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Colgate Palmolive Co. (CL)
Oral Care
Personal Products
Home Care
Pet Nutrition
Recommendation:
SELL
Pricing:
Closing Price
2/6/07
52 Week High
52 Week Low
$64.85
$69.00
$58.01
Profitability and Effectiveness:
ROA
16.8%
ROE
135.1%
Profit Margin
12.0%
Operating
18.2%
Margin
Market Data:
Market Cap
EPS
P/E
Beta
$33.43 Billion
$2.76
23.7
0.85
Equity Limit Prices:
Stop Loss Price
$60.50
Sector: Consumer Goods
Industry: Personal & Household
Goods
Shallu Garg
[email protected]
June 30th, 2007
I. Selection of the firm
Selection of Colgate Palmolive was prompted by the
need to find a solid, consistently earning, staple type
company. Selection was initiated on the following
criteria:
Beta between 0 and 1
ROE > 50%
Profit Margins > 10%
II. The Firm and its Market
II. 1. Company Profile
2006 marked the 200 year anniversary of the founding
of the company. The company operates through two
segments, Oral, Personal, and Home Care; and Pet
Nutrition.
Oral Products – 38% of Business Sales
Oral Products includes four lines of toothpastes
including Colgate Total and Colgate Simply White.
Colgate also produces three lines of extremely popular
toothbrushes including the Colgate 360 and Colgate
Motion. As of 2004, Colgate is the Global market
share leader in toothbrushes. Children’s products
include rights to Sponge Bob Square Pants, Dora the
Explorer, and Barbie.
In addition, Colgate produces full lines of both Over
the Counter and From the Dentist lines of teeth
whitening, Fluoride, and Sensitivity treatments.
Personal Care Products – 23% of Sales
The Company produces full lines of deodorants including Speed Stick for Men and Lady
Speed Stick for Women. Their lines of body wash include the Softsoap name and liquid
hand soaps by the same name. Bar soap is sold under the Irish Spring name and other
toiletries for men include the Colgate shave cream products.
Home Care Products – 26% of Sales
Dishwashing products include the Palmolive and Ajax brands for hand dishwashing,
machine washing, antibacterial, and oxy cleaning treatments. Household cleaners include
Murphy soap and the full Ajax line of home cleaners. Colgate Palmolive also produces a
full line of Fabric Conditioners under the Suavitel Liquid Fabric Conditioner name.
Pet Nutrition – 13% of Sales
Colgate Palmolive also owns Hill’s Pet Nutrition under the trademarks Science Diet and
Prescription Diet. This company is separate from the other business segments and
produces quality prescription grade pet food in 87 countries. Hill’s products are rated by
consumer reports to be of the highest quality available on the market.
Distribution and Brands
The company offers its products to the retail and wholesale customers, distributors,
veterinarians, and specialty pet retailers in North America, Latin America, Europe, Asia,
and Africa. It offers its products primarily under the trademarks Colgate, Palmolive,
Kolynos, Sorriso, Elmex, Mennen, Protex, Softsoap, Irish Spring, Ajax, Axion, Soupline,
Suavitel, Hill’s Science Diet, and Hill’s Prescription Diet. Colgate-Palmolive was
founded in 1806 and is headquartered in New York City.
II. 2. Competitors
Proctor & Gamble
P&G competes with Colgate Palmolive in a number of product categories and in many of
the same distribution channels. Products that directly compete with Colgate Palmolive
include: Olay, Crest, Oral-B, Iams, and Gillette. P&G offers a wide variety of other
products and while this strategy is successful for them, Colgate Palmolive benefits from a
more specialized and focused strategy on a few core products.
Church & Dwight
CHD offers a variety of products that also directly compete with Colgate Palmolive. Its
consumer products include baking soda-based products, refrigerator and freezer
deodorizer, scratchless cleaner and deodorizer for kitchen surfaces and cooking
appliances, bath additive, dentifrice, cat litter deodorizer, and swimming pool pH
stabilizer. The company also provides personal care products, such as lotions, creams,
waxes, home pregnancy and ovulation test kits, antiperspirant, toothpastes, and batteryoperated toothbrushes.
Clorox
CLX is an example of a company that produces products which compete primarily with
just a few of Colgate’s products. Clorox generally represents a market share threat in the
Home Care products category.
