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CFA Institute Research Challenge

Hosted By: NYSSA Team O

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NYSSA Student Research

This report is published for educational

purposes only by students competing in the

CFA Institute Research Challenge.

January 16, 2014 Colgate Initiation Team O

Initiating coverage of Colgate-Palmolive with a BUY

Strong growth presents a positive outlook, current valuation creates

upside potential. We are initiating coverage on Colgate Palmolive with a buy

rating, with a price target of $75.00, representing a 16% upside from the current

price. Colgate Palmolive continues to exhibit strong growth overseas with 80%

of sales coming from outside the United States. This bodes well for the

company’s outlook, with sales growth of 9% and profit growth of nearly 5%

expected over the next 2 years. We believe that at current levels, Colgate

Palmolive still has upside potential, which we believe is justified using a

blended historical multiples, comparable company multiples, and discounted

cash flow analysis valuation.

Maximizing shareholder value continues to be a top priority. Colgate

Palmolive has consistently focused on returning value to shareholders through

dividends, share repurchases, as well as M&A activity. Currently Colgate has

a dividend payout ratio of 47%, lagging its peer group, which sits closer to

50%. We believe this supports an increased dividend above profit growth

moving forward, as strong cash generation and a strong balance sheet allow

Colgate Palmolive to move their payout ratio closer to that of their peers.

Additionally, Colgate Palmolive has purchased shares in every quarter since

2002, and is currently in the middle of a repurchase plan of 40 million shares.

Based on the current rate of approximately 5 million shares per quarter, the

current plan is expected to expire in mid-2015. However based on repurchase

activity over the last 12 years, we feel that it is reasonable to expect another

repurchase plan that will meet the current rate of buying. Finally, Colgate has

strategically acquired household names that will complement their current

portfolio. Sanex was the last significant acquisition, and the company is

consistently pursuing names that add value at a discounted price.

FY13 Outlook: We expect FY13 sales to increase 2.3% to $17.5B, fueled by

growth in product expansion and competitive advantage over other companies.

Gross margin is expected to increase 70 bps to 59.0%. SG&A expenses as a

percent of sales are expected to increase to 40 bps 35.0% in FY13 from 34.6%

last year. EBT margin is expected to expand 30 bps in FY13 to 23.8%. Net

margin is expected to come in relatively flat, expanding only 20 bps in FY13

when compared to last year’s 15.1%. We estimate EPS of $2.85 for FY13,

$3.15 for FY14 and $3.37 for FY15.

Consumer Sector

BUY

$75.00

Trading Data:

Last Price (1/15/2014) $64.78

52–Week High $66.49

52–Week Low $52.88

Market Cap. (B) $59.5

Shares Out. (MM) 936.9

3 Month Avg. Vol. (MM) 2.958

Earnings Estimates: ($ per share)

(Dec) Q1 Q2 Q3 Q4 FY

FY15E 0.78E 0.82E 0.86E 0.91E 3.37E FY14E 0.74E 0.78E 0.80E 0.84E 3.15E FY13E 0.66A 0.70A 0.73A 0.76E 2.85E FY12A 0.62 0.67 0.69 0.70 2.68

12 Month Valuation:

Valuation Bear Base Bull

Historical

Multiples $61.73 $68.59 $75.45

Comparable

Company $67.02 $74.46 $81.91

Discounted

Cash Flow $72.69 $80.77 $88.85

Consolidated

Valuation $67.15 $74.61 $82.07

NYSSA Equity Research – January 16, 2014

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Colgate-Palmolive (CL – $64.78)

Company Description: 52–Week Price Performance:

Colgate-Palmolive is a 200 year-old American consumer

products company with a focus on manufacturing,

packaging, and distributing oral, household, healthcare, and

pet goods. The company is well known for providing

innovative products that are competitively priced and

targeted toward multiple demographic segments. They

currently operate in over 200 countries and derive 80% of

their revenue from outside of the United States. Colgate

currently employ 37,700 people

Company: Colgate-Palmolive High (5/22/2013): $66.49

Low (12/05/2013): $52.88

Ticker: CL Last (12/18/2013): $64.30

Exhibit 1: Cash Flow: ($MM)

Investment Thesis Highlights:

