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CFA Institute Research Challenge
Hosted By: NYSSA
Team O
1
NYSSA Student Research
This report is published for educational
purposes only by students competing in the
CFA Institute Research Challenge.
Colgate Initiation Team O
January 16, 2014
Initiating coverage of Colgate-Palmolive with a BUY
Consumer Sector
BUY
$75.00
Trading Data:
Last Price (1/15/2014)
52–Week High
52–Week Low
Market Cap. (B)
Shares Out. (MM)
3 Month Avg. Vol. (MM)
$64.78
$66.49
$52.88
$59.5
936.9
2.958
Earnings Estimates: ($ per share)
(Dec)
FY15E
FY14E
FY13E
FY12A
Q1
0.78E
0.74E
0.66A
0.62
Q2
0.82E
0.78E
0.70A
0.67
Q3
0.86E
0.80E
0.73A
0.69
Q4
0.91E
0.84E
0.76E
0.70
FY
3.37E
3.15E
2.85E
2.68
12 Month Valuation:
Bear
Base
Bull
Historical
Multiples
Valuation
$61.73
$68.59
$75.45
Comparable
Company
$67.02
$74.46
$81.91
Discounted
Cash Flow
$72.69
$80.77
$88.85
Consolidated
$67.15
Valuation
$74.61
$82.07
Strong growth presents a positive outlook, current valuation creates
upside potential. We are initiating coverage on Colgate Palmolive with a buy
rating, with a price target of $75.00, representing a 16% upside from the current
price. Colgate Palmolive continues to exhibit strong growth overseas with 80%
of sales coming from outside the United States. This bodes well for the
company’s outlook, with sales growth of 9% and profit growth of nearly 5%
expected over the next 2 years. We believe that at current levels, Colgate
Palmolive still has upside potential, which we believe is justified using a
blended historical multiples, comparable company multiples, and discounted
cash flow analysis valuation.
Maximizing shareholder value continues to be a top priority. Colgate
Palmolive has consistently focused on returning value to shareholders through
dividends, share repurchases, as well as M&A activity. Currently Colgate has
a dividend payout ratio of 47%, lagging its peer group, which sits closer to
50%. We believe this supports an increased dividend above profit growth
moving forward, as strong cash generation and a strong balance sheet allow
Colgate Palmolive to move their payout ratio closer to that of their peers.
Additionally, Colgate Palmolive has purchased shares in every quarter since
2002, and is currently in the middle of a repurchase plan of 40 million shares.
Based on the current rate of approximately 5 million shares per quarter, the
current plan is expected to expire in mid-2015. However based on repurchase
activity over the last 12 years, we feel that it is reasonable to expect another
repurchase plan that will meet the current rate of buying. Finally, Colgate has
strategically acquired household names that will complement their current
portfolio. Sanex was the last significant acquisition, and the company is
consistently pursuing names that add value at a discounted price.
FY13 Outlook: We expect FY13 sales to increase 2.3% to $17.5B, fueled by
growth in product expansion and competitive advantage over other companies.
Gross margin is expected to increase 70 bps to 59.0%. SG&A expenses as a
percent of sales are expected to increase to 40 bps 35.0% in FY13 from 34.6%
last year. EBT margin is expected to expand 30 bps in FY13 to 23.8%. Net
margin is expected to come in relatively flat, expanding only 20 bps in FY13
when compared to last year’s 15.1%. We estimate EPS of $2.85 for FY13,
$3.15 for FY14 and $3.37 for FY15.
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NYSSA Equity Research – January 16, 2014
Colgate-Palmolive (CL – $64.78)
Company Description:
52–Week Price Performance:
Colgate-Palmolive is a 200 year-old American consumer
products company with a focus on manufacturing,
packaging, and distributing oral, household, healthcare, and
pet goods. The company is well known for providing
innovative products that are competitively priced and
targeted toward multiple demographic segments. They
currently operate in over 200 countries and derive 80% of
their revenue from outside of the United States. Colgate
currently employ 37,700 people
Company: Colgate-Palmolive
Ticker: CL
Exhibit 1: Cash Flow: ($MM)
Investment Thesis Highlights:
(Dec)
FY15E
FY14E
FY13E
FY12A
Beg
CF-O
$1882.3 $3,955.5
1,195.0 3,796.4
884.0 3,099.0
878.0 3,196.0
CF-I
CF-F
End

2012 Restructuring will help push the company to
new heights

Positive management outlook into 2014

Margin expansion is expected to continue due to
cost saving efforts by the firm

Aggressive EPS growth due to an active buyback
program
Inventory

$1,407.5
1,362.1
1,366.4
1,365.0
Dividends continually increase, and a potential
pay-out ratio to increase from 47% to 50%

