Colgate-Palmolive
Russell Kerschen Zach Glisson Whitney Martin Brian Ghaemmaghami Darren Schreder
1 | Page
Table of Contents
Executive Summary 6 Business and Industry Analysis 12 Company Overview 12 Industry Overview 14 Five Forces Model 20 Rivalry Among Existing Firms 21 Concentration and Balance of Competitors 22 Degree of Differentiation 23 Switching Costs 23 Scale to Learning Economies 24 Ratio of Fixed to Variable Costs 24 Excess Capacity & Exit Barriers 25 Threat of New Entrants 26 Economies of Scale 26 First Mover Advantage 28 Access to Channels of Distribution 28 Legal Barriers 29 Threat of Substitute Products 29 Relative Price Performance 30 Willingness to Substitute 30 Bargaining Power of Customers 31 Price Sensitivity 31 Relative Bargaining Power 32 Bargaining Power of Suppliers 33 Key Success Factors for Value Creation 33 Competitive Advantage-Broad Scope 35 Firm Competitive Advantage Analysis 38
2 | Page
Accounting Analysis 43 Key Accounting Policies 43 Potential Accounting Flexibility 46 Goodwill & Intangible Assets 46 Employee Benefits 47 Legal & Other Contingencies 47 Actual Accounting Strategy 48 Qualitative Analysis of Disclosure 51 Quantitative Analysis of Disclosure 52 Core Sales Manipulation 53 Expense Manipulation Diagnostics 56 Potential “Red Flags” 62 Undo Accounting Distortions 63 Ratio Analysis, Forecast Financials, and Cost of Capital Estimation 65 Financial Analysis 65 Liquidity Analysis 65 Current Ratio 66 Quick Ratio 67 A/R Turnover 68 Days Sales Outstanding 69 Inventory Turnover 70 Inventory Days 71 Working Capital Turnover 72 Profitability Analysis 74 Gross Margin 74 Net Profit Margin 75 Operating Profit Margin 76 Asset Turnover 77
3 | Page
ROA 78 ROE 79 Capital Structure Analysis 80 Times Interest Earned 81 Debt Service Margin 82 Debt to Equity 83 Internal Growth Rate and Sustainable Growth Rate Analysis 84 Financial Statement Forecasting 87 Income Statement 87 Balance Sheet 91 Statement of Cash Flows 93 Cost of Capital Estimation 93 Analysis of Valuations 101 Method of Comparables 101 Dividend Discount Model 107 Discounted Free Cash Flow Models 108 Residual Income Model 110 Long Run ROE Residual Income Model 111 Abnormal Earnings Growth Model 114 Credit Analysis 116 Analyst’s Recommendation 117 Appendix 118 Regressions 118 Income statement 131 Common size income statement 132 Balances sheet 133 Common size balance sheet 134 Cash Flows 135 Z-scores 136
4 | Page
Cost of Debt 139 WACC 140 Method of Comparables 141 Residual income 144 AEG Model 145 Discounting Dividends 146 Long Run ROE Residual Model 147 Discounted Free Cash Flows 148 Ratios 149 Restatement Analysis 152 References 153
5 | Page
Executive Summary Investment Recommendation: Overvalued, Sell 5/05/2008
Share data Valuation Estimates Observed NYSE: CL Share Multiples valuation Price as of 4/1/2008 $ 73.68 Trailing P/E $23.05 52-week range $63.75-81.98 Forward P/E $17.21 Shares Outstanding 509.8M P/B $17.73 Market Capitalization 37.56B D/P $.022 Percent owned by insiders 1.46% PEG $1.74 Percent owned by institutions 71.9% P/EBIDTA $23.03 EV/EBIDTA $12.75 Book Value per share $4.103
Key 2008 financial data Intrinsic Valuations
Revenue 13.79B Discounted Dividends $22.96
Net Earnings 1.78B Discounted FCF $57.12
Return on Equity 94% Residual Income $24.66
LR ROE $49.97
AEG $24.66
Cost of Capital Estimations Altman’s Z-score r^2 Beta Ke 2003 2004 2005 2006 2007 3-month .127 .455 07.4% 7.19 6.57 7.01 6.68 6-month .127 .455 07.4% 2-year .124 .444 06.8% 5-year .128 .455 07.4% 10-year .129 .452 07.4% Published Beta 0.16 K d 6.16% WACC bt 9.6%
6 | Page
7 | Page
Industry Analysis Colgate-Palmolive was originally Colgate a small family owned soap and candle company. They have since grown to merge with Palmolive to become the firm they are today. They have widened their variety of products from soap and candles to oral care, personal care, cleaning goods, and pet nutrition. Their initial public offering was in and have since expanded their firm overseas and are recognized as one of the leading suppliers in their industry. They are on almost every distributor’s shelves in the nation and have become a recognized household name to most all consumers. Their main goal is provide consumers with high quality products that will satisfy their everyday needs. In the personal goods industry the main competitors are Proctor & Gamble, Clorox, and Church & Dwight. All of these firms provide relatively the same products that may simply differ in colors or scents. This makes their industry very dependent on brand image and also susceptible to price wars. By having only a few large firms the high concentration in this industry makes it very important for firm to stay up with the competition on research and development practices. Consumers will always need the products of this industry so the firms compete on low costs and advertising improved products. For instance Colgate and many others have been promoting whitening products for oral care. The personal products industry has a high rivalry among existing firms, a very low threat of new entrants, and a high threat of substitute products. In this industry they also have a high bargaining power of suppliers and a low bargaining power of buyers. This is because of the need for firms to have the large suppliers supply their products to the consumers. The personal products industry is highly concentrated and competitive among the existing firms. The key success factors of the personal products industry are brand image, product differentiation, and cost leadership. All of the products are very similar which makes a firms brand image to the consumers. Since the firms have to compete on price, finding ways to lower production costs is a must to make the most profits. If a
