Date: 10/13/2012 Analyst Name: Ryan Ellingsen CIF Stock Recommendation Report (Fall 2012) Company Name and Ticker: Colgate-Palmolive Company (CL) Section (A) Summary Recommendation Buy: Hold Target Price: $121.25 Sector: Consumer Staples Industry: Household & Personal Products Market Cap (in Billions): 51.2 Stop-Loss Price: $109.50 # of Shrs. O/S (in Millions): 135.99 Current Price: $107.89 52 WK Hi: $109.84 52 WK Low: $86.19 EBO Valuation: 99.14 Morningstar (MS) Fair Value Est.: $97.00 MS FV Uncertainty: LOW MS Consider Buying: $77.60 MS Consider Selling: $121.25 EPS (TTM): 5.05 EPS (FY1): 5.36% EPS (FY2): 5.88% MS Star Rating: 2 Star Next Fiscal Yr. End Year : 2012 Month : December Last Fiscal Qtr. End: March 2012 Less Than 8 WK: Y N If Less Than 8 WK, next Earnings Ann. Date: Forward P/E: 18.13 Mean LT Growth: 8.81% PEG: 1.97 Beta: 0.42 % Inst. Ownership: 72.18% Inst. Ownership- Net Buy: Y N Short Interest Ratio: 2.3 Ratio Analysis Company Industry Sector P/E (TTM) 21.33 60.91 40.39 P/S (TTM) 3.00 6.85 3.66 P/B (MRQ) 22.14 0.99 2.05 P/CF (TTM) 16.86 52.14 23.11 Dividend Yield 2.30 1.46 1.71 Total Debt/Equity (MRQ) 232.57 7.14 23.45 Net Profit Margin (TTM) 15.27 10.75 7.26 ROA (TTM) 19.69 1.83 4.05 ROE (TTM) 93.00 3.14 12.31 Analyst Consensus Recommendation: Hold Short as % of Float: 1.10% 1
Investment Thesis I propose that we hold on Colgate- Palmolive s stock because there s just not enough credentials to enforce a buy. Their expansion is taken into consideration with these margins, however it just seems a little too risky right now and not enough evidence to show it will turn around fast. Summary Colgate-Palmolive is a personal product company that specializes in toothpaste and also other shampoos & shaving products Company Profile: Colgate-Palmolive s main strategy involves extensive global sales through the use of their stellar quality background and reputable brand loyalty Fundamental Valuation: Colgate-Palmolive has seen some growth, its assumed the abnormal growth rate would last 2 years, yielding an implied price of $99.14 Relative Valuation: The most common consumer staples ratios used are P/E and Dividend Yield. P/E was about 18.13 which was about average compared to it s competitors and their Dividend Yield was high at 2.30 compared with the industry Revenue and Earnings Estimates: Revenues are expected to go up along with earnings, with little surprise values. Analyst Recommendations: Majority of analysts recommend a hold on Colgate- Palmolive s stock at this time. Institutional Ownership: Colgate s institutional owners of >5% make up 18.2% stake in the company Short Interest: Colgate has become more bullish with the large pretax savings and global expansion, and becoming more bearish with high input cost inflation and competitor s entry into global expansion. Stock Price Chart: Stock price for Colgate-Palmolive has been relatively stable and increasing along with the S&P, which is standard for XLP. 2