Global expansion and product innovation
-$758.7 -$2,592.8 $2,456.2
-724.5 -2,354.6 1,882.3
-642.3 -2,115.7 1,195.0
-865.0 -2,301.0
884.0
Exhibit 2: Balance Sheet Items: ($MM)
(Dec)
FY15E
FY14E
FY13E
FY12A
Cash
Debt
$2,456.2
1,882.3
1,195.0
884.0
$6,229.1
5,856.8
5,406.7
4,926.0
High (5/22/2013): $66.49
Low (12/05/2013): $52.88
Last (12/18/2013): $64.30
Exhibit 3: FINANCIAL SUMMARY — Non-GAAP
($MM except per share data and where indicated)
(Dec)
FY15E
FY14E
FY13E
FY12A
Revenue
$19,018.5
18,218.5
17,484.0
17,085.0
Gross
Profit Margin
$11,546.0
11,013.0
10,307.7
9,963.0
60.7%
60.4%
59.0%
58.3%
EBT
Tax
Profit Margin Expense Rate
Net
Profit Margin
EPS
$4,821.9
4,544.3
4,177.2
4,008.0
$3,118.9
2,930.1
2,678.2
2,574.0
$3.37
3.15
2.85
2.68
25.4%
24.9%
23.9%
23.5%
$1,543.0
1,454.2
1,327.0
1,275.0
32.0%
32.0%
31.8%
31.8%
16.4%
16.1%
15.3%
15.1%
WASO
923.9
927.9
933.9
960.2
3
NYSSA Equity Research – January 16, 2014
Third Quarter - 2013
Exhibit 4: Porter’s 5-Forces Model
Threat of New Entrants
Bargaining
Power of
Suppliers
Bargaining
Power of
Buyers
Competition in the
Industry
Threat of Substitute
Products
Final Rating: 2.8
Source: Team Efforts
Exhibit 5: 3Q13 Common-size Income Statement
Due to a multitude of management initiatives, growth continued to spur
in 3Q2013. A newly implemented 2-for-1 stock split has now been utilized,
cutting share price and making the company more affordable to investors.
Share repurchases and restructuring has proven in the past to be beneficial, and
it continues to show positive results. Global market share in toothpaste and
manual toothbrushes continue to improve, and hold a significant amount of the
World’s share of customers, representing 45% and 33.4%, respectively.
Mouthwash, which has not been their main driver, continues to improve and
they now hold 16.8% of total market share of the product.
New products are being heavily invested in directly and indirectly, both
through advertisement and other SG&A costs. Colgate has an extensive
worldwide pipeline of new products, and the continued effort of their
marketing team and global outreach programs will help Colgate get the
recognition, and more importantly, the sales that they want to achieve. The
restructuring initiative has gone smoothly thus far, and the results posted for
3Q2013 has led to company to reaffirm its belief in long-term prosperity,
remaining on track to meet their FY13 goal of 4.5%-5.5% EPS growth.
Net sales increased 1.5% to $4,398.0MM, versus $4,332.0MM, primarily
attributed to the emerging markets which showed organic sales growing
by an aggressive 9.5%. Gross profit expanded 40 basis points to 59.0%, a new
all-time high, versus 58.6%. This expansion was due primarily to higher price
points and the cost-savings associated with the “Funding-the-Growth”
initiative, far offsetting the foreign exchange impact on raw and material
packaging costs. SG&A as a percentage of sales increased 40 bps to 35.0%,
versus 34.6% last year. This was a result of increased worldwide
advertisement, growing by approximately 6% to $478.0MM. EBT margin
remained relatively flat, which saw expansion of only 10 bps to 23.9%, versus
23.8%. Net Income and EPS increased 2.9% and 5.2%, respectively, to
$680.0MM and $0.73, versus $661.0MM and $0.69, due to the aforementioned
cost-saving measures and increased price points.
Source: Company Statements
A Strong Emerging Environment
Exhibit 6: China’s share of global middle class (2000vs2030)
Competitors present threats, however market for new participants is
limited. Product launches worldwide from competitors is a continuous risk in
a market that is driven largely by market share. However, due to brand
recognition and relative customer loyalty, there is virtually no market available
to new participants. The major players have the ability to outspend, out market,
and better innovate their products than any new competition.
Population growth will fuel demand in emerging markets. India and China
are the two of the most populous countries in the world with 1.2 billion and 1.3
billion people, respectively. If over the long-term Colgate were able to increase
its market share by 10% in these countries, it would be the equivalent of
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NYSSA Equity Research – January 16, 2014
Exhibit 7: India’s rising middle-class population
capturing one third of the current US market in terms of population.
Additionally, the Chinese government recently lifted its one child policy. This
legislation should fuel population growth further, providing a larger potential
customer base.
Marketing hygiene to Emerging Market countries is paramount to
continued global growth. Currently only 10% of the population in Taiwan,
8% of the population in China, and 5% of the population in India uses
deodorant. Marketing personal hygiene has been successful in these markets
with the Protex brand, an antibacterial body wash sold in Emerging Markets.