8 | Page firm can find ways to increase their appeal to the consumers while bringing costs to a minimum it will allow them to gain market share. Accounting Analysis The best way for a firm to allow investors to understand their firm and make an educated decision on whether or not to invest is to fully disclose their information. Analysis of a firms accounting policies should identify how detailed and how much information they are willing to disclose. Some firms have been known to hide certain “unflattering” data by giving the minimum of what the SEC requires, this can in many cases lead to accounting distortions. Colgate-Palmolive does a fairly good job in disclosing their information whether it has positive or negative effects on the company. Colgate also discloses the risks they face associated with significant international operations and their restructuring programs which implicates that they are willing to disclose data that may be misleading. There are some areas of concern regarding Colgate’s 10-K disclosure of Goodwill and Other liabilities. Goodwill consists of about 23% of our company’s total assets and that number is increasing by about one or two percent each year. Colgate also discloses the risks they face associated with significant international operations. Information regarding our pension benefit plan and property leases seems to be somewhat limited and is a minimal percentage of our company. Also, the 2004 Restructuring Program had a very strong affect on the ROE which also might have led to some accounting distortions. Compared to other firms in the industry our level of disclosure seems to be above-average.
Financial Analysis, Forecast Financials, and Cost of Capital Estimation To be able to figure which items on the financial statements need to be forecasted and what the main driver for forecasting is going to be we must first perform an analysis on their statements. Recently, within the past 5 years, Colgate-Palmolive has had a consistent growth rate of 7.4% which is consistent with the rest of its
9 | Page competitors. Because of firms such as Proctor & Gamble who have control of most of the market, it is imperative that Colgate remain consistent and even try to increase their growth rate to keep their market share. Our estimation of future growth rates for years 2008-17 show to be 8%. For Colgate-Palmolive their asset turnover has averaged 1.33 over the past five years; with this we forecasted current assets as 36.8% and non- current assets were 63.2% of total assets. Our CFFO from net sales was the ratio with the most structure so we used the CFFO/sales ratio of 17% to forecast future cash flows. For the cost of capital estimation we first found the historical monthly stock prices of Colgate for the past 5 years from Yahoo Finance and the S & P 500 prices, and risk-free and market risk premium rates. We used this information to determine a Beta of .46. As a result of low cost to equity found by the equation, we had to use a “back- door method” to find cost of equity. These estimations were then put in the Cost of Capital model to determine a before tax WACC of 9.60%, and an after tax WACC of 8.373%. After collecting data and calculating ratios on our firm and their competitors within the industry it is apparent that Colgate-Palmolive has had an increase in profits over the past few years. Colgate has the highest asset turnover out of all of its competitors and has been increasing each year which shows that their sales and market share are also growing. Our debt service margin although has been declining over that past few years which shows that they are having to more outside funds relative to growth. These discrepancies have shown to be due to the 2004 Restructuring Program. By using all of this data we will be able to better value the firm on whether it is valued over, under, or fairly.
Valuations After analyzing and compiling the business and industry, accounting analysis, and forecasting the financial statements, an investor can perform future valuations to examine the share price of the firm. Through using a choice of valuation models an
10 | Page
investor can determine whether the company is overvalued, undervalued, or fairly priced. The method of comparables is the method that we use to value Colgate. It is made up of 7 ratios that can be relevant to valuing a firm. When computing the industry we excluded any of the outliers that would skew the industry’s average. The P/FCF, EV/EBIDTA, P.E.G., and trailing P/E models all indicate that Colgate-Palmolive is overvalued. The D/P and P/EBIDTA models however indicated that Colgate is undervalued. This method of comparables is not a reliable valuation method because it assumes all firms in an industry operate the same way, which is not true. The Dividend Discount model gives us a way to estimate the value of a firm by estimating the dividends we expect the firm to pay in the future. The dividends for Colgate have been growing at a rate of about 10%. Our sensitivity analysis displays that this model is sensitive to the inputs used. To achieve a price of $76.06, which is very close to our observed price, we would need to increase our growth rate from 8% to about 15%, leaving cost of equity around 16%. The Discounted Free Cash Flows model uses expected future cash flows and discounts them back to the current time period which allows for a valuation of the firm. The cash flow model is rooted in basic theory of present value. The sensitivity analysis performed indicates that the value of this company is overvalued. The Residual Income model is one of the best valuation models used to value a firm. It would take a positive growth rate and a reasonable cost of equity to achieve a share price that is even close to the share price found. This model supports the conclusion that Colgate is overvalued. These are just a few of the many models that we used to determine that Colgate- Palmolive is overvalued.
