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Colgate-Palmolive Equity Valuation and Analysis
Valued at April 1, 2007
Analyzed by the “A” Team
Analysts
Katrina Bazzell: trina.bazzell@ttu.edu
James Estes: james.n.estes@ttu.edu
Travis Flory: tflory1985@yahoo.com
Daniel Latimer: daniel.latimer@ttu.edu
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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)
$0.0
$5,000.0
$10,000.0
$15,000.0
$20,000.0
$25,000.0
2001 2002 2003 2004 2005
Colgate PalmoliveCloroxProcter & GambleChurch & DwightKimberly Clark
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 Dw ightCo.
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.
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Scale/Learning Economies and the Ratio of Fixed to Variable Costs:
Size is extremely important within the personal products industry. To
those tremendous corporations, such as Procter-Gamble, market share is a key
component. Procter-Gamble’s sheer size leads it to have more products, and
more shelf-space at retailers. This engulfs consumers, and lends them more
likely to pick up a Procter-Gamble product than any other competitor product.
When it comes to producing and supplying, the personal products industry is
aggressive in its methods. Most firms focus on competitive pricing, and Colgate-
Palmolive uses their manufacturing plants efficiently, thereby reducing variable
costs, and having the ability to keep prices competitive with other corporations.
This is common among most large personal product corporations, and is a way
to keep general product prices from dropping. As you can see, scale and costs to
corporations is another factor that leads to high competition in the personal
products industry.
Excess Capacity and Exit Barriers:
Excess capacity is the extra amount of inventory a firm has or could
potentially have. This is not beneficial to the company because it causes the firm
to cut prices just to sell the inventory. With Colgate-Palmolive having such a
wide variety and amount of products, it leads to bulk within the firm. This also
proves that excess capacity is extremely high within the industry, having too
many choices among too small of a consuming market. An exit barrier is a cost
that can reduce a company’s will to enter a market. These costs can be legal
costs/regulations or “specialized assets” that block entry into the marketplace
(Palepu, Healy). If new firms lack the start-up capital for machinery and legal
expenses, it is unlikely they will ever succeed within the market. This shows
incumbency is vital within the personal product industry due to exit barriers
being so high.
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Threat of New Entrants:
The ease with which new firms can enter an industry is a key determinant
of its profitability. In an industry where there exist high barriers to entry,
potential entrants have an extremely hard time growing because they cannot
become competitive with existing firms. What attracts a potential entrant into the
industry is the potential of earning large profits. Since people will always need
consumer goods, the industry is one that constantly faces the prospect of a new
firm attempting to enter.
Economies of scale:
To enter into industries where there are large economies of scale,
potential entrants must be willing to make large investments in capacity, which
may not be utilized right away, or enter with less than optimum capacity. With
Colgate-Palmolive and their four major competitors (Procter & Gamble, Kimberly
Clark, Church & Dwight, and Clorox) all having total asset value of between $2
and $58 billion dollars, it would be difficult for a new firm to enter into the
industry and be competitive. To further develop economies of scale, companies
must make significant investments in research and development, brand
advertising, and/or in physical plant and equipment. One of the major points that
guides the direction of Colgate-Palmolive is developing and funding technological
innovations (pg. 4 of 10k). For the year 2005, Colgate-Palmolive spent $246
million dollars in research and development. According to ACNielson, Colgate is
the leading toothpaste brand in most of the world and the U.S. Colgate-Palmolive
also follows a practice of actively seeking trademark protection by all means
necessary in the U.S. and other countries where Colgate-Palmolive’s products are
sold. In order to compete in this industry, companies must be able to continually
develop new and innovative products; this, in turn, provides all products needed
to consumers thereby preventing new entrants from entering the industry. New
entrants would simply face too large an amount of capital to invest in product
research and development. Property plant and equipment is the largest asset of
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Colgate-Palmolive, and is a higher percentage of total assets than other
companies such as Procter & Gamble. Ultimately, without an enormous
investment in capacity, new firms could not compete on cost the way that an
established company such as Colgate-Palmolive can.
2001 2002 2003 2004 2005
Total Asset Value (In Millions) $6,984.8 $7,087.2 $7,478.8 $8,672.9 $8,507.1
Net Sales (in Billions) $9.0843 $9.2943 $9.9034 $10.5842 $11.3969
Percentage Grow th in Sale
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
01-'02 02-'03 03-'04 04-'05
Years
Gro
wth
First mover advantage:
In certain industries, there exists certain first mover advantages that
would deter future entrants into that industry. Such advantages include setting
industry standards, entering into exclusive arrangements with suppliers of cheap
raw materials, or acquiring government licenses to sell certain products. Certain
packing materials used in the non-durable consumer products industry require
government licenses. New suppliers wishing to supply materials to companies
such as Colgate-Palmolive, Johnson & Johnson, or Procter & Gamble must be
certified by the government which takes both time and significant investment.
This keeps new companies from moving into the consumer products industry. A
new firm would either have to contract with an existing supplier or find a new
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supplier. The first would mean that the new company would pay more since they
cannot buy the same bulk as an established company like Colgate-Palmolive, and
do not have established relationships with suppliers. The second would require
significant investment in time and money, both of which would put a new
company at a cost disadvantage. Either way, existing firms in this industry would
enjoy a huge cost advantage over any firm wishing to potentially enter. Since
this is a cost competitive industry, already established firms (first movers) have
an enormous advantage over new entrants.
Access to Channels of Distribution and Relationships:
In order to maintain efficiency and thus a cost advantage in the consumer
products industry, companies must have an established relationship with
suppliers and retailers to ensure timeliness of deliveries as well as have
economies of scale in order to be able to take advantage of large bulk discounts
from these suppliers. One huge barrier facing potential new entrants in the non-
durable consumer products industry is obtaining sufficient, quality shelf space in
retail stores for their products. Retailers such as Wal-Mart Stores, various grocery
stores such as Randall’s and Kroger’s, as well as drug stores including Walgreen’s
and CVS, only have a certain amount of shelf space to put products on. These
retailers want products from established companies that can offer low prices.
Retailers must be guaranteed that products they carry have a high turnover rate.
Potential entrants into the industry must either have a well-established brand
image or a low cost advantage in order to assure retailers that their products can
be moved. Since new entrants typically cannot achieve either of these, retail
stores will either deny them shelf space or charge them a much higher price to
let their products sit on the shelves. Overall, the non-durable consumer products
industry is one that faces high barriers to entry because of the relationship of
established companies in the industry with retailers.
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Legal Barriers:
There are not too many legal barriers that would inhibit a firm from
potentially entering the non-durable consumer goods industry. The ones that do
exist are patents on certain products and obtaining government licenses to
handle and receive certain raw materials. Overall, legal barriers do little to deter
potential competitors from entering into the industry.
Bargaining Power of Buyers:
The personal products industry is extremely large and full of
undifferentiated products. Companies within the personal products industry,
which have a market capitalization of $240 billion, must negotiate with buyers
that have a moderate to high bargaining power. In order to fully understand
who has bargaining power with companies such as Colgate-Palmolive and
Proctor Gamble, and what type of bargaining power they have, a distinction
between first-hand buyers and end consumers must be made. The end
consumers, which by themselves are a very low and inconsequential percentage
of sales are not who these companies make their sales directly to. Thus, the
relative bargaining power of an end consumer in the personal goods industry is
very weak. However, end consumers are price sensitive because of the
multitude of similar products on the market and the low cost of switching to a
competitor’s product. Each company competing in the personal products
industry must have reasonably priced merchandise in order for the end
consumers to choose their product over a competitor’s. The majority of this
industry’s products are sold to first-hand buyers like retail stores and grocery
store chains. These businesses buy a very significant amount of product directly
from their respective producers such as Procter Gamble and Clorox. Because of
the volume of products bought within each transaction, the buyers have a very
high relative bargaining power, and are in position to negotiate the prices of
each product. Overall, each corporation within the industry must negotiate
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prices with the first-hand buyers and the end consumer; this forces them to sell
high quantities of each individual product with a minimal markup.
In conclusion, the buyers that are considered to have the largest amount
of bargaining power over companies in the personal products industry are the
retailers and grocery stores. Each company, such as Colgate Palmolive, must
negotiate prices with their buyers to create a competitive product in order to
maintain their current market share. Also, the end consumers of products in the
industry cannot be disregarded because of the low switching costs and their
price sensitivity.
Bargaining Power of Suppliers:
As an industry with enormous size, diversity, and extensive product lines,
the personal products industry calls for the services of many different types of
suppliers. Not only do these companies need suppliers for raw materials, but
they also need packaging and warehousing suppliers for their products.
Companies the size of Colgate-Palmolive and Proctor Gamble also require vast
amounts of services supplied such as information technology, market research,
and even landscaping. The power of the suppliers is minimized by the extent of
goods and services desired by the many companies competing in the industry, as
well as the number of substitutes for each good supplied. Suppliers to these
companies have very little power over the pricing of their product as well as the
terms and conditions of the contract. The majority of materials and services
needed by could easily be changed due to the fact that the goods and services
are undifferentiated and the cost of switching would be minimal. Because the
production of the industries vast amounts of products use such large amounts of
raw materials, each company has to look for suppliers that are willing to
negotiate price, terms, and logistics of each transaction. In addition to the
requirements placed on the suppliers, companies like Procter Gamble are able to
diversify who their suppliers are. By holding most of the bargaining power, they
can choose who they want to supply a specific product. Colgate-Palmolive,
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Kimberly Clark, as well as other companies within the industry, have developed a
Supplier Diversity Program that encourages suppliers that are woman-owned and
minority-owned businesses to compete with larger companies for their business.
This competition further decreases the bargaining power of the suppliers. Even
with the little bargaining power that the suppliers hold, these companies are very
coveted corporations to do business with. They not only purchase large
quantities of product, but they desire long standing relationships with their
suppliers. Furthermore, the recognition they give to each supplier is great for
expansion of their business. Overall, the enormous amounts of goods and
services required by personal product manufacturers minimize the bargaining
power of their suppliers. Each company within the industry develops long
standing relationships with their perspective supplier, but because of the
competitiveness of the industry they must buy materials from the supplier who
offers a combination of the lowest prices and convenient transactions. The
industry holds the majority of the bargaining power and will continue to expand
because of the cooperation of their suppliers.
Threat of Substitute Products:
The industries of personal products and pet nutrition have a high potential
for substitute products. Each competitor in these industries has their own
products that can easily be justifiable as the best. This decision is usually left to
personal preference. Each brand manufactures similar products that can easily
be substituted for another brand’s product to perform the same task. For
example, the Mr. Clean Magic Eraser can easily be substituted for a sponge.
Some customers would prefer the traditional sponge and others would opt for
the new Magic Eraser. Promotional offers such as coupons entice customers to
purchase these new products and therefore make the risk of substitute products
even larger. For companies to stay competitive in these markets they will need
to engineer their own new products and offer special deals to lure customers in.
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The threat of substitutes depends mainly on the consumer’s willingness to
substitute, price of substitutes, and performance of substitutes. The two
products will need to perform similar functions at different prices in order for the
consumer to be willing to consider a product change. If the two products
perform identical functions at similar prices the customer will not be as willing to
change due to inherent brand loyalty. Most consumers purchase products of a
specific brand because they have purchased that brand before and were happy
with it or some new product or promotion has urged them to try it. Customers
who are loyal to Colgate toothbrushes will more than likely continue to buy their
oral care products even though there are dozens of other companies who
produce very similar products that perform the same function. However, if Oral-
B offers a buy one get one free promotion on a “new and improved” toothbrush
many customers will take the chance on the new product.
Companies in the personal products industry have highly competitive
products, such as battery operated toothbrushes. Colgate boasts that their
toothbrush will clean your teeth 25% more than a standard toothbrush for
around $5.99. However, other companies have also attempted to gain a piece of
the battery operated toothbrush market as well. Oral B has engineered their
own new brush called the Cross Action Power toothbrush and posted results of
increased plaque reduction similar to Colgate’s. This toothbrush can be
purchased for $5.99. Crest has also unveiled a battery operated toothbrush by
the name of Crest Spinbrush. The Spinbrush sells for around $7.99. All of these
products seem to do the same job and they cost about the same. This leads us
to the conclusion that this is indeed a highly competitive market.
Product differentiation plays a large role for companies in many industries.
The pet nutrition sector is a prime example of this. Hill’s Science Diet and Hill’s
Prescription Diet are widely known as “veterinarian recommended.” Many
consumers care greatly for their pets and in the instance of a health problem
with their pet, their veterinarian will prescribe or recommend a certain type of
food. This fact decreases the threat of substitute products greatly because the
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number of companies that offer special diet products for dogs and cats is not
nearly as large as the market as a whole. Other companies such as Iams and
Pedigree offer different food for different pets needs; for instance, Pedigree has
dog food for puppies, adult dogs, senior dogs and overweight dogs. Companies
such as Nutro Max, while smaller than Hills Science diet, have tried the hand at
this specialized dog food market by providing organic dog food. This food can be
purchased at many pet stores and will compete with any other brand in this
segment of the market. Hills Science Diet offers many selections of pet food.
You have choices such as Oral Care Adult, Sensitive Stomach, and Sensitive Skin
dog food to better match your pet’s needs. These special diet foods will come at
a price premium for consumers, who will often pay the price for their pets.
Other companies do still hold a large share of the market. They often compete
in a part of the market that offers more affordable pet food.
Every company in this industry must constantly compete to not lose sales
to substitute products. By providing high quality products at competitive prices
the have created highly competitive markets. New and innovative products, such
as inexpensive battery operated toothbrushes, have swept the industry to create
even more rivalry among firms. Coupons and rebates offered on goods such as
these tempt the public to try new products. Product differentiation, in areas
such as their pet nutrition department, will also allow companies to achieve their
own niche in the market.
Value Chain Analysis
Because the markets of personal care products and pet food are highly
competitive, companies must carefully choose what strategies they will utilize.
These companies often use a high level of product quality and innovation, brand
recognition, marketing capability and acceptance of new products to ensure their
company is profitable. Some obstacles, such as material cost, are challenges
that the companies must work around. Companies, such as Colgate and Proctor
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Gamble, must work diligently in order to maintain the growth rate their company
currently enjoys.
While the success of the company in part depends on profitability of
existing products, creating new products is just as important. Every company is
constantly extending their product lines to provide the public with innovative
products. Since companies in this industry are so competitive, these companies
must strive to be the first to have new products hit the shelves. These new
products must also compete with new products from other companies, and
timing seems to be crucial within the industry. The market and consumers must
be ready and willing to try new products, and all companies must deal with this
dilemma. The products will also need to comply with FDA regulations and be well
accepted by consumers in order to be successful. All corporations must comply
with the same rules, which create an equal ground of product development
within the industry.
Raw materials for their products and packaging have a fluctuating price.
Companies attempt to purchase raw materials from different suppliers around
the world so that they will receive the lowest price. Most companies are
competing for the same resources, and therefore must interact directly on a
supply basis as well. Factors such as government regulations and energy costs
associated with producing these materials will hinder the forecast for affordability
of these commodities. Foreign and domestic regulations exist in the 220 or more
different countries that Colgate sells its products. For example, some ingredients
in Colgate Total Toothpaste are currently being reviewed in Europe and other
countries by their regulatory agencies. The profitability of this product could by
jeopardized if this ingredient is deemed unsafe.
In order to remain competitive, companies create value in many different
ways. They remain profitable by cutting costs in their own operations and
seeking suppliers who do so as well. Carefully choosing what new products to
produce and ensuring that they pass FDA regulations is very important the
success of personal care products. Companies involved in these industries work
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hard to maintain their position and market share by their intrinsic strategies and
development. This industry is unique in the fact that products change
continuously, and order to keep its market capitalization within the industry,
Colgate-Palmolive must strive to implement the same and newer techniques to
keep up with consumers growing demands.
Firm Competitive Advantage Analysis
The personal products industry is currently on the rise for growth. With
endless research and development, the industry is being pushed technologically,
fueled by the needs of its consumers. As stated earlier, the top competitor is
Procter-Gamble, followed by Colgate-Palmolive, Kimberly-Clark, Clorox Co., and
Church and Dwight Co. This industry is highly competitive, and each company
trying to push the envelope has helped the industry evolve into a highly-efficient
and technologically advanced culture. Through its products and manufacturing,
Colgate has been able to keep their market share by having competitive
advantages through its distinct strategies.
Colgate has several areas in which they feel helps them to keep their
niche within the personal products industry. These are their strategic tools. First
of all, they believe that the stepping stone of profitability for them is to keep a
good relationship with their retailers and suppliers. Their goal is to strengthen
their partnerships between retailers and suppliers in order to increase the volume
of products that can be available. This is their link between themselves and the
end consumer. Colgate recognizes the immense power retailers have over them
and complies accordingly so their needs are met. For example, not one of
Colgate’s suppliers equates to more than 10% of its needs. This is a safeguard
for Colgate, so if one supplier goes under, it will not be a devastating loss for the
firm. Their next focus is on innovation. As mentioned earlier, Colgate’s goal is to
create products that will lead to consumer value and loyalty. This is the area that
will most improve the growth and sustainability of the corporation.
22
Research and Development (in millions)
2003 $204.80
2004 $229.20
2005 $246.30
*From Colgate-Palmolive 2005 10-K
As you can see from the chart above, Colgate’s numbers seem to stress
and reinforce the importance of research and development to the firm. Along
with the growth research and development, it has boosted the profitability of
Colgate. Their next important goal is the increase in efficiency. By implementing
streamline manufacturing, Colgate can simplify and modernize their machinery
and product for efficient production. However, Colgate is currently going through
a four year restructuring program, started in 2004. This is to increase efficiency
further, but it currently takes a toll on Colgate’s gross profit margin.
Gross Profit Margin
2003 55%
2004 55.10%
2005 54.40%
*From Colgate-Palmolive 2005 10-K
It is clear that profits are being used to fund the restructuring program, and
Colgate is in a process to help their firm in the long run. It is clear that
throughout these goals, Colgate has and is historically and presently a company
that has achieved successful goals in the demanding personal products industry.
By keeping good relations, increasing research and development and efficiency,
Colgate has currently kept up in this fast-paced industry.
23
Colgate and the Future
Colgate is currently undergoing significant projects in order to stay on top
of the personal products industry. As we briefly mentioned earlier, Colgate is
currently going through a four year restructuring program. In this program,
Colgate has decided to accelerate depreciation and this is being included in their
cost of sales. They have also closed certain warehouses to eliminate storage and
the costs that are associated with excess inventory. Unfortunately, 12% of
Colgate’s employees were lost with the closings also. This is an important
program for total, and Colgate strongly feels that this will tighten their
production and give them a competitive edge against other corporations. Colgate
has also currently acquired GABA, a European oral care company. Colgate found
that with this acquisition, world-wide net sales have increased by 1%. This was
an important investment for Colgate, and the sales show it.
24
Accounting Analysis
Key Accounting Policies
Accounting policy analysis is important to firms because it structures the
firm and the decisions they make. Accounting measures important information
that records the firm’s past, and decisively guides and establishes future goals
and objectives. Colgate-Palmolive is in the personal products industry and
focuses on certain accounting procedures to help enhance their productivity and
ultimately resulting in profits. Colgate depends on many factors to succeed within
the industry, including a highly developed research and development team,
promotional programs, and heavy marketing to grow within the industry. These
link directly with the key success factors of the firm that were described earlier.
It was previously established that Colgate chose a cost leadership competitive
strategy, and it clear that their accounting policies support this idea by restrictive
cost controls, along with other recent changes within the firm that are focusing
on lean manufacturing, ultimately eliminating all waste within the organization.
This is disclosed with the financial statements as we have observed the shutting
down of numerous manufacturing plants across the United States. This
correlates with lean manufacturing by getting rid of operating expenses, unused
equipment and other assets that impact Colgate’s financials. Colgate’s accounting
policies have undoubtedly impacted decisions and actions with the firm’s
management.
Colgate’s management group uses estimates in accordance with generally
accepted accounting principles. These estimates are involved with “stock-based
compensation, asset impairment, tax valuation allowances, and other
contingency reserves” (Colgate-Palmolive 10-K). These estimates are made by
Colgate’s management team to forecast sales in the market, what depreciation
rate and residual value of machinery is, and also pension reserves for employees.
This is important for the firm because estimates leave Colgate vulnerable to
25
market fluctuations, and eventually the inability to properly forecast. This is a
hindrance for a cost leadership firm because this obstructs Colgate from using
the exact amount of resources and proper labor to efficiently complete their
inventory.
Colgate also records sales when risk of ownership changes to the
customer. Trade/promotional programs and sale returns are also taken directly
out of sales, resulting in net sales for the firm. These estimates are made to the
best ability by management; however, actual results may vary and are subject to
bias opinion. Like stated earlier, this is a hindrance because it leaves Colgate
unable to know its net sales before the order of new materials for the production
of inventory. This could possibly lead to an over/under abundance of material,
and eventually an unraveling of the lean manufacturing plan that coincides with
a cost leadership strategy.
