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.
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 battery-operated toothbrushes.
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
Qtrly Rev Growth (yoy):
Gross Margin (ttm):
Oper Margins (ttm):
Net Income (ttm):
PEG (5 yr expected):
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.
Colgate released their fourth quarter earnings on January 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 all-time 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. They are gaining market share in foreign countries, especially Latin America, in the nonoral care categories like soaps and dishwashing liquids. These conditions combined with gross profit margin expansion led to net gains for the company.
With sector revenues likely to grow 6% annually between now and 2009-2011, many companies hoping to deliver double-digit earnings growth will rely heavily on cost-cutting and restructuring efforts to reach their targets. Colgate is doing just this. In 2007, analysts expect to see higher than expected restructuring savings from the Restructuring Program of 2004 and lower commodity costs. Advertising spending will likely decline compared to 2006 because the pressure from Proctor & Gamble’s toothpaste launch will be lifted. Lastly, CL’s interest in developing markets will be big growth opportunities. They will continue to reap the benefits of increasing standards of living and rising discretionary income.
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.
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,
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 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
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:
DPS = Colgate Palmolive has a dividend of $1.28
KS = RF + Beta (Market Risk Premium)
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%, per Portfolio Committee’s proposal, is a conservative assumption.
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) = 1.28*1.0906 =$101.16
Ks – g 0.0838 – 0.07
If the assumptions of the model are to be trusted, then this stock is undervalued.
Warren Buffett Way Owners' Earnings Discount Model
assuming discount rate (k) of
Owner Earnings in 2006:
Prior Year Owner Earnings
First Stage Growth Rate (add)
Discounted Value per annum
Sum of present value of owner earnings
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
Shares outstanding assuming dilution
Intrinsic Value per share
My discount rate was found the same way as with the discount model. I used analysts’ growth estimate of 10.6% courtesy of finance.yahoo.com and chose a conservative 2nd stage growth rate. According to the Owners’ Earnings valuation, this stock is undervalued.
I chose to use the two-stage dividend discount model provided by Damodaran. I wanted to get one more valuation on the stock since there was such a large gap between the past two model’s results.
DPS = Colgate Palmolive has a dividend of $1.28
EPS = $2.38
KS = RF + Beta (Market Risk Premium)
Beta provided by finance.yahoo.com
9% Market Return provided by portfolio committee
Ks = 4.98% + 0.85* (4%) = 8.38%
I assumed a growth rate of 10.6% for the first period of growth, then 7% for the stable period just as with the first model. I was also prompted to provide some numbers from the financial statements such as the book value of equity and net income. The results of this model told me that the value of the stock is undervalued. It calculated that it could be trading at $89.53 when it is currently only trading at around $68.
Two Months Ago
Three Months Ago
These analyst recommendations all support the strength of CL’s stock. There are no sells and mostly buy, hold, and strong buy.
This graph is from Yahoo and it points out that Colgate has been outperforming its competitors as well as the benchmark, the S&P 500.
The following charts have been provided by StockCharts.com:
CL - Default Style
From this analysis, you can see that CL has been above the 300MA for the majority of the time. This is a good indicator that the stock is doing well. Looking closer, one can see that since the middle of 2005, CL is above the MA at all times. The 300MA is sloping upward, which another good sign.
CL - 1 year
I have provided this chart reporting the performance of CL over the past five years. Since the beginning of 2006, it is going up. I will provide reasoning for the major jumps in other years during the presentation.
Stop Loss Price
To calculate the stop loss price, I decided to take the average of the moving average and the purchase price. From this, I calculated a stop loss of $60.36, at which I would recommend we sell the stock.
Going along with the Risk to Capital equation,:
(Current share price – Stop Loss Price)*Shares/IFM Total Value
From this equation, I found that the risk to capital is only 0.02%. The portfolio committee decided to keep the risk under 1%, so this falls into that category.
Given all the above valuations and calculations, I will recommend for the portfolio to increase its holdings of this stock by ten times the current amount of 30 shares. So, we would hold 330 shares all together.
V. Appendices 2004 Restructuring Program2
In December 2004, the Company commenced a four-year restructuring and business-building 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 four-year 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.