Other Competitors include Alberto Culver, Unilever, Avon, CCA Industries, and more.
DIRECT COMPETITOR COMPARISON
Market Cap:
CL
33.43B
CHD
3.01B
Industry
CLX
PG
9.324B 193.218B 286.97M
Qtrly Rev Growth (yoy):
Revenue (ttm):
Gross Margin (ttm):
EBITDA (ttm):
Oper Margins (ttm):
Net Income (ttm):
EPS (ttm):
P/E (ttm):
PEG (5 yr expected):
P/S (ttm):
7.4% 17.10%
5.20%
12.58B
1.85B
4.70B
55.2% 38.48% 42.46%
2.73B 321.34M
1.08B
18.2% 13.98% 17.15%
1.51B 131.24M 447.00M
2.76
1.958
2.918
23.7
23.59
22.75
1.9
1.78
1.97
2.7
1.57
2.15
27.00%
8.50%
72.21B 363.40M
51.77% 56.08%
17.78B 124.36M
20.52%
6.30%
9.20B -75.30K
2.690
N/A
24.01
32.60
1.70
1.73
2.86
1.41
CHD = Church & Dwight Co. Inc.
CLX = Clorox Co.
PG = Procter & Gamble Co.
Industry = Personal Products
From this table, you can see that CL has strong Operating Margins and Gross Margins.
They also have a strong Profit Margin.
Current Events
Colgate released their first quarter earnings on April 30, announcing excellent worldwide
sales and unit volume growth. Much of the growth is attributable to a double-digit
increase in advertising spending contributing to a 14% rise in revenue, which is an alltime record level. Colgate realized gains on the sale of their household bleach business to
Canada and are reaping the benefits of recently purchased Tom’s of Maine, who brings in
over $50 million in revenues every year. The firm has enjoyed a prosperous run in its
Latin American markets where it generates almost 25% of total sales and 40% of total
operating profits although political instability in the region or a disruption to exchange
rates could quickly spell trouble.
Sales growth has been stronger over the past five years than over the past 10 years
increasing about 6.2% annually since 2002. Over the next five years, we expect sales
growth to just over 5% annually. Colgate will probably miss its 2008 gross margin target
of 60%, but it now expects to reach this level by 2010. Earnings before interest and taxes
are 13 times interest expense, which we think is a safe coverage ratio.
III. Risks and Potential Problems1
Foreign Operations
1
http://investor.colgate.com/edgar.cfm?formchoose=10-K,10-K/A,10-K405
2/24/06 10K Annual Report, Page 8/159
Colgate operates on a global basis, with approximately 74% of net sales coming from
operations outside the U.S. While geographic diversity helps to reduce the Company’s
exposure to risks in any one country or part of the world, it also means that they are
subject to the full range of risks associated with significant international operations,
including, but not limited to:
 Exchange Rate Risk, which may reduce the U.S. dollar value of revenue they
receive from non-U.S. markets or increase the labor and supply costs in those
markets,
 Political or economic instability or changing macroeconomic conditions in major
foreign markets, and
 Changes in foreign or domestic legal and regulatory requirements resulting in the
imposition of new or more onerous trade restrictions, tariffs, embargoes, or other
government controls.
Competition
They face vigorous competition around the world, including from other large,
multinational consumer product companies, some of which have greater resources than
Colgate. They face this competition in several aspects of their business, including, but not
limited to:
 the pricing of products,
 promotional activities,
 advertising, and
 new product introductions.
Strength of Buyers
CL’s products are sold in a highly competitive global marketplace, which is experiencing
increased trade concentration and a growing presence of large-format retailers and
discounters. With the growing trend toward retail trade consolidation, especially in
developed markets such as the U.S. and Europe, they are increasingly dependent on key
retailers, and some of these retailers, including large-format retailers, may have greater
bargaining strength than Colgate’s selling agents. They may use this leverage to demand
higher trade discounts, allowances or slotting fees, which could lead to reduced sales or
profitability. Colgate may also be negatively affected by changes in the policies of retail
trade customers, such as inventory de-stocking, limitations on access to shelf space,
delisting of CL products and other conditions. In addition, private label brands sold by
retail trade chains, which are typically sold at lower prices, are a source of competition
for certain of Colgate’s product lines.