Next, it was stated that Colgate uses the straight line depreciation
method. The estimated life for the firm’s machinery and equipment is 3-15 years,
and 40 years for buildings. Colgate’s intangible assets with finite lives are
amortized over their life, ranging from 5-40 years. This is a standard within the
industry and is properly denoted within the notes of the firm. This allows
management to understand the capacity of the manufacturing machinery, and
the plausible/possible outputs which, in turn, allows for the efficient use of both
materials and the equipment. This helps the firm establish accurate forecasting
goals that incorporate into lean manufacturing.
Shipping and handling costs are recorded either as a selling, general, and
administrative cost or cost of sales. Those expenses related to warehousing and
outbound freight are recorded in selling, general, and administrative costs, while
the other portion is expensed through cost of sales. This is a policy that
companies in the personal products industry normally do not have, and therefore
is a unique way to record sales. The norm in this industry, for example Clorox
Co. and all other large firms, records all shipping and handling under cost of
sales only. In essence, this lowers the cost of sales, boosting gross profit for the
26
firm. This shows that Colgate is conservative with the accounting policies.
Instead of incorporating these expenses into gross profit, they decide to allocate
them differently, therefore lowering the end cost of the resulting inventory. This
conservatism is consistent within the cost leadership competitive strategy, with
no resources going to waste, there giving the consumer an efficient, low-cost
product.
Colgate uses both LIFO and FIFO inventory methods. 80% of inventory
uses the first-in-first-out method while the remaining 20% uses the last-in-first-
out method. This 20% is used predominantly in the US and Mexico. Inventories
for Colgate have grown significantly from $845.5 million in 2004 to $855.8 million
in 2005 to $1008.4 million in 2006. With the consolidation of the personal
products industry, remaining firms are continuing to grow by acquiring smaller
companies, resulting in more brand names and consecutively more inventory.
Inventory of Firms in Personal Products Industry (in millions)
$0.00
$1,000.00
$2,000.00
$3,000.00
$4,000.00
$5,000.00
$6,000.00
$7,000.00
2004 2005 2006
Colgate-PalmoliveProcter-Gamble
Clorox
*From Colgate-Palmolive, Clorox Co., and Procter-Gamble 10K’s
As you can see from the chart, inventories in Colgate and Procter-Gamble
had a sudden increase in inventory in the past year, while Clorox has had a slight
decrease. This is a disadvantage for Colgate, however, because this increase in
27
inventory leads also to a higher work-in-progress, which is expensive to store.
This is not consistent with lean manufacturing, but is an almost necessary evil for
Colgate when acquiring new firms. Also, this shows that there is discontinuity
among the personal products industry, because some firms are using a growth
strategy via inventory while others are attempting to downsize their inventory
and eliminate warehousing costs. Inventory can potentially increase sales
because there are simply more products on the shelf for consumers to buy, while
some firms are decreasing operating cost, corresponding to a higher net income.
This was an interesting discovery while researching, showing that different
companies use different strategies to create/boost profits.
These highlighted accounting procedures have shown you that Colgate-
Palmolive acts in accordance with normal accounting procedures, however a few
policies significantly differ from others in the personal products industry. The
normal procedures include estimates for pension and post-retirement programs,
recording sales, and methods of depreciation. Abnormal procedures include
recording shipping and handling, and also a sudden increase in inventory for the
firm, and inventory fluctuations among different firms. Through management
and business practices, accounting policies have seemed to be consistent with
management objectives. These procedures will be discussed in greater detail in
the following sections.
Accounting Flexibility:
The preparation of financial statements is regulated by the Generally
Accepted Accounting Principals (GAAP) inside of the United States. However,
dealing with many accounting policies, management is allowed to use judgment
and make estimates regarding many aspects of their company’s reports. No
matter what degree of overall flexibility they are permitted, there are a few areas
in which management is allowed flexibility in their accounting policies. There are
many accounting choices regarding the following policies: Depreciation,
Inventory, Goodwill, and Pension/Retirement benefits.
28
Beginning with Colgate Palmolive’s accounting choices concerning
depreciation, we see that they mainly use straight-line depreciation. For all
ordinary depreciable assets, such as property, plant and equipment, Colgate
Palmolive uses these straight-line depreciation methods: 3 to 15 years for
machinery and equipment, and 40 years for buildings. Colgate is undergoing
restructuring activities which includes closing one-third of its manufacturing
facilities and the closure of certain warehousing facilities in order to “streamline
its global supply chain” (Colgate-Palmolive 10-K). One of the main reasons for
this “streamlining” is that management is trying to stay competitive and keep to
their main key success factor of being a cost leader. Because of the pending loss
of these property, plant and equipment assets, Colgate has used an accelerated
depreciation method on the plants that are closing prior to their original useful
life. This accounting method has increased annual charges $196 million, and
was included in their cost of sales account. Although this strategy increases
current charges, in the long run it will lower expenses and therefore keep them
as cost effective as possible.
Colgate Palmolive’s inventory policy is fairly straight-forward. They use a
combination of first-in, first-out (FIFO) and last-in, first-out (LIFO). 80% of their
inventories were accounted under FIFO, with the remaining 20% under LIFO.
Colgate takes a more aggressive approach by using FIFO for the majority of their
inventory because usually FIFO results in less expenses and a higher net income.
As a cost leader, Colgate needs to make the best accounting decisions possible
and keep their expenses down so they can keep their products cost low.
However, for the years 2006, 2005, and 2004, Colgate notes that “there would
have been no impact of reported earnings had all inventories been accounted for
under FIFO method” (10-K). This statement shows that the costs of the
inventory accounted under LIFO did not change over time.
Goodwill, such as a companies’ brand name, adds a tremendous amount
of value back into the company by drawing in a large customer base. With a
well known brand name gaining trust from consumers is likely and they will not
29
worry whether or not the product they are buying is faulty. Without the
recognition from goodwill, many consumers would no longer support their
products. Accounting for this goodwill is another area in which a company has
some flexibility. Colgate Palmolive has two methods of accounting for goodwill
and other intangible assets. Colgate uses given flexibility when amortizing a
portion of their goodwill over 5 to 40 years (depending on their useful life).
These assets are those with finite lives, such as trademarks, local brands and
non complete agreements. By making sure they can maintain ownership of
these goodwill assets, Colgate enhances one of their key success factors of
brand recognition.
Colgate’s goodwill and intangible assets with indefinite life are required to
be tested for impairment every year. These assets consist of Colgate’s global
brands. In order to analyze the extent of impairment to these assets, flexibility
is allowed in the form of estimates of future cash flows, growth rates, and some
discount rates. In Colgate’s circumstances, however, the fair value of their
goodwill far exceeds the book values. This means that a substantial drop in the
fair value estimates would be required for there to be any impairment charges
incurred.
The last common area for accounting flexibility is that involving the
estimation of pension and retirement benefits. A company with such a large
amount of pension and compensation owed has to develop many strategies
involving investments and accounting. Colgate’s best estimate for next years’
total benefit payments, including pensions from the U.S. and other countries as
well as other retiree benefits add up to $192 million. Returns on investments are
one of the largest sources of income in which Colgate funds their pension plans.
They take into account the assumed rate of return, historical rate, as well as
international plans that are similar. They have come to the conclusion that the
weighted average rate of return is 6.9%. This is relative to the figures their
competitors have calculated and to the actual market rates. At this rate, Colgate
has to invest over $98 million to balance out their obligations to employees. In
30
both of these figures, vast amounts of estimates and assumptions are made. For
example, one of the most volatile components of the total benefits owed is that
of health care costs. The way Colgate judges the future cost is as followed.
“The Company reviews external data and its own historical trends for health care
costs to determine the medical cost trend rate. The assumed rate of increase is
10% for 2007, declining 1% per year until reaching the ultimate assumed rate of
increase of 5% per year. The effect of a 1% increase in the assumed long-term
medical cost trend rate would reduce Net income by approximately $4” (10-K).
In conclusion, Colgate-Palmolive uses the accounting flexibility allowed to
them in order to report costs and expenses at the lowest figure possible. They
make a very serious effort to keep costs low so that they can, in return, sell their
products at a price that is competitive with other cost leaders in their industry.
Accounting Strategy:
Colgate-Palmolive has nearly identical accounting strategies as their main
competitors. Each company wants to maintain a constant growth rate and
desires to be ahead of the curve regarding innovation and new technology. The
importance of similar competitive strategies within a given industry relates to
how similar each company’s accounting strategies will be. By comparing Colgate
to a larger competitor such as Procter Gamble and a smaller competitor like
Clorox Co., industry norms in accounting procedures are easily detected. There
are a few areas that the Generally Accepted Accounting Principals (GAAP) allows
for company discretion in the methods of reporting those figures. In order to
evaluate a company’s accounting strategies, a distinction must be made to
decide if the manager is communicating the company’s actual economic situation
or intends to hide poor performance.
The first method commonly used to decipher a manager’s accounting
policies is to compare them to the norms of the industry. If dissimilarities are
found within the accounting of a firm, most likely that corporation has a unique
competitive strategy that produces irregularities. When a comparison was
31
performed between Colgate Palmolive and other companies in the personal
goods industry, like Proctor and Gamble and Clorox, the accounting policies of
each company coincided with their competitors. Because the main key success
factor for every company in the industry is cost leadership, each of their
accounting strategies are going to lower their costs so that they will be able to
produce their products cheaper. For example, Procter Gamble reports inventory
on a first-in, first-out base for the majority of items, and for minor inventories
they use last-in, first-out. Similarly, Colgate follows the industry norms and
accounts for 80% of current inventory with the first-in, first-out method.
Another strategy used to assess how a company uses the flexibility
permitted is to evaluate the incentives managers are given if they show a certain
level of earnings. For instance, if bonuses are calculated in relation to the
income of the corporation or managers own a noteworthy amount of stock, then
temptations arise to manufacture or alter earnings. As shown in the table below,
Colgate has a far lower percentage of stock held by managers (insiders) or 5%
owners than a couple of their main competitors. This information negates the
argument that the accounting practices of Colgate’s managers are done with the
motives to enlarge final earnings figures. If ownership of the company was
primarily from the management level, then they would make accounting
decisions just to boost total earning and in the end benefit from dividend
payments and other bonuses.
Percentage of Company Stock Owned by Insiders and 5%
Owners Colgate Palmolive 1% Proctor & Gamble 4% Church & Dwight 3%
32
Pension and post-retirement plans use significant estimates to determine
the yield of benefits for employees. Their discount rate is as follows:
Discount Rate for Pension Accounting for Colgate-Palmolive
2004 5.75%
2005 5.50%
2006 5.80%
*From Colgate-Palmolive 10-K
These rates are based on yield curves for bonds in the firm. These retirement
benefits are hard to accurately estimate, especially when it comes to raising
prices of medical costs. These significant estimates are a large portion of
forecasting liabilities for Colgate, and inaccurate estimates can lead to losses by
under/over production, and also by investing in activities not appropriate for the
firm’s current world-wide growth strategy.
Overall, Colgate Palmolive follows the industry standards when
considering their accounting strategies. Based on the high amounts of disclosure
and lack of dissimilarities between them and their competitors, we can see that
Colgate’s management communicates an accurate portrayal of their current
economic situation, and accurately report these numbers according to the
limitations of GAAP and SFAS. The flexibility allowed to the managers is used
aggressively by Colgate but also inside the confines of accurately reporting their
true performance.
Quality of Disclosure (Qualitative):
Even though accounting rules set forth a required minimum disclosure for
a given company’s financial statements, outside of these rules the management
has a significant amount of discretion over whether or not to provide additional
disclosure. Both the amount and quality of the disclosure make it more or less
33
accessible for investors and analysts to get a true picture of a company’s
activities and their economic implications. These voluntary additional disclosures
allow managers to describe current and future performance, company strategy,
as well as give insight into accounting policy choices. In a highly competitive
industry, such as the personal products industry, we would expect to see the
trend that managers would choose to refrain from disclosing any information that
could potentially expose their company’s key success factors. In addition to
protecting their key success factors, a company’s management may also choose
accounting policies that “dress-up” their financial position in order to meet or
achieve certain financial objectives. These objectives can include pressure to
meet contractual obligations in their debt covenants, the incentive to meet
requirements for management compensation, tax considerations, capital market
considerations, and stakeholder considerations. It is therefore important to
evaluate a company’s quality of disclosure in order to get a truer understanding
of their business reality.
Since Colgate-Palmolive is in a highly competitive industry, their key
accounting policies are ones that relate to efficiency. In regards to the footnotes
in the 10-K, Colgate-Palmolive does an adequate job of explaining how key
policies are utilized and how revenues and expenses associated with such items
as shipping and handling and property, plant, and equipment are recognized.
Generally, their policies are consistent with industry norms except in their
recognition of shipping and handling costs. Other companies in the industry,
such as the Clorox Company, record shipping and handling in cost of products
sold. However, Colgate-Palmolive places shipping and handling costs in their
selling, general, and administrative expense. The footnotes do not explain the
reasoning behind this deviation from industry norms. While this does not affect
overall earnings, it does inflate their gross profit margin as a percentage of sales
(from 47.1% to 54.8% for the year ending 2006).
The current performance of Colgate-Palmolive is adequately dealt with in
the company’s 10-K. Colgate-Palmolive is currently in the midst of a restructuring
34
program designed to “ensure continued long term solid worldwide growth in
sales, unit volume, and earnings per share” (from 10-K). The company includes a
large section in the 10-K about the impact of the program. For example, reported
corporate operating loss doubled from the years ending 2005 to 2006. Colgate-
Palmolive explains that the reasons behind key costs such as operating loss went
up due to the ongoing implementation of their restructuring program.
One area where we felt that Colgate-Palmolive did an excellent job of
disclosing information was in their quality of disclosure by segmentation.
Colgate-Palmolive is a global company that derives the majority of their sales
from four core product lines: Oral Care, Personal Care, Home Care, and Pet
Nutrition. Throughout the 10-K, the company breaks down profits, losses, sales,
and expenses by both product segment and geographic region. This is an
important aspect of their disclosure in that it gives investors and analysts a truer
picture of the economic consequences and performance of each business
segment.
Another key area in the quality of a company’s disclosure is being
forthcoming in regards to bad news facing the company. In this respect, Colgate-
Palmolive does an excellent job in disclosing unfavorable situations facing the
company. For example, Colgate-Palmolive is currently in the middle of a legal
battle in Brazil and Mexico over tax assessment. The Brazilian Central Bank is
trying to asses a penalty of $120 million dollars over the acquisition of the
Kolynos oral care business in 1995. Colgate-Palmolive straightforwardly confronts
this problem in a separate section in the 10-k in which they discuss the situation
and the potential penalties that may be associated with an unfavorable ruling.
Overall we find the quality of disclosure of Colgate-Palmolive to be more
than adequate. The disclosure provided heightens the company’s accounting
quality. In most areas the company is straightforward in providing information
and insight into accounting policy choices. The one area, however, that we did
not like was the expensing of shipping and handling costs as selling, general, and
administrative expenses rather than cost of products sold. We feel that Colgate-
35
Palmolive deviates from the industry standard of recording these costs as
products sold in order to diminish the negative economic implications of the 2004
restructuring program. In doing so, Colgate-Palmolive uses an inflated gross
profit margin percentage to display to investors in their annual report.
Effectively, using this method keeps their gross profit margin 10 to 20
percentage points higher than three of their biggest competitors (Clorox,
Kimberley Clark, and Church & Dwight). This may have an impact on the overall
value of the company, as we will discover when the final valuation is completed.
Gross Profit Margin
20062006 Adjusted
Colgate-Palmolive 54.8% 47.1%
Clorox 42.2% 42.2%
Church & Dwight 39.0% 39.0%
Kimberly Clark 30.3% 30.3%
*From Colgate-Palmolive, Clorox Co., and Procter-Gamble 10K’s
Quality of Disclosure (Quantitative):
Sales and expense diagnostics can give a good idea to the analyst if a
company is manipulating numbers in order to show an overstated amount of
sales or an attempt to bury expenses to artificially increase net income. The
ratios found from running these diagnostics should be compared both over time
within the company and against a cross-section of other companies within the
same industry. The internal comparison will show if certain numbers are being
manipulated in a given year. The cross-sectional comparison will show if a
discrepancy in the sales and expense diagnostics is unique to the company or if
it shares in an industry-wide trend. We have chosen to run three sales
36
diagnostics and two expense diagnostics that we feel are most relevant to
Colgate-Palmolive.
Sales Manipulation Diagnostics
*Procter-Gamble 2006 financial statements not yet reported
Net Sales / Cash Collection from Sales
0.980
0.985
0.990
0.995
1.000
1.005
1.010
1.015
1.020
1.025
1.030
2002 2003 2004 2005 2006
ColgateChurch and DwightKimberly ClarkProcter and Gamble
37
Colgate Church and Dwight Kimberly Clark
Procter and Gamble
2002 1.002 0.994 1.026 1.004
2003 1.008 1.007 0.996 0.999
2004 1.009 0.999 1.006 1.020
2005 0.999 1.013 1.004 1.002
2006 1.018 1.023 1.014 n/a
*From Colgate-Palmolive, Kimberly Clark, Church and Dwight Co. and Procter-Gamble
10K’s
The net sales / cash collection from sales diagnostic will possibly show if
there are any changes in a company’s collection policy or if sales are being
overstated for a given year. This diagnostic also illustrates the efficiency of a
company’s cash to cash cycle. Any significant changes from one year to another
would signify a change in the cash collection cycle. We have concluded that
there are no drastic changes to be concerned about for Colgate-Palmolive in
regards to this diagnostic.
Net Sales / Net Accounts Receivable
4.000
6.000
8.000
10.000
12.000
14.000
16.000
2002 2003 2004 2005 2006
colgatechurch and dwightkimberly clarkprocter and gamble
38
colgate church and dwight kimberly clark
procter and gamble
2002 8.114 10.440 6.596 13.022
2003 8.102 9.882 7.174 14.278
2004 8.019 8.797 7.400 12.656
2005 8.704 9.242 7.566 13.558
2006 8.034 8.408 7.167 n/a
*From Colgate-Palmolive, Kimberly Clark, Church and Dwight Co. and Procter-Gamble
10K’s
The net sales / net accounts receivable diagnostic shows, similarly to the
previous diagnostic, if there is a change in a company’s account collection policy.
In this diagnostic, we found a slight change in the ratio during the year 2005.
However, when compared to other companies in the industry, we see that this
slight increase in the ratio is not unique to Colgate-Palmolive. Therefore, we
have concluded that this change was a result of some industry wide change in
collection policy and not a unique occurrence to Colgate-Palmolive.
39
Net Sales / Inventory
7
8
9
10
11
12
13
14
15
2002 2003 2004 2005 2006
colgatechurch and dwightkimberly clarkprocter and gamble
colgate church and dwight kimberly clark
procter and gamble
2002 13.837 12.661 9.252 11.643
2003 13.787 12.552 8.972 11.917
2004 12.518 9.819 9.027 11.683
2005 13.317 11.124 9.076 9.447
2006 12.136 9.983 8.355 n/a
*From Colgate-Palmolive, Kimberly Clark, Church and Dwight Co. and Procter-Gamble
10K’s
The net sales / inventory diagnostic will determine if there are any strange
increases in sales in relation to the company’s inventory levels. In 2005, we did
find a slight increase in the ratio. However, this slight blip is industry wide and
therefore should not be a reason for concern.
Expense Manipulation Diagnostics
40
*Procter-Gamble 2006 financial statements not yet reported
Asset Turnover
0.600
0.700
0.800
0.900
1.000
1.100
1.200
1.300
1.400
2002 2003 2004 2005 2006
colgatechurch and dwightkimberly clarkprocter and gamble
colgate church and
dwight kimberly
clark procter and
gamble
2002 1.311 1.060 0.846 0.987
2003 1.324 0.944 0.836 0.992
2004 1.220 0.778 0.886 0.901
2005 1.340 0.975 0.975 0.922
2006 1.339 0.830 0.981 n/a
*From Colgate-Palmolive, Kimberly Clark, Church and Dwight Co. and Procter-Gamble
10K’s
The declining asset turnover diagnostic compares a company’s sales to
their total assets. If the ratio were to suddenly decrease, it could indicate that a
company is attempting to hide expenses in order to increase net income. This
41
could be a result of a company aggressively capitalizing items that should be
recognized as expenses. In running this diagnostic, we found no significant
changes in the ratio that would raise a concern.