(Dec) Beg CF-O CF-I CF-F End 2012 Restructuring will help push the company to

new heights

Positive management outlook into 2014

Margin expansion is expected to continue due to

cost saving efforts by the firm

Aggressive EPS growth due to an active buyback

program

Dividends continually increase, and a potential

pay-out ratio to increase from 47% to 50%

Global expansion and product innovation

FY15E $1882.3 $3,955.5 -$758.7 -$2,592.8 $2,456.2

FY14E 1,195.0 3,796.4 -724.5 -2,354.6 1,882.3

FY13E 884.0 3,099.0 -642.3 -2,115.7 1,195.0

FY12A 878.0 3,196.0 -865.0 -2,301.0 884.0

Exhibit 2: Balance Sheet Items: ($MM)

(Dec) Cash Debt Inventory

FY15E $2,456.2 $6,229.1 $1,407.5

FY14E 1,882.3 5,856.8 1,362.1

FY13E 1,195.0 5,406.7 1,366.4

FY12A 884.0 4,926.0 1,365.0

Exhibit 3: FINANCIAL SUMMARY — Non-GAAP

($MM except per share data and where indicated)

Gross EBT Tax Net

EPS WASO (Dec) Revenue Profit Margin Profit Margin Expense Rate Profit Margin

FY15E $19,018.5 $11,546.0 60.7% $4,821.9 25.4% $1,543.0 32.0% $3,118.9 16.4% $3.37 923.9

FY14E 18,218.5 11,013.0 60.4% 4,544.3 24.9% 1,454.2 32.0% 2,930.1 16.1% 3.15 927.9

FY13E 17,484.0 10,307.7 59.0% 4,177.2 23.9% 1,327.0 31.8% 2,678.2 15.3% 2.85 933.9

FY12A 17,085.0 9,963.0 58.3% 4,008.0 23.5% 1,275.0 31.8% 2,574.0 15.1% 2.68 960.2


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Final Rating: 2.8

Threat of New Entrants

Bargaining Power of Buyers

Threat of Substitute Products

Bargaining Power of Suppliers

Competition in the Industry

Third Quarter - 2013

Due to a multitude of management initiatives, growth continued to spur

in 3Q2013. A newly implemented 2-for-1 stock split has now been utilized,

cutting share price and making the company more affordable to investors.

Share repurchases and restructuring has proven in the past to be beneficial, and

it continues to show positive results. Global market share in toothpaste and

manual toothbrushes continue to improve, and hold a significant amount of the

World’s share of customers, representing 45% and 33.4%, respectively.

Mouthwash, which has not been their main driver, continues to improve and

they now hold 16.8% of total market share of the product.

New products are being heavily invested in directly and indirectly, both

through advertisement and other SG&A costs. Colgate has an extensive

worldwide pipeline of new products, and the continued effort of their

marketing team and global outreach programs will help Colgate get the

recognition, and more importantly, the sales that they want to achieve. The

restructuring initiative has gone smoothly thus far, and the results posted for

3Q2013 has led to company to reaffirm its belief in long-term prosperity,

remaining on track to meet their FY13 goal of 4.5%-5.5% EPS growth.

Net sales increased 1.5% to $4,398.0MM, versus $4,332.0MM, primarily

attributed to the emerging markets which showed organic sales growing

by an aggressive 9.5%. Gross profit expanded 40 basis points to 59.0%, a new

all-time high, versus 58.6%. This expansion was due primarily to higher price

points and the cost-savings associated with the “Funding-the-Growth”

initiative, far offsetting the foreign exchange impact on raw and material

packaging costs. SG&A as a percentage of sales increased 40 bps to 35.0%,

versus 34.6% last year. This was a result of increased worldwide

advertisement, growing by approximately 6% to $478.0MM. EBT margin

remained relatively flat, which saw expansion of only 10 bps to 23.9%, versus

23.8%. Net Income and EPS increased 2.9% and 5.2%, respectively, to

$680.0MM and $0.73, versus $661.0MM and $0.69, due to the aforementioned

cost-saving measures and increased price points.

A Strong Emerging Environment

Competitors present threats, however market for new participants is

limited. Product launches worldwide from competitors is a continuous risk in

a market that is driven largely by market share. However, due to brand

recognition and relative customer loyalty, there is virtually no market available

to new participants. The major players have the ability to outspend, out market,

and better innovate their products than any new competition.

