What would you pay more for—Apple Computer or Colgate Palmolive?

I’m always impressed and humbled by those contributing to my blog comments. And that’s why this post is asking for your feedback and opinion directly on a single question.

Speaking to a group of university students, Bill Gates said:

“I think the [earnings] multiples of technology stocks should be quite a bit lower than the multiples of stocks such as Coke and Gillette because we are subject to complete changes in the rules.”

His biggest holding, Microsoft is trading about 30% lower than the S&P 500, currently. This pricing probably aligns with Gates’ philosophy.

But Apple computer is 46% more expensive than the average S&P 500 stock.

Which statement has the highest degree of certainty?

That Apple computer will have higher earnings in 2020 than in 2010 – or that Colgate Palmolive will have higher earnings in 2020 than they do today?

And do you agree with Gates?

Should Apple have a lower PE ratio than a business like Colgate Palmolive?





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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27 Responses

  1. From my point of view technology stocks tend to be cyclical, product cycles are fast and if they become followers instead of innovators they will never regain a leadership position again and either get bought out or go out of business. The amount of energy and brainpower that is required to stay on top of the technology world is staggering. However, a company like Colgate or P&G has a easier road to profits and is capable of a much longer sustain growing cash flow that could stretch into centuries. In short, I think Gates is right in his assessment. Colgate is not as exciting as Whiz-bang Gene Splice Inc, but it will reward the long-term investor.

  2. Agree with @The Biz of Life here.

    Also, I would not invest in Apple at those prices. The time to get in was a few years ago, not now!

  3. I pick Colgate. It's grounded and it would probably provide steady growth with much less risk of crashing down.

    Apple has too many emotional investors feeding it. When it drops, it's a major drop triggered by institutions. At the same time, if they can pull off an entry into the television market with iTV, it may yet reach another level … or the opposite …

    That said, I can invest for short term profit and I do watch Apple 🙂 I have been in and out twice in the past 5 years.

  4. If I recall correctly, Apple was a company almost out of business years ago or at least considered a has-been (back in the early 1990s?). They are one of the few tech companies that were able to pull themselves off of the rubbish heap of history and have a second life.

  5. If there existed two companies with the same growth rate and the same balance sheet strength, then the one that sells toothpaste should indeed be at a higher valuation than the one that sells tech.

    But one must also consider growth rates and balance sheet strength. Apple has better growth and has $50 billion in cash equivalents and investments on its balance sheet with no debt. If you back out that $50 bil from Apple's market capitalization, the stock is not as expensive as it appears (and cheaper than Colgate's.) Plus, Apple is trading at a lower Price-to-Book ratio than Colgate.

    Colgate, on the other hand, has a P/E of 18 despite having a ton of debt. Way too much debt. It's debt is not out of control (as shown by their high interest coverage ratio), but it is a big anchor. The thing that makes Colgate so valuable is its international exposure. Colgate has a higher percentage of its revenue coming from abroad than most other US blue-chips, and that's a big reason why it's valuation is so high.

    I think both Colgate and Apple are mildly overvalued at current prices. I'd pay a higher multiple for Apple than for Colgate, though, considering the balance sheet strength and growth. It's not all about earnings. I don't think Colgate would make a bad buy at these prices, but it's just a bit pricey.

    There is plenty of cheap tech out there like Texas Instruments and Intel. They have better balance sheets than Colgate but trade at far lower prices due to lack of growth in this recession which matches Bill Gate's view. Apple is currently the exception to tech, because as far as Apple is concerned, there was no recession at all.

  6. Please ignore the incorrect usage of "it's" in my above comment. Thanks. 🙂

  7. @Dividend Monk

    Hey Matt,

    I guess it's a tough question to answer in many ways. Over the past 18 years, Colgate-Palmolive has been the bigger growth stock.

    From 1992 until 2010, Colgate-Palmolive increased its EPS by 554%.

    From 1992 to 2010, Apple increased its EPS by 511%.

    Apple has definitely given investors some amazing rides. From 1997 to 2000 Apple's stock price appreciated by 3,800%. That puts the current run to shame, in many respects. But then, as we now know, the stock got really hammered and sold below book value in 2001—looking pretty dead to the world.