Changes in CFFO / OI
0.600
0.700
0.800
0.900
1.000
1.100
1.200
1.300
2002 2003 2004 2005 2006
colgatechurch and dwightkimberly clarkprocter and gamble
colgate church and dwight
kimberly clark
procter and gamble
2002 0.800 1.089 0.989 1.159
2003 0.816 1.054 1.095 1.108
2004 0.827 1.158 1.088 0.953
2005 0.806 0.893 1.001 0.798
2006 0.843 0.739 1.227 n/a
*From Colgate-Palmolive, Kimberly Clark, Church and Dwight Co. and Procter-Gamble
10K’s
Any significant decreases in the ratio of cash flow from operations to
operating income are another indicator of a company that is attempting to hide
42
expenses. A sudden decrease in this ratio would indicate that a company is
hiding expenses that should be classified as selling, general, and administrative
or in the cost of goods sold. As we have noted previously, Colgate-Palmolive is
unique in the industry in regards to recognizing shipping and handling expenses
as selling, general, and administrative rather than cost of goods sold. However,
since they use this accounting practice consistently over time, this practice has
no effect on this particular expense diagnostic because both expenses are
subtracted from net sales prior to reaching the operating income amount. We
feel that Colgate-Palmolive chooses this accounting practice to “dress-up” their
gross profit margin, not to hide any expenses.
After performing our sales and expense diagnostic tests for Colgate-
Palmolive, we have decided that there are few areas of concern in the company’s
accounting. Even though there are a few areas of concern, such as in the net
sales / inventory diagnostic, it must be noted that Colgate-Palmolive is currently
in a period of reconstruction. As previously stated, we will look into this in the
next section. Overall, we have reached the conclusion that Colgate-Palmolive has
a more than satisfactory level of disclosure, both in the quality and quantitative
numbers that they provide.
Identifying Potential Red Flags:
It is important during any accounting analysis of a company to also search
for questionable information that may lead to unscrupulous practices. While
Colgate-Palmolive is a very large reputable company, it is still necessary to study
documents that they have released in order to better understand the company’s
direction. After close inspection of these documents, a few “red flags” were
found. Unusually high increases in accounts receivable caught our attention as
well as rather high increases in inventory in 2006. Financial reports talk about
these increases in assets.
We grew concerned about the increase in accounts receivable in relation
to the Company’s increases in sales. The higher accounts receivable could be a
43
result of a more laid back approach on credit policies which could, in turn, lead
to larger receivable write-offs. The information is as follows:
2006 2005 2004
Sales $12,237.7 $11,396.9 $10,584.2
% Change 7.38% 7.68%
A.R. $1,523.2 $1,309.4 $1,319.9
% Change 16.33% (.8%)
*From Colgate-Palmolive 10-K
Sales for the Company remained fairly constant for this period at about 7.5%.
We would expect to see accounts receivable and other related accounts follow
the trend that sales set. In 2004, accounts receivable actually decreased by
almost 1% but then the next year grew by more than 16%. After digging a little
deeper to obtain information on this topic, we found the explanation. “.Higher
balances in accounts receivables were due primarily to higher sales in the fourth
quarter of 2006 and a slight increase in days sales outstanding over the prior
year, partly due to timing” (Colgate 10-K 2006). We should make a note that
they are allowing companies to owe them more money. Increasing day’s sales
outstanding could lead to a more serious problem of debt write-off. Since this is
only a slight increase, it is nothing to be alarmed about.
Colgate also had an interesting increase in inventory when compared to
sales.
44
Sales Change and Inventory Change for Colgate-Palmolive
2006 2005 2004
Sales $12,237.7 $11,396.9 $10,584.2
% Change 7.38% 7.68%
Inventory $1008.4 $855.5 $845.5
% Change 17.87% 1.18%
*From Colgate-Palmolive 10-K
This table displays similar results to the data presented above. Sales did not
differ more that half a percent during this time; however, we notice a very large
increase in inventory. This increase in inventory could suggest that the demand
for the company’s products is declining; which would obviously pose a problem
for Colgate. An increase in the Company’s day’s coverage ratio from 61 in 2005
to 69 in 2006 may begin to explain why there is an increase in inventory. The
Company is currently implementing a 4 year restructuring program that will
eliminate manufacturing plants, storage warehouses, and many employees. By
increasing inventory, they have simply allowed for some of these changes to
occur without terribly upsetting the system.
While our search to find “red flags” did turn up some uncertain results,
Colgate was able to provide significant explanation for each. Increases in areas
such as accounts receivable and inventory in relation to sales, is a valid excuse
for investigation. In preparation for the possible inventory shortage Colgate will
face when closures and lay-offs take place, they have amplified inventory more
than usual. We will continue to watch the Company’s credit policies to see if
accounts receivable continues to grow more than sales.
Undo Accounting Distortions:
45
Due to the four year restructuring program, we have found that there is a
significant increase in inventory and accounts receivable. This is explained by the
explained by the closing of plants and warehouses, combined with more sales on
credit to retailers and other large customers. Colgate-Palmolive has adequately
explained this process within their footnotes to the financial statements and its
section specifically on the restructuring program. We have found that all of their
accounting policies are in accordance with GAAP and we found more abnormal
among competitors than with Colgate. Colgate’s estimates and rates fall within
industry standards, and therefore nothing unordinary stands out. Continually, the
disclosure of all information leads us to believe that the information to investors
is accurate and precise, and from our research Colgate is upfront and honest
about their nature of business within the personal products industry.
46
Financial Analysis: Ratio Analysis and Forecasting Financials
Financial analysis investigates the performance of the firm by the
evaluation of their goals and strategies. Ratio analysis is one key component in
the financial analysis of valuing firms. An analyst uses a times-series comparison
and a cross-sectional comparison to analyze a firm’s policy decisions and their
effects on the company’s financial position.
These comparisons are important because they each allow the analyst to
look at individual factors, and their effects on the financial statements. For
example, the time-series comparison allows analysts to keep all factors constant
by only looking at the company being valued (in this case Colgate-Palmolive)
over a specific period of time. This allows one to look at any changes among the
company itself over a time period. A cross-sectional comparison allows analysts
to look at the company within the industry, and analyzes the company with other
firms at industry rates and measures. Within these broad categories, we will
examine three branches of ratio analysis including liquidity analysis, profitability
analysis, and capital structure analysis. Each will help determine the financial
status of the firm.
Another important element in financial analysis is the forecasting of
financials. This is an important abridgement between other analyses to show the
effects of business strategy, accounting practices, and financial decisions on the
firm, and ultimately how long they can last. By stating future balance sheets,
income statements, and statement of cash flows, we will be able to forecast of
the firm and determine the efficiency of their business strategy decisions.
Time-Series Analysis/Cross-Sectional Analysis:
Liquidity Ratios:
Liquidity ratios examine the short-term liabilities that the firm is facing. Its
goal is to establish whether or not a firm is able to pay these liabilities with the
47
assets at hand. These ratios also show whether operations are covered by assets
as well. Colgate’s liquidity ratios overall had little to no change. There are few,
such as inventory turnover, that have declined, but this is minimal, and often
have followed the industry trend. These liquidity ratios will be explained in
further detail within the following sections.
Current Ratio:
The first important portion of ratio analysis includes the calculation and
examination of the liquidity ratios. These are ratios that convert assets to cash
value and tell you whether the firm has sufficient resources/cash to meet the
obligations of their liabilities. These ratios are from a five year period (from 2002
to 2006). The first ratio to be examined will be the current ratio, which are the
current assets divided by the current liabilities. This ratio is found to see how
well the firm uses its current assets to pay off their current liabilities. This
information is found on the balance sheet in the firm’s financial statements.
Current Ratio= Current Assets/ Current Liabilities
2002 2003 2004 2005 2006
Colgate-Palmolive 1.04 1.02 1 1 0.95
Procter Gamble 1.3 1.23 0.77 0.81 1.22
Church and Dwight 1.54 1.25 1.38 1.21 1.25
Kimberly Clark 0.94 1.06 1.13 1.09 1.03
48
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2002 2003 2004 2005 2006
Colgate-PalmoliveProcter GambleChurch and DwightKimberly Clark
*Information provided by Colgate-Palmolive, Procter Gamble, Church and Dwight, and Kimberly
Clark 10-K (2002-2006)
The way to read these numbers is as follows: for every one dollar of
current liabilities, there is (the number you have calculated) in current assets to
cover them. The current ratio of the personal products industry and commonly
around most industries is around one. This is because in most years above,
current liabilities are being met, but there is not an overabundance of assets that
are not being utilized or invested. Colgate has a particularly good current ratio,
hovering around exactly one. This shows that their current assets are being
invested, but are still able to meet any short term obligations they have involved
themselves with. The cross-sectional chart above is a visual aid showing the
steadiness of this ratio throughout the industry. Procter Gamble seems to be the
most volatile, suggesting that their business strategies are perhaps shifting,
trying to find one that works for the firm. On the other hand, it is obvious that
Colgate-Palmolive is the most consistent among the other firms. As you can see,
the current ratio for Colgate-Palmolive is a favorable condition that reflects
soundness in the firm’s strategy thus far.
49
Quick Asset Ratio:
The next liquidity ratio to be examined is the quick asset ratio. This ratio
is the sum of quick assets of the firm (This includes cash, accounts receivable,
and marketable securities) divided by the current liabilities. These elements are
found on the balance sheet. This ratio is important because it leaves out
inventory as an asset for the firm, and analyzes how quickly the firm can pay
back any short term liabilities, without the hassle of selling their current
inventory.
Quick Assets= Quick Assets/Current Liabilities
2002 2003 2004 2005 2006
Colgate-Palmolive 0.61 0.61 0.6 0.6 0.59
Procter Gamble 0.62 0.75 0.45 0.49 0.68
Church and
Dwight 0.95 0.79 0.87 0.77 0.77
Kimberly Clark 0.49 0.61 0.57 0.58 0.53
0
0.2
0.4
0.6
0.8
1
1.2
2002 2003 2004 2005 2006
Colgate-PalmoliveProcter GambleChurch and DwightKimberly Clark
* Information provided by Colgate-Palmolive, Procter Gamble, Church and Dwight, and Kimberly
Clark 10-K (2002-2006)
50
We can see through the table and graph that Colgate has, once again, the
steadiest ratio among its industry competitors. This ratio is explained clearly by
the numbers in the balance sheet. Cash, accounts receivable, and marketable
securities all seem to be steadily increasing, along with current liabilities. It is
clear that the firm is properly invested not only within its products (inventory),
but within other sectors as well. This constant ratio once again indicates
soundness in Colgate-Palmolive’s overall business strategy. On the other hand,
we can also see that, once again, Procter Gamble seems to have the most
unsteady ratio, which aligns with its previous ratio as well. The reason for this
unsteadiness lies within their financial statements, and upon further examination,
we can see a drop in cash and cash equivalents followed by a sudden jump in
investment securities. These numbers create unpredictability within the firm, the
product of a perhaps wavering strategy that lacks direction and focus. Colgate
comes out on top in this ratio comparison, proving that consistency is the key.
Accounts Receivable Turnover:
The next ratio is accounts receivable inventory turnover. This ratio is
found by dividing the firm’s sales by the amount of accounts receivable. All this
information is found on the balance sheet and income statement. This ratio
determines how long it takes the firm to collect credit from its customers.
Accounts Receivable Turnover= Sales/Accounts Receivable
2002 2003 2004 2005 2006
Colgate-Palmolive 8.11 8.1 8.01 8.7 8
Procter Gamble 13 14.3 12.7 13.6 11.9
Church and Dwight 10.45 9.83 8.80 9.24 8.41
Kimberly Clark 8.89 9.49 7.17 7.4 7.57
51
0
2
4
6
8
10
12
14
16
2002 2003 2004 2005 2006
Colgate-PalmoliveProcter GambleChurch and DwightKimberly Clark
*Information provided by Colgate-Palmolive, Procter Gamble, Church and Dwight, and Kimberly
Clark 10-K (2002-2006)
This is an important ratio because if the firm fails to have strict rules and
policies about collecting their accounts receivables, customers will fail to
reimburse the company, reducing overall profits due to this increase in bad debt.
It is clear that the higher the ratio, the better because this means the firm is
utilizing these policies, resulting in more accounts receivables being collected,
and at a timely manner. Looking at the displays above, we can see that Procter
Gamble has the highest ratio, and this could be mostly due to the sheer size of
the firm. Because the firm is so massive, they will obviously have more accounts
receivable to deal with, however, as we see this ratio decreasing in the last few
years, it seems that one explanation could be the lack of strictness among their
receivables policy, or an increase in debt holders that have failed to pay. It
seems that Kimberly Clark also had a drop in this ratio between 2003 and 2004,
but is now perhaps adopting policies that collect receivables more efficiently, as
we can see a trend of steady increase in this ratio. Colgate-Palmolive seems to
sit between the large and small firms, having a ratio comparable to its size. The
ratio is steady, proving, once again, in sound policies. However, we see a slight
drop in the ratio between 2005 and 2006. This is an unfavorable condition
because they are not collecting receivables as quickly as before, or their policies
52
have become lax. This, however, could be an aberration, and only time can tell
in this situation. Overall analysis does conclude that their ratio is steady among
comparison within the industry, showing that their receivable turnover is being
monitored by proper policy maintenance.
Days’ Sales Outstanding:
Connectively, the next ratio to examine seems to tie closely with the
accounts receivable turnover ratio. This is the days’ supply of receivables. This is
found by taking 365 days in the year and dividing it by the accounts receivable
turnover ratio that we found previously. This will determine the approximate
amount of days it takes to collect the sales that were paid by accounts
receivable.
Days’ Sales Outstanding= 365/ Accounts Receivable Turnover Ratio
2002 2003 2004 2005 2006
Colgate-Palmolive 45 45 45.5 42 45.4
Procter Gamble 28 25.5 28.7 26.8 30.7
Church and Dwight 34.94 37.14 41.49 39.49 43.41
Kimberly Clark 41.04 38.48 50.88 49.33 48.24
53
0
10
20
30
40
50
60
2002 2003 2004 2005 2006
Kimberly Clark
Colgate-Palmolive
Procter Gamble
Church and Dw ight
Kimberly Clark
*Information provided by Colgate-Palmolive, Procter Gamble, Church and Dwight, and Kimberly
Clark 10-K (2002-2006)
When studying this ratio, it is especially important to consider the industry
when evaluating a firm. The number found for Colgate-Palmolive will only be
relevant within an industry standard, which we find by examining other firm’s
days’ receivable ratios.
Inventory Turnover Ratio:
The next two ratios we will examine involve the inventory of the firm. The
first ratio is the inventory turnover ratio, which is the company’s cost of goods
sold divided by the inventory of the company. These items are found on the
balance sheet and income statement. This ratio is important because its number
reflects the number of times a firm sells its inventory within one year.
54
Inventory Turnover= Cost of Goods Sold/ Inventory
2002 2003 2004 2005 2006
Colgate-Palmolive 6.3 6.2 5.6 6.1 5.5
Procter Gamble 6.1 6.1 5.7 5.6 5.3
Church and Dwight 8.90 8.78 6.24 7.04 6.08
Kimberly Clark 5.77 6.12 5.91 5.99 6.18
0
1
2
3
4
5
6
7
8
9
10
2002 2003 2004 2005 2006
Colgate-Palmolive
Procter Gamble
Church and Dw ight
Kimberly Clark
*Information provided by Colgate-Palmolive, Procter Gamble, Church and Dwight, and Kimberly
Clark 10-K (2002-2006)
This is an important ratio, because the ratio directly reflects how well the
inventory, or product, is selling in the marketplace. If the number is high, then
the product is selling well, and if it is low, then it is not selling well. When
studying the above table and graph, the results are interesting. As shown, the
inventory ratio is roughly the same among all competitors within the personal
products industry. Also, to note, it is obvious that in the year in which there was
a sudden drop (2004), it was unanimous across the industry. This ratio is more
sporadic than the others, and this could be due to a number of reasons. For
example, if companies are putting new items in their inventory and on retailers’
shelves, the product has a chance to not succeed in the marketplace. This
internally leads to higher inventory because the product is not selling well, and
55
eventually a lower ratio. This is the first ratio in which we see uncertainty in
Colgate-Palmolive, and it is visible when isolating their inventory. With Colgate
leading a restructuring program in 2004, inventory could be affected by imposing
new management or developing teams, and due to this incongruence, the
products are not selling as well, or inventory is not being handled properly. The
most recent drop between 2005-2006 leads to an unfavorable condition for
Colgate because their products are not selling as well as previous years.
Days’ Supply of Inventory:
This ratio is also important to understand because it analyzes how much
inventory is being sold in comparison to sales. It is found by dividing 365 (Days
in a year) by the inventory turnover ratio computed above. These items are
found on both the balance sheet and income statement.
Days Supply of Inventory= 365/ Inventory Turnover Ratio
2002 2003 2004 2005 2006
Colgate-Palmolive 58 58.8 65 60.2 66.5
Procter Gamble 59.8 59.8 64 65 68.9
Church and Dwight 41.00 41.58 58.52 51.84 60.06
Kimberly Clark 63.28 59.65 61.81 60.90 59.06
56
0
10
20
30
40
50
60
70
80
2002 2003 2004 2005 2006
Kimberly Clark dayssupply of inventory
Colgate-Palmolive
Procter Gamble
Church and Dw ight
Kimberly Clark
*Information provided by Colgate-Palmolive, Procter Gamble, Church and Dwight, and Kimberly
Clark 10-K (2002-2006)
The smaller the ratio, in this case, the better. This is because inventory is
being sold inline with the amount of sales. There is little inventory sitting in
shelves for a long period of time. The goal for firms is for inventory to be
manufactured and sold within a reasonable amount of time. There seems to be a
strong industry standard, and all the firms are in the same range. The average
time for inventory to be sold is around 60 days. Recently, it seems that over the
last year, Colgate’s ratio has seemed to rise, and this could be due to the
acquisition of new firms, including their inventory, and the firm could be
adopting/learning new inventory policies of the new additional firms. It is an
unfavorable condition for Colgate, but will most likely be an aberration, but is still
well within the personal products industry standard.
Working Capital Ratio:
The next ratio to examine is the working capital ratio which is found by
dividing the firm’s sales by the working capital (working capital is the difference
between current assets and current liabilities). These items are found on the
57
company’s balance sheet and income statement. This ratio is used to find how
much working capital is used in comparison to the company’s sales.
Working Capital Turnover= Sales/Working Capital
2002 2003 2004 2005 2006
Colgate-Palmolive 117.1 193.8 1150.5 808.3 -72.8
Procter Gamble 11.3 15.2 -10.2 -12.7 15.7
Church and Dwight 10.44 18.49 10.73 20.49 17.42
Kimberly Clark
-
52.05 57.70 27.00 35.51 113.43
-200
0
200
400
600
800
1000
1200
1400
2002 2003 2004 2005 2006
Colgate-Palmolive
Procter Gamble
Church and Dw ight
Kimberly Clark
*Information provided by Colgate-Palmolive, Procter Gamble, Church and Dwight, and Kimberly
Clark 10-K (2002-2006)
This ratio is important to analyze because it shows how much working
capital is used to generate sales, and generally the higher this ratio, the better
because the firm is generating large sales, with little working capital. As you can
see from the graph above, Colgate’s ratio soared in 2003. This could be due to
the restructuring program that Colgate started to invest in around this time. By
selling off some manufacturing plants while generating the same sales, this
number seems to be bloated by the management changes that were going on
58
during the time. Then, Colgate’s ratio plummets through 2006, putting it at an
unfavorable condition for the firm, but becoming more consistent within the
industry. It is obvious that the industry standard for this ratio is extremely low,
often becoming a negative ratio. This is due to the fact that many of these firms
have extremely high working capital that can be mostly attributed to increases in
current liabilities and small margins of sale growth.
Liquidity Analysis for Colgate-Palmolive
Current Ratio 1.04 1.02 1 1 0.95 unfavorable
Quick Asset Ratio 0.61 0.61 0.6 0.6 0.58 no change
Accounts Receivable Turnover 8.1 8.1 8 8.7 8 no change
Days Supply of Receivables 45 45 45.5 41.9 45.4 no change
Inventory Turnover 6.3 6.2 5.6 6.1 5.5 unfavorable
Days Supply Inventory 58 58.8 65 60.2 66.5 unfavorable
Working Capital Turnover 117.1 193.8 1150.5 808.3 -72.8 unfavorable
*Information provided by Colgate-Palmolive 10-K (2002-2006)
As stated in the beginning of the section, it is concluded that Colgate has
had little/no change among most of their liquidity ratios. Their ratios seem to fit
within the industry norm. Some ratios seem to have declined, but this is a
small/slight change when looking at overall financials. Variability is the answer
for most of the changes within these liquidity ratios. The only abnormal ratio
seems to be the working capital turnover in 2006, when their current liabilities
were larger than their current assets. This could be due to the acquisition of new
59
firms, and with new firms not only comes assets, but liabilities as well. This is
explained in detail within Colgate’s 10-K notes.
Profitability Analysis:
The value of a firm is very often determined by using ratios designed to
measure its profitability. As demonstrated in the text Business Analysis &
Valuation, “a company’s profitability is affected by their product market and
financial market strategies.” The objective of ratio analysis is to evaluate the
effectiveness of the firm’s policies within these areas. By relating financial
numbers to business strategies, via ratios, an effective analysis of performance
can be calculated. The main measures that profitability ratios evaluate is the
degree of effectiveness they have regarding how profitable they are with the way
they use their assets, and how large their asset base is compared to
investments. An additional benefit of ratio analysis is the ability for comparisons
to be made. Comparisons between past years performance and competitors can
easily be made and turned into useful data. We have found that compared to
their past performance, Colgate-Palmolive’s profitability has been slightly
declining. However, compared to their competitors, Colgate is constantly one of
the leaders regarding profitability.
