The Iconoclast Investor

At the beginning of August, Cabot Benjamin Graham Value Letter featured four buy recommendations that collectively have outperformed the stock market indexes by a noticeable margin.  I’m featuring one of the stocks here because it’s still clearly undervalued.

Colgate-Palmolive (CL) was founded in 1806 by William Colgate in New York City and, after many mergers, acquisitions and transformations, has grown into the leading worldwide manufacturer and seller of toiletries, detergents and other household products.  The company dominates the toothpaste and soap sectors and derives 67% of its sales outside of North America.

Four years ago, management initiated a four-year plan to become more efficient and more profitable.  The company’s four-year restructuring plan has been a huge success.  Costs have been reduced, new and innovative products are being created, advertising and marketing are focused and efficient, and profits are up.  Management will continue to focus on keeping costs low, marketing efficiently and developing new products.

Colgate’s earnings per share increased 17% and sales increased 16% during the first half of 2008.  Profit margins remained steady despite higher raw material costs.  I believe new products and further expansion into developing countries will produce strong growth in the future.

CL shares sell at 17.6 times forward (next 12-month) earnings per share (P/E), which is very reasonable for a top-quality worldwide leader.  The 10-year average P/E for CL is 21.  The company recently raised the dividend, which now yields 2.2%.  CL’s stock is selling below my recommended Maximum Buy Price for the first time in years.  I fully expect CL shares to advance to my Minimum Sell Price within one to three years.