The personal hygiene market has strong growth ahead of it in hopes that it will
eventually reach the hygiene levels of developed countries.
Middle class expansion in Emerging Markets poised to jumpstart
specialty products growth. Colgate Palmolive has already seen Emerging
Market demand for specialty products such as the Colgate 360 product line in
China. As Brazil, India, China, and other Emerging Markets grow their middle
class; the expectation is that the specialty products market will continue to
accelerate. These economies will make up the majority of middle class demand
worldwide in the future.
Exhibit 8: Share of Middle Class Consumption
The end of Quantitative Easing in the US and continued international
easing create a difficult currency environment. The US dollar is expected
to continue to strengthen as the United States economy accelerates going into
2014 and 2015. Additionally, the Federal Reserve announced the reduction of
its monthly bond purchases by $10 billion per month in December, ultimately
creating a stronger US dollar. Globally, the European and Japanese markets
continue to loosen monetary policy in order to drive growth, and in Japan’s
case, inflation. This will result in a decline in growth from foreign currency
exchange rates.
Product and Geographic Segment Expansion
Exhibit 9: Geographical Revenue Breakdown
The Colgate brand name remains the staple of the company, and despite
dominant market share, growth is expected to continue. Colgate holds 45%
market share worldwide in the toothpaste market driven by its household name.
Penetration in emerging markets before they begin to develop has resulted in
Colgate being a world leader in this segment. Share in Latin America is
saturated, with Colgate controlling nearly 70% of the market; however markets
such as China present opportunities for expansion with a current market share
of 35%.
Developed markets show promise with increased product innovation. The
biggest opportunity for Colgate within the developed markets is the launch of
the Optic White line, which encompasses toothpaste, toothbrushes, and
mouthwash. These products are considered specialty products and as a result
carry a higher selling price. Colgate’s marketing is essential, as it attempts to
convince consumers that these are necessary products. Additionally, Colgate
Source: Financial statements and Team Estimates
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NYSSA Equity Research – January 16, 2014
has begun to heavily market mouthwash, as it is underused in comparison to
emerging markets. With the Optic White and the Colgate Advanced Total
mouthwash, Colgate is pushing consumers to add mouthwash to their daily
regiment, which will result in renewed growth in developed markets.
Exhibit 10: Continual Pursuit of Better Business
Sells laundry
detergent
business in
Colombia to
Univlever
Deal Size:
$215MM
Acquires Sanex, a
strong multicategory
personal care
brand
Deal Size:
$940MM
Source: Company Website
Exhibit 11: Pet Nutrition Market Share Expansion
Tailored products and market share gains combine to fuel emerging
market growth. Colgate has consistently tailored its products to specific
regions, which has helped fuel growth in emerging markets. Examples include
green tea toothpaste in China, and anti-cavity preferences in Russia. These
regional marketing strategies have resulted in strong market share gains and
brand loyalty worldwide, as the Colgate brand is used in 65% of household’s
worldwide.
Irish Spring and Speed Stick, both remain iconic brands, but customer
loyalty is sometimes questioned. Sanex acquisition increases hygiene
products such as soap and deodorant hold much less customer loyalty. This
stems at least in part from higher product innovation and viral marketing.
Although Irish Spring and Speed Stick remain staples for users, it is harder for
Colgate to create a firestorm for these products. The global market, however,
continues to expand as deodorant and soap are less commonly used in
emerging countries. The acquisition of Sanex from Unilever in 2011 adds to
Colgate Palmolive’s lineup of specialty high end products, and increases its
European exposure in this segment.
Home care market stable and brand portfolio is strong. Colgate Palmolive
commands the top brands worldwide in this market including Palmolive,
Murphy’s oil, and the Paic brand in Europe. These products however will see
slower growth as the market is saturated, and value brands attempt to take
market share. In addition, consumers are adopting the adage “less is more”
which has translated into volume declines across the product lines.
Expect Hills Pet Nutrition revamp as product innovation overcomes
misinterpreted consumer expectations. The last few years have been
difficult for the Hills brand, as the company has failed to execute on product
launches stemming from customer dissatisfaction with the name. Hills
attempted to increase prices and break into the natural foods market, both of
