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This article was originally published in The Tan Sheet

Executive Summary

COLGATE-PALMOLIVE's 18.6% STOCK GAIN IN FIRST QUARTER of 1993 reflects accelerating sales growth and improved gross margins due in part to the company's 1992 acquisition of the Mennen personal care business. Colgate stock closed at 66-1/8 on March 31, up 10- 3/8 during the first three months of the year. Nearly all the stock's gain was in February following several favorable reports from securities analysts and Colgate's announcement on Feb. 4 of higher than expected fourth quarter net earnings, which increased 27% to $ 110 mil. on a 12% sales increase to over $ 1.7 bil. Overall, 1992 sales increased over 15% and net earnings more than tripled due to a one-time accounting charge in 1991. The company's improved manufacturing efficiencies and product mix, due in part to the integration of the high margin Mennen line into Colgate's North American personal care business, helped the company improve its gross margins to a record 47.1% in 1992. Merrill Lynch Capital Markets analyst D. D. Raj issued a report on the company late last year predicting 17% earnings per share growth in 1993 "as Mennen adds to Colgate's earnings," and calling the stock "attractive, particularly for long-term oriented investors." Colgate stock rose 14% in 1992. Despite the first quarter run-up, Value Line continues to rank Colgate-Palmolive stock above average for timeliness based in part upon the historical attractiveness of household product stocks as defensive investments during times of sluggish growth. In addition, Value Line also cites Colgate-Palmolive for its penetration of international markets. The first quarter performance of "Tan Sheet" index stocks is epitomized in an early February announcement by Salomon Brothers that it was placing Colgate on the investment firm's recommended stock list and removing pharmaceutical manufacturers Merck and Pfizer. Wall Street's preoccupation with whether the Clinton Administration's anticipated health care reform proposal will include price controls on prescription pharmaceuticals has put a hex on the stocks of those companies perceived to have the greatest prescription drug focus. While the broader market averages rose during the first quarter of 1993, the "Tan Sheet" index for manufacturers and marketers of OTC and nutritional products fell 9.3%. In comparison, the Dow Jones Industrials rose 4.1% and the S&P average grew 2%. Not surprisingly, the hardest hit stocks included SmithKline Beecham (down 6-5/8 to 26-1/2), Pfizer (down 10-1/4 to 62-1/4), Bristol-Myers Squibb (down 8-1/4 to 59-1/8), and Johnson & Johnson (down 7-7/8 to 42-5/8). Several years ago, conventional wisdom on Wall Street was that the greater a company's focus on prescription drugs and new drug R&D, the better a stock's investment potential. Thus far, however, 1993 stock performances indicate that companies with profitable and growing consumer products businesses have been the most successful in fending off the Street's onslaught. For example, Rhone-Poulenc Rorer gained 1/8 to 46-3/4, American Home Products slipped only 1-3/8 to 66-1/8 and Schering- Plough has fallen only 3-5/8 to 60 through March 31. Another case in point is Warner-Lambert, which added a point to 70-1/8. While Warner-Lambert's sagging drug business received a strong boost in the quarter from separate FDA advisory committee approval recommendations for the company's anti-epilepsy product Neurontin (in late December 1992) and its Alzheimer's therapeutic Cognex (March 1993), the key to the stock's first quarter performance appeared to reflect expectations for the company's non- pharmaceutical interests. Following the March 18 review of Cognex by FDA's Peripheral & Central Nervous System Drugs Advisory Committee, Alex. Brown analyst Barbara Ryan estimated that a June approval of Cognex could add 10" per share to 1993 earnings. However, she concluded: "We continue to rate the Warner- Lambert shares 'buy,' primarily on the basis of the company's substantial consumer franchise values in OTC medicines and gums and mints." Carter-Wallace slid 9 points in the quarter to 28 (off 24.3%) despite several very positive analyst recommendations and a favorable FDA advisory committee review of the company's prescription anti-epilepsy drug Felbatol late last year. In early January, Vector Securities analyst Patricia Lea recommended "aggressive purchase of Carter-Wallace's stock primarily because of Felbatol's singular promise in the treatment of epilepsy." As recently as early March, investment firm First Albany initiated coverage of the stock with a "buy" recommendation based on the potential impact of Felbatol. Despite the upbeat analyst support, Carter-Wallace has slipped steadily since the beginning of the year. The company's failure to meet analysts' earnings projections for the third quarter of fiscal 1993 ended Dec. 31 did not help the stock. For the three- month period, Carter Wallace reported flat net income and a 1" decline in earnings per share. Chart omitted.

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