Gross Profit Ratio:
The first profitability ratio under analysis is the gross profit margin. This
ratio, which is simply gross profit/sales, measures the company’s income after
cost of goods sold as a percentage of their total sales. The higher this ratio is, in
most cases, the better off the company is. With a high gross profit margin, the
company maintains fairly low inventory costs. Because Colgate’s main inventory
is raw materials and they tend to buy large quantities from their suppliers,
Colgate has very good buying power which is reflected by their constant gross
profit margin of and average just below 55%. Being able to utilize almost their
entire inventory, because it is very unlikely to become obsolete or useless, helps
60
keep company’s inventory costs in the personal products industry relatively low
compared to those whose inventory might become obsolete.
Gross Profit Margin= Gross Profit/ Sales
2002 2003 2004 2005 2006
Colgate-Palmolive 54.55% 55.00% 55.15% 54.44% 54.76%
Procter Gamble 48.00% 49.00% 51.00% 51.00% 51.00%
Church and Dwight 29.72% 30.09% 36.48% 36.68% 39.12%
Kimberly Clark 35.14% 35.50% 34.18% 33.60% 31.91%
*Information provided by Colgate-Palmolive, Procter Gamble, Church and Dwight, and Kimberly
Clark 10-K (2002-2006)
Colgate Palmolive has the highest gross profit margin of its main
competitors, and even edges out the larger Procter and Gamble by almost four
percent. Colgate’s management is doing a great job keeping their inventory
costs low and creating a higher possibility of earning big profits.
Gross Profit Margin
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
50.00%
55.00%
60.00%
2002 2003 2004 2005 2006
Colgate-Palmolive
Procter Gamble
Church and Dw ight
Kimberley Clark
Operating Expense Ratio:
After breaking down the operating expense ratio, you can see that it
shows the percentage of expenses, not connected with the actual sale of the
61
product, with respect to the total sales of the company. This ratio is found by
finding the operating expenses of the firm and then dividing sales. These items
are found on the income statement. Operating expenses are connected to
maintenance and operational costs, and can be controlled to some extent by the
managers.
Operating Expense Ratios= Operating Expenses/ Sales
2002 2003 2004 2005 2006
Colgate-Palmolive 32.89% 33.13% 35.10% 35.01% 37.11%
Procter Gamble 31.00% 31.00% 32.00% 32.00% 32.00%
Church and Dwight 19.74% 19.50% 24.73% 24.43% 26.16%
Kimberly Clark 17.55% 17.34% 17.56% 16.99% 17.38%
*Information provided by Colgate-Palmolive, Procter Gamble, Church and Dwight, and Kimberly
Clark 10-K (2002-2006)
As you can see, Colgate is doing fairly poor compared to their
competitors. Church and Dwight and Kimberly Clark are relatively smaller
companies which can be the reason they have such a smaller operating expense
ratio, but Procter and Gamble is very large, and their operating expense ratio is
lower by nearly five percent. Colgate’s management needs to focus on reducing
unnecessary operating costs. They need to make certain their advertisement is
effective. If they are paying for advertisement that is unnecessary, then that will
make this ratio continue to increase. If their operating expenses are as low as
they can get, then increasing their income will also lower this ratio. Colgate’s
OER has been rising for the past five years. Management will need to address
this problem before investors become concerned.
62
Operating Expense Ratio
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
2002 2003 2004 2005 2006
Colgate-Palmolive
Procter Gamble
Church and Dw ight
Kimberley Clark
Net Profit Margin:
The net profit margin ratio is found by dividing net income by sales. These
items are found on the firm’s balance sheet. Net profit margins for the personal
products industry seem to very healthy. Three of the four companies have a
margin greater than eleven percent on average. Net profit margin is one ratio
that is very coveted and every company wants it to be as high as possible. This
ratio shows how much of every dollar of sales is deposited into net income. This
is a very important ratio for investors, because it shows them how much the
company will be making compared to their total amount of sales.
Net Profit Margin= Net Income/ Sales
2002 2003 2004 2005 2006
Colgate-Palmolive 13.86% 14.35% 12.54% 11.86% 11.06%
Procter Gamble 11.00% 12.00% 13.00% 12.00% 13.00%
Church and Dwight 6.37% 7.66% 6.07% 7.08% 7.14%
Kimberly Clark 12.12% 12.34% 12.08% 11.94% 9.86%
*Information provided by Colgate-Palmolive, Procter Gamble, Church and Dwight, and Kimberly
Clark 10-K (2002-2006)
63
Colgate is doing a fantastic job when observing how much of their sales
they turn into a net income. Although their numbers have been slightly
decreasing, they are still comparable to the industry leader and have a good net
profit margin for any type of company. When analyzed with Colgate’s operating
expenses margin in mind, you can see that Colgate has very few other expenses
that decrease their net income other than their operating expenses.
Net Profit Margin
6.00%
7.00%
8.00%
9.00%
10.00%
11.00%
12.00%
13.00%
14.00%
15.00%
2002 2003 2004 2005 2006
Colgate-Palmolive
Procter Gamble
Church and Dw ight
Kimberly Clark
Asset Turnover:
The asset turnover ratio is used to measure exactly how efficient a
company is with every dollar of assets they have. The number calculated by this
ratio is how much the company generates in sales for every dollar they have
invested in assets. The ratio is simply sales/total assets and shows a good
perspective on how efficiently management uses their assets to generate sales.
However, a company with many assets that are not used for sales purposes will
have a very low asset turnover without it actually reflecting the quality of the
company.
64
Asset Turnover= Sales/Total Assets
2002 2003 2004 2005 2006
Colgate-Palmolive 1.3114 1.3242 1.2204 1.3397 1.3392
Procter Gamble 0.9900 0.9900 0.9000 0.9200 0.5000
Church and Dwight 1.0596 0.9440 0.7785 0.8850 0.8336
Kimberly Clark 0.8854 0.8674 0.8359 0.8863 0.9754
*Information provided by Colgate-Palmolive, Procter Gamble, Church and Dwight, and Kimberly
Clark 10-K (2002-2006)
Colgate Palmolive’s asset turnover is very good for the industry they are
in. They are the only company that has a turnover of better than one, and they
seem to be able to keep it steady even with the acquisitions of smaller
companies. This shows that they are very good, in comparison with the other
three companies, at utilizing all of their assets to generate sales.
Asset Turnover
0.5000
0.6000
0.7000
0.8000
0.9000
1.0000
1.1000
1.2000
1.3000
1.4000
2002 2003 2004 2005 2006
Colgate-Palmolive
Procter Gamble
Church and Dw ight
Kimberly Clark
Return on Assets:
Return on assets is calculated by setting net income over total assets.
This ratio shows how well a company is profiting based on how they use every
asset. The ROA is increased by either increasing net income (which can be done
65
in many different ways) or decreasing total assets (without affecting net
income).
Return on Assets= Net Income/ Total Assets
2002 2003 2004 2005 2006
Colgate-Palmolive 20.05% 17.74% 15.58% 15.91%
Procter Gamble 11.00% 12.00% 11.00% 11.00% 6.00%
Church and Dwight 6.75% 7.23% 4.73% 6.26% 5.95%
Kimberly Clark 10.73% 10.71% 10.10% 10.58% 9.62%
*Information provided by Colgate-Palmolive, Procter Gamble, Church and Dwight, and Kimberly
Clark 10-K (2002-2006)
Colgate Palmolive again has the best return on assets ratio compared to
its competitors. This can be attributed to many things, but after observing their
operating expense ratio, it is amazing that Colgate could have such a high ROA.
Considering the size of Colgate compared to its competitors, they have a very
high efficiency of turning assets into profits. Their lowest return on assets
percentage for the past five years does not even drop below their next
competitor’s highest percentage.
Return on Assets
4.50%
6.50%
8.50%
10.50%
12.50%
14.50%
16.50%
18.50%
20.50%
2002 2003 2004 2005 2006
Colgate-Palmolive
Procter Gamble
Church and Dw ight
Kimberly Clark
66
Return on Equity:
Shareholders will commit money to help a company grow and expand.
The return on equity ratio indicates how much a company turns each invested
dollar into a return or profit. A company can increase their ROE by either
increasing net income or decreasing the amount of equity invested in them.
Return on Equity=Net Income/ Equity
2002 2003 2004 2005 2006
Colgate-Palmolive 36.78% 16.02% 10.66% 10.01% 9.59%
Procter Gamble 32.00% 38.00% 37.00% 14.00%
Church and Dwight 19.18% 18.46% 15.85% 17.64% 16.08%
Kimberly Clark 28.51% 29.64% 25.04% 27.15% 28.22%
*Information provided by Colgate-Palmolive, Procter Gamble, Church and Dwight, and Kimberly
Clark 10-K (2002-2006)
Colgate’s ROE has been declining every year. Five years ago, their ROE
was extremely huge and possibly at a point that could not be sustainable. In
2002, Colgate’s net income was not higher than the following years. Therefore,
we can conclude that they had a very minimal amount of invested equity
compared to the following years. Compared to the industry average, Colgate has
fallen from well above to well below in only five years. This has come from
minimal increases in net income despite higher increases in equity.
67
Return on Equity
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
2002 2003 2004 2005 2006
Colgate-Palmolive
Procter Gamble
Church and Dw ight
Kimberly Clark
Profitability Ratios
Gross Profit Margin 54.55% 55.00% 55.15% 54.44% 54.76% no change
Operating expense
ratio 32.89% 33.13% 35.10% 35.01% 37.11% unfavorable
Net profit margin 13.86% 14.35% 12.54% 11.86% 11.06% unfavorable
Asset turnover 1.311421 1.324196 1.220376 1.339693 1.33921 no change
Return on assets n/a 20.05% 17.74% 15.58% 15.91% unfavorable
Return on equity 367.77% 160.22% 106.56% 100.10% 95.92% unfavorable
*Colgate Palmolive Profitability Ratios for 2002-2006
Overall, Colgate-Palmolive’s profitability compared to past performance is
slightly declining. The management strategies in place seem to gradually result
in less profitability retained compared to the number of financial tools, such as
equity, that Colgate controls. However, comparing Colgate’s profitability
performance to their competitors, they are still ahead of the curve. In order to
stay above their competitors, Colgate’s management needs to continually evolve
their strategies in order to employ the most out of what financial tools they have.
68
Capital Structure Analysis:
Capital Structure analysis entails dissecting the amount of debt financing a
company incurs. There are many benefits that come from debt financing,
however, finding the optimal level of debt should be influenced by the degree of
risk a business has. The following section is useful to find the amount a debt
relative to equity financing and how well equipped the company is to pay their
debt’s interest and current payables. Using this information and comparing the
results to the company’s risk factor will result in a better understanding of their
current policies and how well they are benefiting the company.
Debt to Equity Ratio:
This ratio calculates the difference between how much of a company’s
external financing comes from debt compared to the equity that it has
generated. The debt used as financing for a company is that from long-term
loans and similar liabilities. By showing the ratio between debt and equity, we
can see if the company is being financed by loans from banks or actually
financing itself through equity.
Debt to Equity Ratio= Total Liabilities/ Operating Expenses
2002 2003 2004 2005 2006
Colgate-Palmolive 19.2318 7.430617 5.963947 5.301089 5.476717
Procter Gamble 2.060 2.400 2.300 3.300
Church and Dwight 1.842665 1.553323 2.351754 1.815582 1.702077
Kimberly Clark 1.657671 1.767924 1.479923 1.567011 1.93318
*Information provided by Colgate-Palmolive, Procter Gamble, Church and Dwight, and Kimberly
Clark 10-K (2002-2006)
As you can see, in 2002, Colgate had an extremely large and in turn bad
debt to equity ratio. This figure shows that they had 19 times more financing
from debt then they did from owner’s equity. However, similar to the ROE ratio,
2002’s figures can be explained by Colgate’s lack of equity being incurred for that
year. Colgate is on the right track regarding this ratio and have been doing very
69
well lately in reducing the difference between equity and debt, but compared to
the industry, they still need to improve to reach the average.
Times Interest Earned:
Calculated by dividing net income before interest and taxes by interest
expense, (NIBIT/Interest Expense) the times interest earned ratio is used to
establish the capability of that company to pay off the interest accrued from
money they have borrowed. The higher the figure determined by the ratio is,
the fewer problems that company has paying the interest.
Times Interest Earned= NIBIT/ Interest Expense
2002 2003 2004 2005 2006
Colgate-Palmolive 14.097 17.454 17.728 16.287 13.614
Procter Gamble 11.600 14.400 15.900 13.000 12.100
Church and Dwight 4.359 4.560 4.148 4.825 4.666
Kimberly Clark 11.296 12.616 12.374 13.559 10.352
*Information provided by Colgate-Palmolive, Procter Gamble, Church and Dwight, and Kimberly
Clark 10-K (2002-2006)
Comparing Colgate-Palmolive with its competitors, you can see that they
have the ability to pay interest accrued at a higher rate than their competition.
Although from 2005-2006, Colgate’s times interest earned dropped about 3.5
points, they have kept a relatively stable position and continue to outperform the
industry average.
70
Times Interest Earned
4.000
6.000
8.000
10.000
12.000
14.000
16.000
18.000
2002 2003 2004 2005 2006
Colgate-Palmolive
Procter Gamble
Church and Dw ight
Kimberly Clark
Debt Service Margin:
In order to analyze the debt service margin, operating cash flow is divided
by the current portion of a company’s notes payable. This ratio helps determine
if a company has ample operating cash flows in to finance or pay for their notes
payable. The higher the figure, again, shows that the liabilities that need to be
paid are covered by cash from operations.
Debt Service Margin= Operating Cash Flows/ Current Liabilities
2002 2003 2004 2005 2006
Colgate-Palmolive 17.03171 17.06274 13.06255 10.40466 10.46238
Church and Dwight 2.533831 1.890851 2.025977 1.800887 1.82311
Kimberly Clark 1.823315 2.230996 2.95291 2.24434 1.891043
*Information provided by Colgate-Palmolive, Procter Gamble, Church and Dwight, and Kimberly
Clark 10-K (2002-2006)
By the similarities between Colgate-Palmolive’s debt service margin in
2002 to 2003 and 2005 to 2006, we can infer that management tries to maintain
a consistent ratio between cash flow from operations and notes payable. The
decline between the grouping of years comes from expansion and acquisitions
71
that increased notes payable. Relative to the industry and Colgate’s competitors,
again, Colgate has the upper hand and maintains an above average standard.
Debt to Service Margin
0
2
4
6
8
10
12
14
16
18
2002 2003 2004 2005 2006
Colgate-Palmolive
Church and Dw ight
Kimberly Clark
Capital Structure Analysis
Debt to equity
ratio 19.2318 7.430617 5.963947 5.301089 5.476717 Neutral^
Times interest
earned 14.09734 17.45367 17.72849 16.28676 13.61374 unfavorable
Debt service
margin 17.03171 17.06274 13.06255 10.40466 10.46238 unfavorable
^Analysis based on past three years
*Colgate-Palmolive’s Capital Structure Ratios for the years 2004-2006
Overall, the capital structure analysis of Colgate-Palmolive shows that the
risk related to their industry is growing because of their declining reliance of debt
financing. As their industry expands, Colgate’s management is taking positive
steps to build a more flexible financing policy. Although, Colgate’s capital
structure ratios are declining compared to previous years, they are freeing
themselves from debt that restricts operating, investment, and financing
decisions. By doing so, management will increase flexibility and Colgate’s
unpredictable capital expenditure needs will be financed more easily.
72
Internal and Sustainable Growth Ratio Analysis:
2002 2003 2004 2005 2006
IGR n/a 12.90% 10.57% 8.57% 7.96%
SGR n/a 31.50% 15.12% 12.42% 11.78%
*Information provided by Colgate-Palmolive 10-K (2002-2006)
These ratios are also important for valuation purposes. The Internal
growth ratio explains exactly what it says; it finds a ratio that can measure the
growth within the company. To find this ratio, you must use the following
formula:
IGR= ROA( 1- Dividends/ Net Income)
We can see that Colgate-Palmolive’s ratio steadily declines from 2003-2006. One
can also see that the IGR is consistency less than the SGR. This is important for
management to notice and change strategies accordingly, using one of the
options explained below. These results could be the direct relation to the
acquisition of the European dental company purchase, and other recent
investments made globally. This ratio is important also because it ties directly
into the sustainable growth ratio. Simply put, “the sustainable growth rate (SGR)
of a firm is the maximum rate of growth in sales that can be achieved, given the
firm's profitability, asset utilization, and desired dividend payout and debt
(financial leverage) ratios” (www.referenceforbusiness.com). This ratio is
determined by the following equation:
SGR= IGR( 1- Dividends/ Equity)
This equation correlates directly with the internal growth ratio by declining
steadily from 2003-2006. Firms use this ratio to help create a benchmark for the
comparison of actual growth the company faces. Depending on the difference
between these percentages, this will determine whether the firm needs to sell
more equity (If the actual growth rate exceeds the sustainable growth rate) or
reduce any extra cash flow by investing or increasing dividends (If the actual
growth rate is below the sustainable growth rate). Colgate will need to analyze
73
these ratios in comparison to actual growth, and determine what polices need to
be made/changes in order for the firm to continue to be successful.
Altman’s Z-Score Analysis
Understanding a company’s credit and analyzing the probability that they
will be facing financial distress in the future is vital to a complete and
comprehensive financial analysis. Models such as Altman’s Z-score analysis have
been developed in order to assist with the “forecasting” of a company’s future
distress levels. Although, Altman’s Z-score cannot replace in-depth analysis it
can be helpful with identifying potential distress for the company being analyzed.
This model uses simple financial statement data set to specific coefficients in
order to predict bankruptcy. Future possible bankruptcy is predicted when the
total Z-score of a given company is less than 1.81. Inversely if the company’s Z-
score is over 2.67, future financial distress is very unlikely. Those scores that fall
between 1.81 and 2.67 are said to be in the “grey area”. They are not in any
immediate danger of bankruptcy, but could very likely go either way in the near
future.
Colgate-Palmolive’s Z-score for the past five years has been outstanding
compared to Altman’s benchmarks. As seen in the figure below, Colgate has
maintained a Z-score of over six for the past five years. Based on Colgate’s
financial performance, Altman’s Z-score confirms the fact that the likelihood of a
Colgate failure is nearly zero.
Z-Score =
1.2(Working Capital/Total Assets)
+ 1.4(Retained Earnings/Total Assets)
+ 3.3(E.B.I.T./Total Assets)
+ .6(Market Value of Equity/ Book Value of Liabilities)
+ (Sales/Total Assets)
74
Colgate-Palmolive Z-Score
2002 2003 2004 2005 2006
1.2 0.0112033 0.0068326 0.00106078 0.00165744 -0.018396
1.4 0.9197567 0.993876 0.94822954 1.05419003 1.0553403
3.3 0.2840473 0.2896187 0.24468171 0.26037075 0.2364303
0.6 5.7038025 5.5648232 5.04815402 5.6168178 6.1878837
1 1.3114206 1.3241964 1.22037611 1.33969273 1.3392099
2002 2003 2004 2005 2006
Z-score 6.9721616 7.0184575 6.38551246 7.04686185 7.2875617
Forecasting Methodology:
In order to further assess the value of Colgate-Palmolive, we have
forecasted the company’s financial statements ten years into the future. As
previously discussed, Colgate-Palmolive is a well-established company within a
mature industry. Accordingly, we have chosen to focus on using forecasting
benchmarks from within the company although some aspects of the forecast are
based on other companies within the industry or an industry average.
Based on the information provided in Colgate-Palmolive’s 10-k, we initially
decided to base our forecasts on relatively conservative estimates. Colgate-
Palmolive seems to be more conservative than the general industry in their
accounting policies and we felt that our estimates should reflect this. However,
after seeing the results of the forecasts based on these conservative estimates,
we have decided that slightly more aggressive estimates must be used. Our
initial forecast, which was based on the average company sales growth of the
past 4 years, resulted in Colgate-Palmolive barely being able to rise above the
market risk premium. Since Colgate has obviously been profitable for quite some
75
time, we have redone our forecasts based on a 12% growth rate that is much
more in line with the industry and the potential of the company as a whole.
Income Statement:
Since Colgate-Palmolive is a mature company, we feel that any abnormal
growth or decline in sales has already been sustained due to the principle of
firms to be “mean-reverting” over time (Palepu, 6-3). To forecast sales, we
initially took the average sales growth of the company from the years ending
2003 to 2006. We had chosen to leave out the year ending 2002 due to the
effects on the economy still being felt from the 9/11 incident. However, as
previously discussed, a much more aggressive growth rate was needed to
produce a realistic forecast. We felt that this aggressive growth rate is necessary
to reflect the true nature of the company with respect to their competitors. The
more conservative accounting policies used by Colgate are, in our opinion, the
reason for their conservative growth over the years. As a result, we have chosen
to grow the company by 12% to reflect their value more accurately. Operating
expenses were forecast using an internal operating expense ratio because
Colgate-Palmolive categorizes their expenses differently than any other company
in the industry. Forecasting this line item based on industry standards would
have produced an internal inconsistency. Other important items, including cost of
sales and provisions for income taxes, were forecast using an average of the
previous three years, while the interest expense was forecasted using the
company’s Times Interest Earned ratio. Other expenses were too unpredictable
and small to be effectively forecast with any degree of certainty.
