colgate-palmolive equity valuation and analysis...

Colgate-Palmolive Equity Valuation and Analysis

Valued at April 1, 2007

Analyzed by the “A” Team

Analysts

Katrina Bazzell: [email protected]

James Estes: [email protected]

Travis Flory: [email protected]

Daniel Latimer: [email protected]

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Table of Contents

Executive Summary………………………………………………3

Business and Industry Analysis……………………………….6

Accounting Analysis………………………………………………24

Ratio Analysis and Forecasted Financials…………………..46

Valuation Analysis………………………………………………..84

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Executive Summary

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

Published .83 Discounted Dividends: $12.65 Kd: 5.25% Free Cash Flow: $56.40 WACC: 5.52% Residual Income: $21.26 Altman Z-Score: AEG: $14.29

CL- 7.29

Competitor growth 2002 – 2007

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Colgate-Palmolive historical stock prices 2002-2007

Executive Summary

Colgate-Palmolive is a well established, global company in the personal

products industry. Within Colgate-Palmolive, there are four distinct product

segments: personal care, home care, oral care, and pet nutrition. Other

competitors in the industry include Procter & Gamble, Kimberly Clark Co., The

Clorox Company, and Church and Dwight. The personal products industry is

mature and well-established. Accordingly, there are sizable barriers to entry for

new firms wishing to enter into the industry. Price competition within the

industry is high, although brand images do play a role in influencing customer

decisions. Colgate-Palmolive’s brand image, along with constant product

innovations, helps it to stay ahead in a very competitive industry.

Colgate-Palmolive is somewhat more conservative in their choice of

accounting policies than other competitors within the industry. Colgate-Palmolive

does an effective job in their quality of disclosure in the annual 10-K report. This

fact shows that Colgate-Palmolive has confidence in their accounting policies and

market position, because we would generally not expect to see such a high level

of disclosure within such a competitive industry. Current performance, as well as

any potential negative events, is adequately addressed by the company. An

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analysis of the company’s financial statements produced a few areas for concern.

However this is most likely because of the company’s current restructuring

process.

Conducting a ratio analysis of Colgate-Palmolive and their competitors

gives us a good insight as to the company’s financial performance both over time

and across the industry. This has allowed us to view the effects of Colgate-

Palmolive’s business strategies, accounting practices, and financial decisions as

well as their level of sustainability. With this in mind, we then developed a ten

year forecast of the company’s financial statements. The forecast was based

mainly on internal ratios and relationships, although some ratios used in the

forecast were adjusted to better reflect ongoing changes in the company’s

structure. We were also able to forecast the company more aggressively,

undoing some of the conservative accounting policies, in order to get a more

accurate picture of Colgate-Palmolive’s financial statements in comparison to

other companies within the industry. We have made our forecasts based on our

assessment of the future direction of the company. The implementation of a

company-wide restructuring program beginning in 2004 should be noted,

however, because the effects of it are relatively uncertain at this time.

After conducting an analysis of Colgate-Palmolive’s financial statements,

taking into account the industry as a whole and accounting policies, we have

concluded that the company is severely overvalued. All of the valuation models

we used, except for the discounted free cash flows, showed the stock price to be

highly overvalued. Since the discounted free cash flows model is the most

sensitive to intrinsic factors and forecasts, we have regarded this valuation as the

least accurate. Other models, which take into account the more stable dividends,

all show the company to be severely overvalued. Accordingly, as of 4/1/2007,

our analysis leads us to the recommendation that the stock be sold.

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Business and Industry Analysis

Company Overview:

Colgate-Palmolive Company is a leading manufacturer of personal care,

home care, and oral care products, along with a profitable line of pet nutrition.

Colgate-Palmolive falls into the sector of consumer goods and the industry of

personal products. Some popular personal care products that Colgate offers

would be Speed Stick 24/7 deodorant, Softsoap shower gels, and Colgate brand

oral care products. Ajax, Fabuloso, and Murphy’s Oil Soap are just a few of their

home care products. The Hill’s Pet Nutrition segment of Colgate offers Hill’s

Science Diet and Hill’s Prescription Diet. Their products are sold in over 220

countries across the globe and last year’s sales for Colgate-Palmolive exceed $10

billion. Many product lines were not part of the original company but were

acquired by William Colgate & Company since they began in 1806. Among these

acquisitions would be, of course, the Palmolive soap company. Additional

acquisitions include Mennen, Softsoap, and Murphy’s Oil Soap.

Colgate-Palmolive currently employs 35,800 people from around the

world, and was first listed on the New York Stock Exchange on March 13, 1930.

Today their stock sells for about $66 a share. Their market capitalization is

approximately $34.9 billion, while the personal products industry is around $290

billion. This is a fast-paced industry with new products and competitors surfacing

continuously.