Population growth will fuel demand in emerging markets. India and China

are the two of the most populous countries in the world with 1.2 billion and 1.3

billion people, respectively. If over the long-term Colgate were able to increase

its market share by 10% in these countries, it would be the equivalent of

Exhibit 4: Porter’s 5-Forces Model

Exhibit 5: 3Q13 Common-size Income Statement

Exhibit 6: China’s share of global middle class (2000vs2030)

Source: Team Efforts

Source: Company Statements


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capturing one third of the current US market in terms of population.

Additionally, the Chinese government recently lifted its one child policy. This

legislation should fuel population growth further, providing a larger potential

customer base.

Marketing hygiene to Emerging Market countries is paramount to

continued global growth. Currently only 10% of the population in Taiwan,

8% of the population in China, and 5% of the population in India uses

deodorant. Marketing personal hygiene has been successful in these markets

with the Protex brand, an antibacterial body wash sold in Emerging Markets.

The personal hygiene market has strong growth ahead of it in hopes that it will

eventually reach the hygiene levels of developed countries.

Middle class expansion in Emerging Markets poised to jumpstart

specialty products growth. Colgate Palmolive has already seen Emerging

Market demand for specialty products such as the Colgate 360 product line in

China. As Brazil, India, China, and other Emerging Markets grow their middle

class; the expectation is that the specialty products market will continue to

accelerate. These economies will make up the majority of middle class demand

worldwide in the future.

The end of Quantitative Easing in the US and continued international

easing create a difficult currency environment. The US dollar is expected

to continue to strengthen as the United States economy accelerates going into

2014 and 2015. Additionally, the Federal Reserve announced the reduction of

its monthly bond purchases by $10 billion per month in December, ultimately

creating a stronger US dollar. Globally, the European and Japanese markets

continue to loosen monetary policy in order to drive growth, and in Japan’s

case, inflation. This will result in a decline in growth from foreign currency

exchange rates.

Product and Geographic Segment Expansion

The Colgate brand name remains the staple of the company, and despite

dominant market share, growth is expected to continue. Colgate holds 45%

market share worldwide in the toothpaste market driven by its household name.

Penetration in emerging markets before they begin to develop has resulted in

Colgate being a world leader in this segment. Share in Latin America is

saturated, with Colgate controlling nearly 70% of the market; however markets

such as China present opportunities for expansion with a current market share

of 35%.

Developed markets show promise with increased product innovation. The

biggest opportunity for Colgate within the developed markets is the launch of

the Optic White line, which encompasses toothpaste, toothbrushes, and

mouthwash. These products are considered specialty products and as a result

carry a higher selling price. Colgate’s marketing is essential, as it attempts to

convince consumers that these are necessary products. Additionally, Colgate

Exhibit 7: India’s rising middle-class population

Exhibit 8: Share of Middle Class Consumption

Exhibit 9: Geographical Revenue Breakdown

Source: Financial statements and Team Estimates


6

Sells laundry detergent

business in Colombia to

Univlever

Deal Size: $215MM

Acquires Sanex, a strong multi-

category personal care

brand

Deal Size: $940MM

has begun to heavily market mouthwash, as it is underused in comparison to

emerging markets. With the Optic White and the Colgate Advanced Total

mouthwash, Colgate is pushing consumers to add mouthwash to their daily

regiment, which will result in renewed growth in developed markets.

Tailored products and market share gains combine to fuel emerging

market growth. Colgate has consistently tailored its products to specific

regions, which has helped fuel growth in emerging markets. Examples include

green tea toothpaste in China, and anti-cavity preferences in Russia. These

regional marketing strategies have resulted in strong market share gains and

brand loyalty worldwide, as the Colgate brand is used in 65% of household’s

worldwide.

Irish Spring and Speed Stick, both remain iconic brands, but customer

loyalty is sometimes questioned. Sanex acquisition increases hygiene

products such as soap and deodorant hold much less customer loyalty. This

stems at least in part from higher product innovation and viral marketing.

Although Irish Spring and Speed Stick remain staples for users, it is harder for

Colgate to create a firestorm for these products. The global market, however,

continues to expand as deodorant and soap are less commonly used in

emerging countries. The acquisition of Sanex from Unilever in 2011 adds to

Colgate Palmolive’s lineup of specialty high end products, and increases its

European exposure in this segment.

Home care market stable and brand portfolio is strong. Colgate Palmolive

commands the top brands worldwide in this market including Palmolive,

Murphy’s oil, and the Paic brand in Europe. These products however will see

slower growth as the market is saturated, and value brands attempt to take

market share. In addition, consumers are adopting the adage “less is more”

which has translated into volume declines across the product lines.