76 Dollar Amounts in Millions Actual Financial Statements Forecasted Financial Statements
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006
Net Sales 9294.3 9903.4 10584.2 11396.9 12237.7 13706.2 15351.0 17193.1 19256.3 21567.0 24155.0 27053.7 30300.1 33936.1 38008.4
Cost of Sales 4224.2 4456.1 4747.2 5191.9 5536.1 6167.8 6907.9 7736.9 8665.3 9705.2 10869.8 12174.1 13635.0 15271.2 17103.8
Gross Profit 5070.1 5447.3 5837.0 6205.0 6701.6 7538.4 8443.0 9456.2 10590.9 11861.9 13285.3 14879.5 16665.1 18664.9 20904.6 Selling, General, and Administrative Expense 3034.0 3296.3 3624.6 3920.8 4355.2 4893.1 5480.3 6137.9 6874.5 7699.4 8623.4 9658.2 10817.1 12115.2 13569.0
Other (income) expense, net 23.0 (15.0) 90.3 69.2 185.9
Operating Profit 2013.1 2166.0 2122.1 2215.0 2160.5 2645.3 2962.7 3318.3 3716.5 4162.4 4661.9 5221.4 5847.9 6549.7 7335.6
Interest expense, net 142.8 124.1 119.7 136.0 158.7 166.6 186.6 209.0 234.0 262.1 293.6 328.8 368.3 412.4 461.9
Income Before Income Taxes 1870.3 2041.9 2002.4 2079.0 2001.8 2478.7 2776.2 3109.3 3482.4 3900.3 4368.4 4892.6 5479.7 6137.2 6873.7
Provision for Income Taxes 582.0 620.6 675.3 727.6 648.4 838.8 939.5 1052.2 1178.5 1319.9 1478.3 1655.7 1854.4 2076.9 2326.1
Net Income 1288.3 1421.3 1327.1 1351.4 1353.4 1639.9 1836.7 2057.1 2303.9 2580.4 2890.1 3236.9 3625.3 4060.3 4547.6
Actual Financial Statements Forecasted Financial Statements
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006
Net Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of Sales 45.45% 45.00% 44.85% 45.56% 45.24% 45.00% 45.00% 45.00% 45.00% 45.00% 45.00% 45.00% 45.00% 45.00% 45.00%
Gross Profit 54.55% 55.00% 55.15% 54.44% 54.76% 55.00% 55.00% 55.00% 55.00% 55.00% 55.00% 55.00% 55.00% 55.00% 55.00% Selling, General, and Administrative Expense 32.64% 33.28% 34.25% 34.40% 35.59% 35.70% 35.70% 35.70% 35.70% 35.70% 35.70% 35.70% 35.70% 35.70% 35.70%
Other (income) expense, net 0.25% -0.15% 0.85% 0.61% 1.52% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Operating Profit 21.66% 21.87% 20.05% 19.44% 17.65% 19.30% 19.30% 19.30% 19.30% 19.30% 19.30% 19.30% 19.30% 19.30% 19.30%
Interest expense, net 1.54% 1.25% 1.13% 1.19% 1.30% 1.22% 1.22% 1.22% 1.22% 1.22% 1.22% 1.22% 1.22% 1.22% 1.22%
Income Before Income Taxes 20.12% 20.62% 18.92% 18.24% 16.36% 18.08% 18.08% 18.08% 18.08% 18.08% 18.08% 18.08% 18.08% 18.08% 18.08%
Provision for Income Taxes 6.26% 6.27% 6.38% 6.38% 5.30% 6.12% 6.12% 6.12% 6.12% 6.12% 6.12% 6.12% 6.12% 6.12% 6.12%
Net Income 13.86% 14.35% 12.54% 11.86% 11.06% 11.96% 11.96% 11.96% 11.96% 11.96% 11.96% 11.96% 11.96% 11.96% 11.96%
77
Balance Sheet:
One emerging trend that we focused the forecasting of Colgate-
Palmolive’s upon was the changing capital structure of the company. Through
our ratio analysis, we found that the capital structure of Colgate-Palmolive seems
to be changing so that the company is becoming financed less by debt and more
by equity. This trend can be seen in the decreasing Debt to Equity ratio, Debt
Service margin, and Return on Equity over the past five years. Accordingly, we
have chosen to forecast the company’s liabilities using a Debt to Equity ratio that
declines to the industry average over the next ten years. By decreasing the Debt
to Equity ratio incrementally from 5.5 in the year ending 2007 to the industry
average of 2 in the year ending 2016, we feel that we can more accurately
portray the company’s changing capital structure in our forecasted balance
sheet. Assets were forecasted using an average of the past 3 years’ asset
turnover, which gave us a ratio of 1.3. Other major items in the balance sheet,
such as current assets and liabilities, inventory, and receivables were also
forecasted using internal ratios. Other items were forecasted as either being a
percentage of another major item or using an average of the past 3 years.
78 Actual Financial Statements Forecasted Financial Statements
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
12/31/200
2 12/31/200
3 12/31/200
4 12/31/200
5 12/31/200
6
Assets
Current Assets:
Cash and Cash Equivalents 167.9 265.3 319.6 340.7 489.5 453.4 507.8 568.7 636.9 713.4 799.0 894.9 1002.2 1122.5 1257.2
Receivables 1145.4 1222.4 1319.9 1309.4 1523.2 1661.4 1860.7 2084.0 2334.1 2614.2 2927.9 3279.2 3672.7 4113.5 4607.1
Inventories 671.7 718.3 845.5 855.8 1008.4 1082.1 1211.9 1357.3 1520.2 1702.7 1907.0 2135.8 2392.1 2679.2 3000.7
Other Current Assets 243.1 290.5 254.9 251.2 279.9 282.5 316.4 354.3 396.9 444.5 497.8 557.6 624.5 699.4 783.3
Total Current Assets 2228.1 2496.5 2739.9 2757.1 3301.0 3479.3 3896.8 4364.4 4888.1 5474.7 6131.7 6867.5 7691.6 8614.5 9648.3
Property, Plant, and Equipment, net 2491.3 2542.2 2647.7 2544.1 2696.1 3163.0 3542.5 3967.6 4443.8 4977.0 5574.2 6243.2 6992.3 7831.4 8771.2
Goodwill, net 1182.8 1299.4 1891.7 1845.7 2081.8 2319.5 2597.9 2909.6 3258.8 3649.8 4087.8 4578.3 5127.7 5743.0 6432.2
Other Intangible Assets, net 608.5 597.6 832.4 783.2 831.1 948.9 1062.8 1190.3 1333.1 1493.1 1672.3 1872.9 2097.7 2349.4 2631.4
Other Assets 576.5 543.1 561.2 577.0 228.0 632.6 708.5 793.5 888.8 995.4 1114.8 1248.6 1398.5 1566.3 1754.2
Total Noncurrent Assets 4859.1 4982.3 5933.0 5750.0 5837.0 7064.0 7911.7 8861.1 9924.4 11115.3 12449.1 13943.0 15616.2 17490.1 19589.0
Total Assets 7087.2 7478.8 8672.9 8507.1 9138.0 10543.2 11808.4 13225.5 14812.5 16590.0 18580.8 20810.5 23307.8 26104.7 29237.3
Liabilities
Current Liabilities:
Notes and Loans Payable 94.6 103.6 134.3 171.5 174.1 218.7 244.9 274.3 307.2 344.1 385.3 431.6 483.4 541.4 606.3
Current Portion of Long-Term Debt 298.5 314.4 451.3 356.7 776.7
Accounts Payable 728.3 753.6 864.4 876.1 1039.7 1085.7 1226.8 1385.4 1563.8 1764.2 1989.5 2242.7 2527.1 2846.5 3205.3
Accrued Income Taxes 121.7 183.8 153.1 215.5 161.5
Other Accruals 905.6 1090.0 1127.6 1123.2 1317.1 1447.6 1635.7 1847.2 2085.0 2352.3 2652.7 2990.2 3369.4 3795.4 4273.7
Total Current Liabilities 2148.7 2445.4 2730.7 2743.0 3469.1 3653.2 4091.6 4582.6 5132.5 5748.4 6438.2 7210.8 8076.1 9045.3 10130.7
Long-Term Debt 3210.8 2684.9 3089.5 2918.0 2720.4 3709.6 4191.5 4733.5 5342.8 6027.8 6797.6 7662.5 8634.2 9725.6 10951.3
Deffered Income Taxes 488.8 456.0 509.6 554.7 309.9
Other Liabilities 888.6 1005.4 1097.7 941.3 1227.7 1321.0 1492.6 1685.6 1902.6 2146.5 2420.6 2728.6 3074.6 3463.3 3899.7
Total Noncurrent Liabilities 4588.2 4146.3 4696.8 4414.0 4258.0 5394.5 6131.5 6962.4 7898.7 8953.5 10141.2 11478.2 12982.9 14675.7 16579.8
Total Liabilities 6736.9 6591.7 7427.5 7157.0 7727.1 9047.7 10223.2 11545.0 13031.3 14701.9 16579.4 18689.0 21059.0 23721.0 26710.6
4.9 4.5 4.2 3.9 3.6 3.3 2.9 2.6 2.3 2.0
Shareholder's Equity 0.8 0.8 0.8 0.8 0.8 0.8 0.7 0.7 0.7 0.7
Preference Stock 323.0 292.9 274.0 253.7 222.7
Common Stock 732.9 732.9 732.9 732.9 732.9
Additional Paid-in Capital 1133.9 1126.2 1093.8 1064.4 1218.1
Retained Earnings 6518.5 7433.0 8223.9 8968.1 9643.7 10517.7 11488.9 12568.0 13766.8 15098.4 16577.3 18219.6 20043.0 22067.2 24313.9
Accumulated other Comprehensive Income (1865.6) (1866.8) (1806.2) (1804.7) (2081.2) (2123.7) (2251.1) (2386.2) (2529.3) (2681.1) (2842.0) (3012.5) (3193.2) (3384.8) (3587.9)
6842.7 7718.2 8518.4 9214.4 9736.2 8394.0 9237.8 10181.8 11237.4 12417.3 13735.3 15207.1 16849.8 18682.4 20726.0
Unearned Compensation (340.1) (331.2) (307.6) (283.3) (251.4)
Treasury Stock (at cost) (6152.3) (6499.9) (6965.4) (7581.0) (8073.9) (8449.9) (8956.9) (9494.3) (10063.9
) (10667.8
) (11307.8
) (11986.3
) (12705.5
) (13467.8
) (14275.9
)
Total Shareholder's Equity 350.3 887.1 1245.4 1350.1 1410.9 1495.6 1585.3 1680.4 1781.2 1888.1 2001.4 2121.5 2248.8 2383.7 2526.7
79
Total Liabilities and Shareholders' Equity 7087.2 7478.8 8672.9 8507.1 9138.0 10543.2 11808.4 13225.5 14812.5 16590.0 18580.8 20810.5 23307.8 26104.7 29237.3
Actual Financial Statements Forecasted Financial Statements
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006
Assets
Current Assets:
Cash and Cash Equivalents 2.37% 3.55% 3.69% 4.00% 5.36% 4.30% 4.30% 4.30% 4.30% 4.30% 4.30% 4.30% 4.30% 4.30% 4.30%
Receivables 16.16% 16.34% 15.22% 15.39% 16.67% 15.76% 15.76% 15.76% 15.76% 15.76% 15.76% 15.76% 15.76% 15.76% 15.76%
Inventories 9.48% 9.60% 9.75% 10.06% 11.04% 10.26% 10.26% 10.26% 10.26% 10.26% 10.26% 10.26% 10.26% 10.26% 10.26%
Other Current Assets 3.43% 3.88% 2.94% 2.95% 3.06% 2.68% 2.68% 2.68% 2.68% 2.68% 2.68% 2.68% 2.68% 2.68% 2.68%
Total Current Assets 31.44% 33.38% 31.59% 32.41% 36.12% 33.00% 33.00% 33.00% 33.00% 33.00% 33.00% 33.00% 33.00% 33.00% 33.00%
Property, Plant, and Equipment, net 35.15% 33.99% 30.53% 29.91% 29.50% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00%
Goodwill, net 16.69% 17.37% 21.81% 21.70% 22.78% 22.00% 22.00% 22.00% 22.00% 22.00% 22.00% 22.00% 22.00% 22.00% 22.00%
Other Intangible Assets, net 8.59% 7.99% 9.60% 9.21% 9.09% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%
Other Assets 8.13% 7.26% 6.47% 6.78% 2.50% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%
Total Noncurrent Assets 68.56% 66.62% 68.41% 67.59% 63.88% 67.00% 67.00% 67.00% 67.00% 67.00% 67.00% 67.00% 67.00% 67.00% 67.00%
Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Liabilities
Current Liabilities:
Notes and Loans Payable 1.40% 1.57% 1.81% 2.40% 2.25% 2.42% 2.40% 2.38% 2.36% 2.34% 2.32% 2.31% 2.30% 2.28% 2.27%
Current Portion of Long-Term Debt 4.43% 4.77% 6.08% 4.98% 10.05%
Accounts Payable 10.81% 11.43% 11.64% 12.24% 13.46% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00%
Accrued Income Taxes 1.81% 2.79% 2.06% 3.01% 2.09%
Other Accruals 13.44% 16.54% 15.18% 15.69% 17.05% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00%
Total Current Liabilities 31.89% 37.10% 36.76% 38.33% 44.90% 40.38% 40.02% 39.69% 39.39% 39.10% 38.83% 38.58% 38.35% 38.13% 37.93%
Long-Term Debt 47.66% 40.73% 41.60% 40.77% 35.21% 41.00% 41.00% 41.00% 41.00% 41.00% 41.00% 41.00% 41.00% 41.00% 41.00%
Deffered Income Taxes 7.26% 6.92% 6.86% 7.75% 4.01%
Other Liabilities 13.19% 15.25% 14.78% 13.15% 15.89% 14.60% 14.60% 14.60% 14.60% 14.60% 14.60% 14.60% 14.60% 14.60% 14.60%
Total Noncurrent Liabilities 68.11% 62.90% 63.24% 61.67% 55.10% 59.62% 59.98% 60.31% 60.61% 60.90% 61.17% 61.42% 61.65% 61.87% 62.07%
Total Liabilities 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Shareholder's Equity
Preference Stock 92.21% 33.02% 22.00% 18.79% 15.78%
Common Stock 209.22% 82.62% 58.85% 54.28% 51.95%
Additional Paid-in Capital 323.69% 126.95% 87.83% 78.84% 86.33%
Retained Earnings 1860.83% 837.90% 660.34% 664.25% 683.51% 703.26% 724.72% 747.91% 772.88% 799.66% 828.29% 858.82% 891.29% 925.76% 962.28%
80 Accumulated other Comprehensive Income -532.57% -210.44% -145.03% -133.67% -147.51%
-142.00%
-142.00%
-142.00%
-142.00%
-142.00%
-142.00%
-142.00%
-142.00%
-142.00%
-142.00%
1953.38% 870.05% 683.99% 682.50% 690.07% 561.26% 582.72% 605.91% 630.88% 657.66% 686.29% 716.82% 749.29% 783.76% 820.28%
Unearned Compensation -97.09% -37.34% -24.70% -20.98% -17.82%
Treasury Stock (at cost) -1756.29% -732.71% -559.29% -561.51% -572.25% -
565.00% -
565.00% -
565.00% -
565.00% -
565.00% -
565.00% -
565.00% -
565.00% -
565.00% -
565.00%
Total Shareholder's Equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
81
Statement of Cash Flows:
Cash Flows From Investing activities were approximated using the net
increase in non-current assets from the forecasted balance sheet. For Cash Flows
From Operations, we chose to use the relationship that net income was on
average 75% of CFFO. Depreciation and amortization, as well as accounts
payable and other accruals were both forecasted using an internal average of
their percentage of total CFFO. Other individual line items we found to be too
volatile and unpredictable to be forecasted accurately.
Overall, we found that the relative stability of Colgate-Palmolive over the
past few years as well as the maturity of the industry as a whole were very
important factors in forecasting out the company’s financial statements. One of
the major limitations of these forecasts, however, is the unknown future
consequences of the 2004 restructuring program that is still in its implementation
phase. The effects of the program may increase or decrease the growth of the
company as well as change its profitability, liquidity, and capital structure more
or less favorably. Due to the favorability of the changing capital structure to
lessen the amount of debt that Colgate has, we felt that the company exhibits a
high potential for growth. Accordingly, we chose to grow the company using a
12% growth rate as opposed to the average growth of Colgate-Palmolive over
the last 4 years which was 7.12%.
82 Actual Financial Statements
Forecasted Financial Statements
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
12/31/200
2 12/31/200
3 12/31/200
4 12/31/200
5 12/31/200
6
Operating Activities
Net Income 1288.3 1421.3 1327.1 1351.4 1353.4 1639.9 1836.7 2057.1 2303.9 2580.4 2890.1 3236.9 3625.3 4060.3 4547.6
Adjustments to Reconcile NI to CFFO
Restructuring, net of cash 53.8 38.3 111.6 145.4
Depreciation and Amortization 296.5 315.5 327.8 329.3 328.7 393.6 440.8 493.7 552.9 619.3 693.6 776.8 870.1 974.5 1091.4
Gain before tax on sale of non-core product lines (5.2) (107.2) (26.7) (147.9) (46.5)
Deferred Income Taxes 35.3 (48.8)
Stock-based compensation expense 29.3 41.1 116.9
Cash effects of changes in:
Receivables (18.0) (14.4) (5.6) (24.1) (116.0)
Inventories (2.4) (3.1) (76.1) (46.8) (118.5)
Accounts payable and other accruals 107.7 188.7 80.1 152.7 149.9 196.8 220.4 246.9 276.5 309.6 346.8 388.4 435.0 487.2 545.7
Other non-current assets and liabilities (91.0) (38.1) 60.1 17.1 8.2
Net Cash Provided by Operations 1611.2 1767.7 1754.3 1784.4 1821.5 2186.5 2448.9 2742.8 3071.9 3440.6 3853.4 4315.8 4833.7 5413.8 6063.4
Investing Activities
Capital Expenditures (343.7) (302.1) (348.1) (389.2) (476.4)
Payment for Acquisitions, net of cash acquired (800.7) (38.5) (200.0)
Sale of non-core product lines 127.6 37.0 215.6 55.0
Purchases of marketable securities and investments (10.8) (43.2) (127.7) (20.0) (1.2) Proceeds from sales of marketable securities and investments 0.8 85.1 147.3 10.0
Other (3.5) 15.0 1.8 1.4 2.2
Net Cash used in Investing Activities (357.2) (117.6) (1090.4) (220.7) (620.4) (1227.0
) (847.7) (949.4) (1063.3
) (1190.9
) (1333.8
) (1493.9
) (1673.2
) (1873.9) (2098.8)
Financing Activities
Principal payments on debt (763.5) (804.0) (753.9) (2100.3) (1332.0)
Proceeds from issuance of debt 964.5 229.2 1246.5 2021.9 1471.1
Payments to outside investors (89.7)
Dividends Payed (413.4) (506.8) (536.2) (607.2) (677.8) (765.9) (865.5) (978.0) (1105.1
) (1248.8
) (1411.1
) (1594.6
) (1801.9
) (2036.1) (2300.8)
Purchases of Treasury Shares (1105.2) (554.9) (637.9) (796.2) (884.7) Proceeds from exercise of stock options and excess tax benefits 57.6 79.3 70.4 47.1 364.4 (1.0) (1.2) (1.3) (1.5) (1.7) (1.9) (2.2) (2.5) (2.8) (3.1)
Net Cash Used in Financing Activities (1260.0) (1557.2) (611.1) (1524.4) (1059.0)
Effect of exchange rate changes on Cash and Cash equivalents 1.2 4.5 1.5 (18.2) 6.7
Net increase in cash and cash equivalents (4.8) 97.4 54.3 21.1 148.8
Cash and cash equivalents at beginning of year 172.7 167.9 265.3 319.6 340.7
83 Cash and cash equivalents at end of year 167.9 265.3 319.6 340.7 489.5
Actual Financial Statements Forecasted Financial Statements
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
12/31/200
2 12/31/200
3 12/31/200
4 12/31/200
5 12/31/200
6
Operating Activities
Net Income 79.96% 80.40% 75.65% 75.73% 74.30% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00%
Adjustments to Reconcile NI to CFFO
Restructuring, net of cash 0.00% 3.04% 2.18% 6.25% 7.98%
Depreciation and Amortization 18.40% 17.85% 18.69% 18.45% 18.05% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00%
Gain before tax on sale of non-core product lines -0.32% -6.06% -1.52% -8.29% -2.55%
Deferred Income Taxes 2.19% -2.76% 0.00% 0.00% 0.00%
Stock-based compensation expense 0.00% 0.00% 1.67% 2.30% 6.42%
Cash effects of changes in:
Receivables -1.12% -0.81% -0.32% -1.35% -6.37%
Inventories -0.15% -0.18% -4.34% -2.62% -6.51%
Accounts payable and other accruals 6.68% 10.67% 4.57% 8.56% 8.23% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%
Other non-current assets and liabilities -5.65% -2.16% 3.43% 0.96% 0.45%
Net Cash Provided by Operations 100.00% 100.00% 100.00% 100.00% 100.00% 100.00
% 100.00
% 100.00
% 100.00
% 100.00
% 100.00
% 100.00
% 100.00
% 100.00
% 100.00
%
Investing Activities
Capital Expenditures 96.22% 256.89% 31.92% 176.35% 76.79%
Payment for Acquisitions, net of cash acquired 0.00% 0.00% 73.43% 17.44% 32.24%
Sale of non-core product lines 0.00% -108.50% -3.39% -97.69% -8.87%
Purchases of marketable securities and investments 3.02% 36.73% 11.71% 9.06% 0.19% Proceeds from sales of marketable securities and investments -0.22% -72.36% -13.51% -4.53% 0.00%
Other 0.98% -12.76% -0.17% -0.63% -0.35%
Net Cash used in Investing Activities 100.00% 100.00% 100.00% 100.00% 100.00%
Financing Activities
Principal payments on debt 60.60% 51.63% 123.37% 137.78% 125.78%
Proceeds from issuance of debt -76.55% -14.72% -203.98% -132.64% -138.91%
Payments to outside investors 0.00% 0.00% 0.00% 5.88% 0.00%
Dividends Payed 32.81% 32.55% 87.74% 39.83% 64.00%
Purchases of Treasury Shares 87.71% 35.63% 104.39% 52.23% 83.54% Proceeds from exercise of stock options and excess tax benefits -4.57% -5.09% -11.52% -3.09% -34.41%
Net Cash Used in Financing Activities 100.00% 100.00% 100.00% 100.00% 100.00%
84
Valuations Analysis
Cost of Capital:
After running regression analysis for Colgate’s cost of capital, we found
that particular method would not provide us with an accurate number. The
adjusted R square value was low (3-10%) for every year and every term. This
tells us that the numbers produced are not backed by a large amount of
explanatory power.
