WI think that Colgate-Palmolive (NYSE: CL) is currently a better choice compared to Kimberly-Clark (NYSE: KMB). The CL share is trading at just under 4x sliding income, more than the 2.3x multiple of KMB. Does this gap in company valuations make sense? We believe so, and we expect it to increase even more. While both companies have seen a steady increase in revenue since lockdowns began to be lifted, Colgate-Palmolive revenue has grown much faster over the past five years, while Kimberly-Clark has recorded numbers more or less stable sales. Colgate’s revenue grew steadily year-over-year from $ 15.2 billion in fiscal 2016 to $ 16.5 billion in fiscal 20, as LTM’s revenue rose currently at $ 17.3 billion. In comparison, KMB’s revenue growth has been uneven, with revenue from FY16 to FY19 amounting to just under $ 18.5 billion. The pandemic has seen an increase in demand for Kimberly-Clark’s hygiene products, bringing revenues to $ 19.1 billion in fiscal year ’20. On an LTM basis, Kimberly-Clark’s revenues are $ 19.3 billion. In addition, CL’s EBIT margins are 21.1%, higher than KMB’s 14.5%.
That said, there’s more to the comparison, which makes Colgate-Palmolive a better bet than Kimberly-Clark, even at these valuations. Let’s go back to take a closer look at the relative valuation of the two companies by looking at historical revenue growth as well as operating profit and operating margin growth, as well as financial condition. Our dashboard Kimberly-Clark vs. Colgate-Palmolive: industry peers; Which action is a better bet? has more details on this. Parts of the analysis are summarized below.
1. Colgate-Palmolive is the Big Winner in Revenue Growth
Colgate-Palmolive reported compound revenue growth of 2.1% in the past three years, compared to Kimberly-Clark’s compound revenue growth of 1.4% in the same period. However, for the most recent quarter (Q3 ’21), the two companies saw roughly similar year-over-year growth, and the LTM revenues of both companies are at about the same level.
Despite this, Colgate-Palmolive’s revenue growth, 1.5 times that of Kimberly-Clark over the past three years, makes it the winner in sales growth.
2. EBIT Margins: A Mixed Bag
Colgate’s operating margins were 21.1% on an LTM basis, above Kimberly-Clark’s 14.5%. Kimberly-Clark’s EBIT margins increased from 18.6% in fiscal 2016 to 11.5% in fiscal 2018 due to higher pulp prices. Margins recovered over the next two years, to around 17.1% in FY2020, but on an LTM basis they fell back to 14.5%.
In comparison, Colgate saw a steady decline in margins, from 24.6% in fiscal 2016 to 21.1% on an LTM basis, largely due to increasing competition in emerging markets and markets. headwinds of foreign currencies.
Both companies have seen their margins decline in recent years, but again Colgate’s margins are 1.5 times those of Kimberly-Clark on an LTM basis.
3. Colgate-Palmolive is in a better net cash position
Colgate’s debt ratio currently stands at 11.9%, compared to Kimberly-Clark’s current debt ratio of almost 20%. Additionally, Colgate’s liquidity as a percentage of assets is 6%, well above Kimberly-Clark’s 1.6%. Obviously, Colgate-Palmolive has a much better cash flow cushion compared to Kimberly-Clark.
The net of everything
Colgate’s revenues have grown faster than Kimberly-Clark’s, and although both companies have experienced struggling EBIT margins over the years, Colgate’s higher EBIT margins and stronger cash cushion make it a safer bet. Despite Colgate’s P / S ratio of 3.7x, compared to Kimberly-Clark’s 2.3x, we believe this gap will widen. Moreover, on a P / EBIT and P / E basis, the two companies are at roughly the same level. Given that Colgate has experienced stronger revenue growth in recent times and has a much better cash cushion, we believe this gap is set to widen. As such, we believe the Colgate-Palmolive stock is currently a better bet compared to the Kimberly-Clark stock.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.