Section (B) Company Profile (two pages maximum) Company Summary Colgate-Palmolive is one of the world s largest consumer product companies. On top of their most recognized toothpastes and detergents, they also make shampoos, deodorants, and other grooming and hygiene related products. On top of that, they also own a specialty pet food chain called Hill s which that they sell through pet retailers and vets. Their product lines extend to multiple parts of the world, in fact, they make almost 75% of their sales outside the U.S. (29% Latin America, 15.5% Greater Asia, 12% Africa), with their largest of their divisions being toothpaste. Business Model, Competition, Environment and Strategy Some of Colgate-Palmolive s biggest competitors are Procter & Gamble and Johnson & Johnson. One way Colgate differentiates itself from the competition is using their large reputation in quality oral health care, their low prices, and they also use more global marketing strategy than fellow competitors, they have roughly 45% of the worldwide market share. In terms of their stage in the product life cycle, they are in the mature stage. Their business cycle is not cyclical or seasonal, they are extremely defensive due to the fact that hygiene products are always going to be needed and never going to be cut out of consumer s budget. One issue with Colgate being so globally extensive is that they must deal with currency fluctuations and devaluations. Revenue and Earnings History REVENUE Periods 2010 2011 2012 March 3829.0 3994.0 4200.0 June 3814.0 4185.0 4267.0 September 3943.0 4383.0 December 3978.0 4172.0 TOTAL 15564 EARNINGS PER SHARE 3
Periods 2010 2011 2012 March 0.68786 1.15989 1.22546 June 1.17156 1.2609 1.30272 September 1.21492 1.31091 December 1.24031 1.21026 In general, there are not many patterns in terms of revenue and earnings in relation to seasonal things; Colgate-Palmolive is always going to be in demand no matter what time of the year, due to it being essential to daily life. Year to year however, both the revenues and the earnings have been steadily increasing. Section (C) Fundamental Valuation (EBO) Include the following here: CL PARAMETERS FY1 FY2 Ltg EPS Forecasts 5.36 5.88 8.81% Book value/share (last fye) 4.95 Discount Rate 5.66% Dividend Payout Ratio (POR) 46.06% Next Fsc Year end 2012 Current Fsc Mth (1 to 12) 10 Target ROE (industry avg.) 16.02% Model 1: 12-year forecasting horizon (T=12). and a 7-year growth period. Please download and save this template to your own storage device You only need to input values to cells highlighted in "yellow" The rest of the spreadsheet is calculated automatically Please read "Guidelines_for_FundamentalValuation_ProfLee_Spreadsheet" file carefully Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2 Long-term EPS Growth Rate (Ltg) 0.0881 0.0881 0.0881 0.0881 0.0881 Forecasted EPS 5.36 5.88 6.40 6.96 7.58 8.24 8.97 Beg. of year BV/Shr 4.948 7.839 11.011 14.463 18.219 22.305 26.752 Implied ROE 0.750 0.581 0.481 0.416 0.370 0.335 (Beg. ROE, from ROE EPS forecasts) 1.083 0.750 0.581 0.481 0.416 0.370 0.335 0.300 0.265 0.230 0.195 0 Abnormal ROE (ROE-k) 1.027 0.694 0.525 0.425 0.359 0.313 0.279 0.244 0.209 0.174 0.139 0 4
growth rate for B (1-POR)*(ROEt-1) 0.000 0.584 0.405 0.313 0.260 0.224 0.199 0.181 0.162 0.143 0.124 0 Compounded growth 1.000 1.584 2.225 2.923 3.682 4.508 5.407 6.385 7.419 8.481 9.534 10 growth*aroe 1.027 1.099 1.167 1.242 1.323 1.411 1.507 1.556 1.548 1.472 1.321 1 required rate (k) 0.057 0.057 0.057 0.057 0.057 0.057 0.057 0.057 0.057 0.057 0.057 0.057 0 Compound discount rate 1.057 1.116 1.180 1.246 1.317 1.392 1.470 1.554 1.642 1.734 1.833 1 div. payout rate (k) 0.461 Add to P/B PV(growth*AROE) 0.97 0.98 0.99 1.00 1.00 1.01 1.02 1.00 0.94 0.85 0.72 Cum P/B 1.97 2.96 3.95 4.94 5.95 6.96 7.99 8.99 9.93 10.78 11.50 1 Add: Perpetuity beyond current yr Total P/B (Assume this yr's AROE forever) 17.16 17.39 17.48 17.60 17.74 17.91 18.10 17.69 16.66 14.99 12.74 (P/B if we stop est. this period) 19.13 20.34 21.42 22.54 23.69 24.87 26.09 26.67 26.59 25.77 24.23 2 Implied price 99.14 105.39 111.00 116.78 122.73 128.85 135.16 138.20 137.74 133.53 125.56 11 Check: Beg. BV/Shr 4.95 7.84 11.01 14.46 18.22 22.31 26.75 31.59 36.71 41.96 47.17 5 Implied EPS 5.36 5.88 6.40 6.96 7.58 8.24 8.97 9.49 9.74 9.66 9.21 Implied EPS growth 0.097 0.088 0.088 0.088 0.088 0.088 0.058 0.026-0.008-0.047-0 Inputs (provide below input values used in your analysis) EPS forecasts (FY1 & FY2): FY!: 5.36 FY2: 5.88_ Long-term growth rate: 8.81% Book value /share (along with book value and number of shares outstanding): Book value: 2375 # of shares outstanding: 480.2 Book value / share: 4.95 Dividend payout ratio: 46.06% Next fiscal year end: 2012 Current fiscal month: 10 Target ROE: 16.02% Output 5
Above normal growth period chosen: 2 years EBO valuation (Implied price from the spreadsheet): $99.14 Sensitivity Analysis EBO valuation would be (you can include more than one scenario in each of the following): $99.14 if changing above normal growth period to $111.19 if changing growth rate from mean (consensus) to the highest estimate 9% $109.24 if changing growth rate from mean (consensus) to the lowest estimate 7% $104.64 if changing discount rate to 6% $111.00 if changing target ROE to 18.02% 6
Section (D) Relative Valuation CL Mean FY2 Earnings Estimate Forward Mean LT PEG P/B ROE Value P/S P/CF Growth Ticker Name Mkt Cap Current Price (next fiscal year) P/E Rate (MRQ) 5 yr ave Ratio TTM TTM Church & 1 CHD Dwight $ 7,430.00 $ 53.37 $ 2.77 19.27 11.30% 1.71 3.75 16.19% 0.23 2.64 18.93 2 CLX Clorox $ 9,570.00 $ 73.81 $ 4.29 17.21 8.12% 2.12 #DIV/0! 1.76 13.34 Procter & 3 PG Gamble $ 187,130.00 $67.94 $ 3.90 17.42 8.52% 2.04 3.01 7.91% 0.38 2.25 15.34 4 JNJ Johnson & Johnson $ 187,400.00 $ 67.97 $ 5.47 12.43 6.69% 1.86 3.10 12.91% 0.24 2.90 15.694 CL Colgate- Palmolive $ 51,160.00 $ 107.89 $ 5.95 18.13 9.20% 1.97 22.21 9.05% 2.45 3.01 14.46 1 CHD Implied Price based on: P/E PEG P/B Value P/S P/CF Church & Dwight $114.64 $93.33 $18.22 $10.18 $94.63 $141.24 2 CLX Clorox $102.37 $115.99 $0.00 #DIV/0! $63.09 $99.53 3 PG Procter & Gamble $103.65 $111.92 $14.62 $16.73 $80.65 $114.46 4 JNJ Johnson & Johnson $73.93 $101.67 $15.06 $10.56 $103.95 $117.10 High $114.64 $115.99 $18.22 #DIV/0! $103.95 $141.24 Low $73.93 $93.33 $0.00 #DIV/0! $63.09 $99.53 Median $103.01 $106.80 $14.84 #DIV/0! $87.64 $115.78 As for competition comparison in terms of the relative valuation, Colgate-Palmolive is about middle in terms of PEG ratio compared with competitors, however it is greater than one therefore it most likely represents a growth stock. One outlier that is higher in Colgate- Palmolive compared to their competitors is the value ratio, and I think this is mostly attributing their significantly above average price to book ratio. In terms of market cap, they are significantly less than some of their competitors like Johnson & Johnson and P&G, however their stock is valued much higher. In terms Colgate-Palmolive s forward P/E and P/CF, they are about in the middle area in relation to some of their other competitors. One big value is that Colgate s price to sales value is the highest out of the five stocks, which means that they might not be a better investment. Compared with their current price, their implied prices were much lower, maybe signaling that the stock may be overvalued. In terms of what values are most important to Colgate s particular stock, it would be the P/E ratio and the dividend payout. 7
