Tuesday, February 3, 2009
(Cont'd from above)...

Jim (cont'd):

So we are going to take a look at the single best quarter that I have seen of this earning season from Colgate-Palmolive Co. (CL)… and the single worst, most abominable, most heinous quarter from the beleaguered Textron Inc. (TXT)… everything that could go right went right for Colgate… and everything that could go wrong plus a few things that should never have went wrong for Textron… you could say it was the best of quarters, it was the worst of quarters… I will not do that though… because I know that Dickens alienates the younger demo… now only if Stephen King could come up with something we could quote… maybe Grisham… but to know this, to really understand what makes a quarter great or awful… you have to go thru the conference call… it is the most important piece of you homework… far more important than just knowing that Colgate beat by 2 cents… that is like saying buy Colgate because the Raiders slaughtered the buck nail Bison in a key Patriot league match up… Colgate is the Raiders mascot… anyway… so what made Colgate’s quarter so fabulous… what made us want to brush our teeth and our portfolio with Colgate… what should you be looking for when you examine other companies quarters.

First, Colgate got its raw cost under control for the year… remember there is a huge cost inflation in everything involving this kind of thing… cost inflation for Colgate’s raw product portfolio was up 600 basis points.. but Colgate’s gross margin only declined about 120 basis points… because it kept down the costs that were under it’s control… and now the commodities have plummeted…. Colgate’s future with raw costs looks even brighter than this green, delicious total mint stripe… no other package good company even came close to executing as well… in my opinion.

Second, Colgate didn’t let the strong dollar get in the way of it’s success… Colgate gets 70% of its sales from outside the U.S…. so the stronger dollar ate into 8% of the companies net sales… but they didn’t use that as an alibi for failure… I swear I mean the strong green back… it is as bad as the dog ate my homework… the company still grew sales organically by 9% worldwide… it had 1.5% volume growth… and put thru price increases that contributed to 7.5% of sales growth… Colgate is not going to let anything get in it’s way… that is what we learned from this.

Third, even with Colgate’s price increases the strength of it’s brand meant that it didn’t get hurt by people trading down to cheaper products… the company actually reduced its overall advertising spending… but maintained its market share… and even took share in Australia, Eastern Europe, Brazil, and India… Colgate is holding the line against private label brand competition… this is a brand that people really believe in… this company is totally in control of its own destiny.

The fourth component of Colgate’s great quarter… it innovated beyond what people thought could happen… it was like a drug company.. or at least the way pharma used to be…. introducing products all over the world… and having them take market share rapidly… while at the same time Colgate managed to reduce its spending on R&D… its retched refuse was let free.

The fifth thing that really made the quarter fantastic… Colgate told us that it expects its gross margin… that is the percentage of each dollar of sales the company retains as gross profit… to expand even faster than its annual 75 to 100 basis outlook… Colgate got more profitable this quarter… and it told us that, in the words of Karen Carpenter... “We’ve only just begun”… that is right, we have only just begun… that is a great quarter.

Alright, so how about a terrible one… what went wrong with Textron… to make Textron a diversified conglomerate… such a miserable, horrible quarter… you could put all the Irish Spring that you wanted… and it would still stink… and we are going to try that because we are in a ratings battle against some really key shows… anyway, first of all it is all aerospace… it is an aerospace business… it owns Cessna and makes corporate jets… oh my god, corporate jets… Cessna sales declined 4%… with Cessna's citation deliveries expected to be down 20% year over year… and only 30 orders vs. 23 cancellation… who wants to buy a corporate jet… you have to figure that you are either going to be burned in effigy or burned for real… by an angry mob… what CEO wants to tempt fate like that.

Second, Textron has a finance division… and it is a total black hole… with non performing assets up 77% over the previous quarter… its credit losses are expected to be 2 to 4 times larger than in past down cycles… 2 to 4 times larger… talk about a company that is totally not in control of its fate… private jets… finance… what… could it get any worse… yes… because Textron also has a cyclical factory business that supplies… are you ready… the auto makers… oh man… its volume at its cal techs business were down 20%… and for all industrial businesses they are expected to be down 20% to 25% for 2009... because of the weak global economy.

Number four, Textron… its got a money problem… the company still has occasional difficulties tapping the commercial paper market for short term financing… that ought to tell you to watch out… but Textron worse… it owes a lot of money… and I think that things will have to work just perfectly if it is going to pay all that it has to pay back… it has about $1.6B in debt maturing… holy cow… $2B in payments related to past securitizations… $200 million in dividend payments… I don’t think that you can count on any of this being made… and $1.8B in commercial paper maturities… I just don’t see how Textron is going to pay all of this off… without doing an incredibly dilutive secondary… unless everything goes perfectly… and perfectly is simply not a word that I associate with Textron.

Finally, Textron simply isn’t talking the talk… forget walking the walk… back in August Textron gave a presentation where they said that they expected their portfolio to improve… and that there was no way that they were going back to the losses that they had in 2002, 2003... but the opposite ended up happening… cratering managements credibility… both companies reported last Thursday morning before the bell… since then Colgate is really up a measly 3%… quite an opportunity…Textron is down 40%…. I think those trajectories continue.

Bottom line…

The Bottom Line!:     Great companies look like Colgate-Palmolive Co. (CL)… they are in control of their own destiny… and thriving despite any hardship that comes their way… bad ones look like Textron Inc. (TXT)… a ship that is already filling up with water.. and look like it could capsize if things get a little bit worse.

I think it could be the best of times for CL, and the worst of times for TXT.


[verbatim recap]

[end of segment]

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