Download ColgatePalmolive

Colgate Palmolive Co. (CL)
Oral Care
Personal Products
Home Care
Pet Nutrition
Pricing:
Closing Price
$62.10
October 12, 2006
10/12/06 after hrs
52 Week High
$63.16
I. Selection of the firm
7/21/06
52 Week Low
$51.19
11/7/05
Profitability and Effectiveness:
ROA
ROE
Profit Margin
Operating
Margin
17.22%
94.36%
11.25%
20.46%
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
Market Data:
Total Assets
Market Cap
EPS
P/E
Beta
II. 1. Company Profile
$8.5 Billion
$32.24 Billion
$2.38
26.12
0.36
Equity Limit Prices:
Stop Loss Price
Take Profit Price
Jacob Thomas
[email protected]
2006 marks 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.
Colgate
Palmolive
Proctor &
Gamble
Church &
Dwight
Clorox
Mkt. Cap
$32.2 B
Price/Earn
ROE
22.62
94.36%
Profit Mar. Debt/Equity Beta
11.25%
2.265
0.36
$199.6 B
23.61
21.34%
12.73%
0.606
0.91
$2.56 B
20.84
17.74%
7.17%
0.933
0.68
$9.92 B
22.61
n/a
9.56%
n/a
0.25
III. Risks and Potential Problems1
Foreign Operations
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,
1
http://investor.colgate.com/edgar.cfm?formchoose=10-K,10-K/A,10-K405
2/24/06 10K Annual Report, Page 8/159


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: dividend discount model (stable model2)
Assuming market risk premium3 of 6%:
Value of stock 
DPS(1)
.
KS  g
DPS = Colgate Palmolive has a dividend of $1.22
KS = RF + Beta (Market Risk Premium)
Ks = 4.83% + 0.36 * (6%) = 6.99%
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 6% (3% inflation + 3% GDP
growth).
Colgate Palmolive Dividend Growth
Numbers courtesy of CL cash dividend history
Year
Dividend
Growth Rate
1996
$ 0.47
1997
$ 0.53
12.77%
1998
$ 0.55
3.77%
1999
$ 0.59
7.27%
2000
$ 0.63
6.78%
2001
$ 0.68
7.14%
2002
$ 0.72
6.67%
2003
$ 0.90
25.00%
2004
$ 0.96
6.67%
2005
$ 1.11
15.63%
2006
$ 1.25
12.61%
Geometric Average
Dividend Growth
Rate
2
3
10 yr
5 yr
9.06%
11.70%
http://www.fool.com/research/2000/features000406.htm
The market risk premium is the expected return of the market in excess of the risk-free rate
Substituting dividend growth rate of 9.06%(10 year Geometric Average), we obtain the
value of the stock as follows:
Value of stock 
DPS(1) 1.22  1.0906

 $134.28
K S  g 0.0699  0.06
This model suggests that CL is undervalued. If the assumptions of the model are to be
trusted, then this stock benefits from what Mr. Buffett would consider a significant
margin of safety.
Model Two: two stage dividend discount model4.
The two-stage model assumes that the company will experience a period of high-growth
followed by a decline to a stable growth period. One caveat of this model is that it is
impossible to know for how long the company will continue its high growth. Therefore,
we have to make an assumption for the length of high growth period. Assuming high
growth period of 5 years,
DPS = $1.22
KS = RF + Beta (Market Risk Premium)
Ks = 4.83% +0.36 * (6%) = 6.99%
g = (1 - Payout Ratio) * ROE = (1-0.50) * 0.9436 = 47.18%
DPS(1) = $1.22 * 1.4718 = $1.7956
DPS(2) = $1.7956 * 1.4718 = $2.6428
DPS(3) = $2.6428 * 1.4718= $3.8896
DPS(4) = $3.8896 * 1.4718 = $5.7247
DPS(5) = $5.7247 * 1.4718 = $8.4257
Now, we must discount the dividends by the appropriate rate to determine their present
value.
$1.7956 / (1.0699) = $1.6783
$2.6428 / (1.0699)2 = $2.3088
$3.8896 / (1.0699)3 = $3.1760
$5.7247 / (1.0699)4 = $4.3690
$8.4257 / (1.0699)5 = $6.0102
Total= $17.54
We add up the present value for the dividends during the high-growth stage and get
$17.54.
Next, we value the stable growth period:
4
http://www.fool.com/research/2000/features000406.htm
DPS = $6.0102 (1.0906) = $6.5547
Ks = 6.99%
g = 6%
DPS(1)
6.5547

