Colgate-Palmolive on Neutral List

We areretaining our long-term Neutral recommendation for the global consumer goods manufacturer and distributor Colgate-Palmolive Company (CL - Analyst Report).

We remain encouraged by the company’s robust quarterly results as well as its leading position in the industry. However, rigorous competition and exposure to foreign currency fluctuations keep us on the sidelines.

Colgate-Palmolive’s second-quarter 2012 adjusted earnings of $1.33 per share came in line with the Zacks Consensus Estimate and increased nearly 6% from the prior-year quarter on the back of improved revenue.

Global net sales surged nearly 2% from the prior-year quarter, benefiting from a 3.5% upside in pricing and a 5.5% rise in global unit volume, partially offset by a 6.5% negative impact from foreign currency translations.

Looking ahead, Colgate-Palmolive expects to register double-digit earnings per share growth for fiscal 2012, excluding the impact of foreign currency translation and gross margin expansion in the range of 75 125 basis points.

Of late, management has been focusing on innovations for developing new products regionally to combat rising material costs and promotional investments, which will boost its top line. Also, the company’s strategic acquisition and divestment activities will provide a cushion to its bottom line.

A world leader in oral care, the company also commands a market-leading position in several personal care product categories. Moreover, a strong portfolio of globally recognized brands, including Colgate, Palmolive, Mennen, Softsoap, Irish Spring, Protex, Sorriso, Kolynos, Elmex, Ajax and Axion provide a competitive advantage to the company, further strengthening its dominant position in the market.

However, the company operates in a highly competitive market with new challenges every now and then. The resurgence of archrival Procter & Gamble Co. (PG - Analyst Report) as well as the intensified global competitive conditions is currently posing challenges for the company. Today, Colgate is facing intense competition in various countries including China, Russia, India, Hong Kong, Brazil and Mexico.

Further, the company’s international exposure makes it prone to currency fluctuations, which affect the products pricing and ultimately the company’s profit margins and consumer demand.

The company also strives to gain significant market share as the competitive dynamics in the household products industry have radically shifted from the earlier emphasis on cost savings and manufacturing efficiencies to gaining market share. This, in turn, has increased the company’s costs due to the increasing marketing and promotional expenditures, which weighs on the company’s bottom lines.

Summing up, we believe Colgate is well positioned in the current competitive market. The company’s outlook and growth strategies suggest that it will successfully boost its top and bottom lines going forward. However, maintaining some caution due to the competitive market and unforeseen currency effects, the company retains a short term Zacks #3 Rank (Hold).