An Early (Very Early?) Warning of Trouble at Colgate-Palmolive? - TheStreet

An Early (Very Early?) Warning of Trouble at Colgate-Palmolive?

Also, more on Diamond Tech, Open Text and a Lernahooligan alert. Stop by and put your opinion on our message board.
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Yesterday's third-quarter report by

Colgate-Palmolive

(CL) - Get Report

was another winner. So much so that the exalted

JJC

was

yacking about how maybe it could be where dejected

Philip Morris

(MO) - Get Report

investors put their money. But before they do, they might want to hear what

Banc of America Securities

analyst Bill Steele has to say.

Steele likes to look beyond the P&L, and when he does -- at least when it comes to Colgate -- he doesn't necessarily like what he sees.

Colgate-Palmolive: Join the discussion on

TSC

Message Boards.

Steele is known best to readers of this column for

predicting earnings trouble at

Gillette

(G) - Get Report

. And according to "

Chainsaw

,"

John Byrne's

excellent book on

Sunbeam

(SOC)

, he was one of the few analysts who had the guts to go against the grain on Sunbeam. Colgate is no Sunbeam. It may not even be another Gillette. But what it shares in common with both -- and which is why it's not on Steele's recommended list -- is the kind of balance sheet that makes Steele uneasy.

Specifically, Steele is bothered by what he sees when he analyzes Colgate's cash flow statement and balance sheet. Such analysis "either gives you stronger confidence or lower confidence in EPS trends," he says. While he can't say

when

an earnings miss will occur, he believes that the odds have increased that an earnings miss (or misses) is (or are) looming. "You don't have that one specific catalyst," he says, adding: "This is not a negative call. It's a warning flag call." (And all too often warning flag calls, such as these, are ignored.)

Steele first voiced his Colgate concerns in an August report to clients. Among his concerns: Second-quarter cash flow from operations dropped 17%. It was the first quarterly decline in nearly two years. And days supply of inventory had risen for four straight quarters (finished goods comprising much of it) while days receivables outstanding leaped for the fifth quarter. They inched up by a day or two in the quarter that was reported yesterday. Nothing egregious, mind you (at 45 days and 68 days, respectively), just a potentially troublesome trend.

What's more, in its earnings press release, Colgate made a special point of saying that cash flow from operations in the third quarter rose by 16%. As for the second quarter, a spokeswoman says the decline in operating cash flow was an aberration, caused by a one-time payment to the state of California to settle a tax dispute. She adds that Colgate believes it's more important to look at the long term than a single quarter. For example, for the last nine months Colgate's operating cash flow rose by 15%. And when the third-quarter 10-Q is released in several weeks, she says, it will become evident that other "one-time" issues distorted second-quarter cash flow.

She also points out that while Steele "may be good at spotting trends, he certainly missed the boat on Colgate," which he hasn't recommended for at least four years. During that time Colgate's stock has soared by 235%.

Steele doesn't disagree, but he notes that he was on the "wrong" side of Gillette for a couple of years, too.

Nothing wrong with being early as long as you're right.

Short Positions

Diamond Dollop:

Seen

Diamond Technology Partners

(DTPI)

since it was last

mentioned here as the favorite of one of this column's most diligent short-selling sources? Up 60%. Strong earnings. Another acquisition. Inquiring minds -- among many of this column's readers -- wanna know what the short is saying now?

"I'm staying short," he says. "All consulting firms with these issues I have ever shorted in the past have blown up. Like

Superior Consultant Holdings

(SUPC)

." Will Diamond be the exception? Will keep you posted.

Closing the book on Open Text:

At item

here two months ago raised questions about the quality of

Open Text's

(OTEX) - Get Report

earnings. (The stock was 25 at the time.) Then, a month ago, the company guided analysts lower, and the stock tumbled to around 20. The latest: One of the company's chief cheerleaders, Banc of America Securities analyst Greg Vogel, downgraded the stock. It's now around 16 and, according to short-sellers, headed lower.

Lernahooligan alert:

An item here several weeks ago mentioned that a new

Lernout & Hauspie

(LHSP)

speech-enabled Web browser sounded an awful lot like the same software rolled out almost four years ago by

Quarterdeck

-- back when Quarterdeck was run by the same guy who now runs L&H. Lernout officials, at the time, didn't take my call, so the column -- literally -- asked whether the software was a retread.

After the item ran, the company directed its outside public relations firm to contact me and demand a correction.

Correction?

You gotta be kidding!

The column merely mentioned that the two software products seemed similar, and it publicly

asked if that was so.

So, instead of a correction, here's Lernout's answer to my question: The software in question is not the same software and doesn't use the same technology as the Quarterdeck product, according to the outside public relations firm, which was quoting Lernout.

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

herb@thestreet.com. Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.