6 blades help make 1 hot stock

By Jon Markman

If you watched the World Series at all last month, you may recall that the team that made the most powerful impression was Gillette. The unit of Procter & Gamble repeated the same ad for its new six-blade Fusion razor so many times that it made you either want to throw something at the TV or to run out and buy the razor.

Well, it appears that a whole lot of people have been doing the latter, because Procter & Gamble's (PG, news, msgs) third-quarter earnings report was quite strong, driven by an ideal balance of revenue growth and margin expansion. Procter & Gamble posted earnings growth of around 10% and provided a fiscal 2007 outlook that was much better than management’s somewhat cautious guidance they gave in the spring.

It's hard to imagine how difficult it must be to run a company with so many moving parts, but Procter & Gamble executives are essentially saying they can grow a $200 billion company by 12% to 15% next year. The company, which sells everything from diapers and dog food to drugs and detergent, said it will reach its goals not just through improved efficiency and marketing, but because it expects to pay less for commodities such as energy and basic chemicals in the coming year. If that's true, then Procter & Gamble is even more of a buy than I expected when I recommended it at the start of this year.

Procter & Gamble's results showed robust sales and earnings throughout its product lines and geographies, with emerging markets in Asia and Latin America among its strong points and North America absolutely humming. The coolest part of the report was the part that said how new products are heavily contributing to the bottom line, showing that the Procter & Gamble innovation engine is strong.

Anti-aging goop

Two products highlighted in the report were Olay Definity and Crest Pro-Health. The latter, in case you haven't come across it, is an example of how Procter & Gamble can bring in new customers to an old brand and encourage old customers to buy more. According to marketing literature, it uses "breakthrough technology," called the Polyfluorite System, to protect your mouth against gingivitis, plaque, cavities and tooth sensitivity while also whitening teeth. It may not be a new computer operating system, but it is new ideas like this that a consumer products company needs to constantly add growth. Olay Definity is an anti-aging goop that fights wrinkles and discoloration to make your skin luminous and "more flawless." If you can get past the language (either something is flawless, or it's not), you can easily see that the Procter & Gamble invention and marketing machine is in high gear.

Elsewhere, Procter & Gamble pushed its share of laundry detergent sales in the United States up to the stunning 61% mark. And the Gillette division sold 10% more razors and blades, with a robust rollout of the new Fusion line in Europe and Japan. You will be happy to know that all that advertising paid off, as the Fusion cartridge has gained 21% market share in its category in a short time.

My advice: Take advantage of any weakness over the next month to buy PG in the $59 to $63 area for my $71 target for 2007.

Verizon on the line

Meanwhile, another big Dow stock to report late last month was Verizon (VZ, news, msgs), the telecommunications giant. It reported solid third-quarter results as well, with surprising strength in its wireless segment.

Some investors didn’t care for the report, but a brief sell-off was apparently considered the start of a buying opportunity for long-term investors, as the shares touched their intermediate-term uptrend at $36 and bounced nicely.

The Verizon report showed great progress in terms of gaining market share in wireless, broadband and video, as well as in business relationships. The company also confirmed that it will spin off its directory business, which has been a drag, and buy back shares worth up to $1.5 billion -- including around $200 million in the fourth quarter.

Let's just focus on wireless for a moment. The unit added 15% more subscribers over last year, including 1.9 million new customers in the third quarter alone -- hitting 55.8 million. That's quite a bit more than Cingular reported the other day. Also, Verizon's wireless revenue was up 18% to $9.9 billion, again ahead of Cingular, which posted 9.2% growth. Meanwhile, we can see that Verizon’s business applications are going to be huge, as they were up 95% year over year -- primarily due to wireless broadband service. In addition, its customer churn rate is still the lowest in the industry, according to A.G. Edwards' analysts, at 1.15% per month.

Investors were most worried about the new fiber-to-the-home service, called Fios. But really, they're just being too short-term focused. Verizon added 448,000 broadband Internet customers in the third quarter, with 147,000 of them choosing the Fios service that provides a video competitor to cable. The company reiterated its objective to get to 26% video penetration in its markets by 2010.

I still like Verizon a lot, and think you should buy it here, and down as far as $34 in the event of further trouble, for my $45 target in late 2007. Throw in a 4.5% dividend yield, and it could be worth as much as 30% to you in total return if I’m right.

Jon D. Markman is editor of the independent investment newsletters Strategic Advantage and Trader's Advantage. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, Markman did not own or control shares of companies mentioned in this column.