2 Big Reasons To Loathe Colgate-Palmolive

Consumer stocks are now as risky as they've ever been. Unemployment's historically high, consumers are spooked, and subpar earnings abound, as companies pay the price for lost competitive advantage or fiscal irresponsibility. But tough times can offer investors the best chance to buy stocks.

Even if stock prices are low, investors still need to be careful. Many companies simply won't survive the recession in their current form. And even if you love an investment, it's always Foolish to play devil's advocate, probing for its potential weak spots. To keep you and your portfolio ready for anything, I've highlighted two reasons to loathe consumer staples company Colgate-Palmolive (NYSE: CL  ) .

Pricy vs. peers
I've previously sung the praises of this well-known company, which markets brands such as Irish Spring, Speed Stick, Murphy's Oil Soap, and Palmolive dishwashing products. Now, I'm scouring away the bright spots, looking for vulnerabilities worthy of investor loathing.

What emerges after just a few swipes of steel wool concerns the stock more than the company: Shares are no bargain. Let's check out the peer-comparisons below to see exactly what I mean.

Company

 Share Price

Current-year P/E *

PEG Ratio

Price-to-Sales Ratio

Colgate-Palmolive

$75.68

17.7

1.8

2.6

Procter & Gamble (NYSE: PG  )

$56.58

13.8

1.5

2.1

Clorox (NYSE: CLX  )

$57.56

13.8

1.5

1.5

Unilever (NYSE: UL  )

$28.45

16.1

1.8

1.3

Church & Dwight (NYSE: CHD  )

$56.02

16.3

1.4

1.6

Kimberly Clark (NYSE: KMB  )

$58.24

13.7

1.5

1.3

Data from Yahoo! Finance on 10/01.
*Current-year P/E based on analyst estimates listed on Yahoo! Finance.

Colgate-Palmolive's a strong company that has been withstanding the recession better than many, so it arguably deserves to trade at a premium to peers. Moreover, its current-year P/E is well below its five-year average P/E of 22.8. But these aren't normal times, and no one really knows what consumer sentiment or buying habits will look like on the other side of the recession.

At these levels, shares appear susceptible to the slightest shock in company results. If you're looking for long- and near-term stability from a consumer-staples investment, Colgate-Palmolive shares could disappoint.

Currency counts
One such shock could arise from foreign-exchange exposure. Roughly 75% of company sales are international. That's great if you want to diversify away from the U.S. consumer, but it means that financial results in dollar terms could be tarnished, as has been the case so far this year.

Currency headwinds are not only a matter of unflattering revenue headlines on an earnings release. Consumer-staples companies such as Colgate-Palmolive also purchase a number of raw materials for production. When costs are incurred in dollars, but sales are made in a weaker foreign currency, margins narrow and profit gets squeezed.

Colgate has a number of strategies in place to combat unfavorable exchange rates, but one such approach involves raising prices in local currencies. So far, that hasn't seemed to exact an undue toll on volumes or market share, but one has to wonder when international consumers will get fed up.

What do you think?
We've made our Foolish case on Colgate-Palmolive -- now it's your turn. Do you loathe Colgate-Palmolive? Love it? Share your comments below.

Other Foolishly loathsome investments:

Clorox, Kimberly-Clark, Procter & Gamble, and Unilever are Motley Fool Income Investor recommendations. Unilever is a Global Gains pick. The Fool owns shares of Procter & Gamble. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Mike Pienciak owns shares of Church & Dwight, but holds no financial position in any other company mentioned in this article. The Fool has a disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 02, 2009, at 2:00 PM, Dutton03 wrote:

    Mike,

    Colgate is a much better company than P&G (Push&Grunt)! They should have a higher PE than their peers. They have sound management, they are the trend leaders in the consumer products field, they were global before any of the others (except Lever). There R&D is by far better than the comp. P&G on the other hand dominates by Halo Effect, element comp. and price the customer out of category's. Right now I will take a 5 point increase in PE vs peers over a 10 treasury at close to 3%

    Wild Dutton

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