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Morningstar | With New CEO at the Table, Colgate Shows It May Have Appetite for Deals; Shares Not a Bargain

Wide-moat Colgate-Palmolive announced July 11 that it will acquire premium skincare operator Laboratoires Filorga Cosmetiques, which focuses on anti-aging facial care, in a $1.69 billion deal expected to close by the end of September. The price tag strikes us as quite rich, at a high-single-digit multiple of fiscal 2018 sales (based on data from PitchBook). However, we recognize the strategic merits of the transaction. This tie-up builds out Colgate’s presence in the on-trend and high-growth anti-aging skincare space while also affording access to channels where Colgate is presently underpenetrated, including specialty stores and travel retail. Although we've been encouraged by Colgate’s recent investments in its internal innovation cycle (which have enabled the firm to bring products to market in just 6-12 months, down from 18-36 months historically), we believe that adding niche operators like Filorga, which have proved more agile in responding to evolving consumer trends, could accelerate these efforts.

Although Colgate had selectively looked to smaller bolt-on purchases in the past, we thought it could pursue deals at a faster cadence under new CEO Noel Wallace to offset competitive challenges. However, we don’t expect it will veer from its past prudence, and we don’t expect any tie-ups will jeopardize the company's ability to reinvest in its core operations while returning excess cash to shareholders. Given that it represents a mere low-single-digit percentage of sales, this deal doesn't sway our $70 fair value estimate or our long-term outlook for 3% average annual sales growth and mid-20s average operating margins over the next decade. With the shares trading at a 5%-10% premium to our valuation, we think investors should await a more attractive risk/reward opportunity before building a position.