    If Apple can get even close to maintaining its very recent EPS growth (and it has been very recent) then there's an argument for paying a higher PE ratio. But if Gates is right, tech businesses may never gain the same durable competitive advantage that a toothpaste business can. And Apple's EPS could plummet if it loses the coveted "in product" foothold.

    I guess it brings us to the big question. Which company will show higher EPS growth between now and 2020? Does one earn points over the other for being more volatile and unpredictable, or should it be the other way around? There are going to be two camps to this argument, and both can present a great deal of logic—just as Matt has.

  8. @The Biz of Life

    Biz,

    Apple could end up being the better investment long term. But it might not. It has some powerful rowers at the helm. But it has to row against a pretty strong current, and it can never let up. The moment its rowers let up, Apple gets swept downstream.

    Colgate Palmolive is rowing sleepily in a quiet pond. It will get to the other end if the rowers fall asleep and a gentle breeze blows in the right direction.

    But how far can those rowers take Apple? They might take them far enough upstream to come out onto their own quiet lake. Do you think Apple can do it? If they can, then they'd deserve a higher PE, right?

  9. @The Passive Income Earner

    Hey Passive,

    You make some good points about Apple. I'm a bit too squeamish for it myself. A good friend of mine bought it below book value in 2001 and he sold it after gaining a few hundred percent. I'll bet he wishes he still owned those shares!

  10. @Kevin@InvestItWisely

    Hey Kevin,

    To play the devil's advocate, I'll bet loads of people said the same thing about Berkshire Hathaway over the years.

    That said, I know what your counter will be. Apple ain't that diversified.

  11. Hey Andrew,

    I'd put my money on Colgate. I agree with Biz above, technology stocks tend to be cyclical products. I recall Lowell Miller has never owned or suggested to own tech stocks for long-term (20 year+) investors. Not that his word is gospel or anything, rather, I agree with his principles on why…most of it has to do with volatility. High volatility, high risk. I guess I'm not a big fan of risk.

    I see Colgate Palmolive chugging along, like a lil' engine that always could. Quietly going about its business with minimal noise and distribution that would normally wake up the neighbourhood. Owners of Colgate can hop on the train, enjoy the ride and the vistas it provides. Owners will most definitely get to their destination (long-term growth; steady dividends; you know the story) and they can see that path in front of them. Apple on the other hand, is the fast-moving train barrelling down the tracks like a TGV in France. This train makes lots of noise, is very exciting and fun, but you tend to miss the finer views of your ride, until all of a sudden the train gets to its destination and stops. The Apple TGV got to its destination, rather fast, rather abrupt and most people didn't even notice the ride was over. In my opinion, what travels fast, what eventually goes up, must eventually come to an end and come down. Kinda unpredicatable isn't it?

    Certainly not the best analogy, just something I quickly came up with. I hope you understand my view? 🙂

  12. Marco says:

    Hi Andrew,

    Apple is currently all about momentum. I would consider it for trading purposes but with tight stops. As for the long term one can still have it in their portfolio, just manage the exposure and risk. A 1-5% portfolio exposure should be good and would not dramatically impact the portfolio if it were to ever collapse. Remember when Sony and the Walk-Man were the "big thing" back in the day (I know, I just dated myself), they were at the top of the game. Where are they now with respect to leadership? Expect Apple to eventually lose momentum as other manufacturers catch up with them, it's inevitable in the tech field. It's hard to stay at the top, not saying it can't be done but it can be quite difficult. Eventually the market will recognize this and Apple will come back in line with proper valuations. This is just my two cents…

    I would prefer Colgate-Palmolive in my portfolio. I use their products everyday as many others do too… got to love a model where the consumer keeps coming back to purchase necessary daily-life products.

    Marco

  13. @Financial Cents

    Hey Financial Cents,

    So many of the world's best stocks end up being boring businesses that nobody would have expected to "rip it up". But if Apple had a current PE multiple of 12 and Colgate Palmolive had a multiple of 17x earnings, would the Apple shares interest you? They wouldn't have the certainty that would suit me, but would they tempt you at that price?

  14. @Marco

    Hey Marco,

    Silver hairs might not bode well in a boxing match, but in the investment world, they're essential. Date yourself if you want, but you're revealing wisdom and experience when acknowledging that you've been observant.

