Equity Position Update: Colgate-Palmolive Co.
Colgate (CL, Financial) remains one of the firm’s largest equity positions. The company offers defensive growth at a reasonable valuation, and we continue to see the potential for shares to deliver attractive risk adjusted returns over the next several years.
Fourth Quarter results were disappointing. The company missed on gross margins, guided 2023 well below the Street, and took another large impairment charge on its portfolio of skin care brands. The price action on the day of the print (down 5%) was extreme and perhaps reflective of growing investor frustration that the company has failed to sustainably grow earnings over the past decade.
We believe some of this “miss” was beyond the company’s control and that Colgate is on the road to delivering more predictable results. Organic growth remains strong and we expect it to start translating into earnings growth as execution improves, margins recover, and external pressures calm down.
Since we became involved, there have been several welcome changes at the Board level. The company elevated a new Lead Director and added a new director, who brings relevant consumer products and portfolio management experience. There is further room for Board refreshment, but it is encouraging to see a start.
There are many appealing paths to additional value creation at Colgate and we hope the Board and management team will now devote more attention to portfolio management. The Hill’s pet food business is firing on all cylinders and the flagship oral care business seems to be performing well. We can’t say the same about the company’s household and personal care businesses. Those segments collectively generate about 35% of group sales and come from a long tail of brands that don’t have the same equity as Hill’s and Colgate. Management has assured shareholders that, despite setbacks, its strategy is working. We believe that with a little more self-help, Colgate has enormous potential to quiet its skeptics and reward its shareholders in the coming quarters.
From Daniel Loeb (Trades, Portfolio)'s Third Point fourth-quarter 2022 letter.
