Consumer products company Colgate-Palmolive (NYSE:CL) reported slightly lower fourth-quarter and full-year earnings on January 27, which disappointed Wall Street. The maker of Colgate toothpaste and Palmolive soap cited rising commodity prices, which put downward pressure on prices. The company is also expecting rising costs for this year. (For background reading on investing in this sector, see A Guide To Investing In Consumer Staples.)

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Consumer Product Squeeze
While Colgate reported that its pricing was mostly flat for last year, that won't be the case in 2011.The company announced it would likely hike prices by 1-2% in response to the rising costs, which it originally estimated to be in the 4-6% range, but now believes it will be more like 8-10%.The speed with which costs are rising for producers will mean that household products, food and beverage companies, and others will eventually attempt to pass these costs on to consumers.

A Common Refrain: Commodity and Materials Costs
Through this earnings season, while talk of inflation has been increasing on Wall Street, it's been more about commodity and raw material costs for now rather than about translating immediately into higher consumer goods prices yet. Many will argue there's no inflation as gold prices have come down and there's no rush from stocks. Yet there's a case to be made for pending inflation - however mild - as the numbers tend to under-account true costs on consumer goods due to inefficiencies in assessing component costs, along with consumer trade-downs and other factors.

The increase, however slight, is what investors need to watch. Even more importantly, investors should stay on top of the rise and direction of costs and the future trends these are likely to form. Keep in mind, though, that what might be inflationary factors now are coming on the heels of recession years that saw no inflation or even deflation. Without sounding an alarm, Colgate and many other companies are telling investors to stay vigilant about the possibility of inflation. (For related reading on inflation, see 5 Tales Of Out-Of-Control Inflation.)

Colgate's So-So Quarter
In Colgate's most recent earnings report, revenue was down slightly to $3.98 billion from $4.08 billion in the same quarter a year ago. Net income was $624 million, or $1.24 per share, compared to $631 million, or $1.21 per share, in the same quarter last year. Global unit volume grew 1%, while gross margins fell from 59.5% to 59.1%. Operating profit margins fell to 22.8% from 24.3%. Costs and promotions knocked the margins down as they weren't offset by cost-saving initiatives. Selling, general and administrative expenses rose from 34.2% to 34.6%. For the year, revenue was up 1.5% to $15.56 billion, while net income fell slightly to $2.2 billion from $2.29 billion, with EPS at $4.31 compared to $4.37 in 2009.

The Consumer Products Space
Consumer products stocks like Colgate aren't considered very exciting, but they do solid business. The group features steady dividend payers with historically good fundamentals. Kimberly-Clark (NYSE:KMB) recently reported flat earnings but will restructure its operations to be more cost efficient.While potential cost factors are something to be aware of with Colgate, it's important not to lose sight of the company's fundamentals, which remain strong.

The company's trailing 12-month percentage of free cash flow produced from revenue was 17.7%, a good performance in its industry. Competitors Clorox (NYSE:CLX) featured a 12.2% FCF from revenue, while Church & Dwight (NYSE:CHD) produced 11.3% in its trailing 12 months.

The Bottom Line
Cost and price increases aside, Colgate's outlook for 2011 is to increase its advertising while pursuing sharp cost-cutting initiatives elsewhere. It sees gross margin expansion with mid-single-digit earnings per share increases. The company may not be setting up for a blockbuster year, but it is certainly expecting solid performance. Long-term, Colgate is a fine company that is expected continue to produce good results even in a more challenging environment.

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Tickers in this Article: CL, KMB, CLX, CHD, UL, ACV

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