Expect Hills Pet Nutrition revamp as product innovation overcomes

misinterpreted consumer expectations. The last few years have been

difficult for the Hills brand, as the company has failed to execute on product

launches stemming from customer dissatisfaction with the name. Hills

attempted to increase prices and break into the natural foods market, both of

which proved negative to growth and the brands reputation. As Colgate

Palmolive has worked hard to remarket the brand, growth is now expected to

accelerate with a redesigned Science Diet product, and renewed customer

loyalty regarding the slogan “What Vets Feed their Pets.”

Future Outlook

Continuing share buybacks and dividend increases return value to

shareholders. Colgate has repurchased shares every quarter since 2002, and

currently has approval for the repurchase of 40 million shares. Additionally,

dividends have increased at a 7-year growth rate of 11.9%. We expect Colgate

to continue to increase its dividend moving forward. The company currently

Exhibit 10: Continual Pursuit of Better Business

Source: Company Website

Exhibit 11: Pet Nutrition Market Share Expansion


Exhibit 12: Forefront of Colgate


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has a payout ratio of 47%. Peers such as Proctor and Gamble however have a

payout ratio of 50%. As a result of this as well as strong growth, we expect

Colgate to increase its payout ratio to more comparable levels by 2016, which

will result in even more value added to shareholders. The company has proved

that returning value to shareholders is a top priority, and with FCF expected to

grow 7% this should continue.

Cost savings from restructuring expected to create margin expansion.

Colgate Palmolive is in the midst of its 2012 restructuring plan, with

projections of $275.0MM to $325.0MM savings annually through 2016, with

cumulative savings to amount to $775MM – $875MM. This aftertax savings

will go towards reinvesting in the future of the company, particularly in brand

performance and product innovation. The forefront of the restructuring efforts

is going toward efficient regional office fruition and an overhaul of the global

supply chain and facility to operate at an optimal level.

Colgate-Palmolive has strong statements with low levels of debt and will

continue this way. Debt currently makes up only about 75% of the firm’s

capital structure, with nearly 30 notes outstanding. The firm only issues small

notes, with none that have a principal of $1.0B or more and currently have

$6.1B outstanding. We expect their debt levels to remain relatively flat, as

they have multiple notes maturing during 2014 and 2015. We also do not

believe the company will undertake any acquisitions, but will instead rely on

organic sales growth, which they can safely fund through cash. If Colgate does

need to issue debt they should be able to do so, they have a strong credit rating

of AA. However, we do believe that they will hold off issuing debt and instead

use cash to grow organically.

Cash conversion has begun to normalize after an abnormally high period

due to the recent recession. Inventory payable, which represents how fast a

company converts its inventory into sales, jumped nearly 4 extra days to

convert inventory into sales. Consequently, the cash cycle also increased by 4

days. Calculated by adding days receivable with inventory receivable, minus

days payable, the cash cycle is expected to decrease to 73.5 days by 2015.

Management has given guidance to analysts for their full year

expectations of 2013. For the full year, we are expecting revenue to increase

2.3% to $17.5B from $17.1B last year, driven primarily by the Greater Asia

and Africa region. Gross profit is expected to grow 3.5% to $10.3B, or 59.0%

of sales, from $9.7B, or 58.3% of sales, representing an expansion of 70bps.

SG&A as a percent of sales is expected to increase by 40 basis points due to

increased costs and expenditures in advertisement of new products into

emerging and developed markets. Adjusted for restructuring and other one-

time expenses, net income is expected to increase to $2.7B, or 15.3% of sales,

from $2.6B, or 15.1% of sales, which represents a roughly 4% increase.

Revenue poised from continued growth, with a CAGR of 3.1% from 2008

– 2015. We expect 2015 sales to be impressive, with strong sales coming from

product expansion and successful geographic penetration. Latin America is

expected to be a key player in the future success of Colgate, with growth rates

Exhibit 13: Dividend and Y-o-Y growth

Source: Company Financial Statements

Exhibit 14: Cash Conversion Cycle

Source: Team Estimates and Calculation

Source: Company Financial Statements and Team Estimates

Exhibit 15: Yearly Revenue and CAGR


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touching high-single-digit ranges. A change in the business model has

provoked management to increase their efforts in the Latin America region,

resulting in higher focus and a larger portion of total sales coming from the

segment. In addition to Latin America, population and middle-class growth

will lead to more persons with the cash needed for hygienic products. The

emergence of the middle-class in the developing worlds is a large focus for

Colgate, and it is beneficial to both the top-line as well as their mission to serve

the global community.

