VALUATION OF COLGATE-PALMOLIVE

Presented by:
Carlos Castro
Alejandro Sabogal
FINANCE !
"r# $%ll%a& Tra%nor
A'r%l !() !**(
1
Val+at%on o, Colgate-Pal&ol%-e
I# Introd+.t%on#
We chose the Colgate-Palmolive Company because it is one of the world's leading
consumer products companies with products marketed in over 200 countries and territories
throughout the world Colgate is the second largest !" maker of detergents #mong its main
competitors$ we can find Cloro%$ &illette$ and Procter and &amble 'he Company manages its
business in three product segments( )ral$ Personal and *ome Care$ and Pet +utrition Colgate
has achieved global leadership in toothpaste$ hand dishwashing li,uid$ li,uid hand soap$ li,uid
cleaners and specialty cleaners
Colgate is a large-cap growth company that over the last 2- years has proven to be an
attractive investment because of its global performance and its successful financial strategy 'he
company has increased profitability by reducing costs without inhibiting growth Consistent
innovation and development of new products has allowed it to increase its market share in the
developing world .n 200/$ appro%imately --0 of Colgate1s sales derived from its )ral Care
division in #sia and #frica .n addition$ sales of Pet +utrition products accounted for 1/0 of the
Company's total worldwide sales in 200/
.n graph +o 1$ we can see Colgate1s performance from #pril 122- to #pril 200-
compared to the "3P -00 and one its main competitors$ Procter and &amble
Gra'/ No# 0# Colgate1s Pr%.e 2%story#
"ource( wwwmoneycentralcom
'aking a close look at the graph$ we can see that Colgate was highly correlated with the
"3P -00 and P3&1s stock between #pril 122- and 4anuary 2000 5rom this point$ over the ne%t
five years Colgate tended to overperform both the "3P -00 and P3& 6uring the last year$ P3&
has overperformed Colgate and the "3P -00
2
II# P3E and P3Sales Analys%s
Table 0 4 2%stor%.al EPS) P3E) Sales
5EA6 077( 0778 0779 077: 0777 !***
7P" 028 029 11/ 1:1 1/; 1;
P<7 8-1 211 2;1 :1: :/- :1-
"ales =millions> 9$:-920 9$;/200 2$0-8;0 9$2;180 2$11920 2:-;2
"ales per share 1/:: 1/9; 1-:: 1-:: 21/8 18-1
P<"ales per "hare 12: 1-- 2/ :0: :0: :21
Common "hares
)utstanding =millions>
-9:/ -99- -209 -9-/ /2/2 -88;
5EA6 !**0 !**! !** !**;
!**(
<Proje.ted=
A-erage
7P" 192 212 2/8 2:: !#:7 0#89
P<7 :0 2:- 22: 212 !*#8*> !7#7
"ales =millions> 2/2;9 222/: 220:/ 10-9/2 0*:9#08 7;!(#80>>
"ales per share 1;1128; 1;:/011 19--812 200221: !*#(97( 09#;!
P<"ales per
"hare ::; :02 2;2 2-8 !#9(;8>>> !#8:
Common "hares
)utstanding
=millions> --0; -:8 -::; -288 (!8#(7? (;8#;!
> 7stimates by ?oney central
@@ 2:20 "ales growth
@@@ Price<sales intrinsic growth A ;80
B 200- "hares outstanding are the same as 200/ since "ales and "ales per share grow at the same rate$ 2:20
=10$9:;18<20-; A -28-2>
Cased on the past 10 years$ Colgate1s 7P" has increased from 028 in 122- to 2:: in
200/$ resulting in 2/20 intrinsic growth .ts sales have shown a moderate growth rate of 2:20$
ranging from D9$:-9 millions in 122- to D10$-9/ millions in 200/ 5rom this$ we can estimate the
7P"$ "ales$ and "ales per share for 200- at 292 =2::@12/2>$ 10$9:; millions =10$-9/@102:2>
and 20-9 =2002@102:2>$ respectively We estimated 200- P<sales to be 2;- based on a ;80
intrinsic growth$ see table +o 1 above 5inally$ we decided to use ?oney Central1s estimate for
200- P<7$ 208
Colgate1s P7 ratio has usually ranged from 211 to :/-$ e%cept in 122- when it reached
an unusual 8-1$ consistent with its lowest price =D182>$ 7P" =028> price<sales =12:>$ and net
profit margin =21> for the 10 year period Colgate1s P<sales per share has ranged from 12: to
:21
:
Gra'/ No# !# P3E and P3Sales
#ccording to the P<7 range$ Colgate1s value could vary between D802 =211@292> and
