Stock Analysis & Ideas

Third Point Takes Stake in Colgate-Palmolive (NYSE:CL); Should You Invest?

Story Highlights

Hedge fund manager Dan Loeb’s Third Point has taken a huge stake in Colgate-Palmolive. Loeb sees tremendous potential in spinning off Hill’s Pet Nutrition and focusing on the consumer health sector.

Dan Loeb-led hedge fund Third Point disclosed a stake in consumer goods giant Colgate-Palmolive (NYSE:CL) in its third-quarter Investor Letter. Though the extent of equity investment is not mentioned in the letter, CNBC’s David Faber claims that the investment is about a whopping $1 billion. Following the news, CL stock rose 3.8% yesterday.

Seeing Third Point’s previous investments, an investor may want to follow his advice on Colgate-Palmolive. Let us look at Loeb’s rationale for investing in CL stock.

Here’s Why Third Point Sees Value in Colgate-Palmolive

Third Point has a strong conviction in Colgate’s portfolio of offerings, including oral care, home care, personal care, and pet nutrition. Despite registering modest organic sales growth during the past few years, Colgate’s earnings growth has diminished, marred by supply chain issues, inflationary pressures, and foreign exchange headwinds.

Having said that, with the macro trends reversing, Loeb believes that Colgate’s accelerated investments in “demand generation, product innovation, and digital capabilities are starting to pay off.” In the long run, Loeb sees Colgate delivering outsized earnings growth, robust sales, and favorable margins.

Third Point Wants Colgate to Spin Off Hill’s Pet Nutrition

Interestingly, Third Point sees tremendous value in spinning off Colgate’s premium pet food business, Hill’s Pet Nutrition. Loeb noted that in the last few years, Hill’s has grown sales organically at 11%-12% with mid/high 20’s operating margins, making it a lucrative stand-alone business.

Notably, the pet food category is considered one of the fastest growing with long-term growth potential. As a stand-alone business, Hill’s could enhance its margins and command a premium multiple, valuing the company at around $20 billion based on its calendar year 2023 numbers.

Meanwhile, Loeb suggests that CL must focus on its consumer health business, which has a lot of scope for consolidation. He sees Colgate’s shares compounding at a mid-high teens rate over the next few years just from earnings. Also, Colgate pays a regular quarterly dividend of $0.47 per share, reflecting a current yield of 2.58%.

Is Colgate-Palmolive a Good Stock?

Going by Loeb’s conviction in CL stock, it seems like a good stock to invest in. On TipRanks, Colgate-Palmolive stock has a Moderate Buy consensus rating. This is based on five Buys and seven Holds. The average Colgate-Palmolive price target of $78.67 implies 7.9% upside potential to current levels. Meanwhile, CL stock has lost 12.3% so far this year.

Ending Thoughts

Loeb has put up some very interesting thoughts about Colgate-Palmolive, which could be considered sound investment advice. Looking at Colgate-Palmolive’s historical performance, the company looks well-positioned to make the most of the reversal of macroeconomic trends.

Disclosure

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