which proved negative to growth and the brands reputation. As Colgate
Palmolive has worked hard to remarket the brand, growth is now expected to
accelerate with a redesigned Science Diet product, and renewed customer
loyalty regarding the slogan “What Vets Feed their Pets.”
Source: Company Website
Exhibit 12: Forefront of Colgate
Future Outlook
Continuing share buybacks and dividend increases return value to
shareholders. Colgate has repurchased shares every quarter since 2002, and
currently has approval for the repurchase of 40 million shares. Additionally,
dividends have increased at a 7-year growth rate of 11.9%. We expect Colgate
to continue to increase its dividend moving forward. The company currently
6
NYSSA Equity Research – January 16, 2014
Exhibit 13: Dividend and Y-o-Y growth
has a payout ratio of 47%. Peers such as Proctor and Gamble however have a
payout ratio of 50%. As a result of this as well as strong growth, we expect
Colgate to increase its payout ratio to more comparable levels by 2016, which
will result in even more value added to shareholders. The company has proved
that returning value to shareholders is a top priority, and with FCF expected to
grow 7% this should continue.
Cost savings from restructuring expected to create margin expansion.
Colgate Palmolive is in the midst of its 2012 restructuring plan, with
projections of $275.0MM to $325.0MM savings annually through 2016, with
cumulative savings to amount to $775MM – $875MM. This aftertax savings
will go towards reinvesting in the future of the company, particularly in brand
performance and product innovation. The forefront of the restructuring efforts
is going toward efficient regional office fruition and an overhaul of the global
supply chain and facility to operate at an optimal level.
Source: Company Financial Statements
Exhibit 14: Cash Conversion Cycle
Colgate-Palmolive has strong statements with low levels of debt and will
continue this way. Debt currently makes up only about 75% of the firm’s
capital structure, with nearly 30 notes outstanding. The firm only issues small
notes, with none that have a principal of $1.0B or more and currently have
$6.1B outstanding. We expect their debt levels to remain relatively flat, as
they have multiple notes maturing during 2014 and 2015. We also do not
believe the company will undertake any acquisitions, but will instead rely on
organic sales growth, which they can safely fund through cash. If Colgate does
need to issue debt they should be able to do so, they have a strong credit rating
of AA. However, we do believe that they will hold off issuing debt and instead
use cash to grow organically.
Cash conversion has begun to normalize after an abnormally high period
due to the recent recession. Inventory payable, which represents how fast a
company converts its inventory into sales, jumped nearly 4 extra days to
convert inventory into sales. Consequently, the cash cycle also increased by 4
days. Calculated by adding days receivable with inventory receivable, minus
days payable, the cash cycle is expected to decrease to 73.5 days by 2015.
Source: Team Estimates and Calculation
Exhibit 15: Yearly Revenue and CAGR
Management has given guidance to analysts for their full year
expectations of 2013. For the full year, we are expecting revenue to increase
2.3% to $17.5B from $17.1B last year, driven primarily by the Greater Asia
and Africa region. Gross profit is expected to grow 3.5% to $10.3B, or 59.0%
of sales, from $9.7B, or 58.3% of sales, representing an expansion of 70bps.
SG&A as a percent of sales is expected to increase by 40 basis points due to
increased costs and expenditures in advertisement of new products into
emerging and developed markets. Adjusted for restructuring and other onetime expenses, net income is expected to increase to $2.7B, or 15.3% of sales,
from $2.6B, or 15.1% of sales, which represents a roughly 4% increase.
Revenue poised from continued growth, with a CAGR of 3.1% from 2008
– 2015. We expect 2015 sales to be impressive, with strong sales coming from
product expansion and successful geographic penetration. Latin America is
expected to be a key player in the future success of Colgate, with growth rates
Source: Company Financial Statements and Team Estimates
7
NYSSA Equity Research – January 16, 2014
Exhibit 16: Gross Margin Expansion
Source: Company Financial Statements and Team Estimates
Exhibit 17: Net Income and CAGR
touching high-single-digit ranges. A change in the business model has
provoked management to increase their efforts in the Latin America region,
resulting in higher focus and a larger portion of total sales coming from the
segment. In addition to Latin America, population and middle-class growth
will lead to more persons with the cash needed for hygienic products. The
emergence of the middle-class in the developing worlds is a large focus for
Colgate, and it is beneficial to both the top-line as well as their mission to serve
