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Colgate Shares Fall on Profit Margin Concerns

Colgate-Palmolive posted a higher-than-expected quarterly profit Wednesday, boosted by strong sales outside the United States and higher prices that helped offset soaring commodity costs.

However, the company's forecast for gross profit margin was lower, Morgan Stanley analyst William Pecoriello said in a research note, and shares of Colgate were off 2.3 percent in pre-market trading.

"Essentially (Colgate's) stronger top-line growth will be required to offset the lower gross margin forecast and hold our earnings-per-share forecast," said Pecoriello, who has an "overweight" rating on the stock.

He said the stock's valuation has held up well in recent weeks as some peers have sold off so there could be some weakness in the stock Wednesday.

The personal-care products and pet food maker said net profit was $466.5 million, or 86 cents a share, in the first quarter compared with $486.6 million, or 89 cents a share, a year earlier.

Excluding restructuring and other charges, profit was 90 cents a share, a penny ahead of what analysts polled by Reuters Estimates had expected. Pecoriello said the results were also hurt by a higher-than-expected tax rate that cut the profit by about a penny a share.

Colgate has cut overhead expenses and raised prices to help offset rising costs for energy and raw materials.

The maker of Colgate toothpaste, Hill's Science Diet pet food and Mennen deodorant said worldwide sales rose 15.5 percent to $3.71 billion while unit volume rose 5 percent. Excluding the effects of divestitures, sales and volume rose 16 percent and 5.5 percent, respectively.

Analysts had expected sales of $3.57 billion. SunTrust Robinson Humphrey analyst William Chappell cited stronger-than-expected volumes in Europe and North America, while Pecoriello pointed to strong organic sales growth.

Pecoriello also cited high commodity costs, which was a 300-basis-point hit on the company's gross margin. He had expected an impact of 260 basis points. He said the higher-than-expected sales made up for gross margin that was lower than he had forecast.

The company said it is on track for 2008 earnings per share to grow at a double-digit percentage rate despite a full-year gross margin, excluding restructuring charges, that is expected to be flat to slightly up, as higher costs are somewhat balanced by cost savings and efforts to raise prices.

Shares of Colgate fell to $74.00 a share in pre-market trading from its Tuesday closing price on the New York Stock Exchange of $75.78.