Here’s Why Colgate-Palmolive Is A Strong Consumer Bet

We think that Colgate-Palmolive (NYSE:CL) currently is a better pick compared to Procter & Gamble (NYSE:PG). CL stock trades at 4x trailing revenues, less than that of PG, whose P/S multiple stands at 5x. Does this gap in the companies’ valuations make sense? We don’t think so, and we expect CL to close this gap. While both companies have seen a strong rise in revenues since the lockdowns started being lifted, we expect CL to see stronger and steadier sales growth over the next few years. PG already trades at a higher P/EBIT as well, of almost 22x against CL’s 19x, but only has marginally higher EBIT margins and is in a slightly better net cash position than CL,

Having said that, we dive deeper into the comparison, which makes Colgate-Palmolive a better bet than PG, even at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at detailed historical revenue growth as well as operating income and operating margin growth, along with the financial position. Our dashboard Colgate-Palmolive vs Procter & Gamble: Peers, But Colgate-Palmolive Is A Better Bet has more details on this. Parts of the analysis are summarized below.

1. Colgate-Palmolive Edges Procter & Gamble On Revenue Growth

Both companies managed to see sales grow during the pandemic, but CL has witnessed faster revenue growth lately. PG’s sales have risen from $65.1 billion in FY ’17 to $76.1 billion in FY ’21, and currently stand at $77.1 billion on an LTM basis (PG’s fiscal year ends in June). Likewise, CL’s sales have risen from $15.2 billion in FY ’16 to $16.5 billion in FY ’20, and currently stand at $17.3 billion on an LTM basis.

However, CL’s LTM sales growth stands higher at 7.3%, vs PG’s 6.4%. Both companies saw roughly similar sales growth during Covid, at around 5%, but CL’s YoY growth for its most recent quarter stands higher at 6.3% vs PG’s 5.3%.

2. EBIT margins: Procter & Gamble Ahead; And Also In A Slightly Better Cash Position

PG’s P/EBIT ratio stands at around 22x currently, higher than CL’s 19x. However, PG’s LTM EBIT margins currently stand at 22.9%, higher than CL’s 21.1%, and PG is also ahead in terms of LTM margin change compared to the last three fiscal years, with 5.1% growth vs CL’s -0.7%.

Looking at both companies’ cash position, too, CL’s debt as a % of equity stands at 11%, slightly higher than PG’s 8.2%. Additionally, CL’s cash as a % of assets stands at 6%, a little less than that of PG’s 8.7%.

3. Finally, Colgate-Palmolive Is Ahead In Terms Of Expected Returns

Using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe CL is the better choice. CL’s LTM revenues of $17.3 billion are expected to rise at a CAGR of 1.6% as per our estimates, taking revenue numbers three years out to as high as $18.2 billion. Assuming CL’s P/S ratio to pull back marginally to around 3.9x, this still means that the market cap would rise to $71 billion, an upside of 2% over three years.

In comparison, given historical trends, we expect PG’s sales to rise faster at a CAGR of 1.9%, taking revenue in three years to $81.6 billion. Considering the P/S for PG to also pull back to 4.5x, we estimate a market cap of $369 billion for PG, indicating a downside of around 6%.

The Net of It All

Despite PG’s revenues being larger than that of CL, the latter has seen faster revenue growth lately, and we expect this to reflect in its EBIT margins and financial position soon. Additionally, our comparison of the post-Covid recovery above, shows that CL has shown a much stronger growth than PG. Due to this, we believe that PG does not warrant a higher P/E and P/EBIT multiple than CL, and we believe that this gap in valuation could narrow soon. As such, we believe that Colgate-Palmolive stock is currently a better bet compared to Procter & Gamble stock.

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