Section (E) Revenue and Earnings Estimates HISTORICAL SURPRISES Sales and Profit Figures in US Dollar (USD) Earnings and Dividend Figures in US Dollar (USD) Estimates vs Actual Estimate Actual Difference Surprise % SALES (in millions) Quarter Ending Jun-12 4,254.68 4,267.00 12.32 +0.29 Quarter Ending Mar-12 4,178.23 4,200.00 21.77 +0.52 Quarter Ending Dec-11 4,183.25 4,172.00 11.25-0.27 Quarter Ending Sep-11 4,367.13 4,383.00 15.87 +0.36 Quarter Ending Jun-11 4,175.61 4,185.00 9.39 +0.22 Earnings (per share) Quarter Ending Jun-12 1.33 1.33 0.00 +0.14 Quarter Ending Mar-12 1.24 1.24 0.00 +0.08 Quarter Ending Dec-11 1.29 1.30 0.01 +0.53 Quarter Ending Sep-11 1.30 1.31 0.01 +0.62 Quarter Ending Jun-11 1.25 1.26 0.01 +0.99 In general, Colgate-Palmolive has not really had many surprises, most of their actual values were very close to their estimates in both the sales and earnings values, but if they were, they were most likely were higher than expected, with only one quarter having a negative surprise value of -0.27%. Surprises were about the same in terms of earnings and sales, and were very small which is good. After comparing with the stock prices, it s apparent that these surprise values are much correlated with the stock price. Due to there being relatively stable stock price growth, it would make sense that there would be little surprise values because of its predictability. 8
CONSENSUS ESTIMATES ANALYSIS Sales and Profit Figures in US Dollar (USD) Earnings and Dividend Figures in US Dollar (USD) # of Estimates Mean High Low 1 Year Ago SALES (in millions) Quarter Ending Dec-12 16 4,305.71 4,415.90 4,187.00 4,526.20 Quarter Ending Mar-13 8 4,310.61 4,405.40 4,225.00 4,350.31 Year Ending Dec-12 19 17,202.50 17,929.00 16,949.40 17,665.90 Year Ending Dec-13 19 17,979.60 18,964.00 17,517.00 18,404.60 Earnings (per share) Quarter Ending Dec-12 20 1.39 1.43 1.33 1.47 Quarter Ending Mar-13 11 1.35 1.38 1.32 1.41 Year Ending Dec-12 23 5.36 5.51 5.26 5.54 Year Ending Dec-13 23 5.88 6.14 5.73 6.05 LT Growth Rate (%) 8 8.81 12.00 6.00 9.34 % Difference High % Difference Low Sales Q-End Dec 12 2.56-2.76 Q-End Mar-13 2.20-1.99 Year End Dec-12 4.22-1.47 Year End Dec-13 5.48-2.57 EPS Q-End Dec 12 2.88-4.32 Q-End Mar-13 2.22-2.22 Year End Dec-12 2.80-1.87 9
Year End Dec-13 4.42-2.55 LTG Rate 36-31.90 There are higher discrepancies among analysts estimates for close quarters for Earnings per share and sales. There tends to me much less analysts analyzing in the quarters ending in March. The number of analysts providing the LT growth rate estimate is also lowers than most of the other revenue and earnings estimates. CONSENSUS ESTIMATES TREND Sales and Profit Figures in US Dollar (USD) Earnings and Dividend Figures in US Dollar (USD) Current 1 Week Ago 1 Month Ago 2 Month Ago 1 Year Ago SALES (in millions) Quarter Ending Dec-12 4,305.71 4,307.27 4,300.54 4,299.89 4,526.20 Quarter Ending Mar-13 4,310.61 4,310.61 4,299.60 4,303.10 4,350.31 Year Ending Dec-12 17,202.50 17,204.90 17,189.50 17,184.20 17,665.90 Year Ending Dec-13 17,979.60 17,993.30 17,948.80 17,948.40 18,404.60 Earnings (per share) Quarter Ending Dec-12 1.39 1.39 1.39 1.39 1.47 Quarter Ending Mar-13 1.35 1.35 1.35 1.35 1.41 Quarter Ending Dec-12 5.36 5.36 5.36 5.35 5.54 Quarter Ending Dec-13 5.88 5.87 5.86 5.86 6.05 The consensus trends have appeared to be decreasing in regards to Sales and have also been decreasing in regards to Earnings. In particular, in the Sales estimates, there has been a decrease in estimates for each of the updates presented, and are most notable in the Year 10
