EUR 850.00 For Business Accounts Only

Morningstar | Wallace Set to Take the Reins at Wide-Moat Colgate; Shares a Touch Undervalued

Wide-moat Colgate announced on Feb. 11 that President and COO Noel Wallace will succeed CEO Ian Cook in April 2019. From an internal perspective, Wallace struck us as the heir apparent, given his roles of increased responsibilities across the firm’s operations and geographic network during his 32-year career with the organization. We also surmise that because Wallace has worked with Cook to craft the firm’s strategic playbook, material shifts in the firm’s direction are unlikely in the near term. But to further ensure a smooth transition, Cook, who joined the firm in the mid-1970s and has served in the top spot since 2007, will continue to serve as chairman for up to the next 12 months.

Colgate’s current course centers on enhancing its spending on product innovation (within its core mix, across adjacent categories, and throughout the digital realm) and advertising (which management has suggested would increase on an absolute basis and as a percentage of sales in fiscal 2019, likely to a low-double-digit percentage of sales) to ensure Colgate withstands competition longer term and to offset the lagging top-line prospects that have plagued the business of late (not dissimilar from the broader industry). We believe this spending is even more prudent at present, given that Colgate (like its peer set) is raising prices across its portfolio to stem the impact of recent raw material and transportation inflation. To fund this spending, Colgate has been working to drive efficiencies, targeting $500 million-$575 million in cost savings by the end of 2019, equating to around 5% of cost of goods sold and operating expenses excluding depreciation and amortization, which we view as prudent.

Overall, this announcement fails to sway our $70 fair value estimate or our Exemplary stewardship rating. Shares trade around a 5%-10% discount to our valuation, and as such, we think investors should keep this name on their radar.