Colgate-Palmolive Stock A Better Bet Than Kimberly-Clark?

CL: Colgate Palmolive logo
Colgate Palmolive

The stock price for Colgate-Palmolive (NYSE: CL) is up roughly 13% since the end of 2017. In comparison, Kimberly-Clark (NYSE:KMB) has seen its stock grow by 40% during the same period. The difference in the stock price growth makes no sense when we look at the parameters for both companies.

KMB’s revenue grew just 0.8% from $18.3 billion to $18.45 billion between 2017 and 2019. In comparison, CL’s revenues grew 2x faster, from $15.45 billion to $15.7 billion over the same period, a 1.5% rise. Also, KMB’s margins dropped from 12.7% in 2017 to 7.8% in 2018, as pulp prices soared, leading to a rise in COGS. Margins have since recovered to 11.9% in 2019, as pulp prices dropped back to pre-2017 levels, but margins are still not back up to 2017 levels. In comparison, CL’s margins rose from 14.1% to 16.1% over the same period.

Apart from that, Colgate’s price-to-earnings (P/E) multiple has dropped from 31x to 29x since 2017, while KMB’s multiple has risen from 17x to almost 25x. Given KMB’s significant exposure to pulp prices, it’s fair that it trades at a lower P/E multiple than Colgate, but given how the businesses have shaped up, the difference in change of P/E does not make sense, and we believe Colgate-Palmolive is a much better investment at the moment compared to Kimberly-Clark. Our dashboard, Kimberly-Clark’s Stock Price Change Of 39% vs. 13% For Colgate-Palmolive Since Early 2018 Doesn’t Make Sense, has the underlying numbers.

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Colgate’s Revenues and Margins have grown faster than that of KMB

Let’s look at both companies a little more closely. Kimberly-Clark and Colgate-Palmolive are both household names, manufacturing hygiene essentials used worldwide. Colgate is one of the leading oral care companies, while Kimberly-Clark manufactures tissues and female hygiene products. Colgate’s revenue grew from $15.45 billion in 2017 to $15.7 billion in 2019, 2x faster than Kimberly-Clark’s revenue which grew from $18.3 billion to $18.45 billion.

Further, Colgate’s net margins have risen from 14.1% in 2017 to 16.1% in 2019, primarily due to a lower effective tax rate (37.6% in 2017 to 23.4% in 2019). In comparison, Kimberly-Clark’s margins have dropped from 12.7% to 11.9% over the same period, as rising pulp prices weighed on gross margins (35.9% in 2017 vs 32.7% in 2019).

We believe that all parameters considered, Colgate’s business looks more attractive compared to Kimberly-Clark, despite current valuations. Colgate trades at a 29x P/E trailing multiple, compared to Kimberly-Clark’s stock trading at 25x. Colgate warrants a higher P/E multiple than Kimberly-Clark anyway, due to its lack of exposure to commodity prices, and further given Colgate’s stronger revenue and margin growth, we believe its business currently looks more attractive compared to Kimberly-Clark.

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