Ending Dec-13 with the estimates decreasing by almost 500 million. Also with the earnings per share, the estimates have also been decreasing pretty consistently. ESTIMATES REVISIONS SUMMARY Last Week Last 4 Weeks Number Of Revisions: Up Down Up Down Revenue Quarter Ending Dec-12 1 0 3 0 Quarter Ending Mar-13 0 0 1 0 Year Ending Dec-12 1 0 4 0 Year Ending Dec-13 1 0 4 0 Earnings Quarter Ending Dec-12 1 0 4 0 Quarter Ending Mar-13 0 0 1 1 Year Ending Dec-12 2 0 4 0 Year Ending Dec-13 2 0 5 0 In particular, a majority of the revisions have been up revisions, with most of them happening in the last four weeks for both earnings and revenue, which is a good thing. In general, there have been about the same number of revisions for both revenue and earnings, with slightly more revisions being made in the earnings section. I believe that Colgate has a good chance of beating analyst consensus estimate due to the fact that they currently have so much of the market share and that they are very smartly managed. Despite their falling margins and questions of overvalued stock, their expansionary moves are investments that will pay off eventually. 11
Section (F) Analysts Recommendations. ANALYST RECOMMENDATIONS AND REVISIONS 1-5 Linear Scale Current 1 Month Ago 2 Month Ago 3 Month Ago (1) BUY 4 4 4 4 (2) OUTPERFORM 2 2 2 2 (3) HOLD 15 16 16 16 (4) UNDERPERFORM 2 2 2 1 (5) SELL 0 0 0 0 No Opinion 0 0 0 0 Mean Rating 2.65 2.67 2.67 2.61 Overall, a majority of analysts recommendations regarding Colgate-Palmolive have been to hold, and have been consistent in values over the past. One month ago and two months ago, there was one more analyst than their currently is and were 3 months ago, but for the most part, analysts recommendations have been the same all across the board in terms of buy, outperform, hold, and underperform, with little change in revisions. Analysts currently have been having more bullish opinions, particularly because they know Colgate is a global leader in oral care with worldwide market shares of roughly 45%. This is somewhat consistent with Morningstar s analyst research report, they believe that Colgate is financially sound and they have excellent management and stewardship and believe that margins will get better despite the high use of debt financing. 12
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Section (G) Institutional Ownership CL Ownership Activity # of Holders % Beg. Holders Shares % Shares Shares Outstanding 474,188,430 100.00% # of Holders/Tot Shares Held 1,292 100.00% 351,515,883 74.13% # New Positions 7 0.54% # Closed Positions 7 0.54% # Increased Positions 58 4.49% # Decreased Positions 78 6.04% Beg. Total Inst. Positions 1,292 100.00% 351,557,689 74.14% # Net Buyers/3 Mo. Net Chg -20 42.65% -41,806-0.01% Ownership Information % Outstanding Top 10 Institutions % Ownership 29.20% Mutual Fund % Ownership 1.45% Float % 99.11% > 5% Ownership Holder Name % Outstanding Report Date State Street Global Advisors 7.7 (US) 6/30/2012 Fidelity Management & 5.3 Research Company 6/30/2012 Vanguard Group, Inc. 5.20 6/30/2012 14