the global community.
Strong management initiatives will lead to an increased effort of
decreasing costs of their operation through programs such as “Funding
the Growth”. Gross margin will break another margin record in the coming
years. Colgate for the first time will break their gross margin record and retain
over 60% of all of it sales after the initial deduction of the cost of goods sold.
Gross margins will continue expanding due to 2 main reasons: “Funding the
Growth” and an intricate pricing model. Funding the growth is global initiative
by Colgate where they seek pretax savings in all key areas of their business.
This initiative not only adds value to the firm, but is key to retain business. For
example, to provide better service to customers in the Pacific Northwest,
Colgate initiated the opening of a sustaining distribution center in Portland,
Oregon. Not only did the creation of the facility help satisfy their customer’s
needs, but it also provided Colgate with lower transportation costs and Carbon
dioxide (CO2) emissions. Funding the growth contributes roughly $400MM $700MM each year. Additionally, the improved pricing model gives
management a better understanding of how to keep competitive prices while
keeping the health and the value of the brand up. The higher pricing is
inversely related to the unit volume growth, meaning, the larger the volume,
the higher the margins.
Source: Company Financial Statements and Team Estimates
Exhibit 18: EPS and CAGR
The bottom-line is that investors will be rewarded by Colgate. Net income
is growing at a CAGR of just about 6.0% with no signs of slowing. This is
primarily due the aforementioned cost-saving measures as well as revenue
growth far outpacing COGS growth. Colgate has taken measures to ensure that
they are increasing efficiency and productivity of their entire operations, from
cash conversion to net income. Net income for 2014 and 2015 are expected to
grow to $2.9B and $3.1B, respectively. This represents a 9.4% and a 6.4%
increase on a year-over-year comparison. EPS excluding restructuring costs
and one-time items are also expected to increase, and more dramatically, due
to higher net income and lower diluted shares as a result of an active buyback
program by management. Anticipated EPS for 2014 is $3.15, 10.6% increase
from $2.85 in 2013. 2015 is expected to grow 6.9% from its levels in 2014 to
$3.37. CAGR for 2008 – 2015 is around an impressive 8.3%
Source: Company Financial Statements and Team Estimates
8
NYSSA Equity Research – January 16, 2014
Valuation
Exhibit 19: FCF Equation
Discounted Cash Flow
EBIT is expected to continue growth into 2020, due to high sales and
higher margins, although we are cautious and believe it may be slightly
less aggressive growth. EBIT is growing 4.5% every year from 2017 – 2020,
slightly less than the 6-8% range in the 3 years prior. As the developing markets
and the middle-class begin to mature, the sales of Colgate-Palmolive should
see continued success in the sales department. Furthermore, cost cutting efforts
provided by have been stated work, both on a strategic pricing level, and on an
effective initiative effort.
Exhibit 20: WACC Structure and Calculation
WACC Calculation
Cost of Equity
Beta
Risk Free Rate
Risk Premium
Cost of Debt
% Equity
% Debt
WACC
The WACC is composed of the cost of equity and cost of debt, which hold
about 91% and 9% of the capital structure, respectively. Cost of equity is
calculated by the risk free rate plus the equity risk premium multiplied by the
beta. Our risk-free rate, the 20-year treasury, was 3.66%. The return of the
market that we used was 13.34%, giving us a risk premium of 9.68%. Beta was
calculated using the returns of the market versus the returns of ColgatePalmolive, leading to a value of .49. This yielded a cost of equity of 8.43%.
The cost of debt was taken from Bloomberg actual computation, yielding us a
cost of debt of 2%. When weighted with our capital structure, this gave us a
WACC of 7.85%.
8.43%
0.49
3.66%
9.68%
2.00%
91.00%
9.00%
7.85%
Source: Bloomberg and U.S. Treasury
Exhibit 21: Discounted Cash Flow Valuation
Valuation
PV of UFCF
PV of TV
Enterprise Value
Net Debt
Equity Value
Diluted Shares
Current Price
Implied Valuation
% Upside
$24,487.7
$54,432.7
$78,920.3
$3,974.5
$74,945.9
927.9
$64.30
$80.77
25.61%
Source: Team Estimates and Calculation
The present value of free cash flow is calculated by multiplying the
discount factor by projected free cash flow. Furthermore, you use your
perpetual growth rate, 2%, to project your terminal value, and then discount it
back to present value terms using the last projected years discount factor. Then,
adding together the sum of the present value of all free cash flow, plus the
present value of the terminal value, minus your net debt, you are left with your
intrinsic value. When you divide it by your projected diluted shares, you are
