Is Colgate stock a ‘buy’ after Dan Loeb built a stake?

Colgate-Palmolive Company (NYSE: CL) is in focus on Tuesday after Dan Loeb’s Third Point was reported to have built a decent-sized stake in the producer of consumer products.

Here’s what the activist investor is after

Loeb wants the multinational to consider spinning off “Hill’s Pet Nutrition”. As a standalone, he argues, the pet food subsidiary could grow faster, improve its margins, and be valued at about $20 billion.

There’s a meaningful hidden value in the company’s Hill’s Pet Nutrition business, which we believe would command a premium multiple if separates from Colgate’s consumer assets.

In the latest reported quarter, Hill’s brought in just over $900 million – about 20% of the total sales. Colgate stock has sharply sold off over the past two months.

In dollar terms, his position in the consumer products company is worth about $1.0 billion. Loeb also disclosed a similar sized stake in the Walt Disney Co about two months ago.

Colgate stock was recently upgraded at JPMorgan

Last week, JPMorgan said investors should buy this stock as it has upside to $79. Stickier price increases, analysts at the bank said, will drive close to a 10% growth in per-share earnings next year.

In 2023, they expect the multinational to recover its global market share as well. Other reasons cited for the “overweight” rating included attractive valuation.

Loeb also quoted pricing power and valuation as grounds for building a stake in the Colgate stock.

The New York-headquartered firm is set to report its quarterly results next week. Consensus is for it to earn 74 cents a share versus 81 cents a year ago.