CL: Another Bedrock Stock

As I outlined in my last analysis on Procter and Gamble, it is very important to keep your portfolio safe in these tough times. In this recessionary environment you need to have at least one 'bedrock stock' to diversify your portfolio to the defensive side. Colgate Palmolive, which specializes in consumer staples products, is that stock that you need. Colgate is a leading consumer staples brand which produces mainly oral, personal, and home care products. The oral include the most widely recognized Colgate toothpaste, tootbrushes, and also pharmaceutical oral health products. CL's personal care products include bar and liquid soaps, shampoos, conditioners,deodorants antiperspirants, and shave products. The home care division produces major brands such as Palmolive and Ajax soaps. Oral products is Colgate's largest business and it enjoys a huge market share in the U.S. at 38% but is also a leader around the world. CL holds the number 1 position in 53 out of 71 of the largest toothpaste markets around the world. With 67% of sales coming from outside of the U.S. this means that CL gets to benefit huge from a weaker dollar. Not only that but rising consumers in BRIC and other emerging markets are now in a position to buy more consumer products that CL offers. Emerging market growth will be a significant generator of earnings power in the short and long term for this company. Operationally, CL performs much better than its peers. Its profit margins have to continue to widen at about 1% a year for the past few years and is expected to rise another 1% to 22% for FY08. This higher profit margin than its peers has led CL to have a huge 36% return on capital compared with only 15% for the whole consumer staples sector. This year, Colgate is expected to finish a large four year restructuring plan that is set to give tremendous cost savings in the short and long term. Starting in December 2004 the company enacted this program to shed 12% of the workforce and close a third of its factories. Now that this plan is at its end the initial costs of the restructuring are over, and now CL is expected to have annual savings of $350 million for the next few years. All these factors are going to contribute to an expected 13% rise in earnings for FY08 to $3.81/share. With a 23 P/E multiple that is below its 5yr average of 25 Colgates shares could easily reach $88 within a year. With its 2% dividend this would give us a solid 16% gain over the next year. It is necessary to have at least one defensive position in your portfolio and CL is a great stock to fill that.