Even with a low R square value we ran the numbers to come up with a
cost of capital using this method. -2.2% was the average cost of equity for all of
the years. We know that Colgate could not have had a negative cost of capital.
This number was negative because the S&P 500 monthly return number was
negative for the term in which we used for our calculations. After subtracting the
risk free rate it became an even larger negative number. When the negative
number was multiplied by beta it remained negative. When we added the risk
free rate to this number, it was not large enough to make it positive. The 24
month term was used for each calculation due to its relatively large R square
value.
With unsatisfactory results in the regression analysis, we decided to “back
into” the cost of capital. Our calculations looked like this:
Market/Book 67.07/2.32= 28.9
Market/Book -1 28.9-1= 27.9
Market/Book -1 * g 27.9*.176= 4.91
Times ROE 4.91*.9592= 4.71
Divide by Market/Book 4.71/28.9= .163
Ke= 16.3%
This delivered a cost of capital equal to 16.3%. We would expect to see a
number in between 10% and 14% for a company of this size in this industry.
85
However, fluctuations do exist and we will accept 16.3% as a valid cost of
capital.
Intrinsic Valuation Methods:
Discounted Dividends Model
The first model used in determining the intrinsic share value is the
discounted dividends model. The discounted dividends model is found by using
forecasted dividends divided by the number of shares outstanding. Then, future
dividends are discounted back to the present value. The summations of these
values are added to the present value of the terminal value of the perpetuity,
and the end result is the intrinsic value of the share.
Through our calculations, we found that the price per share is $12.65, in
comparison to the observed share price of $67.30. Through this calculation, this
determines that Colgate’s share price is highly overvalued. The next part of this
analysis included the calculated sensitivity analysis. We included a small
increasing growth, paired with descending cost of capital. This is unique to this
firm because we found that Colgate’s cost of equity was unusually high. To
better analyze the effects of growth, we brought down the cost of capital to
become more compatible with industry standards.
However, this model does have estimation flaws. It is not possible to
accurately estimate exact dividends in the future, or whether or not the
dividends grow or become stagnant. This leads us to believe that the discounted
dividends model has little to no explanatory power.
Discounted Free Cash Flow Model
The discount free cash flows model produces an intrinsic value that is
based on the cash flows generated by a company’s assets. Similarly to the
discount dividends model, the discounted free cash flows model discounts
expected future values to the present value based on a discount rate. Unlike the
residual income, abnormal earnings growth, and discount dividends model, the
86
free cash flows are discounted using the weighted average cost of capital
(WACC). This is because the firm’s assets are financed by both debt and equity.
The free cash flows are approximated by adding net cash flows from investments
to cash flows from operations for a given year. This number is then discounted
back to the present value using our intrinsic WACC.
After running this valuation model with our intrinsic WACC, the resulting
intrinsic share value was significantly higher in value than the other methods we
used. When our sensitivity analysis was run, our intrinsic WACC produced share
values ranging from $56.40 per share to $174.95 per share. This illustrates the
inherent volatility associated with the discounted free cash flows model. The
forecasted free cash flows in addition to the terminal value perpetuity are very
sensitive. Accordingly, any small changes in the implied growth rate and/or the
intrinsic WACC will have a much greater effect on the intrinsic share price than in
other models. At our intrinsic WACC of 5.52%, the derived intrinsic values were
generally more than the observed price of $67.30. We feel that this is most likely
due to the low amount of equity that Colgate-Palmolive has compared to other
firms in the industry. The high cost of equity plays a small effect in raising the
WACC because the amount of Colgate’s debt is so high. Accordingly, the lower
cost of debt keeps the WACC relatively low at 5.52%. In our sensitivity analysis,
we have shown what affect a higher WACC would have on our intrinsic share
price.
While the discount free cash flow model shows that Colgate-Palmolive is
overvalued using our intrinsic WACC and growth rate, we feel that this is the
least accurate model used in our analysis. This is because of the changing capital
structure of the company in addition to the inherent volatility associated with the
model and with the free cash flow forecasts. Accordingly, we have placed less
emphasis on the results of the discounted free cash flows model than on the
other models in our intrinsic valuation.
87
Residual Income Model
Similar to the AEG model and the discounted dividends model, residual
income valuations involve using the cost of equity as a discount rate for finding
present values of forecasted figures. Also, EPS (earnings per share) DPS
(dividends per share) and BVE (book value of equity) are used in order to
accurately value the firm. The ending book value of equity for the last year is
used as the beginning book value of equity for the first year intended to be
forecasted (in our case 2006). This number is added to our forecasted EPS and
then the forecasted DPS is subtracted in order to find a forecasted BVE. Our
valuations are forecasted out ten years so this is done ten times. For each year,
the forecasted BVE is multiplied by the cost of equity in order to calculate the
normal income. The EPS for the year calculated is subtracted by the normal
income to find the residual income. The residual incomes for the ten forecasted
years are then discounted back to 2006 values and added to find the total
present value of residual income. This value is then added to the ending book
value of equity in 2006 and to the present value of the terminal perpetuity. The
PVTP is found by dividing the terminal value perpetuity by the cost of equity
minus the expected growth rate and then discounted back to 2006 values. In
our case it was as follows: $1.90 (BVE 2006) + $9.64 (PV of residual incomes) +
$14.81 (PV of the terminal value). Our residual income valuation resulted in an
estimated share value of $26.34, which is more than half the market price of
$67.30 and would result in an overvalued firm. Our sensitivity model shows a
gradual increase in estimated value as the growth rate is increased and cost of
equity decreased. We placed a negative growth rate in our sensitivity model in
order to correlate it with the AEG model. The cost of equity that we found was
16.3% and instead of increasing it for our sensitivity model, we decreased it so
we could compute the valuations with a cost of equity similar to Colgate’s
industry average.
88
Abnormal Earnings Model
Analyzing the link between earnings and dividends can provide much
information about the intrinsic value of a company’s stock. This model will
provide the intrinsic value of a stock by adding book value of equity and present
value of future abnormal earnings. The firm can maintain, create, or destroy
value. The value will be maintained if a normal rate of return is achieved on its
book value. If the earnings are less than the normal level, the firm has
destroyed value. To create value the firm needs to have abnormal earnings
more than their normal value.
For Colgate, the abnormal earnings model suggests that the firm is
severely overvalued. An intrinsic value of $19.62 was given as the result of this
models calculation and the observed price was $67.30. The cost of equity used
in these calculations was 16.3 percent at a zero growth rate. We continually
used a lower cost of equity in the sensitivity analysis to more closely fit the
industry norm. As our sensitivity analysis suggests, this would produce intrinsic
values much closer to the observed value. Since this model is backed by the
most explanatory power of any of the models, we will not disregard the outcome
stating that this is a highly overvalued company.
Valuation Conclusion
After a thorough evaluation of Colgate-Palmolive using many different
valuation models we can conclude that the firm is severally overvalued. With the
exception of the free cash flows, which we decided was an inaccurate valuation
model for our firm, the average of the valuation models we calculated was
$24.55. This assessment includes the discounted dividends model, residual
income model, and the abnormal earnings model. Each of the models, that we
have deemed accurate, lead to a conclusion that Colgate-Palmolive is severely
overpriced. We have decided to reject the discounted free cash flows model as a
viable valuation because it resulted in a valuation that was not consistent with
the other models. With the valuations resulting in an average value no higher
89
than $33.45, and as low as $19.62, we confidently confirm our assessment that
Colgate-Palmolive is overvalued.
Discounted Dividends Approach WACC(AT)= 0.0552 Kd= 0.0525 Ke= 0.163 g= 0
0 1 2 3 4 5 6 7 8 9 102006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
EPS (Earnings Per Share) $1.84 $2.24 $2.51 $2.81 $3.14 $3.52 $3.94 $4.42 $4.95 $5.54 $6.20DPS (Dividends Per Share) $0.93 $1.05 $1.18 $1.33 $1.51 $1.70 $1.93 $2.18 $2.46 $2.78 $3.14BPS (Book Value Equity per Share) $2.32Cash From Operations $2,079.16 $2,214.30 $2,358.23 $2,511.52 $2,674.77 $2,848.63 $3,033.79 $3,230.98 $3,441.00 $3,664.66Cash Investments ($880.09) ($436.61) ($464.99) ($495.21) ($527.40) ($561.68) ($598.19) ($637.08) ($678.49) ($722.59)
PV Factor 0.85984523 0.7393338 0.6357127 0.5466145 0.4700039 0.4041306 0.3474897 0.2987874 0.2569109 0.2209036PV of Future Dividends 0.90283749 0.8724139 0.8454978 0.8253879 0.7990066 0.779972 0.7575277 0.735017 0.7142124 0.6936374Total PV of Future Dividends 7.92551011Continuing (Terminal) Value Perpetuity 19.2638037PV of Terminal Value Perpetuity 4.25544416Value of Firm Sensitivity AnalysisBook Value of Liabilities gEstimated Market Value of Equity 0.00% 2.50% 5.00% 7.00%Number of Shares 10.00% $23.42 $26.90 $35.82 $52.35Estimated Price per Share (end of 2006) $12.18 Ke 12.00% $18.67 $20.95 $24.86 $30.80Implied Value at 04/01/2007 $12.65 14.00% $15.36 $16.72 $18.84 $21.61Observed Share Price $67.30 16.30% $12.65 $13.45 $14.60 $15.98Initial Cost of Equity (You Derive) Ke=.163 18.00% $11.13 $11.69 $12.47 $13.34
Free Cash Flow Valuation
WACC(AT)= 0.0552 Kd= 0.0525 g= 0 termianl value= $3,118.591
0 1 2 3 4 5 6 7 8 9 102006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
EPS (Earnings Per Share) $1.84 $2.24 $2.51 $2.81 $3.14 $3.52 $3.94 $4.42 $4.95 $5.54 $6.20DPS (Dividends Per Share) $0.93 $1.05 $1.18 $1.33 $1.51 $1.70 $1.93 $2.18 $2.46 $2.78 $3.14BPS (Book Value Equity per Share) $2.32Cash From Operations $2,079.16 $2,214.30 $2,358.23 $2,511.52 $2,674.77 $2,848.63 $3,033.79 $3,230.98 $3,441.00 $3,664.66Cash Investments ($880.09) ($436.61) ($464.99) ($495.21) ($527.40) ($561.68) ($598.19) ($637.08) ($678.49) ($722.59)Free Cash Flows $1,199.07 $1,777.69 $1,893.24 $2,016.31 $2,147.37 $2,286.95 $2,435.60 $2,593.90 $2,762.51 $2,942.07 $3,118.59
g 0.4825573 0.0650001 0.065005 0.0649999 0.0650004 0.0649992 0.0649943 0.0650025 0.0649989
PV Factor 0.95 0.90 0.85 0.81 0.76 0.72 0.69 0.65 0.62 0.58PV of Free Cash Flows 1136.34 1596.56 1611.39 1626.37 1641.47 1656.72 1672.10 1687.62 1703.30 1719.12Total PV of Annual Free Cash Flows 16050.99Continuing (Terminal) Value Perpetuity 56496.27 Sensitivity AnalysisPV of Terminal Value Perpetuity 33012.01 gValue of Firm 49063.00 0.00% 2.00% 4.00% 6.00% 8.00%Book Value of Liabilities 7727.10 5.52% $56.40 $82.00 $174.95Estimated Market Value of Equity 41335.90 WACC 7.00% $40.60 $52.97 $81.81 $226.03Number of Shares 732.85 9.00% $27.71 $33.41 $43.68 $67.65 $187.49Estimated Price per Share (end of 1987) $56.40 11.00% $19.66 $22.68 $27.44 $36.01 $55.99
90
Residual Income Valuation
WACC(AT)= 0.0552 Kd= 0.0525 Ke= 0.163 g= 0
0 1 2 3 4 5 6 7 8 9 102006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
EPS (Earnings Per Share) $1.84 $2.24 $2.51 $2.81 $3.14 $3.52 $3.94 $4.42 $4.95 $5.54 $6.20DPS (Dividends Per Share) $0.93 $1.05 $1.18 $1.33 $1.51 $1.70 $1.93 $2.18 $2.46 $2.78 $3.14BPS (Book Value Equity per Share) $2.32 $3.51 $4.84 $6.32 $7.95 $9.77 $11.78 $14.02 $16.51 $19.27 $22.33Cash From Operations $2,079.16 $2,214.30 $2,358.23 $2,511.52 $2,674.77 $2,848.63 $3,033.79 $3,230.98 $3,441.00 $3,664.66Cash Investments ($880.09) ($436.61) ($464.99) ($495.21) ($527.40) ($561.68) ($598.19) ($637.08) ($678.49) ($722.59)
RI check figure of aeg 0.08 0.08 0.09 0.11 0.12 0.15 0.16 0.18 0.21
EPS 1.84 2.24 2.51 2.81 3.14 3.52 3.94 4.42 4.95 5.54 6.20Normal Income 0.37816 0.57213 0.78892 1.03016 1.29585 1.59251 1.92014 2.28526 2.69113 3.14101Residual Income 1.86 1.94 2.02 2.11 2.22 2.35 2.50 2.66 2.85 3.06PV factor 0.859845228 0.7393338 0.6357127 0.5466145 0.4700039 0.4041306 0.3474897 0.2987874 0.2569109 0.2209036PV of Residual Income 1.600894239 1.4327328 1.2848261 1.1532691 1.0453591 0.9486925 0.8686757 0.7961907 0.7319058 0.675742Sum of PV of Residual Income 10.53828817Terminal Value 38.03680982PV of Terminal Value 8.402469367 Sensitivity AnalysisEstimated Value per share $21.26 g
-10.00% -5.00% 0.00% 5.00% 10.00%10.00% $31.16 $35.14 $43.11 $67.02
Observed Price $67.30 Ke 12.00% $25.85 $28.52 $33.14 $45.29 $116.5914.00% $21.70 $23.53 $26.67 $33.31 $56.5416.30% $17.97 $19.20 $21.17 $24.89 $34.5118.00% $15.77 $16.69 $18.12 $20.65 $26.34
AEG Valuation
0 1 2 3 4 5 6 7 8 9 10 perp2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
EPS $1.84 $2.24 $2.51 $2.81 $3.14 $3.52 $3.94 $4.42 $4.95 $5.54 $6.20DPS $0.93 $1.05 $1.18 $1.33 $1.51 $1.70 $1.93 $2.18 $2.46 $2.78 $3.14DPS invested at 16.3% (Drip) $0.15 $0.17 $0.19 $0.22 $0.25 $0.28 $0.31 $0.36 $0.40 $0.45Cum-Dividend Earnings $2.39 $2.68 $3.00 $3.36 $3.77 $4.22 $4.73 $5.31 $5.94 $6.65Normal Earnings 2.14 2.61 2.92 3.27 3.65 4.09 4.58 5.14 5.76 6.44Abnormal Earning Growth (AEG) $0.25 $0.08 $0.08 $0.09 $0.11 $0.12 $0.15 $0.16 $0.18 $0.21 0.21
PV Factor 0.86 0.74 0.64 0.55 0.47 0.40 0.35 0.30 0.26 0.22PV of AEG $0.22 $0.06 $0.05 $0.05 $0.05 $0.05 $0.05 $0.05 $0.05 $0.05
Core EPS $2.24Total PV of AEG $0.67Continuing (Terminal) Value 1.288344 $0.05PV of Terminal Value $0.28Total PV of AEG $0.67Total Average EPS Perp (t+1) $3.20Capitalization Rate (perpetuity) 0.163
Intrinsic Value Per Share $19.62
Ke 0.163g 0
Sensitivity Analysisg
-10.00% -20.00% -30.00% -40.00% -50.00%10.00% $41.48 $40.13 $39.45 $39.05 $38.78
Observed Price per share $67.30 Ke 12.00% $31.13 $30.33 $29.91 $29.65 $29.4814.00% $24.29 $23.80 $23.53 $23.36 $23.2416.30% $18.95 $18.65 $18.48 $18.38 $18.3018.00% $16.10 $15.89 $15.77 $15.69 $15.63
91
GS10 GS7 GS5 GS1 GS3mo GS10 GS7 GS5 GS1 GS3mo
