Stock Pick of the Week: Buy Colgate-Palmolive Co (CL) – Very Attractive Rating

Colgate-Palmolive Co (CL) is the Stock Pick of the Week as well as one of November’s Most Attrac­tive Stocks.

Like all of our Most Attrac­tive Stocks the com­pany has (1) high and ris­ing eco­nomic prof­its (as dis­tinct from account­ing prof­its) and (2) a cheap val­u­a­tion. As shown in our free report on CL, the company’s return on invested capital (ROIC) (21.2%) is in the Top Quin­tile of all the com­pa­nies we cover and its eco­nomic earn­ings are grow­ing. At the same time, the stock’s val­u­a­tion implies that CL’s prof­its will decline by 7% and never grow again. In other words, the stock mar­ket is pre­dict­ing a per­ma­nent decline of more than 7% in CL’s prof­its. The mar­ket is set­ting the profit growth bar quite low for this stock.

HIDDEN GEMS:

  1. About $250 million in non-operating expenses (after-tax) cause reported earnings to be understated
  2. Our dis­counted cash flow analy­sis shows that CL’s cur­rent val­u­a­tion (stock price of $77.52) implies that the company’s prof­its will decline by 7% and never grow again.
  3. The com­pany grew its eco­nomic earn­ings by $229mm (14% increase) dur­ing its last fis­cal year.

For details on what causes the dif­fer­ence between Eco­nomic Ver­sus Account­ing Prof­its, see Appen­dix 3 on page 10 of our report on CL. See Appen­dix 4 to learn how CL increased net operating profit after tax (NOPAT) by cut­ting costs and increased its NOPAT mar­gin from 15.1% to 16.7%. See Appen­dix 5 for details on how CL grew invested cap­i­tal while revenue dropped and lowered invested cap­i­tal turns from 1.32x to 1.27x. Appen­dix 7 (in the ROIC sec­tion) shows how the com­pany’s increase in NOPAT mar­gin outweighed the decrease in invested cap­i­tal turns to result in an increase in ROIC (from 20.1%% to 21.2%) and Eco­nomic Earnings, which rose by $229mm.

In summary, CL is a Very Attractive Stock because its economic earnings are strong and growing while its valuation implies economic earnings will decline permanently by 7%.

As per Invest­ment Strat­egy 101 and How to make money pick­ing stocks, CL fits the Risk/Reward pro­file of a great stock to buy.

See Finance 101 and Eco­nomic Ver­sus Account­ing Prof­its for more detail on why account­ing prof­its are not reli­able indi­ca­tors of cor­po­rate prof­itabil­ity or value creation.

Note: Stock pick of the week is updated every Tuesday.

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