- COMPANY (NYSE: CL)

Analysts: Cassandra Smalley & Al Clawson November 13, 2009

Colgate-Palmolive Company Targe Price $93.21

Sector: Consumer Staples Industry: Household Products Current Price: $81.42 52-Week Range: $54.51-82.08 Market Cap: $40.42B Shares Outstanding: 497.19M Avg Daily Volume: 2.575M Institutional: 72.7% P/E Ratio(31Dec 10): 16.72 PEG Ratio (5yr exp): 1.93 Dividend: $1.76 Dividend Yield: 2.2% EPS EST (Yr): $4.85 Beta (1YR vs. S&P): 0.52

Company Profile

Colgate‐Palmolive Company (“Colgate”) is a leading global consumer products company that operates in two segments: oral, personal, household care and pet nutrition. Its products are marketed in more than 200 countries and territories. 86% of worldwide revenue stems from the sales of oral, personal and home care products with the balance coming from the sale of pet foods. Oral care products include toothbrushes, toothpaste, oral rinses, tooth whitening systems, dental floss and pharmaceutical products for dentists and other oral health care professionals. Personal care projects include bar and liquid soaps, shampoos, conditioners, body wash and shower gels, deodorants, antiperspirants, and shave products. Home care products include dishwashing products, household cleaners, and fabric conditioners. The Company’s brands include Colgate Total and Max Fresh toothpastes, Colgate 360 toothbrushes, Colgate Plax oral rinses, Colgate Visible White tooth whitening systems, and Lady Speed Stick deodorants, Palmolive and brand shower gels, Palmolive shampoo and conditioners, Softsoap liquid hand soap, Palmolive and dishwashing liquids, , Palmolive, and Protex soaps, and Soupline fabric conditioners, and Hill’s and Prescription Diet pet nutrition products. Oral, personal and home care sales outside of North America accounted for 67% of total sales in 2008. Sales in Latin America, Europe/South Pacific and Greater Asia/Africa accounted for 31%, 27% and 20% of total oral, personal and home care sales segment sales, respectively.

Colgate’s strategic initiatives involve four major goals: getting closer to consumers and professionals, driving innovation, increasing efficiency and effectiveness, and strengthening leadership on a global scale. In order to get closer to consumers, Colgate has initiated integrated marketing communications and creative promotional activities designed to engage customers and send strong messages regarding their oral care. Over 250 clinical studies take place annually around the globe which allow opportunity for academic endorsement and provide opportunities for publication in scientific research journals. The endorsements and publications increase brand exposure and strengthen credibility with professionals and consumers. Colgate is focused on innovation, research and development of new products. The Company increased the number of marketing professionals dedicated to new product development by approximately 50% in the last four years. In an effort to increase efficiency and effectiveness across business units, Colgate recently completed its four year restructuring program resulting in a 25% reduction in manufacturing facilities with five new environmentally efficient facilities which improved the use of energy, water, materials, and land resources1. The Colgate Business Planning system, which is supported by SAP software, integrates commercial planning through execution and evaluates performance with goals. The system has shown a strong return on investment in work processes to date. Overall, the Company is continuing to improve supply chain efficiencies through the use of Enterprise Resource Planning software. Colgate expects to generate annual savings of $350 to $375 million after taxes due to continuing restructuring initiatives12.

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Industry: Household Products/Personal Care

Colgate‐Palmolive is a large cap growth stock in the household products industry that competes with Proctor & Gamble, Clorox and Alberto Culver, among others, in the consumer goods sector. The household products sub‐industry is impacted by consumer spending, commodity costs and foreign exchange translation. Consumer spending habits in both the US and international markets is expected to continue to show weakness. The key raw materials that impact the industry are natural gas, oil, pulp and resin. 2009 has seen significant oil and natural gas declines (40%‐60%) over 2008 prices, and 2010 prices are not expected to significantly erase those declines4.