11 | Page
Business & Industry Analysis
Company Overview
Colgate (NYSE: CL) was founded in 1806 as a small starch, soap and candle business in New York City and later became incorporated in 1923. The company has now grown and acquired other entities such as Palmolive in 1932 to become Colgate- Palmolive. It has since grown to have sales today surpassing $12 billion and sells in over 200 countries; about 75% of their sales are overseas. “Corporate headquarters are still located in New York, NY. In the U.S. the company operates 60 properties in which 16 are owned; overseas the company operates approximately 270 properties in 70 countries.” (CL 2006 10 K) These facilities that Colgate operates in produce their products which are separated into four different areas. Among these are personal care, oral care, cleaning goods, and pet foods and nutrients. Out of these four products their main source of income is oral care. Within the past few years Colgate has made a more recognized name for themselves by introducing top of the line products such as whitening strips. Colgate-Palmolive has many different brands that they sale some of these products that they market are “Colgate®, Speed Stick®, Palmolive®, Murphy’s Oil Soap, Irish Spring®, Softsoap®, AJAX®, Palmolive®, Suavitel®, and Hill’s®Science Diet®;” (Colgate 10-K) many of these brands have been acquired because of the an already firmly established consumer base. These products have made Colgate brand a well recognized household name that “serves people around the world with well-known brands that make their lives healthier and more enjoyable”. (www.colgate.com) Colgate-Palmolive’s strategy is to focus on global new products to drive growth.
As of December 31, 2006 the Colgate-Palmolive corporation employs about 34,700 employees. Colgate’s market cap is 38.17B and the stock currently trades for about $76. The company manages its business in two separate product segments: the oral, personal, and home care: and pet nutrition. “Colgate is one of top leaders in the
12 | Page
world in the oral care industry with having one of the most well known toothpaste brands throughout the world. This is including the U.S., according to value share data provided by ACNielsen” (CL 2006 10-K) As well as being a major leader in oral care, Colgate-Palmolive holds a high “ranking” against many of their competitors with their other products in both pet nutrition and the personal consumer and household products. In Colgate’s 2006 10-K one of their main goals that is stated is to gain market share. Just last year they purchased Tom’s of Maine, Inc., which was a company that makes their products using all natural substances, which is becoming a growing commodity in today’s environmentally aware society. Acquisitions such as this one goes to show how aware Colgate-Palmolive is of their consumers needs and how they are attempting to broaden their clientele. Colgate’s worldwide sales are mostly derived of oral care products but one needs to take into account the pet nutrition products that one might not recognize is a product of Colgate that makes up 14% of their total sales. “Product quality and innovation, brand recognition, marketing capability, and acceptance of new products largely determine success in the company’s business segment.” (Colgate 2006 10-K)
Total Assests, Net Sales, and Sales Growth (*In Millions)
Total Assets Net Sales Sales Growth
2002 7,087 9,294 2.3%
2003 7,479 9,903 6.6%
2004 8,673 10,584 6.9%
2005 8,507 11,397 7.7%
2006 9,138 12,238 7.4%
2007 10,084 12,581 2.8%
(Morningstar.com)
13 | Page
Colgate’s Worldwide Sales Percentage
2006 2005 2004
Oral Care 38% 38% 35%
Home Care 25% 26% 28%
Personal Care 23% 23% 23%
Pet Nutrition 14% 13% 14%
Total 100% 100% 100%
(Colgate 2006 10-K)
These two tables are perfect examples to show the company’s growth and the areas that they concentrate their business. The total assets, sales, and growth table shows how the company is trying to pursue greater market share within their industry. As one can see, their assets and sales have greatly increased from years 2002 to 2007. There was a great increase in their sales growth around the year of 2004; this is due to the company implementing a Restructuring program in 2004 that had a great impact on their total sales.
Industry Overview
Colgate-Palmolive Co. is located in the Personal Products industry which is in the Consumer Goods sector. Throughout this industry firms sell Oral Care, Personal Care, and Home Care products, while some firms also compete in the Pet Nutrition segment. The Personal Products industry is a highly competitive industry. Colgate Palmolive, Proctor & Gamble, and other firms in this industry face competition in several aspects of their businesses which includes; the pricing of products, promotional activities, advertising, and new product introductions (CL 2006 10-K). The degree of actual and potential competition in this industry consists of rivalry among existing firms, the threat
14 | Page of new entrants, and the threat of substitute products. The Personal Products industry faces a high level of competition with rivalry among existing firms for reasons that will be discussed later in this analysis. There is also a high level of competition with the threat of substitute products, but there is a low level of competition for the threat of new entrants. The Bargaining Power in Input and Output Markets determines the overall profitability of the different firms in this industry. The high competition in this industry leads to reduced profitability. While this industry faces a high level of competition with the bargaining power of buyers, the level of competition with the bargaining power of suppliers is minimal. These reasons will also be explained in further detail throughout this analysis. The firms in this industry experience a net profit margin percentage of 17.63%, a gross margin % of 52.09%, and a return on investment of 12.25% (www.reuters.com). According to Colgate’s 10-K report, a failure to compete effectively could adversely affect the growth and profitability of any of these firms in the Personal Products industry. This section will analyze the Personal Products industry by examining the five forces model. The Industry’s Key Success Factors (KSF) will then be explained, along with the firm’s competitive advantage analysis. Finally we will analyze Colgate’s future competitive analysis and discuss how well Colgate utilizes their KSF in the Personal Products Industry.