 $662.09
K S  g 0.0699  0.06
Next, we must calculate the present value of the dividends.
$662.09 / (1.0699)5 = $472.28
When calculating the present value of the dividends of the stable growth period, we use
the same required rate of return as the high-growth phase and raise it to the fifth power
for a five-year example like the one above.
Adding the two values, we get: $472.28 + $17.54 = $489.82
***scratching g= 47.18% and substituting g=6%, we rerun.
DPS(1) = $1.22 * 1.06 = $1.2932
DPS(2) = $1.2932 * 1.06 = $1.3708
DPS(3) = $1.3708 * 1.06= $1.4530
DPS(4) = $1.4530 * 1.06 = $1.5402
DPS(5) = $1.5402 * 1.06 = $1.6326
Now, we must discount the dividends by the appropriate rate to determine their present
value.
$1.2932 / (1.0699) = $1.2087
$1.3708 / (1.0699)2 = $1.1975
$1.4530 / (1.0699)3 = $1.1864
$1.5402 / (1.0699)4 = $1.1755
$1.6326 / (1.0699)5 = $1.1646
Total= $5.9327
We add up the present value for the dividends during the high-growth stage and get
$5.93.
Next, we value the stable growth period:
DPS = $1.1646*(1.0906) = $1.2701
Ks = 6.99%
g = 6%
DPS(1)
1.2701

