Keeping Your Portfolio Clean

07/09/2008 12:00 am EST


Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Vahan Janjigian, editor of Forbes Growth Investor, recommends Colgate-Palmolive as a good, well-managed consumer staples stock that should post steady growth.

Colgate-Palmolive (NYSE: CL) is one of the largest and most recognized names in the global consumer staples industry.

In 2007, 40% of revenues came from oral care products, including toothpaste, toothbrushes, mouthwash, floss, and pharmaceutical products for oral health professionals. Brands include Colgate, Tom's of Maine, and Ultra Brite.

Personal care products, which produced 23% of revenues, include shower gels, shampoos, conditioners, bar soaps, deodorants, antiperspirants, liquid hand soaps, and shaving creams. Brands include Irish Spring, Palmolive, Softsoap, Mennen Speed Stick, Afta, and Skin Bracer.

Home care products accounted for 24% of sales. This category includes dishwashing soaps, household cleaners, and fabric care products [under brands like] Ajax, Murphy Oil Soap, Cold Power, Dynamo, and Suavitel. Pet nutrition produced the remaining 13% of sales. CL sells pet foods under the Hill's Science Diet brand and supplies prescription foods through veterinarians.

Management launched a comprehensive four-year restructuring program in 2004 to enhance long-term sales growth and profitability. It consolidated manufacturing and warehousing facilities, and divested the low-margin household bleach business.

To help spur growth, it increased marketing and new-product development expenditures. These activities yielded notable market share gains. Increased prices, greater cost efficiencies, and a shift toward higher-margin products have more than offset the unfavorable impact of rising raw material and packaging costs.

Adjusted for restructuring costs, the gross profit margin improved to 57.3% in 2007 from 55.2% in 2004. Adjusted for divestitures, first-quarter net sales increased 16% year over year to $3.71 billion. Unit volume growth and higher pricing were responsible for 5.5 and three percentage points of the gain, while foreign exchange added 7.5 percentage points.

Oral, personal, and home care sales grew 15.3%, with volume gains reported in all regions. Sales climbed 7.1% in North America, 19.6% in Latin America, 19.4% in Greater Asia/Africa, and 15.1% in Europe/South Pacific. Pet nutrition sales increased 16.7%.

However, soaring raw material and packaging costs outweighed price increases and other cost savings, causing the adjusted gross profit margin to fall 12 basis points to 57.25% [in the first quarter]. The pro forma operating profit margin declined five basis points to 20.53%. Pro forma net income grew 15.8% to $487.7 million, or 90 cents per share.

Rising raw material costs remain a primary concern. However, ongoing cost restructuring programs give CL some ability to absorb this effect. Restructuring activities should ultimately yield $425-$475 million in annual cost savings.

Sales should keep rising in developing regions, where higher incomes and improved living standards are driving demand for hygiene products. CL holds market shares of 31% and 33% in China and Russia. It also controls over 70% of the Brazilian toothpaste market and roughly 50% of India's market. (The stock closed just below $70 Tuesday-Editor.)

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