The following is a chart showing the price history of Colgate-Palmolive over the past five years. As one can see Colgate’s price has stayed along the normal trend for a firm in the personal and household goods. Only was it after the 2004 Restructioning Program was there a dip in their price value, this is due to uncertainty to how the firm would react to the changes. But most recently Colgate has regained their market share and their price is right around the largest firm of Proctor & Gamble.
15 | Page
(Graph from money.msn.com) Industry Growth “Most stocks in the household & personal products industry have seen steadily growing revenue and earnings over the past three years…as well as asset revenue growth.” (Morningstar.com) To be able to stay alive in this industry Colgate and other companies alike are going to have to use the most cost-effective decisions to rid of any unneeded expenses. Colgate’s sales have been increasing in the oral care area; just this week an article in the Wall Street Journal reported that “Colgate(R) Simply White(TM) is among the easiest to use of the four leading at-home whitening products currently available on the market.” (www.wsj.com) Although true it is obviously declining in others, which means they are stagnant and are only going to be able to grow overall by finding a way to take the shares away from other players. They are currently trying to do this, “The Company said it expects double-digit earnings per share growth in 2008.” (www.wsj.com) Although Colgate’s total assets seems to be increasing at a slower rate, the industry itself is still growing at a significant rate because of other firms such as
16 | Page
Proctor & Gamble who have greatly increased their shares. “Colgate also plans to buyback up to 30 million shares over the next two years”. (www.wsj.com) The competition to gain these shares of other firms can make one anticipate future price wars. The charts below display their growth in comparison with the other firms in the industry.
(Morningstar.com)
Stock: Colgate-Palmolive Company Industry: Household & Personal Products Index: S&P 500
This particular graph shows how Colgate is a little below the industry average but has seemed to grow at the same rate as the rest of the industry. This growth in the industry is due to peoples increased interest in personal hygiene. One of the biggest “fad’s” especially in the U.S. has been whitening products for teeth and with these products Colgate is one of the most used brands.
17 | Page
Total Assets of Industry Over Past 6 Years (*In Millions)
Colgate- Clorox Church & Proctor &
Palmolive Company Dwight Gamble
2002 7,087.2 3,630.0 988.2 40,776.0
2003 7,478.8 3,652.0 1,119.6 43,706.0
2004 8,672.9 3,834.0 1,878.0 57,048.0
2005 8,507.1 3,617.0 1,962.1 61,527.0
2006 9,138.0 3,616.0 2,334.2 135,695.0
2007 10,083.7 3,666.0 2,480.6 138,014.0
(Morningstar.com)
This table displays that Proctor & Gamble are making huge increases in their total assets over the past couple of years and at the same time, Colgate’s assets are also increasing each year. Proctor and Gamble is the largest competitor within the industry and has more than tripled their assets in this short time frame. This factor will be better explained in the five forces model later; showing how hard it would be for new entrants to come into an industry where there are already firms that hold so many assets.
18 | Page
Colgate’s Worldwide Sales (CL 2006 10-K)
2006 2005 2004
Oral, Personal and
Home Care
North America $ 2,590.8 $ 2,509.8 $ 2,378.7
Latin America 3,019.5 2,623.8 2,260.0
Europe/South 2,952.3 2,845.9 2,759.4 Pacific Greater Asia/ Africa 2,006.0 1,897.2 1,747.0
Total Oral, Personal 10,568.6 9,876.7 9,151.1 and Home Care Pet Nutrition 1,669.1 1,520.2 1,433.1
Total Net Sales $ 12,237.7 $ 11,396.9 $ 10,584.2
*Net Sales in the U.S. for Oral, Personal and Home Care were $2,211.2, $2,124.2, and 2,000.3 in 2006, 2005, and 2004, respectively. *Net Sales in the U.S. for Pet Nutrition were $897.9, $818.1, and $781.0 in 2006, 2005, and 2004, respectively. (Colgate 2006 10K)
This table shows Colgate’s worldwide sales and is a nice visual to how this industry does its business and the many opportunities they have to expand and grow. Most of the industry’s firms are originated in the U.S. but if one looks at the sales in 2006 there was an even greater amount sold to Latin/South America than in the U.S. This goes to show that there are many options in the personal products industry to expand their firms outside of the U.S. and earn profits elsewhere. It is very obvious that
19 | Page
the need for personal hygiene and dental care will always be a high demand and is increasing every day.