left with your implied target price. Our DCF yielded an implied target price of
$80.77, representing a potential 26% upside. Using a sensitivity table, we find
the range of potential price targets if perpetual growth rate or the WACC would
change. Both WACC and perpetual growth rate deviate by 50 bps.
Exhibit 22: Sensitivity of Value per Share
WACC
$80.77
6.4%
6.9%
7.4%
7.9%
8.4%
8.9%
9.4%
0.5%
1.0%
$79.91
$75.36
$71.47
$68.11
$65.18
$62.60
$60.32
$85.62
$80.19
$75.62
$71.72
$68.34
$65.40
$62.81
S ensitivity of S hare Value
Growth Rate
1.5%
2.0%
2.5%
$92.51
$85.94
$80.48
$75.89
$71.96
$68.57
$65.61
$100.99
$92.86
$86.25
$80.77
$76.15
$72.21
$68.80
$111.67
$101.38
$93.21
$86.56
$81.06
$76.42
$72.45
3.0%
3.5%
$125.53
$112.11
$101.76
$93.55
$86.88
$81.34
$76.68
$144.26
$126.03
$112.54
$102.15
$93.90
$87.19
$81.63
Historical Multiples
The historical multiple valuation uses the P/E and EV/EBITDA metric,
both of which are equally weighted for this valuation method. Price to
9
NYSSA Equity Research – January 16, 2014
earnings has continued to expand, with price appreciation far outpacing EPS
producing, and considering EPS has done remarkably well, P/E will continue
to do well with it. EV/EBITDA has also expanded rapidly, with enterprise
value growing at a CAGR of nearly 13% historically from 2008, and should
continue to grow at about 10% for the next two years.
P/E and EV/EBITDA is going to experience large expansions from its
historical averages. P/E historical 5-year average is at about 17.0X, and we
expect it to expand to 21.8X in 2014. EV/EBITDA historical 5-year average is
at about 10.7X, and we expect it to expand into to 13.2X in 2014. We calculate
our historical comp valuation as follows: Using projected metrics, we arrived
at a price target of $68.59
Exhibit 23: Historical Multiple Valuation
Metric
P/E
EV/EBITDA
Total
Multiple
21.8X
13.2X
Weight
50.0%
50.0%
100.0%
Source: Team Estimates & Calculation
FY2014E BEAR
30.87
30.87
$61.73
FY2014E BASE
34.30
34.30
$68.59
FY2014E BULL
37.73
37.73
$75.45
Comparable Companies
The competitors that were selected are within consumer staples industry
and have relatively similar size. Each company has multiple consumer
segments in which they generate revenue from, which parallel Colgate. The
largest of the competitors, Proctor and Gamble, has a significantly larger
market capitalization at $219.0B. On the other end of the spectrum, Kimberly
Clark is a more direct competitor with similar market capitalization of 40
Billion. Due to the combination of varying size companies in the consumer
staples sector, the industry is adequately described through the use of these
competitors.
Proctor and Gamble, its relatively large competitor, has much different
revenue segments. For example, P&G has roughly 61% of their revenue from
developed markets, whereas Colgate is heavily invested in developing
countries. P&G also receives 39% of their revenue from North America,
whereas Colgate generates 80% of their sales from locations outside of the
United States. Due to the fact that P&G is so large, their strategy is to focus
on maintaining market share instead of rapid growth, which is a focus on
Colgate within emerging markets.
Exhibit 24: Comparable Comps Valuation
Comparable Valuation
EV/EBITDA
$79.12
P/E
$69.81
Consolidated Valuation
$74.46
Upside:
15.8%
Using both a P/E and EV/EBITDA ratio, we used the mean competitor
multiples to derive a price target. Mean P/E for the comparable companies
stood at 22.1X, while mean EV/EBITDA for the comparable companies stood
at 14.8X. We arrived at a price target of $74.46
Source: Team Calculation
Exhibit 25: Comparable Comps Statistics
Market Valuation
Ticker
Mean
Median
Market
Enterprise
Cap
Value
$69.72B
$77.76B
NTM Financial
Sales
$26.32B
EBITDA
$6.00B
EBIT
$4.13B
NTM Financial Margins
Net
Income
$2.94B
EBITDA
(%)
15.6%
NTM Multiples
EBIT
Net Income
(%)
(%)
12.3%
8.4%
EV/
EBITDA
14.8X
Price/
Earnings
22.1X
$34.12B
$36.57B
$10.55B
$2.71B
$1.55B
$1.02B
16.8%
12.8%
10.0%
15.1X
20.6X
Max
$218.93B
$244.53B
$84.17B
$18.41B
$15.42B
$11.31B
21.9%
18.3%
13.4%
17.5X
28.6X
Min
$7.40B
$9.39B
$5.62B
$0.54B
$0.31B
-$0.04B
5.1%
2.9%
-0.4%
12.6X
19.7X
10
Source: Bloomberg and Company Website
NYSSA Equity Research – January 16, 2014
Exhibit 26: Consolidated Company Graph
Consolidated Valuation
All things considered, an equally weighted valuation was used to
consolidate the three valuation methods. All were relevant to future growth
prospects and multiple expansion, justifying a strong growth in the short- and
long-term life of the investment. We are reiterating a BUY for ColgatePalmolive, ticker CL, with a price target of $75.
Exhibit 27: Consolidated Company Valuation
Consolidated Valuation
DCF
Historical
Comps
Weighted
Source: Team Estimates and Calculation
2014 Bear
2014 Base
2014 Bull
$72.69
$61.73
$67.02
$67.15
$80.77
$68.59
$74.46
$74.61
$88.85
$75.45
$81.91
$82.07
Source: Team Estimates and Calculation
Risks Associated with Colgate-Palmolive
Venezuela