1/1/2007 4.72 4.71 4.71 5.05 5.16 0.00393 0.00393 0.00393 0.00421 0.0043012/1/2006 4.76 4.75 4.75 5.06 5.11 0.00397 0.00396 0.00396 0.00422 0.0042611/1/2006 4.56 4.54 4.53 4.94 4.97 0.00380 0.00378 0.00378 0.00412 0.0041410/1/2006 4.60 4.58 4.58 5.01 5.07 0.00383 0.00382 0.00382 0.00418 0.004239/1/2006 4.73 4.69 4.69 5.01 5.05 0.00394 0.00391 0.00391 0.00418 0.004218/1/2006 4.72 4.68 4.67 4.97 4.93 0.00393 0.00390 0.00389 0.00414 0.004117/1/2006 4.88 4.83 4.82 5.08 5.09 0.00407 0.00403 0.00402 0.00423 0.004246/1/2006 5.09 5.05 5.04 5.22 5.08 0.00424 0.00421 0.00420 0.00435 0.004235/1/2006 5.11 5.08 5.07 5.16 4.92 0.00426 0.00423 0.00423 0.00430 0.004104/1/2006 5.11 5.03 5.00 5.00 4.84 0.00426 0.00419 0.00417 0.00417 0.004033/1/2006 4.99 4.94 4.90 4.90 4.72 0.00416 0.00412 0.00408 0.00408 0.003932/1/2006 4.72 4.71 4.72 4.77 4.63 0.00393 0.00393 0.00393 0.00398 0.003861/1/2006 4.57 4.56 4.57 4.68 4.54 0.00381 0.00380 0.00381 0.00390 0.00378
12/1/2005 4.42 4.37 4.35 4.45 4.34 0.00368 0.00364 0.00363 0.00371 0.0036211/1/2005 4.47 4.41 4.39 4.35 3.97 0.00373 0.00368 0.00366 0.00363 0.0033110/1/2005 4.54 4.48 4.45 4.33 3.97 0.00378 0.00373 0.00371 0.00361 0.003319/1/2005 4.46 4.38 4.33 4.18 3.79 0.00372 0.00365 0.00361 0.00348 0.003168/1/2005 4.20 4.08 4.01 3.85 3.49 0.00350 0.00340 0.00334 0.00321 0.002917/1/2005 4.26 4.18 4.12 3.87 3.52 0.00355 0.00348 0.00343 0.00323 0.002936/1/2005 4.18 4.06 3.98 3.64 3.29 0.00348 0.00338 0.00332 0.00303 0.002745/1/2005 4.00 3.86 3.77 3.36 3.04 0.00333 0.00322 0.00314 0.00280 0.002534/1/2005 4.14 3.94 3.85 3.33 2.90 0.00345 0.00328 0.00321 0.00278 0.002423/1/2005 4.34 4.16 4.00 3.32 2.84 0.00362 0.00347 0.00333 0.00277 0.002372/1/2005 4.50 4.33 4.17 3.30 2.80 0.00375 0.00361 0.00348 0.00275 0.002331/1/2005 4.17 3.97 3.77 3.03 2.58 0.00348 0.00331 0.00314 0.00253 0.00215
12/1/2004 4.22 3.97 3.71 2.86 2.37 0.00352 0.00331 0.00309 0.00238 0.0019811/1/2004 4.23 3.93 3.60 2.67 2.22 0.00353 0.00328 0.00300 0.00223 0.0018510/1/2004 4.19 3.88 3.53 2.50 2.11 0.00349 0.00323 0.00294 0.00208 0.001769/1/2004 4.10 3.75 3.35 2.23 1.79 0.00342 0.00313 0.00279 0.00186 0.001498/1/2004 4.13 3.75 3.36 2.12 1.68 0.00344 0.00313 0.00280 0.00177 0.001407/1/2004 4.28 3.90 3.47 2.02 1.50 0.00357 0.00325 0.00289 0.00168 0.001256/1/2004 4.50 4.11 3.69 2.10 1.36 0.00375 0.00343 0.00308 0.00175 0.001135/1/2004 4.73 4.35 3.93 2.12 1.29 0.00394 0.00363 0.00328 0.00177 0.001084/1/2004 4.72 4.31 3.85 1.78 1.04 0.00393 0.00359 0.00321 0.00148 0.000873/1/2004 4.35 3.89 3.39 1.43 0.96 0.00363 0.00324 0.00283 0.00119 0.000802/1/2004 3.83 3.31 2.79 1.19 0.95 0.00319 0.00276 0.00233 0.00099 0.000791/1/2004 4.08 3.59 3.07 1.24 0.94 0.00340 0.00299 0.00256 0.00103 0.00078
12/1/2003 4.15 3.65 3.12 1.24 0.90 0.00346 0.00304 0.00260 0.00103 0.0007511/1/2003 4.27 3.79 3.27 1.31 0.91 0.00356 0.00316 0.00273 0.00109 0.0007610/1/2003 4.30 3.81 3.29 1.34 0.95 0.00358 0.00318 0.00274 0.00112 0.000799/1/2003 4.29 3.75 3.19 1.25 0.94 0.00358 0.00313 0.00266 0.00104 0.000788/1/2003 4.27 3.74 3.18 1.24 0.96 0.00356 0.00312 0.00265 0.00103 0.000807/1/2003 4.45 3.96 3.37 1.31 0.97 0.00371 0.00330 0.00281 0.00109 0.000816/1/2003 3.98 3.45 2.87 1.12 0.92 0.00332 0.00288 0.00239 0.00093 0.000775/1/2003 3.33 2.84 2.27 1.01 0.94 0.00278 0.00237 0.00189 0.00084 0.000784/1/2003 3.57 3.07 2.52 1.18 1.09 0.00298 0.00256 0.00210 0.00098 0.000913/1/2003 3.96 3.47 2.93 1.27 1.15 0.00330 0.00289 0.00244 0.00106 0.000962/1/2003 3.81 3.34 2.78 1.24 1.15 0.00318 0.00278 0.00232 0.00103 0.000961/1/2003 3.90 3.45 2.90 1.30 1.19 0.00325 0.00288 0.00242 0.00108 0.00099
12/1/2002 4.05 3.60 3.05 1.36 1.19 0.00338 0.00300 0.00254 0.00113 0.0009911/1/2002 4.03 3.63 3.03 1.45 1.21 0.00336 0.00303 0.00253 0.00121 0.0010110/1/2002 4.05 3.64 3.05 1.49 1.25 0.00338 0.00303 0.00254 0.00124 0.001049/1/2002 3.94 3.54 2.95 1.65 1.61 0.00328 0.00295 0.00246 0.00138 0.001348/1/2002 3.87 3.50 2.94 1.72 1.66 0.00323 0.00292 0.00245 0.00143 0.001387/1/2002 4.26 3.88 3.29 1.76 1.65 0.00355 0.00323 0.00274 0.00147 0.001386/1/2002 4.65 4.30 3.81 1.96 1.71 0.00388 0.00358 0.00318 0.00163 0.001435/1/2002 4.93 4.60 4.19 2.20 1.73 0.00411 0.00383 0.00349 0.00183 0.001444/1/2002 5.16 4.90 4.49 2.35 1.76 0.00430 0.00408 0.00374 0.00196 0.001473/1/2002 5.21 5.02 4.65 2.48 1.75 0.00434 0.00418 0.00388 0.00207 0.001462/1/2002 5.28 5.14 4.74 2.57 1.83 0.00440 0.00428 0.00395 0.00214 0.001531/1/2002 4.91 4.71 4.30 2.23 1.76 0.00409 0.00393 0.00358 0.00186 0.00147
12/1/2001 5.04 4.79 4.34 2.16 1.68 0.00420 0.00399 0.00362 0.00180 0.0014011/1/2001 5.09 4.86 4.39 2.22 1.72 0.00424 0.00405 0.00366 0.00185 0.0014310/1/2001 4.65 4.42 3.97 2.18 1.91 0.00388 0.00368 0.00331 0.00182 0.001599/1/2001 4.57 4.31 3.91 2.33 2.20 0.00381 0.00359 0.00326 0.00194 0.001838/1/2001 4.73 4.51 4.12 2.82 2.69 0.00394 0.00376 0.00343 0.00235 0.002247/1/2001 4.97 4.84 4.57 3.47 3.44 0.00414 0.00403 0.00381 0.00289 0.002876/1/2001 5.24 5.06 4.76 3.62 3.59 0.00437 0.00422 0.00397 0.00302 0.002995/1/2001 5.28 5.14 4.81 3.58 3.57 0.00440 0.00428 0.00401 0.00298 0.002984/1/2001 5.39 5.24 4.93 3.78 3.70 0.00449 0.00437 0.00411 0.00315 0.003083/1/2001 5.14 5.03 4.76 3.98 3.97 0.00428 0.00419 0.00397 0.00332 0.003312/1/2001 4.89 4.88 4.64 4.30 4.54 0.00408 0.00407 0.00387 0.00358 0.003781/1/2001 5.10 5.10 4.89 4.68 5.01 0.00425 0.00425 0.00408 0.00390 0.00418
12/1/2000 5.16 5.13 4.86 4.81 5.29 0.00430 0.00428 0.00405 0.00401 0.0044111/1/2000 5.24 5.28 5.17 5.60 5.94 0.00437 0.00440 0.00431 0.00467 0.0049510/1/2000 5.72 5.78 5.70 6.09 6.36 0.00477 0.00482 0.00475 0.00508 0.005309/1/2000 5.74 5.84 5.78 6.01 6.29 0.00478 0.00487 0.00482 0.00501 0.005248/1/2000 5.80 5.98 5.93 6.13 6.18 0.00483 0.00498 0.00494 0.00511 0.005157/1/2000 5.83 6.05 6.06 6.18 6.28 0.00486 0.00504 0.00505 0.00515 0.005236/1/2000 6.05 6.22 6.18 6.08 6.14 0.00504 0.00518 0.00515 0.00507 0.005125/1/2000 6.10 6.33 6.30 6.17 5.86 0.00508 0.00528 0.00525 0.00514 0.004884/1/2000 6.44 6.69 6.69 6.33 5.99 0.00537 0.00558 0.00558 0.00528 0.004993/1/2000 5.99 6.27 6.26 6.15 5.82 0.00499 0.00523 0.00522 0.00513 0.004852/1/2000 6.26 6.51 6.50 6.22 5.86 0.00522 0.00543 0.00542 0.00518 0.004881/1/2000 6.52 6.72 6.68 6.22 5.73 0.00543 0.00560 0.00557 0.00518 0.00478
12/1/1999 6.66 6.70 6.58 6.12 5.50 0.00555 0.00558 0.00548 0.00510 0.00458
Risk Free Rates
92
SUMMARY OUTPUT 72 mo
Regression StatisticsMultiple R 0.18220443R Square 0.03319845Adjusted R Square 0.02140819Standard Error 0.05709168Observations 84
ANOVAdf SS MS F ignificance F
Regression 1 0.009178 0.009178 2.815752 0.097151Residual 82 0.267276 0.003259Total 83 0.276454
Coefficients tandard Erro t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 0.00504055 0.006233 0.808729 0.421011 -0.007358 0.017439 -0.007358 0.017439X Variable 1 0.2567679 0.153018 1.67802 0.097151 -0.047634 0.56117 -0.047634 0.56117
SUMMARY OUTPUT 60 mo
Regression StatisticsMultiple R 0.19658624R Square 0.03864615Adjusted R Square 0.02491252Standard Error 0.04351759Observations 72
ANOVAdf SS MS F ignificance F
Regression 1 0.005329 0.005329 2.81398 0.097906Residual 70 0.132565 0.001894Total 71 0.137894
Coefficients tandard Erro t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 0.00436399 0.005129 0.850795 0.397784 -0.005866 0.014594 -0.005866 0.014594X Variable 1 0.21749863 0.129657 1.677492 0.097906 -0.041094 0.476091 -0.041094 0.476091
SUMMARY OUTPUT 48 mo
Regression StatisticsMultiple R 0.23209334R Square 0.05386732Adjusted R Square 0.03755469Standard Error 0.0439694Observations 60
ANOVAdf SS MS F ignificance F
Regression 1 0.006384 0.006384 3.302184 0.074355Residual 58 0.112132 0.001933Total 59 0.118516
Coefficients tandard Erro t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 0.00478969 0.005691 0.841605 0.403466 -0.006602 0.016182 -0.006602 0.016182X Variable 1 0.2923956 0.160905 1.817191 0.074355 -0.029691 0.614482 -0.029691 0.614482
SUMMARY OUTPUT 36 mo
Regression StatisticsMultiple R 0.22539606R Square 0.05080339Adjusted R Square 0.03016868St d d E 0 04401958
3 Month Regression
93
3 Month Regression Continued SUMMARY OUTPUT 36 mo
Regression Statistics Multiple R 0.22539606 R Square 0.05080339 Adjusted R Square 0.03016868 Standard Error 0.04401958 Observations 48 ANOVA
df SS MS F Significance
F Regression 1 0.004771 0.004771 2.462035 0.123482 Residual 46 0.089135 0.001938 Total 47 0.093906
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.0050324 0.006792 0.740975 0.462474 -0.00864 0.018703 -0.00864 0.018703X Variable 1 0.42687081 0.27205 1.569087 0.123482 -0.12074 0.97448 -0.12074 0.97448 SUMMARY OUTPUT
Regression Statistics Multiple R 0.36315821 R Square 0.13188389 Adjusted R Square 0.10635106 Standard Error 0.04308086 Observations 36 ANOVA
df SS MS F Significance
F Regression 1 0.009587 0.009587 5.165268 0.029482 Residual 34 0.063103 0.001856 Total 35 0.072689
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.00732691 0.007337 0.99863 0.325028 -0.00758 0.022237 -0.00758 0.022237X Variable 1 0.84397206 0.371348 2.272723 0.029482 0.089301 1.598643 0.089301 1.598643
SUMMARY OUTPUT 72 mo
Regression StatisticsMultiple R 0.183225R Square 0.033571Adjusted R Square 0.021786Standard Error 0.057081Observations 84
ANOVAdf SS MS F ignificance F
Regression 1 0.009281 0.009281 2.848474 0.095261Residual 82 0.267173 0.003258Total 83 0.276454
Coefficientstandard Erro t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 0.005091 0.006233 0.816918 0.416342 -0.007307 0.01749 -0.007307 0.01749X Variable 1 0.258419 0.153115 1.687742 0.095261 -0.046176 0.563013 -0.046176 0.563013
SUMMARY OUTPUT 60 mo
Regression StatisticsMultiple R 0.197342R Square 0.038944Adjusted R Square 0.025214Standard Error 0.043511Observations 72
ANOVAdf SS MS F ignificance F
Regression 1 0.00537 0.00537 2.836533 0.096597Residual 70 0.132524 0.001893Total 71 0.137894
Coefficientstandard Erro t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 0.004414 0.005129 0.860596 0.392399 -0.005816 0.014644 -0.005816 0.014644X Variable 1 0.218477 0.129722 1.684201 0.096597 -0.040244 0.477199 -0.040244 0.477199
SUMMARY OUTPUT 48 mo
Regression StatisticsMultiple R 0.233109R Square 0.05434Adjusted R Square 0.038035Standard Error 0.043958Observations 60
ANOVAdf SS MS F ignificance F
Regression 1 0.00644 0.00644 3.332822 0.07306Residual 58 0.112076 0.001932Total 59 0.118516
Coefficientstandard Erro t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 0.004859 0.005687 0.85432 0.396443 -0.006525 0.016242 -0.006525 0.016242X Variable 1 0.293632 0.160841 1.825602 0.07306 -0.028327 0.615592 -0.028327 0.615592
1 Year Regression
95
1 Year Regression Continued SUMMARY OUTPUT 36 mo
Regression Statistics Multiple R 0.226584 R Square 0.05134 Adjusted R Square 0.030717 Standard Error 0.044007 Observations 48 ANOVA
df SS MS F Significance
F Regression 1 0.004821 0.004821 2.489473 0.121463 Residual 46 0.089085 0.001937 Total 47 0.093906
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95%
Lower 95.0%
Intercept 0.005122 0.006766 0.757003 0.452908 -0.0085 0.01874 -0.0085X Variable 1 0.428486 0.271571 1.577807 0.121463 -0.11816 0.97513 -0.11816 SUMMARY OUTPUT 24 mo
Regression Statistics Multiple R 0.363941 R Square 0.132453 Adjusted R Square 0.106937 Standard Error 0.043067 Observations 36 ANOVA
df SS MS F Significance
F Regression 1 0.009628 0.009628 5.190969 0.029107 Residual 34 0.063061 0.001855 Total 35 0.072689
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95%
Lower 95.0%
Intercept 0.007541 0.007315 1.030828 0.309899 -0.00733 0.022407 -0.00733 0X Variable 1 0.844104 0.370486 2.27837 0.029107 0.091186 1.597022 0.091186
96
SUMMARY OUTPUT 72 mo
Regression StatisticsMultiple R 0.185725R Square 0.034494Adjusted R 0.022719Standard E 0.057053Observatio 84
ANOVAdf SS MS F ignificance F
Regression 1 0.009536 0.009536 2.929544 0.090752Residual 82 0.266918 0.003255Total 83 0.276454
Coefficientstandard Erro t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 0.005293 0.006235 0.848994 0.398357 -0.00711 0.017697 -0.00711 0.017697X Variable 0.261931 0.153034 1.711591 0.090752 -0.042502 0.566364 -0.042502 0.566364
SUMMARY OUTPUT 60 mo
Regression StatisticsMultiple R 0.20039R Square 0.040156Adjusted R 0.026444Standard E 0.043483Observatio 72
ANOVAdf SS MS F ignificance F
Regression 1 0.005537 0.005537 2.928522 0.091455Residual 70 0.132356 0.001891Total 71 0.137894
Coefficientstandard Erro t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 0.004611 0.00513 0.898959 0.371757 -0.005619 0.014842 -0.005619 0.014842X Variable 0.221698 0.12955 1.711293 0.091455 -0.036681 0.480077 -0.036681 0.480077
SUMMARY OUTPUT 48 mo
Regression StatisticsMultiple R 0.237168R Square 0.056248Adjusted R 0.039977Standard E 0.043914Observatio 60
ANOVAdf SS MS F ignificance F
Regression 1 0.006666 0.006666 3.456852 0.068065Residual 58 0.11185 0.001928Total 59 0.118516
Coefficientstandard Erro t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 0.005092 0.005674 0.897444 0.373192 -0.006266 0.016451 -0.006266 0.016451X Variable 0.298096 0.16033 1.859261 0.068065 -0.02284 0.619032 -0.02284 0.619032
5 Year Regression
97
SUMMARY OUTPUT 36mo
Regression StatisticsMultiple R 0.998406R Square 0.996815Adjusted R Square 0.996746Standard Error 0.00255Observations 48
ANOVAdf SS MS F ignificance F
Regression 1 0.093607 0.093607 14397.04 4.37E-59Residual 46 0.000299 6.5E-06Total 47 0.093906
Coefficientstandard Erro t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 0.004878 0.000369 13.20087 2.97E-17 0.004134 0.005621 0.004134 0.005621X Variable 1 0.999701 0.008332 119.9876 4.37E-59 0.98293 1.016472 0.98293 1.016472
SUMMARY OUTPUT 24mo
Regression StatisticsMultiple R 0.998413R Square 0.996828Adjusted R Square 0.996735Standard Error 0.002604Observations 36
ANOVAdf SS MS F ignificance F
Regression 1 0.072459 0.072459 10685.95 4.52E-44Residual 34 0.000231 6.78E-06Total 35 0.072689
Coefficientstandard Erro t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 0.005173 0.000437 11.8283 1.34E-13 0.004284 0.006062 0.004284 0.006062X Variable 1 1.001567 0.009689 103.3729 4.52E-44 0.981877 1.021258 0.981877 1.021258
5 Year Regression Continued
98
SUMMARY OUTPUT 72 mo
Regression StatisticsMultiple R 0.186055R Square 0.034616Adjusted R Square 0.022843Standard Error 0.05705Observations 84
ANOVAdf SS MS F ignificance F
Regression 1 0.00957 0.00957 2.940321 0.090171Residual 82 0.266884 0.003255Total 83 0.276454
Coefficientstandard Erro t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 0.005356 0.006237 0.858717 0.393 -0.007051 0.017762 -0.007051 0.017762X Variable 1 0.262369 0.153009 1.714736 0.090171 -0.042013 0.566752 -0.042013 0.566752
SUMMARY OUTPUT 60 mo
Regression StatisticsMultiple R 0.200981R Square 0.040393Adjusted R Square 0.026685Standard Error 0.043478Observations 72
ANOVAdf SS MS F ignificance F
Regression 1 0.00557 0.00557 2.946563 0.090483Residual 70 0.132324 0.00189Total 71 0.137894
Coefficientstandard Erro t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 0.004671 0.005131 0.910335 0.36577 -0.005562 0.014903 -0.005562 0.014903X Variable 1 0.222307 0.129508 1.716556 0.090483 -0.035988 0.480602 -0.035988 0.480602
SUMMARY OUTPUT 48 mo
Regression StatisticsMultiple R 0.23799R Square 0.056639Adjusted R Square 0.040374Standard Error 0.043905Observations 60
ANOVAdf SS MS F ignificance F
Regression 1 0.006713 0.006713 3.482315 0.067087Residual 58 0.111803 0.001928Total 59 0.118516
Coefficientstandard Erro t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 0.005167 0.005671 0.911054 0.366038 -0.006186 0.01652 -0.006186 0.01652X Variable 1 0.299008 0.160232 1.866096 0.067087 -0.021731 0.619747 -0.021731 0.619747
7 Year Regression
99
7 Year Regression Continued
SUMMARY OUTPUT 36 mo
Regression Statistics Multiple R 0.233918 R Square 0.054717 Adjusted R Square 0.034168 Standard Error 0.043929 Observations 48 ANOVA
df SS MS F Significance
