Price Hikes in Emerging Markets to Drive Colgate-Palmolive’s Q1 Results

Oral care major Colgate-Palmolive (NYSE: CL) is scheduled to report its 2015 first quarter earnings on April 30th. Unlike bigger rivals Procter & Gamble (NYSE: PG), Unilever (NYSE: UL), and Kimberly-Clark (NYSE: KMB), Colgate-Palmolive is currently not carrying out any notable strategic initiatives to boost its top-line and had a quiet first quarter. It has stuck to its guns so far and has not indicated any plans to join the divestments bandwagon (Read: Personal Care Companies Shed Weight In 2014). Instead, Colgate-Palmolive redoubled its efforts to revive its non-core pet nutrition business in 2014.

Despite the absence of major strategic upheavals, Colgate-Palmolive outperformed all of the aforementioned rivals in calendar 2014 (Read: Higher Volumes Help Colgate-Palmolive Beat Currency Troubles in Q4). It employed a combination of a shrewd pricing strategy along with a robust cost saving program to counter the impact of strong currency headwinds in 2014. Whether the company will be able to carry forward the momentum into 2015 remains to be seen.

We have a price estimate of $56 for Colgate-Palmolive, which is about 20% lower than its current market price.

See our complete analysis for Colgate-Palmolive here

Price Hikes in Emerging Markets to Drive Top-Line Growth

Colgate-Palmolive derives over half of its revenues from emerging markets. Revenues from emerging markets expanded by 9.5% year on year in the fourth quarter of 2014, compared to a mere 1.5% revenue growth in developed markets. The strong performance in emerging markets was primarily attributable to increased pricing, which contributed 7 percentage points to top-line expansion. In contrast, prices had a negative impact of 50 basis points on revenue growth in developed markets. ^[1]

Colgate-Palmolive stated in the fourth quarter earnings call that it will continue to hike prices in emerging markets in 2014. ^[2] In fact, price hikes are expected to be a major factor in gross margin expansion this year. The company believes that it still has considerable potential to drive prices upwards without unduly affecting volume growth, which is what seems to have happened in Procter & Gamble’s case (Read: Falling Volumes Compound P&G’s Problems as Currency Headwinds Dampen Q2 Results).

The bulk of the revenue growth is expected to be derived from emerging markets. The company expects to achieve mid-single digit top-line expansion in emerging markets in local currency terms. Comparatively, growth in North America is expected to range from 1% – 2%, while in Europe it is expected to be up to 1%. ^[2]

Margins May Benefit From Cost Savings Program and Stable Commodity Costs

Colgate-Palmolive’s ‘Funding the Growth’ program and the 2012 restructuring program contributed a commendable 280 basis points benefit to its gross margin in 2014. These measures, along with sustained price hikes, helped offset the impact of commodity cost inflation and currency headwinds. Thus, Colgate-Palmolive was able to restrict the decline in gross margin in 2014 to a mere 10 basis points despite the hostile macroeconomic environment.

The company expects to continue to derive benefits from its Funding the Growth program in 2015. Further, commodity costs are expected to remain stable and benefits from lower oil prices are expected to begin trickling down this year. These factors, along with higher pricing in emerging markets, are expected to offset the impact of currency headwinds on Colgate-Palmolive’s bottom-line. Consequently, Colgate-Palmolive expects to expand its gross margin by 50 to 100 basis points in 2015. ^[2]

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1. Colgate-Palmolive 2014 Fourth Quarter SEC Filing [↩]
2. Colgate-Palmolive 2014 Fourth Quarter Earnings Call Transcript, Seeking Alpha, January 29, 2015 [↩] [↩] [↩]