On a net basis, there has been a large decrease in net buyers of around 20 net buyers, accounting for a -0.01% change in shares since March. This could indicate a move towards a bearish attitude; however analysts have continued to take a holding standpoint on Colgate- Palmolive. There are three institutions that make up the owners with more than a 5% stake in the company, them being State Street Global Advisors, Fidelity Management & Research Company, and Vanguard Group, Inc. Together, they make up about 18.2% of shares outstanding. Overall, institutional ownership above 5% does not appear to have a large impact on Colgate-Palmolive, even though there are a very large amount of holders. Section (H) Short Interest (two pages) Settlement Date Short Interest Avg Daily Share Volume Days to Cover 9/28/2012 5,007,973 2,231,516 2.244202 9/14/2012 6,240,545 2,547,328 2.449840 8/31/2012 5,087,194 1,213,267 4.192972 8/15/2012 5,244,586 1,613,481 3.250479 7/31/2012 6,747,494 1,943,355 3.472085 7/13/2012 8,184,674 1,382,513 5.920143 6/29/2012 8,019,196 1,939,745 4.134150 6/15/2012 8,144,544 1,824,359 4.464332 5/31/2012 7,041,008 2,161,558 3.257376 5/15/2012 7,067,603 2,343,958 3.015243 4/30/2012 5,868,593 2,328,379 2.520463 4/13/2012 5,220,350 3,398,873 1.535906 3/30/2012 5,812,686 1,995,988 2.912185 3/15/2012 6,023,561 1,737,852 3.466096 2/29/2012 6,139,701 1,912,478 3.210338 2/15/2012 5,415,658 1,748,062 3.098093 1/31/2012 4,660,150 3,257,694 1.430506 1/13/2012 7,980,830 3,587,538 2.224598 12/30/2011 7,174,455 1,790,921 4.006014 12/15/2011 7,136,646 1,936,425 3.685475 11/30/2011 6,562,007 2,070,853 3.168746 15
11/15/2011 6,565,101 2,441,859 2.688567 10/31/2011 6,524,748 2,806,331 2.325010 10/14/2011 7,390,050 2,261,589 3.267636 Avg Vol Avg Vol Shares (3 month) (10 day) Outstanding Float 1,790,380 1,382,190 474.17M 471.48M Shares Short Short Ratio Short % of Float Shares Short 16
(Most recent date) (Most recent date) (Most recent date) (2 weeks prior) 5.01M 2.30 1.10% 6.24M Over the past year, Colgate-Palmolive has had both increases and decreases in their number of days to cover, suggesting moves toward a more bearish response because of the lack of predictability. Over the last year, the sentiment has turned more of a bearish response. The 1.10% short of float indicates a small level of negative sentiment. Some of the bullish sentiment that has come about in the past few years relates to the fact that their savings program, Funding the Growth, has generated hundreds of millions in pretax savings, and that they dominate the global market. Some bearish sentiment has come from the high input cost inflation and that P&G has started to expand into parts of Mexico and Brazil. 17
Section (I) Stock Charts CL: Dark Blue S&P500: Red Non-Cyclical: Green PG: Light Purple JNJ: Dark Purple A three months price chart VOLUME A one year price chart VOLUME 18
A five year price chart VOLUME Based off of the three month price chart, Colgate-Palmolive prices have been lower than the S&P 500, higher than Johnson & Johnson, lower than P&G, and about the same with their sector. Based off of the one year price chart, Colgate-Palmolive prices have been a little under the S&P 500, have been rising above both Johnson & Johnson and P&G, and have also been greater than their sector Based off the five year chart, Colgate-Palmolive prices have been greater than the S&P 500, Johnson & Johnson, and P&G, and have been about the same as their sector From these three charts it has been clear that Colgate-Palmolive s prices have been increasing along with their sector, and their sector has been doing much better than the S&P 500. 19