F Regression 1 0.005138 0.005138 2.662698 0.109555 Residual 46 0.088768 0.00193 Total 47 0.093906
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.005376 0.006678 0.805037 0.42494 -0.00807 0.018819 -0.00807 0.018819X Variable 1 0.444056 0.27213 1.631777 0.109555 -0.10371 0.991827 -0.10371 0.991827 SUMMARY OUTPUT 24 mo
Regression Statistics Multiple R 0.366151 R Square 0.134067 Adjusted R Square 0.108598 Standard Error 0.043027 Observations 36 ANOVA
df SS MS F Significance
F Regression 1 0.009745 0.009745 5.263999 0.028072 Residual 34 0.062944 0.001851 Total 35 0.072689
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95%
Lower 95.0%
Upper 95.0%
Intercept 0.007987 0.007272 1.098377 0.279758 -0.00679 0.022766 -0.00679 0.022766X Variable 1 0.842815 0.367345 2.294341 0.028072 0.09628 1.589351 0.09628 1.589351
100
SUMMARY OUTPUT 72 mo
Regression StatisticsMultiple R 0.186175R Square 0.034661Adjusted R Square 0.022889Standard Error 0.057048Observations 84
ANOVAdf SS MS F ignificance F
Regression 1 0.009582 0.009582 2.944264 0.089959Residual 82 0.266871 0.003255Total 83 0.276454
Coefficientstandard Erro t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 0.005399 0.006238 0.86549 0.389295 -0.007011 0.017809 -0.007011 0.017809X Variable 1 0.262588 0.153033 1.715886 0.089959 -0.041844 0.56702 -0.041844 0.56702
SUMMARY OUTPUT 60 mo
Regression StatisticsMultiple R 0.201315R Square 0.040528Adjusted R Square 0.026821Standard Error 0.043475Observations 72
ANOVAdf SS MS F ignificance F
Regression 1 0.005589 0.005589 2.956775 0.089937Residual 70 0.132305 0.00189Total 71 0.137894
Coefficientstandard Erro t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 0.004718 0.005132 0.919464 0.36101 -0.005516 0.014953 -0.005516 0.014953X Variable 1 0.222725 0.129527 1.719528 0.089937 -0.035608 0.481058 -0.035608 0.481058
SUMMARY OUTPUT 48 mo
Regression StatisticsMultiple R 0.238571R Square 0.056916Adjusted R Square 0.040656Standard Error 0.043899Observations 60
ANOVAdf SS MS F ignificance F
Regression 1 0.006745 0.006745 3.500356 0.066403Residual 58 0.111771 0.001927Total 59 0.118516
Coefficientstandard Erro t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 0.005233 0.00567 0.923057 0.359802 -0.006116 0.016582 -0.006116 0.016582X Variable 1 0.299731 0.160205 1.870924 0.066403 -0.020954 0.620415 -0.020954 0.620415
10 Year Regression
101
SUMMARY OUTPUT 36 mo
Regression StatisticsMultiple R 0.235122R Square 0.055282Adjusted R Square 0.034745Standard Error 0.043916Observations 48
ANOVAdf SS MS F ignificance F
Regression 1 0.005191 0.005191 2.691792 0.107688Residual 46 0.088715 0.001929Total 47 0.093906
Coefficientstandard Erro t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 0.005448 0.006659 0.81812 0.417507 -0.007956 0.018852 -0.007956 0.018852X Variable 1 0.446808 0.272333 1.640668 0.107688 -0.10137 0.994985 -0.10137 0.994985
SUMMARY OUTPUT 24 mo
Regression StatisticsMultiple R 0.366604R Square 0.134399Adjusted R Square 0.10894Standard Error 0.043018Observations 36
ANOVAdf SS MS F ignificance F
Regression 1 0.009769 0.009769 5.279046 0.027864Residual 34 0.06292 0.001851Total 35 0.072689
Coefficientstandard Erro t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 0.008104 0.007262 1.115971 0.27226 -0.006654 0.022862 -0.006654 0.022862X Variable 1 0.842868 0.366844 2.297618 0.027864 0.097351 1.588385 0.097351 1.588385
10 Year Regression Continued
102
Firm's Split split
No split adjusted split adjusted S&P500adjustment Raw Split closing adjusted closing monthly
Date close Dividend Factor price dividend return return1/1/2007 68.3 0.32 68.3 0.32 0.051809 0.0141
12/1/2006 65.24 65.24 0.002921 0.012611/1/2006 65.05 65.05 0.016883 0.016510/1/2006 63.97 0.32 63.97 0.32 0.035266 0.03159/1/2006 62.1 62.1 0.037421 0.02468/1/2006 59.86 59.86 0.009103 0.02137/1/2006 59.32 0.32 59.32 0.32 -0.004341 0.00516/1/2006 59.9 59.9 -0.007292 0.00015/1/2006 60.34 60.34 0.020636 -0.03094/1/2006 59.12 0.32 59.12 0.32 0.040981 0.01223/1/2006 57.1 57.1 0.048091 0.01112/1/2006 54.48 54.48 -0.007469 0.00051/1/2006 54.89 0.29 54.89 0.29 0.006016 0.0255
12/1/2005 54.85 54.85 0.006053 -0.001011/1/2005 54.52 54.52 0.029456 0.035210/1/2005 52.96 0.29 52.96 0.29 0.008714 -0.01779/1/2005 52.79 52.79 0.005524 0.00698/1/2005 52.5 52.5 -0.008311 -0.01127/1/2005 52.94 0.29 52.94 0.29 0.06652 0.03606/1/2005 49.91 49.91 -0.001201 -0.00015/1/2005 49.97 49.97 0.003615 0.03004/1/2005 49.79 0.29 49.79 0.29 -0.040061 -0.02013/1/2005 52.17 52.17 -0.014172 -0.01912/1/2005 52.92 52.92 0.007233 0.01891/1/2005 52.54 0.24 52.54 0.24 0.031665 -0.0253
12/1/2004 51.16 51.16 0.112416 0.032511/1/2004 45.99 45.99 0.030704 0.038610/1/2004 44.62 0.24 44.62 0.24 -0.007083 0.01409/1/2004 45.18 45.18 -0.163333 0.00948/1/2004 54 54 0.015038 0.00237/1/2004 53.2 0.24 53.2 0.24 -0.085714 -0.03436/1/2004 58.45 58.45 0.021853 0.01805/1/2004 57.2 57.2 -0.011748 0.01214/1/2004 57.88 0.24 57.88 0.24 0.054809 -0.01683/1/2004 55.1 55.1 -0.006312 -0.01642/1/2004 55.45 55.45 0.081529 0.01221/1/2004 51.27 0.24 51.27 0.24 0.029171 0.0173
12/1/2003 50.05 50.05 -0.046667 0.050811/1/2003 52.5 52.5 -0.012972 0.007110/1/2003 53.19 0.24 53.19 0.24 -0.044015 0.05509/1/2003 55.89 55.89 0.011035 -0.01198/1/2003 55.28 55.28 0.012454 0.01797/1/2003 54.6 0.24 54.6 0.24 -0.053667 0.01626/1/2003 57.95 57.95 -0.028011 0.01135/1/2003 59.62 59.62 0.042855 0.05094/1/2003 57.17 0.24 57.17 0.24 0.054555 0.08103/1/2003 54.44 54.44 0.082091 0.00842/1/2003 50.31 50.31 -0.011786 -0.01701/1/2003 50.91 0.18 50.91 0.18 -0.025558 -0.0274
12/1/2002 52.43 52.43 0.020237 -0.060311/1/2002 51.39 51.39 -0.065296 0.057110/1/2002 54.98 0.18 54.98 0.18 0.022428 0.08649/1/2002 53.95 53.95 -0.010999 -0.11008/1/2002 54.55 54.55 0.062317 0.00497/1/2002 51.35 0.18 51.35 0.18 0.02957 -0.07906/1/2002 50.05 50.05 -0.076568 -0.07255/1/2002 54.2 54.2 0.022449 -0.00914/1/2002 53.01 0.18 53.01 0.18 -0.069291 -0.06143/1/2002 57.15 57.15 0.0209 0.03672/1/2002 55.98 55.98 -0.020472 -0.02081/1/2002 57.15 0.18 57.15 0.18 -0.007273 -0.0156
12/1/2001 57.75 57.75 -0.010452 0.007611/1/2001 58.36 58.36 0.014604 0.075210/1/2001 57.52 0.18 57.52 0.18 -0.009442 0.01819/1/2001 58.25 58.25 0.075716 -0.08178/1/2001 54.15 54.15 -0.000923 -0.06417/1/2001 54.2 0.18 54.2 0.18 -0.078149 -0.01076/1/2001 58.99 58.99 0.04149 -0.02505/1/2001 56.64 56.64 0.014145 0.00514/1/2001 55.85 0.158 55.85 0.158 0.013536 0.07683/1/2001 55.26 55.26 -0.064183 -0.06422/1/2001 59.05 59.05 -0.017144 -0.09231/1/2001 60.08 0.158 60.08 0.158 -0.066801 0.0346
12/1/2000 64.55 64.55 0.098723 0.004111/1/2000 58.75 58.75 -0.00017 -0.080110/1/2000 58.76 0.158 58.76 0.158 0.248263 -0.00499/1/2000 47.2 47.2 -0.07342 -0.05358/1/2000 50.94 50.94 -0.085294 0.06077/1/2000 55.69 0.158 55.69 0.158 -0.067335 -0.01636/1/2000 59.88 59.88 0.137754 0.02395/1/2000 52.63 52.63 -0.078768 -0.02194/1/2000 57.13 0.158 57.13 0.158 0.016105 -0.03083/1/2000 56.38 56.38 0.080284 0.09672/1/2000 52.19 52.19 -0.119156 -0.02011/1/2000 59.25 0.158 59.25 0.158 #DIV/0!
12/1/1999
103
MRP10 MRP7 MRP5 MRP1 MRP3mo GS10 GS7 GS5 GS1 GS3mo0.01013 0.01013 0.01013 0.00985 0.00976 0.00393 0.00393 0.00393 0.00421 0.004300.00865 0.00866 0.00866 0.00840 0.00836 0.00397 0.00396 0.00396 0.00422 0.004260.01267 0.01268 0.01269 0.01235 0.01232 0.00380 0.00378 0.00378 0.00412 0.004140.02767 0.02769 0.02769 0.02733 0.02728 0.00383 0.00382 0.00382 0.00418 0.004230.02062 0.02066 0.02066 0.02039 0.02036 0.00394 0.00391 0.00391 0.00418 0.004210.01734 0.01737 0.01738 0.01713 0.01717 0.00393 0.00390 0.00389 0.00414 0.004110.00102 0.00106 0.00107 0.00085 0.00084 0.00407 0.00403 0.00402 0.00423 0.00424
-0.00416 -0.00412 -0.00411 -0.00426 -0.00415 0.00424 0.00421 0.00420 0.00435 0.00423-0.03518 -0.03515 -0.03514 -0.03522 -0.03502 0.00426 0.00423 0.00423 0.00430 0.004100.00790 0.00796 0.00799 0.00799 0.00812 0.00426 0.00419 0.00417 0.00417 0.004030.00694 0.00698 0.00701 0.00701 0.00716 0.00416 0.00412 0.00408 0.00408 0.00393
-0.00348 -0.00347 -0.00348 -0.00352 -0.00341 0.00393 0.00393 0.00393 0.00398 0.003860.02166 0.02167 0.02166 0.02157 0.02168 0.00381 0.00380 0.00381 0.00390 0.00378
-0.00464 -0.00459 -0.00458 -0.00466 -0.00457 0.00368 0.00364 0.00363 0.00371 0.003620.03146 0.03151 0.03153 0.03156 0.03188 0.00373 0.00368 0.00366 0.00363 0.00331
-0.02152 -0.02147 -0.02145 -0.02135 -0.02105 0.00378 0.00373 0.00371 0.00361 0.003310.00323 0.00330 0.00334 0.00347 0.00379 0.00372 0.00365 0.00361 0.00348 0.00316
-0.01472 -0.01462 -0.01456 -0.01443 -0.01413 0.00350 0.00340 0.00334 0.00321 0.002910.03242 0.03248 0.03253 0.03274 0.03303 0.00355 0.00348 0.00343 0.00323 0.00293
-0.00363 -0.00353 -0.00346 -0.00318 -0.00288 0.00348 0.00338 0.00332 0.00303 0.002740.02662 0.02674 0.02681 0.02715 0.02742 0.00333 0.00322 0.00314 0.00280 0.00253
-0.02356 -0.02339 -0.02332 -0.02288 -0.02253 0.00345 0.00328 0.00321 0.00278 0.00242-0.02273 -0.02258 -0.02245 -0.02188 -0.02148 0.00362 0.00347 0.00333 0.00277 0.002370.01515 0.01530 0.01543 0.01615 0.01657 0.00375 0.00361 0.00348 0.00275 0.00233
-0.02877 -0.02860 -0.02843 -0.02782 -0.02744 0.00348 0.00331 0.00314 0.00253 0.002150.02894 0.02915 0.02937 0.03007 0.03048 0.00352 0.00331 0.00309 0.00238 0.001980.03507 0.03532 0.03559 0.03637 0.03674 0.00353 0.00328 0.00300 0.00223 0.001850.01052 0.01078 0.01107 0.01193 0.01226 0.00349 0.00323 0.00294 0.00208 0.001760.00595 0.00624 0.00657 0.00751 0.00787 0.00342 0.00313 0.00279 0.00186 0.00149
-0.00115 -0.00084 -0.00051 0.00052 0.00089 0.00344 0.00313 0.00280 0.00177 0.00140-0.03786 -0.03754 -0.03718 -0.03597 -0.03554 0.00357 0.00325 0.00289 0.00168 0.001250.01424 0.01456 0.01491 0.01624 0.01686 0.00375 0.00343 0.00308 0.00175 0.001130.00814 0.00846 0.00881 0.01032 0.01101 0.00394 0.00363 0.00328 0.00177 0.00108
-0.02072 -0.02038 -0.02000 -0.01827 -0.01766 0.00393 0.00359 0.00321 0.00148 0.00087-0.01998 -0.01960 -0.01918 -0.01755 -0.01716 0.00363 0.00324 0.00283 0.00119 0.000800.00902 0.00945 0.00988 0.01122 0.01142 0.00319 0.00276 0.00233 0.00099 0.000790.01388 0.01428 0.01472 0.01624 0.01649 0.00340 0.00299 0.00256 0.00103 0.000780.04731 0.04772 0.04817 0.04973 0.05002 0.00346 0.00304 0.00260 0.00103 0.000750.00357 0.00397 0.00440 0.00604 0.00637 0.00356 0.00316 0.00273 0.00109 0.000760.05138 0.05179 0.05222 0.05384 0.05417 0.00358 0.00318 0.00274 0.00112 0.00079
-0.01552 -0.01507 -0.01460 -0.01299 -0.01273 0.00358 0.00313 0.00266 0.00104 0.000780.01431 0.01476 0.01522 0.01684 0.01707 0.00356 0.00312 0.00265 0.00103 0.000800.01252 0.01292 0.01342 0.01513 0.01542 0.00371 0.00330 0.00281 0.00109 0.000810.00801 0.00845 0.00893 0.01039 0.01056 0.00332 0.00288 0.00239 0.00093 0.000770.04812 0.04853 0.04901 0.05006 0.05012 0.00278 0.00237 0.00189 0.00084 0.000780.07807 0.07849 0.07894 0.08006 0.08014 0.00298 0.00256 0.00210 0.00098 0.000910.00506 0.00547 0.00592 0.00730 0.00740 0.00330 0.00289 0.00244 0.00106 0.00096
-0.02018 -0.01979 -0.01932 -0.01804 -0.01796 0.00318 0.00278 0.00232 0.00103 0.00096-0.03066 -0.03029 -0.02983 -0.02850 -0.02841 0.00325 0.00288 0.00242 0.00108 0.00099-0.06371 -0.06333 -0.06287 -0.06147 -0.06132 0.00338 0.00300 0.00254 0.00113 0.000990.05371 0.05404 0.05454 0.05586 0.05606 0.00336 0.00303 0.00253 0.00121 0.001010.08307 0.08342 0.08391 0.08521 0.08541 0.00338 0.00303 0.00254 0.00124 0.00104
-0.11331 -0.11297 -0.11248 -0.11140 -0.11137 0.00328 0.00295 0.00246 0.00138 0.001340.00166 0.00196 0.00243 0.00345 0.00350 0.00323 0.00292 0.00245 0.00143 0.00138
-0.08255 -0.08224 -0.08175 -0.08047 -0.08038 0.00355 0.00323 0.00274 0.00147 0.00138-0.07633 -0.07604 -0.07563 -0.07409 -0.07388 0.00388 0.00358 0.00318 0.00163 0.00143-0.01319 -0.01291 -0.01257 -0.01091 -0.01052 0.00411 0.00383 0.00349 0.00183 0.00144-0.06572 -0.06550 -0.06516 -0.06338 -0.06288 0.00430 0.00408 0.00374 0.00196 0.001470.03240 0.03256 0.03286 0.03467 0.03528 0.00434 0.00418 0.00388 0.00207 0.00146
-0.02517 -0.02505 -0.02472 -0.02291 -0.02229 0.00440 0.00428 0.00395 0.00214 0.00153-0.01967 -0.01950 -0.01916 -0.01743 -0.01704 0.00409 0.00393 0.00358 0.00186 0.001470.00337 0.00358 0.00396 0.00577 0.00617 0.00420 0.00399 0.00362 0.00180 0.001400.07093 0.07113 0.07152 0.07333 0.07374 0.00424 0.00405 0.00366 0.00185 0.001430.01422 0.01442 0.01479 0.01628 0.01651 0.00388 0.00368 0.00331 0.00182 0.00159
-0.08553 -0.08532 -0.08498 -0.08367 -0.08356 0.00381 0.00359 0.00326 0.00194 0.00183-0.06805 -0.06787 -0.06754 -0.06646 -0.06635 0.00394 0.00376 0.00343 0.00235 0.00224-0.01488 -0.01477 -0.01455 -0.01363 -0.01361 0.00414 0.00403 0.00381 0.00289 0.00287-0.02940 -0.02925 -0.02900 -0.02805 -0.02803 0.00437 0.00422 0.00397 0.00302 0.002990.00069 0.00081 0.00108 0.00211 0.00212 0.00440 0.00428 0.00401 0.00298 0.002980.07232 0.07245 0.07271 0.07366 0.07373 0.00449 0.00437 0.00411 0.00315 0.00308
-0.06849 -0.06840 -0.06817 -0.06752 -0.06751 0.00428 0.00419 0.00397 0.00332 0.00331-0.09637 -0.09636 -0.09616 -0.09587 -0.09607 0.00408 0.00407 0.00387 0.00358 0.003780.03039 0.03039 0.03056 0.03074 0.03046 0.00425 0.00425 0.00408 0.00390 0.00418
-0.00025 -0.00022 0.00000 0.00005 -0.00035 0.00430 0.00428 0.00405 0.00401 0.00441-0.08444 -0.08447 -0.08438 -0.08474 -0.08502 0.00437 0.00440 0.00431 0.00467 0.00495-0.00972 -0.00977 -0.00970 -0.01002 -0.01025 0.00477 0.00482 0.00475 0.00508 0.00530-0.05827 -0.05835 -0.05830 -0.05849 -0.05872 0.00478 0.00487 0.00482 0.00501 0.005240.05587 0.05572 0.05576 0.05559 0.05555 0.00483 0.00498 0.00494 0.00511 0.00515
-0.02120 -0.02138 -0.02139 -0.02149 -0.02157 0.00486 0.00504 0.00505 0.00515 0.005230.01889 0.01875 0.01878 0.01887 0.01882 0.00504 0.00518 0.00515 0.00507 0.00512
-0.02700 -0.02719 -0.02716 -0.02706 -0.02680 0.00508 0.00528 0.00525 0.00514 0.00488-0.03616 -0.03637 -0.03637 -0.03607 -0.03579 0.00537 0.00558 0.00558 0.00528 0.004990.09173 0.09149 0.09150 0.09159 0.09187 0.00499 0.00523 0.00522 0.00513 0.00485
-0.02532 -0.02553 -0.02552 -0.02529 -0.02499 0.00522 0.00543 0.00542 0.00518 0.00488-0.00543 -0.00560 -0.00557 -0.00518 -0.00478 0.00543 0.00560 0.00557 0.00518 0.00478-0.00555 -0.00558 -0.00548 -0.00510 -0.00458 0.00555 0.00558 0.00548 0.00510 0.00458
104
Amount Weight Rate Weighted AverageCurrent Liabilities Notes and Loans Payable 141.7 1.67% 4.20% 0.0703% Current Portion of Long-Term Debt 776.7 9.17% 6.00% 0.5501% Accounts Payable 1039.7 12.27% 4.20% 0.5155% Accrued Income Taxes 161.5 1.91% 4.20% 0.0801% Other Accruals 1317.1 15.55% 4.20% 0.6530%
3436.7 40.57%Long-Term Debt Notes 1931.4 22.80% 6% 1.3679% Payable to Banks 688.7 8.13% 4.70% 0.3821% ESOP notes, guaranteed by company 192.1 2.27% 8.80% 0.1996% Commercial Paper 651.6 7.69% 4.20% 0.3231% Capitalized leases 33.3 0.39% 4.20% 0.0165%
3497.1 41.28%Defferred Income Taxes 309.9 3.66% 6% 0.2195%Other liabilities 1227.7 14.49% 6% 0.8695%
Total debt 8471.4 100.00% 5.2471%
Cost of Debt
ROE (2006) 0.9592PPS 67.07 g 0.176BPS 2.32
M/B 28.90948M/B-1 27.90948
M/B-1*g 4.912069add ROE 4.711657
divide by M/B 0.16298 ke = 16.3%
Backed into Ke
WACC WACC 5.52% Vd 7727 Ve 1411 Kd 0.0525 Ke 0.163
Tax rate 0.324 From colgate 10-k 2006
105
Works Cited
1. Colgate-Palmolive Website: www.colgate.com
2. Yahoo Finance Website: www.finance.yahoo.com
3. CNN Money Website: www.money.cnn.com
4. Procter-Gamble Website: www.pg.com
5. Clorox Co. Website: www.thecloroxcompany.com
6. Kimberly Clark Website: www.kimberly-clark.com
7. Palepu, Healy, and Bernard. Business Analysis & Valuation. Australia:
Thompson Southwestern, 2004.
8. Church and Dwight Website: www.churchdwight.com
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