Conclusion The personal products and household goods industry has always been a very stable one; but with recent increasing interest in oral care the demand for new innovative products has had a positive impact on the industry.
Five Forces Model In any given industry, when a firm is being analyzed the analyst must first review the potential profits of each of the industries in which their particular firm is competing within. Due to the fact that the diversity of each industry will change in a somewhat predictable manner over a period of time when a certain event may happen in the economy the analyst need a way to predict what the outcomes are going to be. There is a model that we refer to too do just this, it is known as the “Five Forces Model” and it shows the influence of industry structure on profitability. The model is made up of two main components. The first one is the degree of actual and potential competition, which consists of the rivalry among existing firms, threat of new entrants, and the threat of substitute products. The second one is the bargaining power of input and output markets; made up of the powers of buyers and suppliers. Together these five forces can help predict the industry’s profitability and be able to classify the important factors of Colgate- Palmolive.
Within the five forces there is a high and low end that must be applied to each of the forces to determine the volatility and to what extent each force affects a firm within the industry. These five forces help an investor understand how and by how much, different factors that could happen in an industry would affect the firm. The following table shows a summary of the highs and lows within the personal product industry.
20 | Page
Personal Product Industry Rivalry Among existing firms - high Threat of new entrants - low Threat of substitute products - high Bargaining power of buyers - high Bargaining Power of suppliers – low
Rivalry Among Existing Firms “In most industries the level of profitability is primarily influenced by the nature of rivalry among existing firms in the industry” (Palepu & Healy). In the Personal Products industry firms don’t have much room to compete aggressively when it comes to price; but rather they are more conservative and compete on brand image, research and development, and innovation. This makes the rivalry among existing firms very high. The products in this industry are all relatively the same, with the exception of flavors or scents, and this makes everything very competitive. One firms can not necessarily charge a significant amount more for their product that is very similar to others so they are forced to use other factors like brand image. Firms constantly have to use their research and development teams to not only come up with new and improved products but to also come up with ways to lower their costs.
21 | Page
Concentration and Balance of Competitors Market Share Colgate-Palmolive- 38.17B Clorox- 8.23B Church & Dwight- 3.61B Proctor & Gamble- 201.99B Total- 252 Billion
This chart shows how competitive this industry is and how unbalanced the market share is. There is a very high concentration in this industry, there are a select few main firms including Colgate-Palmolive, J&J, Clorox, Church & Dwight Co., and P&G; with Proctor & Gamble holding the largest amount of shares in the industry. With their being the dominant firm they can to an extent set some of the rules of competition, and the other firms will need to adjust their prices to compete with P&G’s if they want to survive. For instance, the personal products industry generates approximately $290 billion a year with Proctor & Gamble earning about $210 billion of that and Colgate only $35 billion. (finance.yahoo.com) Colgate is still a prime 22 | Page
competitor in this industry but with their sales being less than half of P&G’s they will have to keep their prices within reason of the larger firm.
Degree of Differentiation Firms in any given industry have a better chance to not have to compete head-on with other firms if their products differentiated. In the personal products industry all of the products are very similar between the firms which in turn makes it difficult to reduce the head-on competition. It states in Colgate’s 10-k the composition and goals of their company. By looking at other firms 10-k’s one can tell that most all firms in this industry are separated into two separate areas the personal consumer goods and then the pet nutrition. For the most part all business activities and practices follow the same concept. This means that the firms are going to have to mainly compete not on product differentiation but on price competitions. Firms in this industry are constantly trying to have or show their uniqueness through customer satisfaction and brand image. The degree of differentiation is very low in this industry.
Conclusion Colgate-Palmolive and other firms in this industry must compete mostly on price or new and improved ideas. All of these companies spend a lot of their money on research and development; not necessarily for new products but more on ways to reduce costs on production.
Switching Costs In this industry the consumers have a high propensity to move, they are more susceptible to move from one brand to another; the different scents, colors, and flavors are not alone enough in most cases to keep a customer from switching if the price for another brand with the same purpose is lower. This is just one more factor that forces the firms to employ in price wars.
23 | Page
Conclusion The switching costs in this industry are significantly low and it would not be unlikely for a consumer to choose for instance, toothpaste that has the same affects that cost $3 compared to another that costs $4. This causes major price wars and constant focus on brand image.
Scale to Learning Economies The size of this industry is very large with a wide range of products. There is a massive amount of price wars and competition to increase brand image and gain market share. The products in this Industry will always be needed by people, and especially in the oral area have been a growing interest. According to Colgate’s most recent 10-K’s they have been gaining market share consistently over the past 3 years. This is important in this industry to be one of the larger providers. Currently Proctor & Gamble is the largest and they are able to “set” many of the standards in the personal goods sector.
Conclusion The scale to learning the industry and becoming one of the “big guys” is very hard in this industry. But if a firm does not acquire a significant amount of market share it will be even tougher for that firm to continue.