    I've made some risky moves before, but one man's risk is another man's walk in the orchard. I like to hear when great businesses get slapped with lawsuits. If the primary business isn't going to be shut down, then lawsuits are great for investors. Merck's Vioxx issue was awful for the people involved, but I was able to buy shares really cheaply after doing the math on what I thought the liability might be. I used Wyeth as my benchmark–from the litigation issues they had with their diet pill. I believe it was called Phen Phen or Phin Phin, or something like that. Anyway, I calculated Merck's liability estimate at $18B after including a margin for error. And I figured they could handle that. They didn't turn out to be anything like that. I sold Merck shares at a lovely profit. But Merck and Apple are both so different—even though they both rely heavily on R&D. At least that's what I think. But I'll admit to being a wimpy investor.

  15. Hey Andrew,

    Yes, it would interest me, and tempt me, but I don't think I'd bite. I probably say that with some certainty because I don't have any money burning any holes in any pockets at this time.

    Your article above would be an excellent one to revisit in one year's time. I wonder if everyone here, commenters, including me, would write the same thing in October 2011? 🙂

    Great discussion! Have a great weekend!

    Mark

  16. @Financial Cents

    Hey Mark,

    My guess is that Apple is going to keep moving up until it doesn't. How cryptic is that? On another note, I didn't pick Colgate Palmolive for any specific reason. I was just thinking of a company that I knew had a boring but very consistent growth rate. Matt mentioned its debt. And he's right. But its earnings consistency can also service that debt and benefit from it, I suppose. That's one of the reason Apple is cash heavy. SJ knows what happened 10 years ago with Apple. And he knows that a business with drying revenue can't have debt. And of course, Apple could once again have drying revenue in 5-10 years. It's possible. But not as likely with Colgate.

  17. DIY Investor says:

    I wouldn't buy Apple here. I owned it at one time, made a nice return and got out way too early but am not looking back. I remember at the end of class a few years back my students gathering around a student in the back of the class who was fiddling with something. I approached the group and asked what he was holding. It was my first look at the ipod. The word "cool" comes to mind. Students were asking where he got it, how much it cost, etc. And ever since Apple has been the epitome of cool and knows how to play the "cool card". Motorola, for a counter example, never seems to have caught on.

    Apple now has to stay cool which is very difficult and has non financial risks – most notably Jobs' health.

    In my career I have had instances where I have felt everybody whose going to buy has bought so there is only one way to go! Extraneous observation : I feel the same about gold.

    I've also,however, often been early.:)

  18. @DIY Investor

    Hey Robert,

    If their success relies on them remaining cool, as you suggest, then it's going to be very very difficult for them indeed. I agree with you.

  19. On a very superficial level, the main difference between these companies is hype. One has it, the other doesn't. Hype drives wants and wants drive prices up. Nothing about Colgate is hyped or to get hyped about. Thoughts?

  20. @Financial Cents

    Haven't you heard about their latest, newest floss Mark? They're lining up overnight in Thailand for it, and it should reach Canada soon. Apparently, Colgate is working on a new version to be introduced next year.

  21. I'm pretty hyped about the "Colgate Wisp". It's a toothbrush you can use without any water, on the go. Cool people are really busy, so they need to brush their teeth while doing other exciting things, like hanging out at the beach or dancing at a club (or at least Colgate's commercials would imply).

    This is kind of self-promotion, but if anyone is interested I posted a stock analysis of Colgate back in September. (I don't have one for Apple, though.)
    http://dividendmonk.com/colgate-palmolive-company

  22. Davo says:

    <blockquote cite="#commentbody-1326">

    The Biz of Life :If I recall correctly, Apple was a company almost out of business years ago or at least considered a has-been (back in the early 1990s?). They are one of the few tech companies that were able to pull themselves off of the rubbish heap of history and have a second life.

    @The Biz of Life

    Hi Biz, Andrew

    Since Apple got going in the late 70's /early 80's, I have had one Apple product in all those years: an ipod touch I purchased a little over 2 years ago. And while I like it a lot, I get frustrated with Apple's single dimensional approach to doing things — it's Apple's way or the highway; to me, iTunes is a pain in the butt, it's counter-intuitive. When I had a generic MP3 player it was as simple as dragging files from one window to another.

