As Inflation Eases, This Consumer Giant and Innovator Will Benefit

Have you ever noticed that when a company has operational issues…and we saw plenty of issues coming out of the Covid pandemic…they raise prices quickly, but aren’t as quick to lower them when the issue is resolved? As a consumer it’s extremely annoying. But, as a stock investor it can mean a nice unexpected boom in a stock price. 

One of those “issues” impacting a lot of companies the past few years has been inflation. And few companies were more impacted than consumer goods companies. Not only did they still have supply chain problems as a hangover effect from the pandemic, but suddenly the cost of raw material to make everything from shampoo to frozen dinners went through the roof. 

One company that rode that treacherous wave expertly, and as a result is in excellent shape to benefit from a downtick in inflation is Colgate- Palmolive (CL). The toothpaste, pet food, cleaning products (just to name a few) behemoth not only managed through inflation, but put up some pretty good financials coming out of the most rapid interest rate rise in U.S. history.  

Colgate is upping its game in a way you may not realize if you only know the company as a consumer. Management has focused the various product divisions on a science first approach, which is vaulting its products forward in the benefits they provide to consumers. 

If you don’t have a teenage daughter as I do, you may not realize the amount of disposable income that goes toward shampoos, creams, lotions and potions. But, those items have to actually do what they promise to do, and social media will rapidly reward products that work…while punishing those that don’t. 

CL is using “science-based innovation” to advance its product offerings, making sure they work better than the competition. This is elevating their whitening toothpaste, which now has 5% hydrogen peroxide (they’ve been increasing the levels based on scientific methodologies). 

In their pet division, Hill’s, they report, “we used cutting-edge wearable technology and our expertise in clinical research to develop Hill’s Prescription Diet Derm Complete, a breakthrough nutrition that helps manage food and environmental sensitivities in dogs.”   

This focus, along with an expansion of their online selling strategy…online sales are now 14% of overall sales…has the company well positioned as inflation eases, driving down production costs. We had a preview of the strength in 2023 as inflation began falling in reaction to increased Federal Reserve interest rate increases.

In the latest quarter the company reported net sales increased 10.5% with growth in 5 of the 6 product divisions the Colgate operates. Earnings increased 16% in the quarter YoY, and gross margins rose to 58.5%, with operating margins right at 20%. 

And Colgate restocked its cash coffers, with a net cash inflow of $2.6 billion in the first three quarters of 2023, a 39% increase over the same period in 2022. 

For the quarter, Noel Wallace, Chairman, President and CEO, was happy to report, “This was our third quarter of sequential improvement in gross profit margin and our second quarter in a row delivering double-digit operating profit growth along with a double-digit increase in advertising spending.”

Colgate has an overall B rating in our POWR Ratings. The company has a stellar Quality component rating, where it rates better than 95.97% of the stocks we follow. And it’s not too shabby in the Stability component either, with a score of 90.33%.

The combination of a well running business, which Colgate has at this point, along with easing business conditions, in the form of both lower inflation and lower interest rates, should put CL in a great place moving into 2024. 

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CL shares were trading at $80.16 per share on Thursday afternoon, down $0.39 (-0.48%). Year-to-date, CL has gained 0.56%, versus a -0.47% rise in the benchmark S&P 500 index during the same period.

After earning a law degree cum laude with a focus on securities law, Steven worked as a Nasdaq market maker for a large broker dealer, and then as a trader for an arbitrage focused proprietary hedge fund. He subsequently worked as a consultant for a Fortune 500 consulting firm serving both government and commercial clients, including the NYSE, Prudential, FDIC, and NASA.

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