Ratio of fixed to Variable Costs It is a necessity to lower variable costs in this industry in order to obtain the lowest price for the customers. Colgate-Palmolive has made it one of its missions to “aim for cost reduction across every category”. They have done so by “reducing suppliers from 11 to 5 and by installing regional multi-year contracts with on-site manufacturing programs that were put in place and record savings and total cost reductions were achieved over 5 years.” (www.colgate.com) Although manufacturing
24 | Page
strategies are always trying to be reduced the economy can also effect prices in other ways such as the new price increases in crude oil will have an effect P&G just reported, "Commodity and energy cost increases were higher than originally anticipated. Diesel fuel, phosphates and resins, just to name a few, increased significantly during the quarter. To offset this significant commodity and energy cost pressure, we have announced a number of price increases” (www.wsj.com). These types of changes that increase costs are also factors that change the ratio of fixed and variable costs.
Fixed to Variable Ratios Colgate- Clorox Church & Proctor & Palmolive Company Dwight Gamble 2002 .72 .41 .28 .60 2003 .74 .44 .28 .60 2004 .76 .41 .39 .66 2005 .76 .40 .39 .65 2006 .79 .40 .43 .66 2007 .82 .41 .42 .66 (Morningstar.com) Conclusion This table shows the current fixed to variable ratios of the main firms in this industry. Colgate has one of the highest ratios in the industry followed by Proctor & Gamble. This may show that Colgate needs to reduce prices to more efficiently to fill their competence.
Excess Capacity and Exit Barriers Exit barriers are higher when the products of the company are more specific/specialized and regulations on exiting the industry are strong. The contracts with suppliers and process of writing-off or ridding of assets are some of the barriers that would be very difficult to overcome in the personal product industry. The problem
25 | Page
of excess capacity is caused when the industry is larger than their consumer base. If a firm is not filling their capacity they are not utilizing their fixed cost and will need to reduce their price to compensate the difference and reduce their fixed to variable ratio. By comparing the ratios above it shows that Colgate may be in this situation and may need to find a way to reduce their variable.
Conclusion Within the personal product industry one can tell that it is one with large scales of economy and most all of the products are very similar and easy to replicate; which makes it very obvious that there will be price wars between competitors. All factors in this industry combined lead to the rivalry among existing firms to be high.
Threat of New Entrants The easier it is for a firm to enter an industry the more competitive the industry will be. For the personal product industry most firms are already established very well, which would make it very difficult for others to enter.
Economies of Scale In this industry, with the firms being so large any new entrants would ultimately suffer in the beginning by having to buy in large capacity and they would then not be able to compete with the present firms on price. The personal products industry strive on reducing costs and as one can see in the following table that one of the main goals is to increase the gross margin. As you can from the graph, firms gross margin percentages are increasing over the years. This is a result from lowering the cost of goods sold each year. Colgate’s gross margin percentage appears to increasing at a slower rate than a couple of the other firms.
26 | Page
Comparative Gross Margin 2002 2003 2004 2005 2006 2007 Colgate-Palmolive .55 .55 .55 .54 .55 .56 Proctor & Gamble .48 .49 .51 .51 .51 .52 Clorox .43 .47 .45 .43 .42 .43 Church & Dwight .30 .30 .36 .37 .39 .39
Total Assets/Growth (in Millions)
(Morningstar.com)
Conclusion This asset graph goes to further show how large in scale Proctor & Gamble is compared to the other main firms. Although Colgate has maintained their total assets and continued to slightly grow since 2004 Proctor & Gamble has the industry pretty much in the palm’s of their hand and has the ability to set many standards which would make it very difficult for and new firm to enter.
27 | Page
First Mover Advantage First-movers might be able to set industry regulations and be able to acquire harder to come by government licenses. These first movers have the advantage to gain higher market share, and the biggest advantage of all in this industry, to create patents on products. The first mover in this industry is clearly P&G who has over half of the total market share and sets many of the standards. In this sense new entrants would have a difficult time finding cost effective prices with suppliers and would also have no name recognition on the shelves. This gives the first movers in this industry a very significant advantage. These first movers of the personal consumer goods are obviously firms such as Proctor & Gamble and Colgate-Palmolive. It would be extremely difficult for a new firm to enter and gain the name recognition and gain confidence with buyers.
Conclusion In this industry the first-mover advantage is a very important issue concerning those who are considering on entering into this industry. The personal products industry already has a high concentration of firms and also already has its standards set by one of the main firms. So this is just another issue that makes the threat of new entrants low.
Access to Channels of Distribution and Relationships This is very important to any new entrants and also analysts to look at because this can determine how difficult or threatening it would be for a new firm to enter and the ease they would have with gaining support from suppliers. A key factor in this industry is customer relationships and the limited capacity on the shelves of participating distribution chains. These factors can act as significant barriers to entering an industry. For instance, there is already a high competition between existing firms of the personal product industry for shelf space. With P&G, Colgate-Palmolive, and J&J products having some of the most well known products that consumers have become
28 | Page accustomed to it would make new consumer goods hard to come-by shelf space because of the fact that retailers want a product that can sell at reasonable price and create a high turnover rate, and brand recognition is key in this proposal.
