Reflections – ANTIthesis of Colgate Palmolive (CL)

  • Although Q4 results showed positive earnings, much of this earnings was attributed to forex translation (a depreciating dollar relative to others), whereby 75% of Colgate’s sales are from outside the US
  • Margins are being squeezed due to higher raw materials and packaging costs
  • Intense competition from cheaper private-label alternatives (due to increasing popularity of discount stores such as Costco, Aldi and Lidl)
  • Inability to raise prices due to low inflation environment and failure to generate significantly more revenue from lowering prices in Europe
  • Large and growing long-term debt
  • Dividend growth slowed down rapidly over last 4 years

Verdict

  • Despite strong brand name (moat) and strong growth potential from emerging markets and attractive dividend growth track records, reliance on forex for positive earnings growth is very worrisome and large debt amounts may be problematic in the rising rates environment.
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