February 2013 the government of Venezuela devalued its currency, which will
adversely affect our business and results of operations for 2013
 In 2010, the results of operations were adversely impacted by the designation
of Venezuela as hyperinflationary and the subsequent currency devaluations in
Venezuela in that year
International Sales



80% of Net Sales originate outside of the US
ForEx rates on international currency may have negative effects on revenue
Political or economic instability, social or labor unrest or changing
macroeconomic conditions in our markets
Volatility


Raw materials and packaging materials such as resins, tropical oils, essential
oils, tallow, poultry, corn and soybeans are subject to wide price variations
Increase in costs and availability of commodities as well as the cost of energy,
transportation, and other services can impact profit margins if higher pricing
cannot be achieved for Colgate goods
11
NYSSA Equity Research – January 16, 2014
Appendix
 Financial Statements
 Revenue Growth Model..…………………………………………………………………………………………………………………13
 Income Statement

Projected Income Statement – Quarterly.……………………………………………………………………….…………14

Margin Expansion and EPS Growth – Quarterly……..…………………………………………………………………..15

Projected Income Statement – Yearly….…………………………………………………………..………………………..16
 Balance Sheet

Key Ratio Analysis………….………………………………………………………………………………………………………..…17

Balance Sheet Assumptions……………………………………………………………………………………………………….18

Projected Yearly Balance Sheet..………………………………………………………………………………………………..19
 Projected Yearly Cash Flow…………………………………..………………………………………………………………………….20
 Valuation
 Discounted Cash Flow

Discounted Cash Flow Analysis…………………………………………………………………………………………………..21

Discounted Cash Flow Sensitivity……………………………………………………………………………………………….22
 Historical Multiple……..…………………………………………………………………………………………………………………….23
 Comparable Companies…….…………………………………………………………………………………………………………….24
 Consolidated Valuation & Share Price Potential…………………………………..………………………………………………….25
 Supplemental Information
 Porters 5-Forces Model…..……………………………………………………………………………………………………………….26
 In-depth DuPont Analysis……..………………………………………………………………………………………………………….27
 Market Share Analysis