The sub‐industry is mature and very competitive, and many companies are vying to capture market share in developing markets. Private labels compete with the branded company labels in many markets. This competition, in addition to the leverage applied by the larger retailers, works to keep product price increases in check. Most companies use

1 Company 2008 Annual Report 2 Company 2008 10‐K 3 Colgate.com 4 Standard & Poor’s Stock Report advertising and product innovation to boost sales and profit margins. Due to the mature markets in developed countries, large multinationals look to developing and emerging markets for growth. Continued global consolidation in retail will benefit the larger industry players as the larger retailers prefer to carry the leading brands.

Most of 2009 was impacted by negative foreign exchange translation and weak economies. With economic metrics generally trending higher across the globe and a weaker dollar going forward, multinationals are poised to see increased revenue and EPS in the near term.

Earnings Estimates

Consensus EPS Trend FY(12/09) Growth % FY(12/10) Growth % Current Estimate (Mean) 4.32 18.0 4.85 12.3 Current Estimate (High) 4.38 19.7 5.07 17.4 Current Estimate (Low) 4.25 16.1 4.61 6.7 30 Days Ago 4.26 16.4 4.76 11.7 60 Days Ago 4.26 16.4 4.76 11.7 90 Days Ago 4.28 16.9 4.76 11.2 Number of Estimates 18 18 Numerical Source: Morningstar.com

Earnings Highlights

On 10/29/09 Colgate‐Palmolive announced quarterly earnings of $1.12 per share. Over the last 12 quarters the Company’s actual earnings have resulted in four quarters with positive surprises (> 2%), zero quarters with negative surprises (< 2%), and eight quarters in‐line with analyst estimates5.

Key Statistics: CL vs. Industry, Sector, and Benchmark

Current Trading Multiples CL Industry Sector S&P 500 TEV/Total Revenue 2.9 2.2 1.0 ‐ TEV/EBITDA 11.6 10.6 9.9 ‐ TEV/EBIT 12.8 12.9 13.3 ‐ P/E TTM 19.9 17.4 20.9 61.6 Price/Book (MRQ) 14.6 3.5 2.7 2.3 Numerical Source: Capital IQ

Profitability CL Industry Sector S&P 500 Return on Assets % 21.7 7.8 5.7 2.0 Return on Capital % 36.8 11.4 8.3 ‐ Return on Equity % 85.9 20.4 12.8 3.9 Numerical Source: Capital IQ

5 Thomson Reuters StockReports Margin Analysis CL Industry Sector S&P 500 Gross Margin % 59.2 48 28.5 ‐ Net Income Margin % 14.8 11.8 4.0 2.2 Net Income Avail. For Common 14.6 11.7 4.0 2.4 Margin% Levered Free Cash Flow Margin % 22.8 11.5 2.9 ‐ Unlevered Free Cash Flow Margin % 23.0 12.5 3.8 ‐ Numerical Source: Capital IQ

Asset Turnover CL Industry Sector S&P 500 Total Asset Turnover 1.5 0.8 1.2 ‐ Fixed Asset Turnover 4.8 4.2 4.2 ‐ Accounts Receivable Turnover 9.1 9.0 13.9 ‐ Inventory Turnover 5.3 5.0 7.2 ‐ Numerical Source: Capital IQ

Liquidity/Solvency CL Industry Sector S&P 500 Current Ratio 1.2 1.0 1.1 ‐ Quick Ratio 0.7 0.6 0.6 ‐ Avg Days Payable Outstanding 1.3 62.2 54.8 ‐ Avg Days Sales Outstanding 40.4 40.7 26.3 ‐ Total Debt/Equity % 110.5 66.3 82.1 ‐ Total Debt/Capital % 51.2 39.6 43.6 ‐ LT Debt/Equity % 97.7 46.6 64.4 ‐ LT Debt/Capital % 45.2 27.7 33.0 ‐ EBIT/Interest Expense 55.8 10.4 5.2 ‐ Numerical Source: Capital IQ

CAGR 3‐Yr CL Industry Sector S&P 500 Total Revenue% 8.3 5.7 8.9 1.5 Gross Profit% 10.1 6.3 7.6 ‐ Net Income% 19.7 13.2 0.0 ‐36.8 Total Assets% 6.5 2.3 7.7 5.9 Levered Free Cash Flow% 23.8 6.8 13.6 ‐ Unlevered Free Cash Flow% 22.1 6.5 13.9 ‐ Numerical Source: Capital IQ

Fundamental Highlights

The Company trades with valuation multiples at a slight premium to its industry, but the Company’s net margin has been greater than its sub‐industry average for each of the past five years and exceeds the industry, sector, and S&P 500 on all profitability measures (Return on Assets, Return on Capital, and Return on Equity) by a wide margin. Colgate also has a 23% margin in Unlevered Free Cash Flow in comparison to 12.5% of the industry. The Company’s debt ratios are higher with a Total Debt/Equity ratio of 110.5% versus the industry’s 66.3%; however, the greater margins, unlevered cash flows, and long‐term sustainability of the Company eases this concern.