D22; =:/-@292>$ e%cluding the 122- P<7 in our computation of the ma%imum price Cased on
P<sales$ the price could range from D2-:1 =12:@20-9> to D90/; =:21@20-9>
!sing the proEected P<7 and 7P" for 200-$ we can find an estimated price of D-2-:
=208@292> 'his value is below the P<7 floor of D802 because money central estimated P<7 for
200- to be 208$ below the historical minimum of 211 )ur proEected price based on 200- P<sales
and sales per share is D-8-2 =2;-@20-9> 'herefore$ based on these estimates we can
conclude Colgate1s price should be somewhere between around D-8 and D-2 "ee graph :$ and
table +o 2
Gra'/ No# # Pr%.e o, Colgate@ Sto.A Based on PE Proje.t%ons
/
Table ! 4 Proje.ted Sto.A Pr%.e +s%ng P3E and P3Sales
P7 7P" "tock Price P<"ales "ales<"hare "tock Price
7%pected 20$8 2$92 -2$-:/ 2$;- 20$-9 -8$-2
?inimum 21$1 2$92 80$2;2 1$2: 20$-9 2-$:1
?a%imum :/$- 2$92 22$;0- :$21 20$-9 90$/;
Compared to the industry and "3P -00 over the last - years only$ Colgate1s sales growth
has been lower .ts 7P" growth rate has been about the industry average$ but greater than "3P
-00$ as shown in table +o :
Table 4 Sales and EPS .o&'ared to %nd+stry and SCP (**
&rowth Fates 0 Company .ndustry "3P -00
"ales =--Gear #nnual #vg> 281 :22 /89
7P" =--Gear #nnual #vg> 10;1 10;: 2/;
Cased on P<7$ P<" and P<Cash flow ratio ratios$ Colgate seems an attractive stock since
its ratios are all below the industry average CH1s Price<Cook value is greater than the industry1s
due to Colgate1s total e,uity decrease over the last - years We will e%plain this decrease in the
ne%t section "ee table +o /
Table ; 4 Pr%.e 6at%os .o&'ared to t/e %nd+stry
Colgate1s net profit margin$ 1220 =- last year average> has been greater than the
industry1s$ 980 'his may be e%plained partly by CH1s debt<e,uity ratio :19$ which is higher than
the industry1s$ at 120 5inally$ Colgate1s Feturn on e,uity has been considerably higher than the
industry1s$ 12/- and 82;$ respectively =we will discuss CH1s F)7 further> )n the other hand$ its
F)# has been relatively close to the industry1s$ see table +o -
Table ( 4 6OE and 6OA .o&'ared to t/e %nd+stry#
Colgate .ndustry
Feturn )n 7,uity =--Gear #vg> 12/- 82;
Feturn )n #ssets =--Gear #vg> 18; 10;
-
III# FUN"AMENTAL ANAL5SIS:
*ere we will value Colgate based on the 5C57 per share and the two-stage growth model
We assume in the first stage that Colgate will grow at a fi%ed rate for - years and in the second
stage will show an infinite growth at -0 'his last is consistent with the estimated returns
investors can e%pect from the "3P -00$ based on IWhat to e%pect from your stocksJK by
Catchelor$ 9<2-<0/
#> Cost of Capital( C#P?( Fi A Ff B Ceta=Fm-Ff>
We will use a risk free of /:20$ actual yield on the 10 year treasury according to ?oney
Central !" 'reasury .nde%es .n addition$ we will use the historical average of --0 for the risk
premium
"ince we found the current Ceta for Colgate at only 02$ we decided to use the market
Ceta of 1 to make our cost of capital close to 100 =historical re,uired rate of return> )therwise$
our L would be too low and we would violate the &ordon dividend discount model$ assuming a L
smaller than &
Ff A /:20 =from ?oney Central current US Treas+ry IndeDes=
E F*#! <,ro& Money Central) .o&'any re'ort=
6& F7#:! <to Aee' t/e r%sA 're&%+& at (#(G=
L A /:2 B 02=292-/:2> A -/20
H F ;#! ? 0<7#:!-;#!= F 7#:!G
C> &rowth Fate for Colgate
We first calculated & based on Colgate1s F)7 and C =Fetention ratio> !nfortunately$ we
encountered a problem here because Colgate1s F)7s during the last five years have been
e%tremely high due to a notorious decrease in total 7,uity
#ccording to Colgate1s Calance sheet from 2000 to 200/$ this reduction in "hareholder's
7,uity may be best e%plained by shareholders1 repurchase of common stock for the period
Table No# 8 4 S/are/older1s eI+%ty