Strength of Suppliers and Input costs
Raw and packaging material commodities such as resins, tallow, corn and soybeans are
subject to wide price variations. Increases in the costs of these commodities and other
costs, such as energy costs, may adversely affect profit margins if Colgate is unable to
pass along any higher costs in the form of price increases or otherwise achieve cost
efficiencies in manufacturing and distribution. In addition, the move to global suppliers,
to achieve cost reductions and simplify business, has resulted in an increasing
dependence on key suppliers. For certain materials, new suppliers may have to be
qualified under industry and government standards, which can require additional
investment and take additional time.
Level of Success of 2004 Restructuring Program
In December 2004, Colgate Palmolive commenced the 2004 Restructuring Program, a
four-year restructuring and business-building program to enhance global leadership
position in core businesses. This program presents significant organizational challenges
and in many cases will require successful negotiations with third parties, including labor
organizations and business partners who may provide manufacturing or administrative
services. It is not assured that:
 the 2004 Restructuring Program will be implemented in accordance with the
planned timetable,
 the actual charges incurred will not exceed the estimated charges, or
 the full extent of the expected savings will be realized
A failure to implement the 2004 Restructuring Program in accordance with expectations
could adversely affect profitability.
Success of Acquisitions
From time to time, Colgate make strategic acquisitions, such as the June 2004 acquisition
of GABA, a European oral care company, and the 84% acquisition of Tom’s of Maine in
March of 2006 for $100 million. Acquisitions have inherent risks, including, but not
limited to, whether they can:
 Successfully integrate the acquired business,
 Achieve projected synergies and performance targets, and
 Retain key personnel
IV. Valuation
Model One:
The following was used in last year’s report to use the dividend discount model. The
dividend discount model can be used in valuing CL where:
Value of stock 
DPS(1)
.
KS  g
DPS = Colgate Palmolive has a YTD dividend of $1.28
KS = RF + Beta (Market Risk Premium)
 Beta provided by finance.yahoo.com – 0.83
Ks = 4.50% + 0.83* (5.5%) = 9.065%
g = Because the stable model assumes a growth rate equal to the long-term nominal
growth of the economy, we will use a growth rate of 7% (3% inflation + 4% GDP
growth). GDP growth of 4% is a conservative assumption.
Dividend growth rate of 10 year for Colgate is 10.5% per Morningstar.com.
Substituting dividend growth rate of 10.5%, we obtain the value of the stock as follows:
Value of stock = DPS(1) = 1.28*1.105 =$68.49
Ks – g 0.09065 – 0.07
If the assumptions of the model are to be trusted, then this stock is only slightly
undervalued.
Model Two:
Warren Buffett Way Owners' Earnings Discount Model
assuming discount rate (k) of
Owner Earnings in 2006:
Net Income
Depreciation
Amortization
Capital Expenditures
Owner Earnings
8.75%
$
$
$
$
$
1,353,400,000.00
328,700,000.00
(476,400,000.00)
1,205,700,000.00
$
1,205,700,000.0
9.7%
1,322,652,900.0
1,322,652,900.0
Prior Year Owner Earnings
First Stage Growth Rate (add)
Owner Earnings
Discounted Value per annum
$
$
Sum of present value of owner earnings
$13,758,767,530.1
Residual Value
Owner Earnings in year 10
Second Stage Growth Rate (g) (add)
Owner Earnings in year 11
Capitalization rate (k-g)
Value at end of year 10
Present Value of Residual
$
$
$
3,043,025,114.5
2.00%
3,103,885,616.8
6.75%
45,983,490,618.52
$19,875,098,026.22
$33,633,865,556.36
Intrinsic Value of Company
Shares outstanding assuming dilution
511490000
$65.76
Intrinsic Value per share
My discount rate was found the same way as with the discount model. I used analysts’
growth estimate of 9.7% courtesy of Morningstar.com and chose a conservative 2nd stage
growth rate. According to the Owners’ Earnings valuation, this stock is neither
undervalued nor overvalued.
