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.
- About $250 million in non-operating expenses (after-tax) cause reported earnings to be understated
- 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.
- 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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