S/are/older@s EI+%ty !**; !** !**! !**0 !***
Preferred "tock 7,uity 2;/0 2222 :2:0 :/1: :-/1
Common "tock 7,uity 2;1/ -2/2 2;: -0-1 1$11/0
Total EI+%ty 0)!;(#; ::9#0 (*# :;8#; 0);8:#0
'hus$ based on the averages of F)7 and C A =1-payout ratio>$ we find an intrinsic growth
of 2-2:0
8
Table No# 9 4 Cal.+lat%on o, G0
!**; !** !**! !**0 !*** A-erage
'otal +et .ncome 1$:2;10 1$/21:0 1$299:0 1$1/880 1$08:90 1$2/2/2
Payment of Cash
6ividends -:82 -089 /1:/ :28; :92/ //;10
6ividend Payout 0/0/0:2 0:-8-;- 0:20999 0:/-2;2 0:-2/88 :-;/0
CA =1-dividend payout> 0-2-281 08/:/2- 08;2112 08-/021 08/0-:/ 8/280
F)7 12/0 2:00 21-0 220 ;20 1/9210
&1 A 1/9210 @ =1-0:-;/> A 2-2:0
'his growth is not reasonable mainly because of the significant decrease in Colgate1s
total e,uity from 2000 to 200/ 'herefore$ we decided to use the #nalyst1s estimates for the
growth of Colgate =;1;0 200-> of 220 for the ne%t five years
We assume that the growth rate after - years will be -0
&2 A -0
C> 5C57(
'he formula is +et .ncome B depreciation M Capital e%penditure M change in working capital M
principal debt repayments B new debt issues
+ote numbers are in millions(
Table No# : 4 FCFE 'er s/are
!**; !** !**! !**0 !*** AVE6AGE
+et .ncome 1$:2;10 1$/21:0 1$299:0 1$1/880 1$08:90 1$2/2/2
B 6epreciation :2;9 :1-- 228- ::82 ::;9 :22;8
- Capital e%penditure 1$2;/;0 29;10 :-9;0 //100 //9-0 -8200
-
Change in working
capital -/120 -29:0 -0-0 -2:20 2190 -1//2
-
Principal debt
repayments ;-:2 90/ ;8:- -2-2 ;:2/ ;:1:/
B +ew debt issues 1$2/8-0 2222 28/- 99;2 22-/ 9-0;0
21/;0 20:20 1$/2;80 1$:-;00 1$11;:0 1$1/:28
"hares )utstanding -288 -::; -:8 --0; -88; -/2;/
5C57 per share 1;:8222 1822::; 288:/:: 2/8/1:; 12;1-2 211
AVE6AGE !#0*(87:
'herefore$ our 5C57 for this company is 211 We used averages for every component of the
formula #s we can see from the table above$ Colgate has issued more debt than it has paid over
the last five years
6> 'wo "tage growth model(
*ere we plugged the numbers obtained above to calculate the intrinsic value of Colgate We
assumed the current growth continues for five more years
;
Table No# 7 4 TJo Stage GroJt/ Model
Pessimistic and optimistic input values were estimated to be 100 more or less than
proEected #s table +o2 shows$ the intrinsic value for Colgate should be around D-- with a range
between D:; =pessimistic> and D20 =optimistic> "ince the current value of Colgate is D-1:9$ we
consider this price is very close to our valuation 'his event does not let us conclude that the
stock is undervalued with certainty
IV# SUMMA65 AN" CONCLUSIONS:
.n summary$ we used various techni,ues to determine a good estimate for Colgate1s
price 5irst$ based on our P<7 and P<sales analysis$ we suggested Colgate1s stock should be
worth between D-8- and D-2-$ with a minimum of D2- and a ma%imum of D22 #ccording to our
5C57 analysis the stock should be valued around D--
"ince the current value of Colgate is around D-1$ we concluded to hold the stock We first
thought the stock was undervalued$ but the difference between the intrinsic and the current value
is very small$ leading us to believe it would be better to wait for the stock to drop somewhere
close to the pessimistic value of D:;
*owever$ if the predictions from ?oney Central1s analysts are accurate$ the price should
be somewhere around D-2- =7P" A 292 @ P<7 A 208> at the end of 200-$ showing a small
chance of profit from the current price of D-1:9 'his assumption is very risky and should not be
considered as a serious alternative for a long-term investor We would only suggest buying this
stock if Colgate1s growth prospects were estimated at a much higher rate than the last five-year
average from table +o: We would look for a smaller ratio of CH's P<7 to its five-year growth
compared to the industry
9
2