    But more disappointingly the on/off button no longer works after about 18 months.

    I've been told by Apple they can't/won't/don't repair them. The back is non-removable and the entire device needs to be junked — and I have to purchase a new one!

    It's very disappointing to find a $500 dollar product is essentially considered disposable by the manufacturer;

    To me this is also a mockery on apple being green. (Yes I know it's about recycling, but when it has an inbuilt obsolescence in a 2 year old unit — I can't upgrade to the most recent software, so that there are some iTunes apps that I have purchased are no longer supported and are unable to be used any further.

    Would I purchase another Apple product?

    I seriously though about a Mac Book Pro a few months back – and stayed with Windows instead. So I'd have to say, No.

    I'll wait and see what Android has to offer and there are iPad clones soon being released on mass, that will be cheaper with more features and less restrictive, and probably repairable.

    Nevertheless, Apple' products are seen as sexy and without doubt, many of them are beautifully made: the iPod, iPad, Mac Book Pro.

    As well, Apple has a hard core of 'fanboys' that will buy anything with the apple logo and Steve Jobs is seen as the Apple guru and saviour.

    But, when Apple Founder, Steve Jobs was sacked by the Apple board, Apple went sour and nearly went bust. (Steve Jobs returned after investing into LucasFilm and creating Pixar – a company that has produced some of the most brilliant animated modern films destined to become classics, such as Toy Story, Cars and Up.)

    And there's the rub:

    If history is anything to go by, Apple's future appears to be tied in with its innovative genius Steve Jobs. (Much more than Microsoft was with Bill Gates.)

    I think Apple needs a genius / guru at the helm. Committees / Boards rarely have 'vision.'

    Toothpaste and other personal products – no matter how hard the marketing companies work with beautiful girls flashing big iridescent white toothy smiles — may be the least sexy product on the market…

    But I just walked through my condo and had a quick look… we have Colgate product everywhere, and we constantly restock…

    I think Colgate will be around for a long time. Unsexy products, but purchased and consumed every day.

    Apple is basically only as good as its last 'Sexy' product — and maybe it's current CEO, Steve Jobs. The stock market is littered with the corpses of dead computer and technology companies.

    As you say Andrew, "Pick companies that an idiot can run, because one day an idiot may run it…"

    But with Steve's Jobs medical history with cancer and liver transplant, it will be interesting to see what happens initially to the price of Apple shares when it's announced Jobs is unable to helm Apple; and the long term results when he is no longer able to provide innovative strategies for Apple.

  23. I personally avoid Apple products for the most part. I had two iPods early on, and was not impressed, and I'm not particularly interested in cycling through several-hundred-dollar gadgets every 2 years.

  24. @Dividend Monk

    I used to have a little portable MP3 player for running. It took a single AA battery, and when the battery died, I bought a new one. The thing was bombproof–but I lost it during a move we made two years ago. Since then I have owned 3 iPod shuffles. I have never been able to get more than 2 months out of them, so I've given up on them. Perhaps I sweat too much when I run. But I won't be buying another. Can anyone sell me a cheap, portable MP3 player that takes old school batteries?

  25. The Rat says:

    I'm an Apple fanatic. I own an iMac, an iPhone, and a MacBook and I believe Steve Jobs is a visionary leader that launches great products and is starting to make Microsoft look…well that's another story.

    But you know what? I would still go with Colgate. Dividend wise, you're looking at a pretty solid entry point (not far from 3%) and I've always viewed this company to be more recession proof in nature. It's a true champion in my book.

    Great thread

  26. @The Rat

    Hey Rat,

    It's great to hear from you again. Microsoft is definitely out of favour. I'm crossing my fingers on that one after recently buying 650 shares. I don't own Colgate Palmolive, but I think it might be one of the few businesses that Buffett would deem an "inevitable"

    Thanks for the comment!

    Andrew

  27. Tom says:

    I'm a little late to this discussion, but I want to give my opinion about Apple and "cool". I wouldn't be so quick to link Apple's success being dependant on "cool".

    I recently had to go back to Windows at a new job since switching to a MBP a year ago. And let me tell you, for me it is not a question of apple being "cool". It's about productivity. I believe organizations will start adopting apple products en-masse because they are easier to use, and easier on the IT dept.

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