Legal Barriers Legal barriers can at times hinder the ability to enter and industry but within the personal products there are not too many variables that exist. The main one that might cause some difficulty would be the ability receive license to receive a few certain raw materials and acquire patents. For instance, in Colgate’s most recent 10-K there was a product using all natural chemicals in it that was delayed in production because of FDA regulations; but because of the experience in their industry they were able to find the problem quickly and the product was out by the end of the year.
Conclusion Overall the treat of new entrants is significantly low. There are many legal barriers and FDA regulations that have to be kept when dealing with personal products. The ability to create a brand image and compete with the low costs of the first movers would be extremely difficult and not practical for one to try and attempt.
Threat of Substitute Products There is a threat of substitute products when there are two or more products that perform the same function or purpose. “The threat of substitutes depends on the relative price and performance of the competing products or services and on customers’ willingness to substitute.” (Business Analysis) In this industry there is a very substantial amount of possible threats in this area because all firms and products are extremely similar and can easily be substituted.
29 | Page
Relative Price and Performance Customers’ perception on whether or not a product serves the same purpose depends mainly on if they can do so, and at the same cost. In this industry there are many products that can be easily substituted by generic brands that are lower in price. Brand names like Colgate, Scope, Kleenex, etc. are able to price their products a portion above the generic substitutes because of their relationship with the customer and brand recognition. Another factor though is that in the personal products industry a higher price is viewed by the customer of that product having a higher value, and they will receive a better performance from that particular brand. So in this industry it depends on the customer and if they are willing to pay a little extra for the higher quality or to go with the generic brand for a little less. This decision in a lot of cases is not a difficult one because of the fact that all of the products are so similar there really is no way for the gap in price to be that significant and the deciding factor usually comes down to name recognition.
Willingness to Substitute In the personal products industry the willingness to switch is normally very high, especially when it comes to looking at the buyers’ as retail stores. For example in the oral healthcare area there are the few top competitors such as Aquafresh, Colgate, & Crest that are now household names. The retail stores know they will have a high turnover rate with these brand names and they also have good relationships with those firms because of it. Since all of these products perform the same function customers are usually willing to “try-out” a new product or different brand that claims to create the same outcome as their previous product.
Conclusion In the personal products industry it is clear that the threat of substitute products is extremely high. Since there are more than two products that perform an identical purpose it would make it very hard to create a large difference in price. The main way
30 | Page
for a company to gain more sales would be by brand recognition and making their product a household name. These reasons also go to show how in an industry like this firms are almost forced to engage in price wars.
Bargaining Power of Buyers Every morning, people wake up relying on personal care products to survive daily routines with special focus on personal hygiene, clean clothes, and home care. In order for the consumer to pull items off the shelves, another buyer within the industry stocks inventory. This customer is the intermediary between the consumer and the personal care companies that generate these products. The intermediaries consist of retailers and distributors that serve the final consumer: the shopper. Industry competitors such as Proctor & Gamble, Colgate-Palmolive, Clorox, and Church & Dwight are the main sources of personal care products. Furthermore, they do not directly sell mass quantities to the shopper, but instead sell mass inventories to distributors such as Wal-Mart & Target. When selling to distributors and retailers, firms must keep in mind that actual profits are relative to the bargaining power a firm has with suppliers and buyers. In retrospect, distributors/ retailers have the bargaining power in this field due to their ability to negotiate price per large purchased quantities. Plus, the industry competes on undifferentiated products firm wide, which yields more bargaining power to buyers as they have ability to switch products. They also have ability to substitute products leaving firms battling on lower prices. Overall, the bargaining power of buyers is a component of the five forces model and is essential in evaluating the total profitability added to each competing firm.
Price Sensitivity Price sensitivity, a determinant of buyer power, decides the attitude of buyers in respect to bargaining on price. Since products are similar and associate with low switching costs in the industry, firms want to obtain products with high value and high
31 | Page
quality. Personal care products are needed by the average shopper because products such as toothpaste, laundry detergent, and cleaning products are imperative. Thus, searching for the lowest price of undifferentiated products within this industry is important to retailers own cost structure. In addition, the quality of the product is important because it can also determine price as a factor in purchasing. PCP competitors strive to put quality on the shelves. Retailers have to maintain quality products because shoppers have ability to easily switch. Finally, due to undifferentiated products PCP market customers are high price sensitive.
Relative Bargaining Power The key factor to bargaining power is what the cost will be to not do business with the buyer and vice-versa. For example Proctor & Gamble is one of the largest firms in the industry and they have some bargaining power because retailers want their products on the shelf. However, P&G needs their products on the shelves in order for the firm’s survival. “Although P&G is a very large company, its future is dependent on buyers. Wal-Mart and affiliates represent 15% of the firm's total revenue in 2006. This percentage of total revenue gives Wal-Mart the ability to bargain with the Company for lower prices, which would result in lower earnings.” (www.wsj.com) This holds true for most firms in this industry because the buyers have a very high bargaining power. Firms provide customers with their products in a convenient manner, but this is invaluable to firms due to the products they sell.