This analysis will first begin by dissecting the personal products industry

by discussing the Five Forces Model and each of its factors. It will then move on

to discuss the Value Chain Analysis of the industry and how Colgate-Palmolive

fits into the industry using their specific corporate strategies and activities. We

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will finish by explaining the Firm’s Competitive Advantage Analysis, and analyze

Colgate-Palmolive’s competitive advantages and how well they utilize these tools

in the market.

Five Factor Model:

The five factor model helps to understand the personal products industry

that Colgate-Palmolive competes in by analyzing both its structure and

profitability. By examining each of the five key components of this model, we will

determine the competitiveness of the industry and its effects on the firm. These

five components include the rivalry of existing firms, which examines the level of

competition in the industry by examining direct competitors and their influence in

the industry. The second component we will be discussing is the threat of new

entrants, and its effect on both Colgate-Palmolive and their direct competitors.

Third and fourth, we will consider the bargaining power of buyers and suppliers

and its effects on the pricing of products throughout the industry. Lastly, we will

consider the threat of new products in the marketplace, and comparisons among

differing brands and products.

Rivalry of Existing Firms:

The first component to be examined is the rivalry of existing firms within

the personal products industry. By determining the amount of counterparts

within the industry, we will be able to determine the aggressiveness of Colgate-

Palmolive within the personal products industry and, more importantly, how

Colgate-Palmolive adjusts their business strategy in order to stay competitive.

Industry Growth Rate:

The main competitors to Colgate-Palmolive are as follows; Procter and

Gamble (PG), Kimberly Clark(KMB), Clorox Co. (CLX), and Church and Dwight Co.

(CHD). It seems that the oral care sector of Colgate-Palmolive has steadily risen

in sales since 2003, but it is obvious that other parts of the company have

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decreased in sales over the same time period. This shows that Colgate’s sales

are stagnant and that the only way to gain more market share within the

industry is by taking it away from other existing competitors, such as Procter-

Gamble.

Although Colgate seems stagnant, this industry is growing rapidly.

Procter-Gamble has shown dramatic increases in assets, and their firm is clearly

developing. This indicates a high level of competition within the personal

products industry.

Colgate-Palmolive Worldwide Sales Percentages

2003 2004 2005

Oral care 34% 35% 38%

Personal care 24% 23% 23%

Home care 29% 28% 26%

Pet Nutrition 13% 14% 13%

*From Colgate-Palmolive 10-K 2005

Total Asset Value - last 5 years

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

2001 $6,984.8 $3,995.0 $10,889.0 $949.1 $15,007.6

2002 $7,087.2 $3,524.0 $12,166.0 $988.2 $15,639.6

2003 $7,478.8 $3,652.0 $15,220.0 $1,119.6 $16,779.9

2004 $8,672.9 $3,834.0 $17,115.0 $1,878.0 $17,018.0

2005 $8,507.1 $3,617.0 $20,329.0 $1,962.1 $16,302.2

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Total Asset Value (in millions)

$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


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


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


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


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


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


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


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%)


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%


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


* 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


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



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


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


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


Procter Gamble 6.1 6.1 5.7 5.6 5.3


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


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


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


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


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


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%


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


Procter Gamble 31.00% 31.00% 32.00% 32.00% 32.00%


Kimberly Clark 17.55% 17.34% 17.56% 16.99% 17.38%


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


Procter Gamble 11.00% 12.00% 13.00% 12.00% 13.00%


Kimberly Clark 12.12% 12.34% 12.08% 11.94% 9.86%


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


Procter Gamble 0.9900 0.9900 0.9000 0.9200 0.5000


Kimberly Clark 0.8854 0.8674 0.8359 0.8863 0.9754


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%


Kimberly Clark 10.73% 10.71% 10.10% 10.58% 9.62%


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


Procter Gamble 32.00% 38.00% 37.00% 14.00%


Kimberly Clark 28.51% 29.64% 25.04% 27.15% 28.22%


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


Procter Gamble 2.060 2.400 2.300 3.300


Kimberly Clark 1.657671 1.767924 1.479923 1.567011 1.93318


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


Procter Gamble 11.600 14.400 15.900 13.000 12.100


Kimberly Clark 11.296 12.616 12.374 13.559 10.352


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



Kimberly Clark 1.823315 2.230996 2.95291 2.24434 1.891043


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


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


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












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






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





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











1 Year Regression

95

1 Year Regression Continued SUMMARY OUTPUT 36 mo






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






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


Regression StatisticsMultiple R 0.185725R Square 0.034494Adjusted R 0.022719Standard E 0.057053Observatio 84



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











5 Year Regression

97

SUMMARY OUTPUT 36mo



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 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
















7 Year Regression

99








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






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
















10 Year Regression

101










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


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

colgate-palmolive equity valuation and analysis...

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