COLGATE'S REUBEN MISSES THE MARK
By Nelson D. Schwartz

(FORTUNE Magazine) – OVER THE PAST TWO DECADES, Colgate's Reuben Mark built up one of the most enviable records of any big-company CEO--year after year of dependable profit growth, with stock price gains to match.

But now, as the 65-year-old Mark prepares to hand over the reins, it looks as if Colgate's winning streak could be coming to an end. In late September the company shocked Wall Street with a major earnings disappointment that knocked its shares down 11% in a single day. Now some observers are wondering if Mark, who took over in 1984, has overstayed his welcome in the top job. While archrival Procter & Gamble has returned 28% over the past five years, Colgate has risen by just over 1%. And in the past two years Colgate shares are down 14%, while the S&P 500 is up 44%.

In July, Colgate named Ian Cook, who previously ran North American and European operations, as chief operating officer, setting the stage for him to take over in the next year or two. Unfortunately for Mark, the transition comes just as P&G is stepping up the pressure, spending heavily on marketing in key areas like the U.S., Mexico, Russia, and China. Colgate has been forced to respond by spending more on advertising, even as the cost of its raw materials surged. "Mark doesn't want to be remembered for 19 years of building this company and then have it crumble in the last year," says Jason Gere, an analyst with A.G. Edwards. "He wants to go out on a high note."

That won't be easy. Instead of a 6% to 7% gain, Wall Street now expects Colgate's earnings to fall this year, the first annual drop in Colgate profits since 1995. To his credit, Mark didn't take the easy way out and simply cut back on advertising in order to make the quarterly numbers. That would have satisfied the Street but done long-term damage in markets like Europe, Mexico, and China, where Colgate toothpaste outsells rivals like P&G's Crest by a wide margin. Mark, a board member of Time Warner, FORTUNE's parent, wouldn't comment, but he's been telling investors publicly that "it's a voluntary decision to bear the slings and arrows of short-term market reaction to help ensure the continued success of the business."

Skeptics like Deutsche Bank's Andrew Shore doubt whether additional ad spending will be enough--what Colgate needs is a blockbuster new product like Total toothpaste, he says, but there doesn't seem to be one on the horizon. Mark, who has long been a master at squeezing costs out of the company, may well have to draw on that skill again. All told, "you could get a 5% rebound in the stock," Shore says. "But I'm unequivocal that Colgate's best days are in the rearview mirror." Mark has never been a fan of Wall Street analysts--he's been known to pepper them with angry phone calls when he has disagreed with their conclusions. Recently he's been working the phones with institutional investors, making the case that Colgate's problems are temporary, and it would serve investors well to stick around long enough to see them resolved. -- Nelson D. Schwartz