We think that Colgate-Palmolive is currently a better choice compared to Procter & Gamble. The CL share trades at 4x sliding income, less than that of PG, which has a P / S multiple of 5x. Does this gap in company valuations make sense? We don’t think so and expect CL to close that gap. While both companies have seen a strong increase in revenue since the lockdowns were lifted, we expect CL to experience stronger and more stable sales growth over the next several years. PG is already trading at a higher P / EBIT, nearly 22x vs. 19x for CL, but only has slightly higher EBIT margins and is in a slightly better net cash position than CL,
That said, we’re digging deeper into the comparison, which makes Colgate-Palmolive a better bet than PG, even at these valuations. Let’s step back to take a closer look at the relative valuation of the two companies by looking at detailed historical revenue growth as well as operating profit and operating margin growth, as well as financial condition. 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 Borders Procter & Gamble on Revenue Growth
Both companies managed to see their sales increase during the pandemic, but CL has recently experienced faster revenue growth. PG sales grew from $ 65.1 billion in fiscal 2017 to $ 76.1 billion in fiscal 21, and currently stands at $ 77.1 billion on a LTM (the PG exercise ends in June). Likewise, CL sales have grown from $ 15.2 billion in fiscal 2016 to $ 16.5 billion in fiscal 20, and currently stand at $ 17.3 billion. on an LTM basis.
However, CL’s LTM sales growth was over 7.3%, compared to PG’s 6.4%. The two companies saw roughly similar sales growth during Covid, at around 5%, but CL’s year-on-year growth for its most recent quarter is over 6.3% versus 5.3% for PG.
2. EBIT margins: Procter & Gamble Ahead; And also in a slightly better cash position
PG’s P / EBIT ratio is currently around 22x, above 19x for CL. However, PG’s EBIT LTM margins currently stand at 22.9%, higher than CL’s 21.1%, and PG is also ahead in terms of the evolution of the LTM margin compared to the last three years, with growth of 5.1% against -0.7% for CL.
If we also look at the cash flow of the two companies, CL’s debt as a percentage of equity is 11%, slightly higher than PG’s 8.2%. In addition, CL’s cash flow as a% of assets is 6%, slightly less than PG’s 8.7%.
3. Finally, Colgate-Palmolive is ahead in terms of expected returns
Using P / S as a basis, due to the high fluctuations in P / E and P / EBIT, we believe CL is the best choice. CL’s LTM revenue of $ 17.3 billion is expected to grow at a CAGR of 1.6% according to our estimates, bringing three-year revenue to $ 18.2 billion. Assuming CL’s P / S ratio drops slightly to around 3.9x, that still means market cap would hit $ 71 billion, up 2% over three years.
In comparison, given historical trends, we expect PG sales to grow faster at a CAGR of 1.9%, bringing revenue in three years to $ 81.6 billion. Considering that the P / S for PG would also fall to 4.5x, we estimate a market cap of $ 369 billion for PG, indicating a decline of around 6%.
The net of everything
While PG’s revenue is higher than CL’s, the latter has experienced faster revenue growth in recent times, and we expect this to be reflected in its EBIT margins and financial position soon. Additionally, our comparison of the post-Covid recovery above shows that CL has shown much stronger growth than PG. For this reason, we believe that PG does not guarantee a higher P / E and P / EBIT multiple than CL, and we believe that this valuation gap may soon narrow. As such, we believe Colgate-Palmolive stock is currently a better bet compared to Procter & Gamble stock.
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