UPDATE 3-BMO cuts Colgate, Avon, Kimberly over Venezuela

* BMO cuts Colgate, Avon, Kimberly-Clark to market perform

* Cites potential Venezuelan currency devaluation

* Says Kimberly-Clark also faces pulp pricing pressure

* Colgate, Avon, Kimberly-Clark shares fall (Adds Venezuela background)

By Jessica Wohl

CHICAGO, Dec 7 (Reuters) - BMO Capital Markets cut ratings on Colgate-Palmolive Co (CL.N), Avon Products Inc (AVP.N) and Kimberly-Clark Corp (KMB.N) to "market perform" from "outperform," saying a possible devaluation of the Venezuelan bolivar could hurt the U.S. consumer goods makers' profits.

Venezuela's socialist President Hugo Chavez fixed the bolivar currency against the dollar in 2003 and imposed strict currency controls to prevent capital flight during political turmoil.

In addition to concerns that Cuba-ally Chavez's nationalization drive could touch new sectors, foreign companies operating in the South American oil exporter are often prevented from repatriating profits at the official rate of 2.15 bolivars per dollar.

Instead they either turn to a tolerated parallel currency market where dollars are several times more expensive, or build up large reserves of bolivars.

Most economists say a devaluation of the bolivar is long overdue, but such a move is unlikely ahead of September legislative elections since Chavez is loathe to risk spurring inflation, already one of the world's highest.

He did not devalue this year, when there were no elections and when oil prices dropped dramatically, increasing pressure on the bolivar. Oil has now bounced back to more than $70 a barrel.

Venezuela's inflation rate was 31 percent last year and soared 20.7 percent in the first 10 months of this year. [ID:nN05132246]

Venezuela is likely to be designated a high-inflation economy in January, which "would trigger a shift to high-inflation accounting," BMO analyst Connie Maneaty wrote in a note on Monday. If that were "accompanied by or followed by an official devaluation, (it) would lead to translation and transaction losses."

Venezuela accounts for about 6 percent of sales at Colgate and 5 percent at Avon, Maneaty said. Procter & Gamble Co (PG.N), the world's largest maker of household products, derives a greater amount of sales from Venezuela than the other manufacturers, but those sales account for just about 3 percent of its total sales.

In October, P&G said that if Venezuela were designated as a high inflation economy and/or if there was a devaluation of the official exchange rate, "results of operations will be negatively impacted."

Avon also said in October that such a move would "negatively" impact its earnings.

Kimberly-Clark has slightly less exposure, as Venezuela accounted for just 2 percent of its 2008 sales. But the maker of Kleenex tissues and other paper products also faces higher pulp prices, Maneaty said.

On the New York Stock Exchange, Colgate closed down 2.6 percent and Avon declined 3.6 percent, Kimberly-Clark fell 1 percent, and P&G slipped 0.2 percent.

COLGATE BOUGHT BONDS

Last week, Venezuela closed seven small banks for breaches including capitalization problems and unexplained funds and investors dumped Venezuelan bonds as President Chavez threatened to nationalize the financial system. On Monday, Chavez softened his attack on the banking system, and Venezuela's benchmark global bond rose. [ID:nN0719568]

Colgate has purchased Venezuelan bonds to hedge transaction risks against devaluation and this could expose the company to sovereign credit risk, Maneaty said.

Colgate bought $72 million of U.S. dollar-denominated bonds issued by a Venezuelan state-owned corporation and $50 million of U.S. dollar-linked, devaluation-protected bonds issued by the Venezuelan government during the third quarter. The company said in October that it made the purchases in order to manage its overall currency exposure.

"A devaluation may not occur until after national elections in September, but unless its effect is discounted, we see little upside in the near term," Maneaty wrote in her note about Avon.

Colgate did not respond to a request for comment, Avon could not be reached, and Kimberly-Clark declined to comment on Maneaty's report.

Maneaty cut her 2010 price target on Colgate's stock by $5 to $90. She had raised the price target from $85 to $95 in mid-November based on expectations for the company's U.S. business.

(Reporting by Renju Jose in Bangalore and Jessica Wohl in Chicago and Frank Jack Daniel in Caracas; Editing by Phil Berlowitz)