Third Point Confirms Colgate-Palmolive (CL) Stake in Q3 Letter

Dan Loeb's Third Point confirmed its stake in Colgate-Palmolive (NYSE: CL) in its third-quarter letter to investors, seen by StreetInsider.com.

The firm describes the stake as "significant" and said the investment fits several important criteria in the current investment environment.

First, Third Point notes the business is defensive in nature and has "significant pricing power in inflationary conditions."

Second, Third Point sees "meaningful hidden value" in the Hill’s Pet Nutrition business. The hedge fund believes the business would "command a premium multiple" if separated from the company's consumer assets.

Third, the hedge fund said there is a favorable industry backdrop in consumer health, with new entrants via spin-offs and potential for consolidation.

Finally, Third Point said the valuation is attractive both because "earnings growth is poised to inflect higher, and because shareholders are paying very little for the optionality around Hill’s or Colgate’s ability to participate in further consolidation in the consumer health sector."

The hedge fund believes the four categories of brands should perform well across most economic conditions: oral care, home care, personal care, and pet nutrition. While organic sales have grown 5-6% over the past few years, earnings growth has been disappointing, and the stock has become a perennial underperformer, the firm notes.

On the Hill’s Pet Nutrition business, the firm notes it has been the "star" of Colgate’s portfolio over the past few years with organic sales growing 11-12% and operating margins in the mid/high 20’s. Further, the recently acquired three pet food manufacturing plants "allows the company to bring on additional capacity faster than rivals, take share and thus accelerate growth."

Third Point believes as a stand-alone business, Hill’s could deliver even faster growth and better margins. They see Hill's commanding a premium multiple of 25-30x EPS for an aggregate valuation approaching $20 billion on CY23 numbers.

The hedge fund also urged the board to become "part of the current M&A minuet in consumer health" with GSK and Pfizer recently separating their consumer health division.

On the stock's valuation, Third Point sees it as providing a "strong margin of safety coupled with significant upside." They highlighted that share trade for a low 20x multiple on CY23 EPS. They see shares compounding at a mid to high teens rate over the next several years just from earnings growth and the nearly 3% dividend. "Any strategic actions around Hill’s or the consumer health sector could add materially to our expected return," they add.

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