Colgate Getting Pushed by P&G

Colgate-Palmolive Co. (CL - Analyst Report) has had a stellar long-term growth record. The company’s tight financial controls and history of new product innovations coupled with efforts to enhance shareholder value through share repurchases and dividend increases support a positive long-term view on the stock. However, rising raw material/fuel costs and the costs related to the implementation of the restructuring plan remain concerns. Hence, a Hold rating is retained.

Colgate-Palmolive’s growth strategy is dependent upon product innovation. The company remains the clear market leader in the oral care segment, both domestically and internationally. With an array of new products scheduled to be launched in 2008, the company should deliver strong results. Colgate is also benefiting from the recently introduced Red Storm program, which strengthens its presence among retail distributors.

The resurgence of archrival Procter & Gamble Co. (PG - Analyst Report) has signaled new challenges. The competitive dynamics in the household products industry are changing, reflecting a change in focus on gaining market share from the earlier emphasis on cost savings and manufacturing efficiencies. As a result, the costs have increased and earnings growth has slowed. Despite anticipated benefit from its restructuring program, the company’s long-term earnings growth profile will remain a drag on its short-term profitability.

Colgate-Palmolive stock has traded in a P/E multiple range of 18 to 27 over the last four years. The stock is currently trading at a P/E multiple of 21.2, which is in the middle quartiles of the historical range. Positive earning surprises along with savings from the company’s restructuring and business-building plan should support future growth. However, aggressive advertising expenditures and higher input costs should continue to constrain near-term growth. The target price of $80.75 is based on a 23 P/E on 12 month trailing earnings.

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Read the full analyst report on PG