Competitive Analysis

CL – Colgate‐Palmolive

ACV – Alberto‐Culver

^GSPC – S&P 500

CLX – Clorox

PG – Proctor & Gamble

Current Trading Multiples CL PG CLX ACV TEV/Total Revenue 2.9 2.7 2.1 1.6 TEV/EBITDA 11.6 11.1 8.8 10.5 TEV/EBIT 12.8 13.1 10.3 11.9 P/E TTM 19.9 17.3 15.0 23.3 Price/Book (MRQ) 14.6 2.8 NM 2.3 Numerical Source: Capital IQ

Profitability CL PG CLX ACV Return on Assets % 21.7 7.2 14.9 7.9 Return on Capital % 36.8 9.8 22.0 10.3 Return on Equity % 85.9 17.1 NM 10.2 Numerical Source: Capital IQ

Margin Analysis CL PG CLX ACV Gross Margin % 59.2 51.5 44.5 51.3 Net Income Margin % 14.8 17.2 10.4 8.3 Net Income Avail. For Common 14.6 14.1 10.4 8.2 Margin% Levered Free Cash Flow Margin % 22.8 13.1 11.1 N/A Unlevered Free Cash Flow Margin % 23.0 14.2 12.9 N/A Numerical Source: Capital IQ

Asset Turnover CL PG CLX ACV Total Asset Turnover 1.5 0.6 1.2 0.9 Fixed Asset Turnover 4.8 4.0 5.8 6.1 Accounts Receivable Turnover 9.1 11.7 11.9 6.1 Inventory Turnover 5.3 4.7 7.4 5.1 Numerical Source: Capital IQ

Liquidity/Solvency CL PG CLX ACV Current Ratio 1.2 0.9 0.6 3.1 Quick Ratio 0.7 0.4 0.4 2.5 Avg Days Payable Outstanding 64.1 58.8 44.1 114.2 Avg Days Sales Outstanding 43.3 31.3 30.6 60.2 Total Debt/Equity % 110.5 53.1 NM 0.1 Total Debt/Capital % 51.2 34.6 101.5 0.1 LT Debt/Equity % 97.7 33.6 NM 0.0 LT Debt/Capital % 45.2 21.9 68.4 0.0 EBIT/Interest Expense 55.8 12.4 7.1 N/A Numerical Source: Capital IQ

CAGR 3‐Yr CL PG CLX ACV Total Revenue% 8.3 2.5 5.0 6.5 Gross Profit% 10.1 2.4 6.7 6.2 Net Income% 19.7 12.7 8.2 ‐16.5 Total Assets% 6.5 18.5 9.1 ‐15.5 Levered Free Cash Flow% 23.8 6.3 8.6 N/A Unlevered Free Cash Flow% 22.1 6.8 8.4 N/A Numerical Source: Capital IQ

Competitive Highlights

Colgate‐Palmolive competes worldwide against companies such as Proctor & Gamble, Clorox and Alberto‐Culver. The Company generally trades with valuation multiples at a slight premium to its competitors, but the Company’s profitability ratios, Return on Assets, Return on Capital and Return on Equity, are far greater than its competitors. Furthermore, Colgate’s net income available to common shares, cash flow performance and asset turnover metrics are superior to its competitors. The Company’s debt ratios are generally higher than that of its competitors, but the greater EBIT/Interest Expense coverage erases any concerns that may be introduced through leverage. Overall, the greater profitability, margin and cash flow metrics indicate that Colgate is performing more efficiently than its competitors, and its exceptional growth rate in the past, combined with increasing market share and double digit earnings growth going forward, substantiates the valuation premium that is currently applied.