Price Target Summary
Mean Target
Median Target
High Target
Low Target
Number of Estimates
Courtesy WSJ
$73.93
$75.00
$79.00
$67.00
15
This graph is from WSJ and it points out that Colgate’s closest competitor PG (Procter
and Gamble) has been outperforming it over the past year.
Technical Analysis:
The following charts have been provided by finance.yahoo.com:
CL - Default Style
From this analysis, you can see that CL has been below the S&P for the majority of the
time.
Recommendation:
Based on the two valuations done above, this stock is either only slightly overvalued or
just right at the exact value. Given that we would like to have some stocks in the
consumer goods segment and that PG has significantly done well in the past compared to
CL, I would recommend selling these stocks and purchasing an equivalent amount of
Procter and Gamble shares.
PG has been rated as a five star by Morningstar.com and after evaluating its stock price,
the stock comes significantly undervalued as the fair market value is calculated at $77.00
by Morningstar.com. PG has worked through integrating Gillette over the past 18 months
but with the two companies almost completely merged, the fair value estimate of this
company has raised significantly.
Below is Warren Buffet Way Owners’ Earnings Discount Model. The intrinsic value for
PG comes at $78.90 thereby making it significantly undervalued.
Warren Buffett Way Owners' Earnings Discount Model
for PG (Procter and Gamble)
assuming discount rate (k) of
Owner Earnings in 2006:
Net Income
Depreciation
Amortization
Capital Expenditures
Owner Earnings
8.75%
$
$
$
$
$
8,684,000,000.00
2,627,000,000.00
(2,667,000,000.00)
8,644,000,000.00
Prior Year Owner Earnings
First Stage Growth Rate (add)
Owner Earnings
Discounted Value per annum
$
Sum of present value of owner earnings
$100,666,730,256.7
Residual Value
Owner Earnings in year 10
Second Stage Growth Rate (g) (add)
Owner Earnings in year 11
Capitalization rate (k-g)
Value at end of year 10
Present Value of Residual
8,644,000,000.0
10.1%
$
9,517,044,000.0
$9,517,044,000.0
$
$
$
22,624,966,661.3
2.00%
23,077,465,994.5
6.75%
341,888,385,103.70
$147,771,843,254.19
$248,438,573,510.84
Intrinsic Value of Company
Shares outstanding assuming dilution
Intrinsic Value per share
3148920000
$78.90
Based on the Dividend Discount Model:
Ks = 4.50% + 0.88* (5%) = 8.9%
Value of stock = DPS(1) = 1.24*1.11 =$72.44
Ks – g 0.089 – 0.07
Currently the price CL is selling for is $64.85. Hence 300 shares of CL would provide us
with $19,455 which can use to purchase share of PG (Procter and Gamble) at $61.19.
Hence we can purchase 320 stocks of PG at $19,580.80.
V. Appendices
2004 Restructuring Program2
In December 2004, the Company commenced a four-year restructuring and businessbuilding program to enhance the Company’s global leadership position in its core
businesses (the 2004 Restructuring Program). As part of the 2004 Restructuring Program,
the Company anticipates streamlining its global supply chain through the rationalization
of approximately one-third of its manufacturing facilities and the closure of certain
warehousing facilities and also plans to centralize its purchasing and other business
support functions. Business-building initiatives include enhancing and reallocating
resources with an increase and upgrade in the sales, marketing and new product
organizations in high-potential developing and other key markets, and the consolidation
of these organizations in certain mature markets. The 2004 Restructuring Program is
expected to result in approximately a 12% workforce reduction.
The cost of implementing the 2004 Restructuring Program is estimated to result in
cumulative pretax charges, once all phases are approved and implemented, totaling
between $750 and $900 ($550 and $650 aftertax). The estimated cost in 2006 is $300$350 ($225-$250 aftertax). Savings are projected to be in the range of $325-$400 ($250$300 aftertax) annually by the fourth year of the program. Over the course of the fouryear 2004 Restructuring Program, it is estimated that approximately 50%-60% of the
charges will result in cash expenditures. While the Company’s initial estimates remain
unchanged, charges and savings may vary in a given year. Management’s estimates of the
cost and savings associated with the 2004 Restructuring Program are forward-looking
statements and are subject to revision over time.