Strong management initiatives will lead to an increased effort of

decreasing costs of their operation through programs such as “Funding

the Growth”. Gross margin will break another margin record in the coming

years. Colgate for the first time will break their gross margin record and retain

over 60% of all of it sales after the initial deduction of the cost of goods sold.

Gross margins will continue expanding due to 2 main reasons: “Funding the

Growth” and an intricate pricing model. Funding the growth is global initiative

by Colgate where they seek pretax savings in all key areas of their business.

This initiative not only adds value to the firm, but is key to retain business. For

example, to provide better service to customers in the Pacific Northwest,

Colgate initiated the opening of a sustaining distribution center in Portland,

Oregon. Not only did the creation of the facility help satisfy their customer’s

needs, but it also provided Colgate with lower transportation costs and Carbon

dioxide (CO2) emissions. Funding the growth contributes roughly $400MM -

$700MM each year. Additionally, the improved pricing model gives

management a better understanding of how to keep competitive prices while

keeping the health and the value of the brand up. The higher pricing is

inversely related to the unit volume growth, meaning, the larger the volume,

the higher the margins.

The bottom-line is that investors will be rewarded by Colgate. Net income

is growing at a CAGR of just about 6.0% with no signs of slowing. This is

primarily due the aforementioned cost-saving measures as well as revenue

growth far outpacing COGS growth. Colgate has taken measures to ensure that

they are increasing efficiency and productivity of their entire operations, from

cash conversion to net income. Net income for 2014 and 2015 are expected to

grow to $2.9B and $3.1B, respectively. This represents a 9.4% and a 6.4%

increase on a year-over-year comparison. EPS excluding restructuring costs

and one-time items are also expected to increase, and more dramatically, due

to higher net income and lower diluted shares as a result of an active buyback

program by management. Anticipated EPS for 2014 is $3.15, 10.6% increase

from $2.85 in 2013. 2015 is expected to grow 6.9% from its levels in 2014 to

$3.37. CAGR for 2008 – 2015 is around an impressive 8.3%


Exhibit 16: Gross Margin Expansion


Exhibit 17: Net Income and CAGR


Exhibit 18: EPS and CAGR


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Valuation

PV of UFCF $24,487.7

PV of TV $54,432.7

Enterprise Value $78,920.3

Net Debt $3,974.5

Equity Value $74,945.9

Diluted Shares 927.9

Current Price $64.30

Implied Valuation $80.77

% Upside 25.61%

WACC Calculation

Cost of Equity 8.43%

Beta 0.49

Risk Free Rate 3.66%

Risk Premium 9.68%

Cost of Debt 2.00%

% Equity 91.00%

% Debt 9.00%

WACC 7.85%

Sensitivity of Share Value

Growth Rate

$80.77 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5%

6.4% $79.91 $85.62 $92.51 $100.99 $111.67 $125.53 $144.26

6.9% $75.36 $80.19 $85.94 $92.86 $101.38 $112.11 $126.03

7.4% $71.47 $75.62 $80.48 $86.25 $93.21 $101.76 $112.54

7.9% $68.11 $71.72 $75.89 $80.77 $86.56 $93.55 $102.15

8.4% $65.18 $68.34 $71.96 $76.15 $81.06 $86.88 $93.90

8.9% $62.60 $65.40 $68.57 $72.21 $76.42 $81.34 $87.19

9.4% $60.32 $62.81 $65.61 $68.80 $72.45 $76.68 $81.63

WA

CC

Valuation

Discounted Cash Flow

EBIT is expected to continue growth into 2020, due to high sales and

higher margins, although we are cautious and believe it may be slightly

less aggressive growth. EBIT is growing 4.5% every year from 2017 – 2020,

slightly less than the 6-8% range in the 3 years prior. As the developing markets

and the middle-class begin to mature, the sales of Colgate-Palmolive should

see continued success in the sales department. Furthermore, cost cutting efforts

provided by have been stated work, both on a strategic pricing level, and on an

effective initiative effort.

