Colgate-Palmolive Equity Valuation and Analysis Valued at April 1

105 Pages·2007·0.41 MB·English

Colgate-Palmolive Equity Valuation and Analysis
Valued at April 1, 2007

Analyzed by the “A” Team
Analysts
Katrina Bazzell: [email protected]
James Estes: [email protected]
Travis Flory: [email protected]
Daniel Latimer: [email protected]
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Table of Contents

Executive Summary………………………………………………3
Business and Industry Analysis……………………………….6
Accounting Analysis………………………………………………24
Ratio Analysis and Forecasted Financials…………………..46
Valuation Analysis………………………………………………..84
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Executive Summary

Investment Recommendation: Overvalued, Sell 4/1/2006

CL- NYSE: $67.30 EPS Forecast:
52-Week Range: $58.01- $69.00 FYE 4/1 06’ 07’ 08’ 09’
Revenue (2006): $12,237,700,000 EPS 1.84 2.24 2.51 2.81
Market Capitalization: $34.42 billion
Shares Outstanding: 732.9 million Ratio Comparison: CL PG KMB
Dividend Yield: 2.2% P/E Trailing 35.26 22.61 25.74
3-Month Avg. Daily Trading Vol: 2,073,620,000 P/E Forward 29.65 20.36 22.59
Book Value Per Share: $2.32 M/B 33.80 3.12 6.34
ROE: 95.92%
ROA: 15.91% Valuation Estimates:
Est. 5-Year EPS Growth Rate: Actual Price (AS of 4/1/07): $67.30
Est. Cost of Capital: R2 Beta Ke Ratio Based Valuations:
Ke Estimated 16.3% P/E Trailing- $41.99
10-Year .109 .843 -2.16% P/E Forward- $41.27
7-Year .109 .843 -2.27% Enterprise Value- $
5-Year .108 .842 -2.27% M/B- $21.68
1-Year .107 .844 -2.30%
3-Month .106 .844 -2.30% Intrinsic Valuations:
Published .83 Discounted Dividends: $12.65
Kd: 5.25% Free Cash Flow: $56.40
WACC: 5.52% Residual Income: $21.26
Altman Z-Score: AEG: $14.29
CL- 7.29

Competitor growth 2002 – 2007
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Colgate-Palmolive historical stock prices 2002-2007

Executive Summary

Colgate-Palmolive is a well established, global company in the personal
products industry. Within Colgate-Palmolive, there are four distinct product
segments: personal care, home care, oral care, and pet nutrition. Other
competitors in the industry include Procter & Gamble, Kimberly Clark Co., The
Clorox Company, and Church and Dwight. The personal products industry is
mature and well-established. Accordingly, there are sizable barriers to entry for
new firms wishing to enter into the industry. Price competition within the
industry is high, although brand images do play a role in influencing customer
decisions. Colgate-Palmolive’s brand image, along with constant product
innovations, helps it to stay ahead in a very competitive industry.
Colgate-Palmolive is somewhat more conservative in their choice of
accounting policies than other competitors within the industry. Colgate-Palmolive
does an effective job in their quality of disclosure in the annual 10-K report. This
fact shows that Colgate-Palmolive has confidence in their accounting policies and
market position, because we would generally not expect to see such a high level
of disclosure within such a competitive industry. Current performance, as well as
any potential negative events, is adequately addressed by the company. An
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analysis of the company’s financial statements produced a few areas for concern.
However this is most likely because of the company’s current restructuring
process.
Conducting a ratio analysis of Colgate-Palmolive and their competitors
gives us a good insight as to the company’s financial performance both over time
and across the industry. This has allowed us to view the effects of Colgate-
Palmolive’s business strategies, accounting practices, and financial decisions as
well as their level of sustainability. With this in mind, we then developed a ten
year forecast of the company’s financial statements. The forecast was based
mainly on internal ratios and relationships, although some ratios used in the
forecast were adjusted to better reflect ongoing changes in the company’s
structure. We were also able to forecast the company more aggressively,
undoing some of the conservative accounting policies, in order to get a more
accurate picture of Colgate-Palmolive’s financial statements in comparison to
other companies within the industry. We have made our forecasts based on our
assessment of the future direction of the company. The implementation of a
company-wide restructuring program beginning in 2004 should be noted,
however, because the effects of it are relatively uncertain at this time.
After conducting an analysis of Colgate-Palmolive’s financial statements,
taking into account the industry as a whole and accounting policies, we have
concluded that the company is severely overvalued. All of the valuation models
we used, except for the discounted free cash flows, showed the stock price to be
highly overvalued. Since the discounted free cash flows model is the most
sensitive to intrinsic factors and forecasts, we have regarded this valuation as the
least accurate. Other models, which take into account the more stable dividends,
all show the company to be severely overvalued. Accordingly, as of 4/1/2007,
our analysis leads us to the recommendation that the stock be sold.
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Business and Industry Analysis

