Analyst Upgrades Colgate-Palmolive Company, Cites Latin America Outlook

Colgate-Palmolive Co.

long-term under-performance could turn around with a brightening of the world economy, an analyst said Monday. The consumer products company known for its toothpaste, gets 80 percent of its sales and profits from outside the U.S., and its shares have underperformed the S&P 500 index in five of the past six years. Currency headwinds have been blowing stronger recently, but Colgate-Palmolive "generally manages through tough times and emerges stronger," according to Citi's Wendy Nicholson, who upgraded the shares to Buy from Neutral and boosted her target more than 9 percent to $81. Colgate changed hands recently at $70.60. Its shares are up about 74 percent in the past five years, versus 90 percent for the S&P 500. The stock has been hurt by a slowdown in earnings growth and numerous downward revisions to estimates, Nicholson said. The company's global toothpaste market share has declined slightly since 2009 to 44.5 percent, while its premium pet food brand, Hills, suffered in the U.S. economic recession. But "when headwinds turn into tailwinds, as they inevitably will," Nicholson said, she expects a "notable recovery" in share-price and earnings growth. With oral care products representing 45 percent of Colgate revenue, the declining market share "represents a far bigger piece of the story to investors" than warranted, Nicholson said. Although the company's oral care share may remain "flattish," Nicholson said the good news is that the category is growing globally in the mid-single digits, while Colgate "has ample room to grow market share in other categories." "Toothpaste shouldn't prevent Colgate from growing revenue in its targeted 4 percent to 7 percent range," Nicholson said. Latin America, which represents 30 percent of the company's sales and profits, has slowed in recent years. Nicholson pointed especially to Brazil and Mexico, where Colgate does the lion's share of its business in the region. "As the economy in Latin America recovers, so too will Colgate's growth in the region," according to Nicholson, who didn't elaborate on Latin America's economic prospects. Nicholson said gross margin expansion offers the "single best prediction of share price performance in the home and personal care field, and Colgate margin's haven't expanded much since 2009. Based on $60 oil, the company is targeting 2015 gross margin expansion of 50 to 100 basis points, "which seems reasonable," Nicholson said.