 $128.29
K S  g 0.0699  0.06
Next, we must calculate the present value of the dividends.
$128.29 / (1.0699)5 = $91.51
When calculating the present value of the dividends of the stable growth period, we use
the same required rate of return as the high-growth phase and raise it to the fifth power
for a five-year example like the one above.
Adding the two values, we get: $91.51 + $5.93 = $97.44
Model Three:
Warren Buffett Way Owners' Earnings Discount Model
assuming discount rate (k) of
Owner Earnings in 2004:
Net Income
Depreciation
Amortization
Capital Expenditures
Owner Earnings
6.99%
$
$
$
$
$
Prior Year Owner Earnings
First Stage Growth Rate (add)
Owner Earnings
Discounted Value per annum
1,351,400.00
329,300.00
(389,200.00)
1,291,500.00
$
$
Sum of present value of owner earnings
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
Intrinsic Value of Company
2005
1,291,500.0
6.2%
1,371,573.0
$1,371,573.0
$13,268,850.6
$
$
$
2,356,891.4
2.50%
2,415,813.7
4.49%
53,804,314.47
$27,376,960.36
$40,645,810.95
Shares outstanding assuming dilution
516,420
Intrinsic Value per share
$78.71
Price Target Summary
Mean Target
Median Target
High Target
Low Target
Number of Estimates
Courtesy Yahoo! Finance
$65.66
$65.00
$78.00
$60.00
14
V. Appendices
2004 Restructuring Program5
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 Companyanticipates 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 areapproved 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.
5
http://investor.colgate.com/edgar.cfm?formchoose=10-K,10-K/A,10-K405
2/24/06 10K Annual Report, page 19/159
6
6
http://investor.colgate.com/financial_info.cfm
7
7
http://investor.colgate.com/financial_info.cfm
Financial Strength
Company
Industry
Sector
S&P 500
Quick Ratio (MRQ)
0.68
0.70
0.67
1.24
Current Ratio (MRQ)
1.17
1.28
1.24
1.76
LT Debt to Equity (MRQ)
1.98
0.76
0.71
0.64
Total Debt to Equity (MRQ)
2.27
0.94
0.91
0.80
14.20
11.99
13.91
14.48
Industry
Sector
Interest Coverage (TTM)
Valuation Ratios
RATIO COMPARISON
Valuation Ratios
Company
S&P 500
P/E Ratio (TTM)
26.12
25.56
22.20
20.49
P/E High - Last 5 Yrs.
32.25
40.22
33.81
36.99
P/E Low - Last 5 Yrs.
17.69
19.81
15.52
14.37
Beta
0.36
0.31
0.47
1.00
Price to Sales (TTM)
2.96
2.60
2.39
2.86
Price to Book (MRQ)
23.86
6.23
5.39
3.90
NM
11.26
9.97
7.13
Price to Cash Flow (TTM)
21.43
18.73
16.61
14.41
Price to Free Cash Flow (TTM)
46.79
40.54
43.44
31.23
% Owned Institutions
68.58
59.49
57.13
67.98
Price to Tangible Book (MRQ)
EARNINGS ESTIMATES
This Quarter Next Quarter This Year Next Year
09/2006
12/2006
12/2006 12/2007
Average Estimate
Number of Estimates
Low Estimates
High Estimate
Year Ago EPS
EPS Growth
0.72
17
0.70
0.74
0.67
8.17%
0.76
15
0.75
0.78
0.69
10.82%
2.89
3.23
18
18
2.86
3.16
2.92
3.32
2.64
2.89
9.51% 11.63%
Profitability Ratios
Profitability Ratios (%)
Company
Industry
Sector
S&P 500
Gross Margin (TTM)
54.34
49.53
43.88
44.87
Gross Margin - 5 Yr. Avg.
54.51
48.94
44.05
45.09
EBITD Margin (TTM)
21.25
19.98
18.87
22.90
EBITD - 5 Yr. Avg.
20.97
19.40
19.29
20.71
Operating Margin (TTM)
17.16
16.31
16.33
20.43
Operating Margin - 5 Yr. Avg.
19.25
16.08
16.63
19.11
Pre-Tax Margin (TTM)
17.16
15.34
15.75
18.87
Pre-Tax Margin - 5 Yr. Avg.
19.25
15.27
15.70
17.19
Net Profit Margin (TTM)
11.25
10.56
11.01
13.68
Net Profit Margin - 5 Yr. Avg.
13.05
10.45
10.64
11.64
Effective Tax Rate (TTM)
34.42
31.89
30.40
30.39
Effective Tax Rate - 5 Yr. Avg.
32.30
31.92
32.41
31.83
Learn about Profit Margin Ratios
Management Effectiveness
Management Effectiveness (%)
Company
Industry
Sector
S&P 500
Return On Assets (TTM)
15.14
8.85
9.95
8.15
Return On Assets - 5 Yr. Avg.
17.22
11.32
10.50
6.44
Return On Investment (TTM)
21.80
12.21
13.73
12.10
Return On Investment - 5 Yr. Avg.
25.06
17.10
14.95
10.00
Return On Equity (TTM)
117.64
20.95
24.79
20.07
Return On Equity - 5 Yr. Avg.
271.60
31.48
31.56
17.94
All charts courtey MSN Money
PERIOD ENDING
Total Revenue
31-Dec-05
31-Dec-04
31-Dec-03
11,396,900
10,584,200
9,903,400
Cost of Revenue
5,191,900
4,747,200
4,456,100
Gross Profit
6,205,000
5,837,000
5,447,300
-
-
-
3,920,800
3,624,600
3,296,300
Non Recurring
-
-
-
Others
-
-
-
Total Operating Expenses
-
-
-
2,284,200
2,212,400
2,151,000
Operating Expenses
Research Development
Selling General and Administrative
Operating Income or Loss
Income from Continuing Operations
Total Other Income/Expenses Net
Earnings Before Interest And Taxes
(7,400)
(86,300)
19,000
2,221,500
2,126,100
2,170,000
142,500
123,700
128,100
2,079,000
2,002,400
2,041,900
727,600
675,300
620,600
-
-
1,351,400
1,327,100
1,421,300
Discontinued Operations
-
-
-
Extraordinary Items
-
-
-
Effect Of Accounting Changes
-
-
-
Other Items
-
-
-
1,351,400
1,327,100
1,421,300
-
-
-
$1,351,400
$1,327,100
$1,421,300
Interest Expense
Income Before Tax
Income Tax Expense
Minority Interest
Net Income From Continuing Ops
(55,300)
Non-recurring Events
Net Income
Preferred Stock And Other Adjustments
Net Income Applicable To Common Shares
PERIOD ENDING
31-Dec-05
31-Dec-04
31-Dec-03
340,700
319,600
265,300
-
-
-
1,309,400
1,319,900
1,222,400
Inventory
855,800
845,500
718,300
Other Current Assets
251,200
254,900
290,500
2,757,100
2,739,900
2,496,500
-
-
-
Property Plant and Equipment
2,544,100
2,647,700
2,542,200
Goodwill
1,845,700
1,891,700
1,299,400
783,200
832,400
597,600
-
-
-
577,000
561,200
543,100
-
-
-
8,507,100
8,672,900
7,478,800
2,214,800
2,145,100
2,027,400
528,200
585,600
418,000
-
-
-
Total Current Liabilities
2,743,000
2,730,700
2,445,400
Long Term Debt
2,918,000
3,089,500
2,684,900
Other Liabilities
838,000
881,700
1,005,400
Deferred Long Term Liability Charges
554,700
509,600
456,000
Minority Interest
103,300
216,000
-
-
-
-
7,157,000
7,427,500
6,591,700
Misc Stocks Options Warrants
-
-
-
Redeemable Preferred Stock
-
-
-
Preferred Stock
253,700
274,000
292,900
Common Stock
732,900
732,900
732,900
Retained Earnings
8,968,100
8,223,900
7,433,000
Treasury Stock
(7,581,000)
(6,965,400)
(6,499,900)
Capital Surplus
1,064,400
1,093,800
1,126,200
Other Stockholder Equity
(2,088,000)
(2,113,800)
(2,198,000)
Total Stockholder Equity
1,350,100
1,245,400
887,100
($1,278,800)
($1,478,700)
Assets
Current Assets
Cash And Cash Equivalents
Short Term Investments
Net Receivables
Total Current Assets
Long Term Investments
Intangible Assets
Accumulated Amortization
Other Assets
Deferred Long Term Asset Charges
Total Assets
Liabilities
Current Liabilities
Accounts Payable
Short/Current Long Term Debt
Other Current Liabilities
Negative Goodwill
Total Liabilities
Stockholders' Equity
Net Tangible Assets
($1,009,900