Company Overview:
Colgate-Palmolive Company is a leading manufacturer of personal care,
home care, and oral care products, along with a profitable line of pet nutrition.
Colgate-Palmolive falls into the sector of consumer goods and the industry of
personal products. Some popular personal care products that Colgate offers
would be Speed Stick 24/7 deodorant, Softsoap shower gels, and Colgate brand
oral care products. Ajax, Fabuloso, and Murphy’s Oil Soap are just a few of their
home care products. The Hill’s Pet Nutrition segment of Colgate offers Hill’s
Science Diet and Hill’s Prescription Diet. Their products are sold in over 220
countries across the globe and last year’s sales for Colgate-Palmolive exceed $10
billion. Many product lines were not part of the original company but were
acquired by William Colgate & Company since they began in 1806. Among these
acquisitions would be, of course, the Palmolive soap company. Additional
acquisitions include Mennen, Softsoap, and Murphy’s Oil Soap.
Colgate-Palmolive currently employs 35,800 people from around the
world, and was first listed on the New York Stock Exchange on March 13, 1930.
Today their stock sells for about $66 a share. Their market capitalization is
approximately $34.9 billion, while the personal products industry is around $290
billion. This is a fast-paced industry with new products and competitors surfacing
continuously.
This analysis will first begin by dissecting the personal products industry
by discussing the Five Forces Model and each of its factors. It will then move on
to discuss the Value Chain Analysis of the industry and how Colgate-Palmolive
fits into the industry using their specific corporate strategies and activities. We
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will finish by explaining the Firm’s Competitive Advantage Analysis, and analyze
Colgate-Palmolive’s competitive advantages and how well they utilize these tools
in the market.

Five Factor Model:
The five factor model helps to understand the personal products industry
that Colgate-Palmolive competes in by analyzing both its structure and
profitability. By examining each of the five key components of this model, we will
determine the competitiveness of the industry and its effects on the firm. These
five components include the rivalry of existing firms, which examines the level of
competition in the industry by examining direct competitors and their influence in
the industry. The second component we will be discussing is the threat of new
entrants, and its effect on both Colgate-Palmolive and their direct competitors.
Third and fourth, we will consider the bargaining power of buyers and suppliers
and its effects on the pricing of products throughout the industry. Lastly, we will
consider the threat of new products in the marketplace, and comparisons among
differing brands and products.

Rivalry of Existing Firms:
The first component to be examined is the rivalry of existing firms within
the personal products industry. By determining the amount of counterparts
within the industry, we will be able to determine the aggressiveness of Colgate-
Palmolive within the personal products industry and, more importantly, how
Colgate-Palmolive adjusts their business strategy in order to stay competitive.

Industry Growth Rate:
The main competitors to Colgate-Palmolive are as follows; Procter and
Gamble (PG), Kimberly Clark(KMB), Clorox Co. (CLX), and Church and Dwight Co.
(CHD). It seems that the oral care sector of Colgate-Palmolive has steadily risen
in sales since 2003, but it is obvious that other parts of the company have
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decreased in sales over the same time period. This shows that Colgate’s sales
are stagnant and that the only way to gain more market share within the
industry is by taking it away from other existing competitors, such as Procter-
Gamble.
Although Colgate seems stagnant, this industry is growing rapidly.
Procter-Gamble has shown dramatic increases in assets, and their firm is clearly
developing. This indicates a high level of competition within the personal
products industry.

Colgate-Palmolive
Worldwide Sales Percentages

2003 2004 2005
Oral care 34% 35% 38%
Personal care 24% 23% 23%
Home care 29% 28% 26%
Pet Nutrition 13% 14% 13%
*From Colgate-Palmolive 10-K 2005

Total Asset Value - last 5 years

Colgate-Palmolive Clorox Procter-Gamble Church & Dwight Kimberly Clark

2001 $6,984.8 $3,995.0 $10,889.0 $949.1 $15,007.6
2002 $7,087.2 $3,524.0 $12,166.0 $988.2 $15,639.6
2003 $7,478.8 $3,652.0 $15,220.0 $1,119.6 $16,779.9
2004 $8,672.9 $3,834.0 $17,115.0 $1,878.0 $17,018.0
2005 $8,507.1 $3,617.0 $20,329.0 $1,962.1 $16,302.2
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Total Asset Value (in millions)
$25,000.0
$20,000.0
Colgate Palmolive
$15,000.0 Clorox
Procter & Gamble
$10,000.0 Church & Dwight
Kimberly Clark
$5,000.0
$0.0
2001 2002 2003 2004 2005

Concentrations and Balance of Competitors:
Within the personal products industry there is clearly a leading corporation
that is governing the industry. This corporation is Procter-Gamble. With their
market capitalization unable to be touched by any competitor, it is clear that
Colgate-Palmolive must abide by the pricing and market decisions based on what
Procter-Gamble is doing within the same industry. For example, Colgate-
Palmolive’s market capitalization is approximately $34.84 billion and sales in
2006 are $12 billions. Procter-Gamble has a much higher capitalization of $207
billion and sales of $68 billion. Although Colgate has less than half of Procter-
Gambles’ market capitalization, the firm is extremely large, and still a prime
competitor. Accordingly this shows that in order to stay competitive within the
personal products industry, Colgate-Palmolive must set prices accordingly with
their primary competition in order to keep/grow their existing market share of
$34.84 billion.
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Market Capitalization (in billions)

Procter-Gamble $207.05
Colgate-Palmolive $34.84
Clorox Co. $10.22
Church and Dwight Co. Inc. $2.93

Total Personal Products
Industry $286.97

*From Yahoo Finance
Procter Gamble
Colgate-Palmolive
Clorox Co.
Church and Dwight
Co.

Degree of Differentiation and Switching Costs:
In order to lower/eliminate competition, it is important for companies to
differentiate their products to reduce competition in the industry. However,
because most of the products within the personal products industry are similar,
this is difficult for Colgate-Palmolive to accomplish. In turn, this leaves Colgate
with the decision to work on price competition within the industry. Switching
costs within the personal products industry are extremely low, with the fact that
most products are all performing the same function. The differentiation among
these products (such as scent and advertising effectiveness) is miniscule, prices
included. This engages the personal products industry into price competition.