2 Big Reasons to Love 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. I've already highlighted two reasons to loathe consumer-staples company Colgate-Palmolive (NYSE: CL  ) . Many companies simply won't survive the recession in their current form. However, thinning the herd of weaker competitors should lead to big winners in the consumer space when the economy recovers. In this article, I'll discuss two reasons to why you should spare a little love for Colgate-Palmolive.

Margin appeal
The company behind such ubiquitous brands as Colgate, Softsoap, Tom's of Maine, and Hill's Science Diet, Colgate-Palmolive is familiar to consumers and investors alike. However, the company excels in more than simple brand recognition: Among peers, Colgate-Palmolive boasts top-notch margins -- a key factor in sustaining long-term profitability.

In the table below, I've showcased Colgate's trailing-12-month margin performance vis-a-vis that of competitors.

Company

Market Cap

TTM Gross Margin

TTM Operating Margin

Colgate-Palmolive

$38.1 B

57.2%

22.1%

Procter & Gamble (NYSE: PG  )

$169.0 B

50.8%

20.4%

Clorox (NYSE: CLX  )

$8.2 B

43.4%

19%

Unilever (NYSE: UL  )

$79.0 B

47.4%

12.2%

Church & Dwight (NYSE: CHD  )

$4.0 B

42.7%

15.9%

Kimberly-Clark (NYSE: KMB  )

$23.9 B

32%

14.7%

Industry

N/A

52.1%

18.1%

S&P 500

N/A

45.6%

14.2%

Data from Capital IQ, Reuters, and Yahoo! Finance on 10/01.

Now, these companies don't compete in all the same categories; Unilever, for instance, offers packaged foods in addition to personal- and household-care goods. So, to an extent, we're comparing baseball scores to hockey.

However, Colgate-Palmolive's competitive outperformance seems to owe as much to superior management as any category edge it may enjoy. In late 2004, the company began a four-year restructuring program, cutting jobs, streamlining production, and building more efficient factories. Completed in 2008, the program is expected to save $350 million-$375 million annually. That's a nice chunk of change, whether to help offset rising commodity prices or fill a gap from sales lost to cheaper store brands offered by Wal-Mart (NYSE: WMT  ) .

Emotional loyalty
On the topic of cash-strapped consumers, management hasn't seen trade-down behavior emerge as an overwhelming threat. That owes more to the nature of the company's product portfolio than plain dumb luck. See, when seeking a cheaper product substitute, consumers are more likely to trade down on functional products, such as household cleaners and detergents. But products that consumers use directly on their bodies tend to create -- and sustain -- greater emotional loyalty.

On that note, oral- and personal-care products represented 41% and 22% of Colgate-Palmolive's 2008 net sales, respectively. Home-care products, meanwhile, came in at 23%. That helps explain why volume fell only 1.5% in the company's most recently completed quarter, versus a 4% rout for P&G. Also, the Colgate brand gained global market share in both toothpaste and manual toothbrushes. If that's what the company can accomplish during a global recession, just imagine what results it could enjoy in an improved economy.

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

Other examples of Fools lavishing love:

Clorox, Kimberly-Clark, Procter & Gamble, and Unilever are Motley Fool Income Investor recommendations. Wal-Mart is an Inside Value pick. Unilever is a Global Gains pick. The Fool owns shares of Procter & Gamble. Try any of our Foolish newsletter services free for 30 days.

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


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