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Colgate Brushes Past Estimates


Management paints a pretty forward-looking picture.

On Tuesday Colgate-Palmolive (CL), which is perhaps best known for its toothpaste, Ajax and Irish Spring brands reported a second quarter profit of $493.8 million or 92 cents per share. However, not counting restructuring costs its EPS came in at 98 cents per share. In any case, that's a marked improvement over the $415.8 million or 76 cents a share it booked in the comparable period last year. It was also well north of the 94 cents a share that the Street had been expecting.

Meanwhile its worldwide sales came in at about $3.96 billion, which was north of the $3.84 billion that analysts had expected.

Strong sales growth in Latin America, North America, Europe/South Pacific and Greater Asia/Africa was a big reason behind the better-than-expected results. Digging a bit deeper higher prices played a role as well.

With all of that in mind here are some of my thoughts on the Colgate story:

The first thing in between the lines that stands out to me is its gross margin, which per the press release not counting restructuring charges, "decreased 30 basis points from 57.1% to 56.8%." Now to be clear a 30-basis point decline is nothing to write home about. But at the same time, I feel it's not the worst thing in the world either given the increase in oil prices we've seen and the price increases of other commodities. Frankly, the fact that it dropped so little is, in my mind, evidence of good management. Also, if my hunch is correct, and what some refer to as the "oil bubble" does burst, I think we could see the margin number come roaring back with a vengeance down the line.

Next, as I mentioned above, Colgate showed sales growth in several geographic regions. Very simply I have to say that this piqued my interest because it seems to demonstrate that the company isn't just a North American company. Incidentally per the release, North America constitutes just 18% of sales, which I think is a relief.

Also, I have to say that I'm pretty pumped by the following comment about future earnings made in the 2Q release:

"We expect that our strong top-line and excellent savings initiatives will result in solid, good quality, mid-teens earnings per share growth in 2008, and while we have not yet begun our 2009 budget process, we anticipate another year of solid double-digit earnings per share growth in 2009 with gross profit margin up versus 2008."

Very simply, I'm happy that management apparently feels comfortable enough to go out on a limb and say that about 2008 with only about half the year under its belt. Second, to even suggest the possibility of "double-digit earnings per share growth in 2009" is, I think, a big sign of confidence. Seriously folks, I think this is a biggie.

In sum, I think that the second quarter results were pretty solid, and I'm excited by management's comments regarding earnings for both 08' and 09'. Finally I think the shares could move higher in the days ahead as retail and institutional investors digest the news.

Colgate closed at $74.15, up $5.59 or 8.15%.
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No positions in stocks mentioned.

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