The WACC is composed of the cost of equity and cost of debt, which hold

about 91% and 9% of the capital structure, respectively. Cost of equity is

calculated by the risk free rate plus the equity risk premium multiplied by the

beta. Our risk-free rate, the 20-year treasury, was 3.66%. The return of the

market that we used was 13.34%, giving us a risk premium of 9.68%. Beta was

calculated using the returns of the market versus the returns of Colgate-

Palmolive, leading to a value of .49. This yielded a cost of equity of 8.43%.

The cost of debt was taken from Bloomberg actual computation, yielding us a

cost of debt of 2%. When weighted with our capital structure, this gave us a

WACC of 7.85%.

The present value of free cash flow is calculated by multiplying the

discount factor by projected free cash flow. Furthermore, you use your

perpetual growth rate, 2%, to project your terminal value, and then discount it

back to present value terms using the last projected years discount factor. Then,

adding together the sum of the present value of all free cash flow, plus the

present value of the terminal value, minus your net debt, you are left with your

intrinsic value. When you divide it by your projected diluted shares, you are

left with your implied target price. Our DCF yielded an implied target price of

$80.77, representing a potential 26% upside. Using a sensitivity table, we find

the range of potential price targets if perpetual growth rate or the WACC would

change. Both WACC and perpetual growth rate deviate by 50 bps.

Historical Multiples

The historical multiple valuation uses the P/E and EV/EBITDA metric,

both of which are equally weighted for this valuation method. Price to

Exhibit 19: FCF Equation

Source: Bloomberg and U.S. Treasury

Exhibit 20: WACC Structure and Calculation


Exhibit 21: Discounted Cash Flow Valuation

Exhibit 22: Sensitivity of Value per Share


10

Comparable Valuation

EV/EBITDA $79.12

P/E $69.81

Consolidated Valuation $74.46

Upside: 15.8%

Market Valuation NTM Financial NTM Financial Margins NTM Multiples

Ticker Market Enterprise Net EBITDA EBIT Net Income EV/ Price/

Cap Value Sales EBITDA EBIT Income (%) (%) (%) EBITDA Earnings

Mean $69.72B $77.76B $26.32B $6.00B $4.13B $2.94B 15.6% 12.3% 8.4% 14.8X 22.1X

Median $34.12B $36.57B $10.55B $2.71B $1.55B $1.02B 16.8% 12.8% 10.0% 15.1X 20.6X

Max $218.93B $244.53B $84.17B $18.41B $15.42B $11.31B 21.9% 18.3% 13.4% 17.5X 28.6X

Min $7.40B $9.39B $5.62B $0.54B $0.31B -$0.04B 5.1% 2.9% -0.4% 12.6X 19.7X

Metric Multiple Weight FY2014E BEAR FY2014E BASE FY2014E BULL

P/E 21.8X 50.0% 30.87 34.30 37.73

EV/EBITDA 13.2X 50.0% 30.87 34.30 37.73

Total 100.0% $61.73 $68.59 $75.45

earnings has continued to expand, with price appreciation far outpacing EPS

producing, and considering EPS has done remarkably well, P/E will continue

to do well with it. EV/EBITDA has also expanded rapidly, with enterprise

value growing at a CAGR of nearly 13% historically from 2008, and should

continue to grow at about 10% for the next two years.

P/E and EV/EBITDA is going to experience large expansions from its

historical averages. P/E historical 5-year average is at about 17.0X, and we

expect it to expand to 21.8X in 2014. EV/EBITDA historical 5-year average is

at about 10.7X, and we expect it to expand into to 13.2X in 2014. We calculate

our historical comp valuation as follows: Using projected metrics, we arrived

at a price target of $68.59

Comparable Companies

The competitors that were selected are within consumer staples industry

and have relatively similar size. Each company has multiple consumer

segments in which they generate revenue from, which parallel Colgate. The

largest of the competitors, Proctor and Gamble, has a significantly larger

market capitalization at $219.0B. On the other end of the spectrum, Kimberly

Clark is a more direct competitor with similar market capitalization of 40

Billion. Due to the combination of varying size companies in the consumer

staples sector, the industry is adequately described through the use of these

competitors.

Proctor and Gamble, its relatively large competitor, has much different

revenue segments. For example, P&G has roughly 61% of their revenue from

developed markets, whereas Colgate is heavily invested in developing

countries. P&G also receives 39% of their revenue from North America,

whereas Colgate generates 80% of their sales from locations outside of the

United States. Due to the fact that P&G is so large, their strategy is to focus

on maintaining market share instead of rapid growth, which is a focus on

Colgate within emerging markets.

