Unexciting Quarters for Colgate-Palmolive and J.P. Morgan
Our take on Colgate's ad spending and J.P. Morgan's first postmerger results.
Colgate-Palmolive's CL third-quarter results, announced Wednesday, came in about as we had expected, given the company's profit warning in mid-September. Our fair value estimate will likely remain at $60 per share; the shares look attractive to us. We believe that increased raw material prices and advertising spending to support Colgate's brands in a highly competitive environment appear to be exceeding the cost savings the company relies on to fund these brand-building activities. As a result, global sales increased 7% for the quarter while operating profit margins contracted to 19.9% of sales, as compared with 21.2% in the prior-year period. We think Colgate's plan to increase its advertising spending is a much needed move, but, in our opinion, the company created some of this problem itself, having reduced overall advertising expenditures over the past five years. We expect it will take some time before the company can fortify its competitive position. That said, the company is still a global leader in the oral care market segment, and it continues to deliver sales growth and market gains.
In its first quarter of reporting combined results with the old Bank One, J.P. Morgan Chase & Co.'s JPM earnings, announced Wednesday, looked unimpressive. The firm's return on equity was a paltry 5%, and even after backing out merger-related charges, it amounts to just 8%. The results are difficult to immediately dissect because of how the merger was accounted for; historical generally accepted accounting principles results focus on just the old Morgan Chase while current results incorporate Bank One earnings as well. However, it does appear to us that the investment-banking division--which came from the legacy Morgan Chase side--is the main area of weakness. Revenues in this business were down 3% year over year and earnings were off 10%. On the bright side, merger integration appears to be proceeding faster than anticipated, with merger-related charges occurring at a more rapid pace than we'd been budgeting.
Craig Woker, CFA
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