Oral Care & Personal Care………………………………………………………………………………………………………….28

Home Care & Pet Food……………………………………………………………………………………………………………….29
 Management….………………………………………………………………………………………………………………………………..30
 Disclosure….……………………………………………………………………………………………………………………………………..31
12
NYSSA Equity Research – January 16, 2014
Appendix 1: Revenue Growth Model
Source: Company Statements & Team Estimates
13
NYSSA Equity Research – January 16, 2014
Appendix 2A: Projected Income Statement - Quarterly
Source: Company Statements & Team Estimates
14
NYSSA Equity Research – January 16, 2014
Appendix 2B: Margin Expansion and EPS Growth - Quarterly
Source: Company Statements & Team Estimates
15
NYSSA Equity Research – January 16, 2014
Appendix 2C: Projected Income Statement - Yearly
Source: Company Statements & Team Estimates
16
NYSSA Equity Research – January 16, 2014
Appendix 3A: Key Ratio Analysis
Source: Bloomberg & Team Estimates
17
NYSSA Equity Research – January 16, 2014
Appendix 3B: Balance Sheet Assumptions
Source: Company Statements & Team Estimates
18
NYSSA Equity Research – January 16, 2014
Appendix 3C: Projected Yearly Balance Sheet
Source: Company Statements & Team Estimates
19
NYSSA Equity Research – January 16, 2014
Appendix 4: Projected Yearly Cash Flow
Depreciation and CapEx
Revenue
Capex
$15,329.8
684.0
Additions as a % of Sales
Amortization
Amortization as % of CapEx
Depreciation
Depreciation as % of CapEx
Debt Payments and Proceed Growth
Debt Payments and Proceed Growth
Growth %
Debt Payments and Proceed Growth
Growth %
$15,326.8
575.0
$15,564.0
550.0
$16,734.0
537.0
$17,085.0
565.0
$17,484.0
699.4
$18,218.5
728.7
19018.4904
760.7
4.5%
3.8%
3.5%
3.2%
3.3%
4.0%
4.0%
4.0%
87.0
(15.0)
93.0
232.0
102.0
125.9
131.2
136.9
12.7%
-2.6%
16.9%
43.2%
18.1%
18.0%
18.0%
18.0%
261.0
366.0
283.0
189.0
323.0
349.7
364.4
380.4
38.2%
63.7%
51.5%
35.2%
57.2%
50.0%
50.0%
50.0%
($2,320.0)
($3,950.0)
($4,719.0)
($4,429.0)
($5,011.0)
($5,462.0)
($5,789.7)
($5,992.3)
N/A
70.3%
19.5%
-6.1%
13.1%
9.0%
6.0%
3.5%
$2,515.0
$3,424.0
$5,015.0
$5,843.0
$5,452.0
$5,942.68
$6,239.81
$6,364.61
N/A
36.1%
46.5%
16.5%
-6.7%
9.0%
5.0%
2.0%
Source: Company Statements & Team Estimates
20
NYSSA Equity Research – January 16, 2014
Appendix 5A: Discounted Cash Flow Analysis
Source: Bloomberg, Company Statements, & Team Estimates
21
NYSSA Equity Research – January 16, 2014
Appendix 5B: Discounted Cash Flow Sensitivity
Source: Team Calculation
22
NYSSA Equity Research – January 16, 2014
Appendix 6: Historical Multiple
Source: Bloomberg, Company Statements, & Team Estimates
23
NYSSA Equity Research – January 16, 2014
Appendix 7: Comparable Companies
Source: Bloomberg, Company Statements, Team Estimates
24
NYSSA Equity Research – January 16, 2014
Appendix 8: Consolidated Valuation and Share Price Potential
Source: Yahoo! & Team Estimates
25
NYSSA Equity Research – January 16, 2014
Appendix 9: Porters 5-Forces Model
Threat of New Entrants
Threat of New Entrants (1)
1.
2.
3.
4.
Extremely high barrier to entry
Large Economies of Scale
Capital intensive R&D
Extensive regulation for products
Bargaining Power of
Suppliers
Bargaining Power of
Buyers
Bargaining Power of Suppliers (1)
1.
2.
3.
Multitude of suppliers worldwide
Existence of long term contracts
Significant long term supplier relationships
Competition in the
Industry
Final Rating: 2.8
Bargaining Power of Buyers (5)
1.
2.
3.
4.
5.
Threat of Substitute
Products
Diversified global demand
Competitive pricing may give buyers the edge
80% of sales originate outside of the United States
Long term contracts with Colgate
Not one buyer represents more than 10% of Colgate revenue
Competition in the Industry (4)
1.
2.
3.
4.
Few competitors, yet they are major companies with significant resources
Economies of scale
High exit barriers
Well established reputation of current brands & companies
Threat of Substitute Products (3)
1.
2.
3.
4.
Fair amount of competitor products
Rise in generic brands through difficult economic climate
Large amount of R&D and product development by companies in industry
Significant regulation of products
The scale of the interaction:
0
No Interaction
2
Low
4
High
1
Insignificant
3
Average
5
Very High
Source: Team Assumptions
26
NYSSA Equity Research – January 16, 2014
Appendix 10: In-depth DuPont Analysis
Source: Company Statements & Team Estimates
27
NYSSA Equity Research – January 16, 2014
Appendix 11A: Market Share Analysis
Source: Bloomberg & Company Statements
28
NYSSA Equity Research – January 16, 2014
Appendix 11B: Market Share Analysis (Cont’d)
Source: Bloomberg & Company Statements
29
NYSSA Equity Research – January 16, 2014
Appendix 12: Management Hierarchy
Ian Cook (CEO)
Fabian Garcia
(COO)
Peter BronsPaulsen (CEO
Hill's)
Don Buchner
(VP Hill's)
Franck J Moison
(COO)
Alain Semeneri
(VP
Development)
Dennis Hickey
(CFO)
Jesper
Andersen (VP
North America)
Elyse Kane (VP
North America)
Andrew Hendry
(CLO)
Andrea Bernard
(VP Legal)
Marty Collins
(VP Legal)
Source: Company Website
30
NYSSA Equity Research – January 16, 2014
Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the
content or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as an officer or director:
The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.
Market making:
The author(s) does not act as a market maker in the subject company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be
reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information
is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment
advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by
any individual affiliated with NYSSA, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.
CFA Institute Research Challenge
31