Using both a P/E and EV/EBITDA ratio, we used the mean competitor

multiples to derive a price target. Mean P/E for the comparable companies

stood at 22.1X, while mean EV/EBITDA for the comparable companies stood

at 14.8X. We arrived at a price target of $74.46

Exhibit 23: Historical Multiple Valuation

Source: Team Estimates & Calculation

Exhibit 24: Comparable Comps Valuation

Source: Team Calculation

Exhibit 25: Comparable Comps Statistics

Source: Bloomberg and Company Website


11

Consolidated Valuation 2014 Bear 2014 Base 2014 Bull

DCF $72.69 $80.77 $88.85

Historical $61.73 $68.59 $75.45

Comps $67.02 $74.46 $81.91

Weighted $67.15 $74.61 $82.07

Consolidated Valuation

All things considered, an equally weighted valuation was used to

consolidate the three valuation methods. All were relevant to future growth

prospects and multiple expansion, justifying a strong growth in the short- and

long-term life of the investment. We are reiterating a BUY for Colgate-

Palmolive, ticker CL, with a price target of $75.

Risks Associated with Colgate-Palmolive

Venezuela

February 2013 the government of Venezuela devalued its currency, which will

adversely affect our business and results of operations for 2013

In 2010, the results of operations were adversely impacted by the designation

of Venezuela as hyperinflationary and the subsequent currency devaluations in

Venezuela in that year

International Sales

80% of Net Sales originate outside of the US

ForEx rates on international currency may have negative effects on revenue

Political or economic instability, social or labor unrest or changing

macroeconomic conditions in our markets

Volatility

Raw materials and packaging materials such as resins, tropical oils, essential

oils, tallow, poultry, corn and soybeans are subject to wide price variations

Increase in costs and availability of commodities as well as the cost of energy,

transportation, and other services can impact profit margins if higher pricing

cannot be achieved for Colgate goods

Exhibit 26: Consolidated Company Graph

Exhibit 27: Consolidated Company Valuation




12

Appendix

Financial Statements

Revenue Growth Model..…………………………………………………………………………………………………………………13

Income Statement

Projected Income Statement – Quarterly.……………………………………………………………………….…………14

Margin Expansion and EPS Growth – Quarterly……..…………………………………………………………………..15

Projected Income Statement – Yearly….…………………………………………………………..………………………..16

Balance Sheet

Key Ratio Analysis………….………………………………………………………………………………………………………..…17

Balance Sheet Assumptions……………………………………………………………………………………………………….18

Projected Yearly Balance Sheet..………………………………………………………………………………………………..19

Projected Yearly Cash Flow…………………………………..………………………………………………………………………….20

Valuation

Discounted Cash Flow

Discounted Cash Flow Analysis…………………………………………………………………………………………………..21

Discounted Cash Flow Sensitivity……………………………………………………………………………………………….22

Historical Multiple……..…………………………………………………………………………………………………………………….23

Comparable Companies…….…………………………………………………………………………………………………………….24

Consolidated Valuation & Share Price Potential…………………………………..………………………………………………….25

Supplemental Information

Porters 5-Forces Model…..……………………………………………………………………………………………………………….26

In-depth DuPont Analysis……..………………………………………………………………………………………………………….27

Market Share Analysis

Oral Care & Personal Care………………………………………………………………………………………………………….28

Home Care & Pet Food……………………………………………………………………………………………………………….29

Management….………………………………………………………………………………………………………………………………..30

Disclosure….……………………………………………………………………………………………………………………………………..31


13

Source: Company Statements & Team Estimates

Appendix 1: Revenue Growth Model


14


Appendix 2A: Projected Income Statement - Quarterly


15


Appendix 2B: Margin Expansion and EPS Growth - Quarterly


16


Appendix 2C: Projected Income Statement - Yearly


17

Source: Bloomberg & Team Estimates

Appendix 3A: Key Ratio Analysis


18


Appendix 3B: Balance Sheet Assumptions


19


Appendix 3C: Projected Yearly Balance Sheet


20


Depreciation and CapEx

Revenue $15,329.8 $15,326.8 $15,564.0 $16,734.0 $17,085.0 $17,484.0 $18,218.5 19018.4904

