Colgate-Palmolive (NYSE:CL) announced today that it had reached an agreement to shed the remainder of its "heavy-duty detergent" brands in North America. That means the buyer, Phoenix Brands, LLC, will get familiar soap-aisle staples such as Fab, Dynamo, Arctic Power -- who names these things? -- along with the license for Ajax laundry detergent in the U.S., Canada, and Puerto Rico.
This isn't exactly a new or unheralded development. Colgate has been deemphasizing detergent for a while and sold some of its overseas laundry brands in 2003 and 2004.
Basically, the firm wants to concentrate on higher-margin products in the oral-care line, pet care, and other personal-care products. The company doesn't break down the gross margins from the varying lines in its financial reports, but it does credit recent increases in gross margin -- 10 basis points in fiscal 2004 -- to the ongoing shift away from detergents. As such, it's difficult to gauge the long-term impact of this move for shareholders; suffice to say that they should hope it's worth more than the upfront, after-tax gain of $60 million expected for Q3.
As you can guess, the market is less than electrified by this development, but from this investor's perspective, it's just another reason to lean toward buying these shares.
Colgate's late 2004 swoon was, to my mind, undeserved, punctuated as it was by a big drop on an analyst's leak that there were restructuring charges a comin'. Colgate is working on making itself more profitable, and despite the lumps -- or dips -- that it might bring in earnings, I figure a company that makes a habit of returning 30% on invested capital should get the benefit of the doubt, especially when the market shoves the shares down the chute. I did well with an options position then, and my colleague in pecuniary rigor, Philip Durell, made the stock a pick for Motley Fool Inside Value.
Consumer staples are some of my favorite behemoth investments. Unlike big-ticket hawkers Ford (NYSE:F), DaimlerChrysler (NYSE:DCX), and GM (NYSE:GM), who have to give away the shop just to make the top-line hum, Colgate and peers like Procter & Gamble (NYSE:PG) -- which recently swallowed Gillette (NYSE:G) -- just keep selling in good times and bad. As such, they offer good hedges against economic soft spots, especially if the shares are already out of favor.
Colgate's more recent slide just might present us with one of those occasional second chances for value. Take a look and see what you think, or click here for a free trial that will give you access to Philip's thoughts on the matter.
For related Foolishness:
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- See how P&G cleaned up earnings.
Seth Jayson loves a business that sells stuff that people dump down the drain. At the time of publication, he had positions in no firm mentioned here. View his stock holdings and Fool profile here. Fool rules are here.
