Colgate-Palmolive's oral care business still growing
Revenue has increased faster than the global market size for related products in the past few years.
The company's oral care market share grew from to 26% in 2011, and it delivered strong growth in the first quarter this year, which has led the stock to expand by 13% since. The core oral care business generates half of the company's stock value. Other products include shampoos, dish washing liquid and laundry products, as well as pet nutrition product segments. It competes with other leading personal care companies such as Proctor & Gamble (PG), Unilever (UL) and Kimberley-Clark (KMB).
Leadership in oral care category
Colgate's oral care division occupies more than a quarter of the global oral market and generates half of Colgate-Palmolive's stock value. Geographically, oral care is a significant part of the company's business in Greater Asia/Africa, comprising approximately 73% of sales in that region for 2011.
We estimate that Colgate's global market share of oral care increased from 22% in 2007 to 25% in 2010 and 26% in 2011, as its revenues from oral care increased faster than the global market size for oral care products.
The company invests significant resources in consistently increasing its brand equity among consumers and oral health care professionals. It also has a deep retail presence in North America and Europe as well as its markets in Asia and Africa and makes huge promotional investments to attract customers.
Colgate stands to gain higher market share than other global players in Asia and Africa because it offers an entire portfolio of oral care products (toothpastes, toothbrushes, mouthwashes, etc.), which economizes branding and advertising efforts, along with a greater scope for cross-selling.
Regular product innovation and a launch of premium-priced products have helped Colgate expand its sales while defending its market share from lower-priced private labels. Accordingly, we expect Colgate's market share of oral care to continue to grow over coming years.
Volume driven growth could put pressure on margins
The company's oral care's EBITDA margin increased from 24.5% in 2008 to 29% in 2009, driven by higher pricing and cost-saving initiatives, but declined to 28% in 2010 because of higher advertising spending and input commodity costs. Margins recovered to 28.4% in 2011 owing to lower SG&A costs despite higher input commodity costs that lowered gross margins by 1.70%.
Since much of Colgate's future growth is expected to be volume-driven, any attempts to absorb cost pressures through higher pricing may be constrained by price competition especially in the emerging markets, leading to a downward pressure on margins.
We currently expect the margins to decline gradually to 28% by the end of Trefis forecast period. However, there could be a 5% downside to the Trefis price estimate if it declines to 26% over the same period due to input cost pressures, high commodity inflation and higher advertising costs, leaving little room for higher pricing due to fierce competition.
We value Colgate-Palmolive with a $98 Trefis price estimate of its stock, almost in line with the current market price.
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