Valuation

The Dividend Discount Model (DDM) is used to provide an indication of valuation. The DDM input variables were unchanged from those provided in the Bloomberg model. The DDM results in a theoretical price of $93.21, a 14% premium from the close on 12Nov09.

Headlines

10/30/09 Colgate‐Palmolive Company Reaches 100 Million Children With Its Bright Smiles, Bright Futures Oral Health Education Program, PR Newswire.

10/29/09 Colgate Announces Record 3rd Quarter Earnings, Exceeding Expectations – Company Expresses Comfort with 4Q and Full Year 2009 External Expectations, Company News.

10/29/09 Colgate‐Palmolive profit up 18%, MarketWatch.

10/9/09 Colgate‐Palmolive Co. Declares Quarterly Dividend, Payable on November 13, 2009, CAPIQ.

9/25/09 Colgate‐Palmolive Co. Introduces a New Toothpaste to Help Consumers Suffering from Tooth Sensitivity, CAPIQ.

4/6/09 Colgate‐Palmolive Introduces Colgate Wisp, Company News.

12/11/08 Colgate Elects Ian M. Cook As Board Chairman Reuben Mark To Retire As Planned, Company News. Positive Factors

Colgate‐Palmolive completed a four year restructuring program to enhance its global leadership position through cost saving initiatives. The Company streamlined its global supply chain by closing factories, reducing the workforce by 12%, and increasing its focus on faster growing markets and new product innovations. This restructuring has reduced the total number of existing facilities around the world from 87 to 58. Colgate expects to generate an annual savings of $350 to $375 million after taxes due to this restructuring.

The company continues to gain market share. In the oral care segment in North America, Colgate’s market share for toothpaste has consistently increased: 40 bps in 2005, 50 bps to 37.3 % in 2006, 60 bps in 2007 to 44.2% and 40 bps to 44.8% in 2008. In the U.S. Colgate commands 36.9% of the market over its major competitor, Proctor & Gamble, which has 35.1% market share.6

Worldwide revenues grew at an 8.3% 3‐yr CAGR, and the Company saw global sales growth of 11% in 2008.

Recent 3rd quarter reporting saw record net income and diluted Earnings per Share. Organic sales grew 7% and operating profit, net income and earnings per share showed double digit growth, driven by positive volume and higher pricing. The Company is increasing dividend payments while repurchasing shares outstanding. The company anticipates $1B is repurchases for 2009.

Advertising spending increased by 7% in 2008, capitalizing on both reduced media costs due to economic conditions and greater exposure in the marketplace at a time when competitors have pulled back on advertising expenses. Continued increasing advertising expenditures new product launches are expected to drive revenue growth as follows7: ‐ North America: Volume to increase by mid‐single digits in Q4 and the full year. Operating profit to grow double digits in Q4 and high single digits for full year. ‐ Europe/South Pacific: Volume expected to be up low single‐digits for Q4 and flat for the full year. Operating profit is expected to grow with strong double digit growth in Q4 with a modest decline on an absolute basis for the full year but be up as a percentage of sales. ‐ Latin America: Positive volume growth is expected for Q4 and the full year. Operating profit is expected to grow double‐digits for Q4 and the full year. ‐ Greater Asia/Africa: Volume is expected to increase to mid to high single digits in Q4 with modest growth for the full year 2009. Operating profit is expected to grow double‐digits for Q4 and the full year.

Negative Factors

A sudden rise in commodity prices would negatively impact the Company as it would be difficult and potentially unable to pass the increase onto the customer.

The company experiences unfavorable currency translation through purchases of raw materials and inventory in $US by its overseas subsidiaries.

Colgate is generally more leveraged than its competitors and its industry. Significant deterioration of economic and business conditions could lead to increased risk for the company.

6 AC Nielson 7 Reference: 3rd Quarter Conference Call Overall Analysis and Recommendation

While Colgate is priced at somewhat of a premium to its competitors, its superior margins and other business analytics, along with its growing market share and worldwide revenues going forward, warrant the price premium. We recommend purchase one position of CL at the market open with a price target of $93.20.

Disclaimer

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