and has around 34,000 around the world. STZ Stock Price Performance vs. S&P 500 (YTD) Colgate-Palmolive operates in approximately 60 locations within the US. Worldwide, they operate in approximately 260 locations in over 80 countries. They specialize in the production, distribution, and provision of household, health care, Personal Care, and veterinary products. They divide their business into Oral Care, Personal Care, Home Care, and Pet Nutrition products. They manufacture and market their products under trusted brands such as Colgate, Palmolive, and Elmex. Source: Bloomberg 1 the year-over-year rate at which the prices of goods Economic Outlook and services are increasing. Therefore, higher inflation Real GDP Growth causes consumer purchasing power to decrease. This The United States’ Real GDP is a measure of plays a large part in the consumer staples industry as overall economic prosperity as it values the the industry has historically had low margins with high various goods and services produced in the U.S. sales volume.5 When inflation rises, it causes an in any given year while accounting for increase in the input prices for the products of these inflation. GDP is often one of the most inclusive companies, leading to even tighter margins. measures as it accounts for all industries and Additionally, some of the increases in input prices are sectors producing for-sale goods in the United pushed onto the consumer, causing consumers to opt States. As a whole, GDP in the United States has for lower quality and less expensive consumer been steadily increasing since the financial crisis products. in 2008-2009, reaching 2.1% in Q4 of 2019 as seen in the graph below.1 Source: Trading Economics6 Inflation in the United States hit an 18-month high of Source: Trading Economics2 2.5% in January 2020, followed by 2.3% in February However, despite the recent steady GDP growth 2020 before dropping to 1.5% in March 2020, all of around 2% annually, we believe that GDP illustrated above. growth in all of 2020 will be significantly lower due to the Coronavirus (COVID-19) outbreak. Looking forward, we expect a short-term increase in inflation due to higher demand for essential products Looking at past pandemics, the best comparison by consumers and hoarding tendencies brought about to the Coronavirus is the Ebola virus outbreak by the Coronavirus. Thus, we expect inflation to be at of 2014. However, it is clear that the Ebola virus 2.5% though Q2 2020 and stabilize around 2% by end was far less severe than the Coronavirus will end of 2020. up being. During the Ebola outbreak, the virus infected 28,000 people worldwide and led to Consumer Price Index (CPI) 11,310 total deaths.3 During the peak of the The CPI reflects how inflation rates affect consumer Ebola virus, US Real GDP growth was as low spending. CPI is determined by a weighted average as -1.1%1. As of today, the number of price from a variety of goods and services. As the CPI Coronavirus’ cases worldwide have increases, the consumer purchasing power and surpassed 2.05 million and resulted in over demand for those goods will decrease. This is 130,000 deaths.4 important for the Consumer Staples sector because as CPI increases, product groups with low margins will We expect Q1 2020 Real GDP growth to drop to suffer as people trim their levels of 1% and continue to fall in Q2 2020 to -9% as spending. However, because the Consumer Staples companies adjust to slower economic activity sector holds a lot of necessities for consumers, it is not worldwide. Looking forward to the third and as drastically affected by lower levels of consumer fourth quarters, we expect -4% growth in Q3 spending. 2020 and –3% growth in Q4 2020. Over the last eight years, CPI has averaged a growth Inflation rate of just below 2%.7 With our expected increase in The inflation rate shows a numerical measure for inflation over the next couple quarters, we anticipate 2 an equal, temporary increase in CPI. We predict a Outlook on Capital Markets CPI growth rate around 3% through the end With a recession almost certainly imminent, even with October before returning to its average over the last the uncertainty regarding its severity at this point, 10 years of 1.9%, assuming the Coronavirus the consumer staples sector will remain relatively safe. outbreak has been mostly mitigated. The consumer staples sector tends to perform comparatively well in times of recession and Unemployment Rate economic hardship because of what consumer staples Currently, the U.S. job market is going through an encompasse: Personal Care, household, and food and unprecedented rise in unemployment levels and beverage products, all of which are things that remain people filing for unemployment brought about by in demand when broader economic challenges are the Coronavirus. In the United States’ most faced. recent recession, the financial crisis of 2008 and 2009, unemployment rate reached around 9.5%.8 Industry Analysis and Trends Overview The household product industry consists of companies that manufacture and sell products to retailers, although some companies are working to create more direct to consumer products and services. With the rise of eCommerce sites like Amazon, many household product companies are utilizing online retailers rather than putting their products in traditional retail stores. Colgate- Palmolive specifically utilizes Walmart for around 11% of net sales generation.11 Product lines in this industry typically include items like laundry detergent, dish soap, razors, and Source: New York Times 10 cleaning wipes, but there are a large number of With the recent disruption of the economy, millions similar products owned by many companies. These of Americans have been forced out of work and companies typically have ownership of products moved to apply for additional benefits recently that fall more into the personal products category made available for the unemployed. Even such as toothpastes, deodorants, employees with stable full-time jobs are beginning shampoo/conditioner and body wash.11 to file for unemployment because their hours and pay are being cut. The Wall Street Journal has Almost every major household product company reported that unemployment numbers have has products that differentiate themselves increased to above 20 million with more expected from other companies in the industry. For example, if the current economic slowdown should extend Church and Dwight owns Trojan into the summer.9 condoms, Colgate-Palmolive owns Hills Nutrition dog food, and Unilever owns food brands such as The New York Times estimates the current Hellman’s and Breyer’s.12 Household products unemployment rate to be around 13%. This drastic companies differentiate their product lines to increase in the unemployment rate is the fastest and strengthen their brand in the home of their biggest increase in unemployment in the history of consumers. Additionally, in the congested the United States, surpassing the Great marketplace of household products, a lot of the Depression10. With all this considered, we expect company’s main product lines have relatively the United States’ unemployment rate to reach as stagnant profits, increasing only marginally each high as 20% within the next quarter or two.