Investors urged to get teeth into Colgate stock

STOCK markets have had a flying start to the year.

We have seen strong performances in tech-laden indices such as the NASDAQ and German Dax.

This momentum may continue for much of the first quarter. But there is a general consensus that later in the year investors will switch their attention from more aggressive 'new economy' stocks towards the larger blue chip companies.

The reason for this is value. Larger companies have generally under-performed in the wider market since they are perceived as having less exposure to economic recovery. However, this has resulted in a growing valuation gap between market leaders and smaller stocks.

A good example of this is Colgate-Palmolive. This is a company that deals essentially in brands in the consumer products arena. Its leading brands are in a number of key areas, the most important being personal care and oral care.

In the oral care market, Colgate is the leading brand in 45 out of 61 countries. In personal care, the company makes soaps, deodorants, shaving creams and many other products. Leading brands include the ubiquitous Palmolive.

The firm is global in nature. Sales for 2003 were approximately $10bn and these are split almost evenly between north America, Latin America, Europe and Asia.

Many businesses wax lyrical about the opportunities in developing nations when their marketing strategies are only aimed at the richest 1% of these markets.

For the wider populations of China or India, Colgate is one of the few international brands affordable.

Historically it has been one of the genuine US blue-chip stocks, reflecting its global reach. For many years it has traded at a valuation premium to the wider S&P500 Index.

At the moment however, this valuation premium is all but closed. There have only been two major corrections in Colgate's stock this decade and the second of these took place late last year when the company reported weaker than expected sales figures for north America.

The most striking problem seems to centre around one of its newer segments of the oral care market namely teeth whiteners. The number two brand to Colgate in most major markets is Crest, owned by Procter&Gamble.

Americans place almost as much importance on getting their teeth right as the Italians do on finding the right shoes.

Recent trade figures however, show Colgate's leading product, imaginatively called SimplyWhite, lagging behind the Whitestripes brand promoted by Procter&Gamble.

The resultant shift in market shares has caused an unexpected shortfall in north American volumes.

Investors took a dim view of Colgate's poor trading figures in this arena and we have seen the stock out of favour for the past three months or so.

Of course, there are other forces at play. Investors have been more focussed on technology names in the stock market. While the news is disappointing, it should be remembered this is just one of many market segments for Colgate-Palmolive Inc.

To focus on this one area is unreasonable, as the company's wider track record is excellent. They have grown earnings at 10% or more for each of the past 15 quarters. Very few other businesses can claim this.

Moreover, the Colgate-Palmolive remains capable of growing these areas at reasonable growth rates. The most obvious way of doing this is cutting costs, something the company is adept at doing.

Currently they are implementing SAP business software in their many divisions. This facilitates better processes in manufacturing and distribution. A good example of this is its regionalisation strategy of bringing together manufacturing capacity into one location.

Colgate has consolidated its entire global toothbrush capacity into just one factory in China. Finally, the company has shown it is prepared to acquire aggressively to protect its leading market share positions.

In December it acquired Gaba, a leading Swiss dental hygiene business for $830m. Further acquisitions could trigger a stock recovery.

For investors looking for a low-risk play on US markets, Colgate-Palmolive is an excellent business. Management has been in place for a long time, with chief executive Reuben Mark leading the company for the past 20 years.

Its valuation premium to wider stock markets has all but closed out, and for a company of its quality this seems harsh. The stock is at the bottom of its recent trading range and looking ripe for a bounce.