2
http://investor.colgate.com/edgar.cfm?formchoose=10-K,10-K/A,10-K405
2/24/06 10K Annual Report, page 19/159
3
4
Valuation Ratios
Company Industry
P/E Ratio (TTM)
23.7
22.9
Price to Sales (TTM)
2.7
2.6
Price to Book (MRQ)
27.7
8.8
Price to Cash Flow (TTM)
17.4
18.2
Price to Free Cash Flow (TTM) 23.8
25.1
Dividend Yield
2.0
1.80
3
4
http://investor.colgate.com/financial_info.cfm
http://investor.colgate.com/financial_info.cfm
Profitability Analysis
Return on Equity
Return on Assets
Fixed Asset Turns
Inventory Turnover
Revenue Per Employee
Gross Margin %
Operating Margin %
Net Margin %
Company Industry
135.1
29.6
16.8
9.1
4.8
5.6
5.5
4.8
343.7K 555.6K
55.2%
52.8%
18.2%
19.2%
12.0%
13.0%
Financial Strength
Company Industry
Quick Ratio (MRQ)
0.91
0.54
Current Ratio (MRQ)
1.31
0.99
LT Debt to Equity (MRQ) 2.60
0.70
Total Debt to Equity (MRQ) 2.60
0.87
Interest Coverage (TTM)
13.61
11.34
Cash Flow Statement
PERIOD ENDING
31-Dec-06
31-Dec-05
31-Dec-04
1,353,400
1,351,400
1,327,100
Depreciation
328,700
329,300
327,800
Adjustments To Net Income
215,800
(5,500)
Changes In Accounts Receivables
(116,000)
(24,100)
Changes In Liabilities
149,900
Changes In Inventories
(118,500)
Net Income
Operating Activities, Cash Flows Provided By or Used In
Changes In Other Operating Activities
Total Cash Flow From Operating Activities
8,200
1,821,500
193,800
69,300
(5,600)
109,400
(46,800)
(76,100)
(13,700)
2,400
1,784,400
1,754,300
Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures
Investments
(476,400)
(389,200)
(348,100)
(1,200)
(10,000)
19,600
Other Cashflows from Investing Activities
(142,800)
178,500
(761,900)
Total Cash Flows From Investing Activities
(620,400)
(220,700)
(1,090,400)
Dividends Paid
(677,800)
(607,200)
(536,200)
Sale Purchase of Stock
(520,300)
(749,100)
(567,500)
Financing Activities, Cash Flows Provided By or Used In
Net Borrowings
139,100
Other Cash Flows from Financing Activities
Total Cash Flows From Financing Activities
Effect Of Exchange Rate Changes
Change In Cash and Cash Equivalents
(168,100)
-
(1,059,000)
6,700
$148,800
492,600
-
(1,524,400)
(18,200)
$21,100
-
(611,100)
1,500
$54,300
Income Statement
PERIOD ENDING
Total Revenue
31-Dec-06
31-Dec-05
31-Dec-04
12,237,700
11,396,900
10,584,200
Cost of Revenue
5,536,100
5,191,900
4,747,200
Gross Profit
6,701,600
6,205,000
5,837,000
-
-
-
4,355,200
3,920,800
3,624,600
106,600
-
-
16,300
-
-
-
-
-
2,223,500
2,284,200
2,212,400
Operating Expenses
Research Development
Selling General and Administrative
Non Recurring
Others
Total Operating Expenses
Operating Income or Loss
Income from Continuing Operations
Total Other Income/Expenses Net
Earnings Before Interest And Taxes
Interest Expense
Income Before Tax
Income Tax Expense
Minority Interest
Net Income From Continuing Ops
(1,000)
(7,400)
(86,300)
2,168,400
2,221,500
2,126,100
166,600
142,500
123,700
2,001,800
2,079,000
2,002,400
648,400
727,600
675,300
(57,500)
(55,300)
-
1,353,400
1,351,400
1,327,100
Discontinued Operations
-
-
-
Extraordinary Items
-
-
-
Effect Of Accounting Changes
-
-
-
Non-recurring Events
Other Items
Net Income
Preferred Stock And Other Adjustments
Net Income Applicable To Common Shares
-
-
-
1,353,400
1,351,400
1,327,100
-
-
-
$1,353,400
$1,351,400
$1,327,100