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Colgate-Palmolive: Optic White Fuels Organic Growth

 December 24, 2012 01:02 AM

(By Mani) Colgate-Palmolive Co.'s (NYSE: CL) high multiple is a function of industry leading organic growth and cost savings and mix driven gross and operating margin expansion.

Incremental innovation has been the lifeblood of the Colgate story for several years, with Optic White oral care regiment the latest success story from Colgate's proven new product engine.

Priced at a 167 index to Colgate's US toothpaste business, Optic White provides a powerful combination of category dollar growth for retailers and margin accretive organic growth acceleration for Colgate.

The excess profits from Optic White and other premium-priced launches are expected to fund EPS growth and new product initiatives across categories and price tiers.

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"Moreover, 15% of triers have repeated purchase 3 or more times and repeat purchases represented roughly 87% of total Optic White volume in the most recent 4 week period, strong signs the product has staying power," Deutsche Bank analyst Bill Schmitz wrote in a note to clients.

Launched in the third quarter of 2011, Optic White toothpaste weighted distribution in the US is now 92 percent. The product represented 16 percent of total Colgate US toothpaste sales in the latest 4 weeks, has household trial at a cumulative 13.9 percent and cumulative repeat of 45 percent of triers – all very solid metrics.

Optic White is another trophy oral care franchise Colgate can put on its shelf. Across most industry new product success metrics, the product has expanded category sales and profits, with a premium price point and margin structure resonating with consumers despite a weak macro backdrop.

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In addition, the distribution has been broad and deep, with average weekly distribution at 92 and growing. Product has been incremental, lifting total Colgate toothpaste market shares.

Of course, much of this is priced into the shares here, and makes the long-term attractive, especially with the added benefits of the restructuring program, modestly slowing organic growth trends and sentiment overhang from potential Venezuelan devaluation keeps us waiting for earnings to catch up with the multiple in a group overvalued relative to the market.

"With a strong right to win, Colgate remains a core long-term holding, although we are taking a breather on this one, despite forthcoming restructuring savings, waiting for earnings to catch up with elevated relative multiple," Schmitz said.

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