Capex 684.0 575.0 550.0 537.0 565.0 699.4 728.7 760.7

Additions as a % of Sales 4.5% 3.8% 3.5% 3.2% 3.3% 4.0% 4.0% 4.0%

Amortization 87.0 (15.0) 93.0 232.0 102.0 125.9 131.2 136.9

Amortization as % of CapEx 12.7% -2.6% 16.9% 43.2% 18.1% 18.0% 18.0% 18.0%

Depreciation 261.0 366.0 283.0 189.0 323.0 349.7 364.4 380.4

Depreciation as % of CapEx 38.2% 63.7% 51.5% 35.2% 57.2% 50.0% 50.0% 50.0%

Debt Payments and Proceed Growth

Debt Payments and Proceed Growth ($2,320.0) ($3,950.0) ($4,719.0) ($4,429.0) ($5,011.0) ($5,462.0) ($5,789.7) ($5,992.3)

Growth % N/A 70.3% 19.5% -6.1% 13.1% 9.0% 6.0% 3.5%

Debt Payments and Proceed Growth $2,515.0 $3,424.0 $5,015.0 $5,843.0 $5,452.0 $5,942.68 $6,239.81 $6,364.61

Growth % N/A 36.1% 46.5% 16.5% -6.7% 9.0% 5.0% 2.0%

Appendix 4: Projected Yearly Cash Flow


21

Source: Bloomberg, Company Statements, & Team Estimates

Appendix 5A: Discounted Cash Flow Analysis


22

Source: Team Calculation

Appendix 5B: Discounted Cash Flow Sensitivity


23

Source: Bloomberg, Company Statements, & Team Estimates

Appendix 6: Historical Multiple


24

Source: Bloomberg, Company Statements, Team Estimates

Appendix 7: Comparable Companies


25

Source: Yahoo! & Team Estimates

Appendix 8: Consolidated Valuation and Share Price Potential


26

Final Rating: 2.8

Threat of New Entrants

Bargaining Power of Buyers

Threat of Substitute Products

Bargaining Power of Suppliers

Competition in the Industry

Source: Team Assumptions

Appendix 9: Porters 5-Forces Model

Threat of New Entrants (1)

1. Extremely high barrier to entry

2. Large Economies of Scale

3. Capital intensive R&D

4. Extensive regulation for products

Bargaining Power of Suppliers (1)

1. Multitude of suppliers worldwide

2. Existence of long term contracts

3. Significant long term supplier relationships

Bargaining Power of Buyers (5)

1. Diversified global demand

2. Competitive pricing may give buyers the edge

3. 80% of sales originate outside of the United States

4. Long term contracts with Colgate

5. Not one buyer represents more than 10% of Colgate revenue

Competition in the Industry (4)

1. Few competitors, yet they are major companies with significant resources

2. Economies of scale

3. High exit barriers

4. Well established reputation of current brands & companies

Threat of Substitute Products (3)

1. Fair amount of competitor products

2. Rise in generic brands through difficult economic climate

3. Large amount of R&D and product development by companies in industry

4. Significant regulation of products

The scale of the interaction:

0 No Interaction 2 Low 4 High

1 Insignificant 3 Average 5 Very High


27


Appendix 10: In-depth DuPont Analysis


28

Source: Bloomberg & Company Statements

Appendix 11A: Market Share Analysis


29

Source: Bloomberg & Company Statements

Appendix 11B: Market Share Analysis (Cont’d)


30

Ian Cook (CEO)

Fabian Garcia (COO)

Peter Brons-Paulsen (CEO

Hill's)

Don Buchner (VP Hill's)

Franck J Moison (COO)

Alain Semeneri (VP

Development)

Dennis Hickey (CFO)

Jesper Andersen (VP

North America)

Elyse Kane (VP North America)

Andrew Hendry (CLO)

Andrea Bernard (VP Legal)

Marty Collins (VP Legal)


Appendix 12: Management Hierarchy


31

Disclosures: Ownership and material conflicts of interest:

The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.

The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the

content or publication of this report.

Receipt of compensation:

Compensation of the author(s) of this report is not based on investment banking revenue.

Position as an officer or director:

The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.

Market making:

The author(s) does not act as a market maker in the subject company’s securities.

Disclaimer:

The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be

reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information

is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment

advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by

any individual affiliated with NYSSA, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

CFA Institute Research Challenge

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