Conclusion So the relatively high bargaining power of the buyers in this industry has a huge effect of how firms operate. The variety of undifferentiated products in this industry is the main driver that increases the buyer’s bargaining power. Buyers are extremely price sensitive, which requires them to negotiate lower prices. Firms in the personal product industry have to comply with the buyers in order to continue being competitive in this
32 | Page
market, or else buyers will purchase these goods from competitors that have lower prices.
Bargaining Power of Suppliers There are a great number of suppliers in the personal products industry and they must compete on prices along with quality, speed, and innovation. Because there is a high number of companies and suppliers in this industry, suppliers power is minimized. Firms within this industry have many suppliers all around the world from which they get their resources and services. If suppliers want to be successful and compete in this industry, they must be creative and provide “unsurpassed customer service, proven processes, and technology tools that are used” (www.colgate.com). There is a high threat of substitute products in this industry which takes away from the power of these suppliers. Suppliers are able to compete successfully by offering low and competitive prices and high quality packaging, raw, and indirect materials. Suppliers must create and maintain good relationships with these companies. Because the products and services are undifferentiated and the cost of switching is low, suppliers do not have much power over pricing. Companies such as Proctor and Gamble and Colgate have developed a Supplier Diversity Program which reaches out to woman-owned and minority owned businesses. “This helps build supplier diversity and develop mutually beneficial supply relationships (Colgate). This Supplier Diversity Program creates even more competition with the other suppliers because now firms have more of a variety of suppliers from where they can receive their materials and resources. In conclusion, it is very difficult for suppliers to control prices within an industry where there are many firms and a number of substitute products available to customers.
Key Success Factors for Value Creation The personal product industry, a very competitive market, has to ensure the strategies they are using are the right ones. In terms of differentiation versus cost leadership strategies, PCP firms rely on both in order to survive the competitive markets. However,
33 | Page
firms do not equally weight both strategies, but focus more on differentiation. Such strategies or success criteria are important in evaluating firms in the PCP market. According to Colgate’s 10-K, “product quality and innovation, brand recognition, marketing capability and acceptance of new products largely determine success in the Company’s business segments.” New product development is a must in this industry in order to compete with the competitors in the industry. Along with new product development and innovation, is the brand recognition for each product. In order to be effective in this industry you must reduce costs as much as possible, and for some companies in this industry, that might become a barrier to remain highly competitive. Expenses just decrease the bottom line of the firm. These personal care products that you currently see at certain stores such as Wal-mart, Target, and Walgreens are very dependent on how much success the company has in a given year. This is obvious; however, new product development/innovation creates a huge factor in the future growth in the company. ” The growth of our business depends on the successful development and introduction of new products (Colgate 2006 10-K).” Firms in the industry should always want to develop that edge over existing products by creating new and better products in order to stay one step ahead of the competing firms. Not only that, but they should want to market them heavily and get the product to the public faster than its competitors. Suppliers also affect the company’s value. Firms in this industry try to do business with the supplier who will give them the lowest cost with the best quality. This will not only reduce their raw materials costs, but also keep them highly competitive overall. Firms in the personal care product industry are usually trying to allocate almost identical resources, so these suppliers’ costs are more important than some might believe. In order to continue to be a competitive firm in this industry of personal care products, firms must create value by implementing certain things. This includes reducing costs maybe by finding that new and better supplier or a different ingredient
34 | Page
in the product that works the same but costs less. This industry is different from others in that certain products, such as the oral care market, are always changing.
Industry Classification – Competitive Advantages Broad Scope In order for a firm to successfully compete in the personal care products market, it must maintain both a differentiated product and cost focus. In order to effectively promote a cost leadership strategy, companies within the personal care industry have to emerge as a cost leader. Through economies of scale and scope, efficient production, and controlling low input costs companies such as Colgate-Palmolive and Procter and Gamble are able to efficiently implement a cost leadership strategy. However, being a cost leader is only part of the spectrum as the industry requires differentiation of product, which yields focus on investment in brand image, research and development, and innovations. Through these strategies companies are able to compete at the industry level and maintain a competitive edge over new and existing entrants. Furthermore, implementing these characteristics contributes to the overall goal of maintaining a superior value chain in comparison to competitors.
Economies of Scale Achieving economies of scale occurs, “[w]hen more units of a good or a service can be produced on a larger scale, yet with (on average) less input costs, economies of scale (ES) are said to be achieved (www.investopedia.com). Given that the market for personal care products is highly competitive, economies of scale is a requirement to succeed against competitors. By doing so yields an influential force over the bargaining power of suppliers, which leads to lower input costs. Within the industry economies of scale also contributes to the increase in market share. Thus, increases competitive advantage and lowers the willingness of new entrants into the market.
35 | Page
Economies of Scope Increasing the scope of distribution and marketing is another key element to the personal care product market and economies of scope is an aimed strategy to accomplish this element. Attention given to distribution is a must as firms are required to mass distribute at the demand level in order to successfully compete within the market. If different products are not provided then the consumer demand declines; therefore, a firm must offer a variety of products to compete in this industry.
Lower Input Costs Input costs are an essential focus to the cost leadership approach and strategy. Due to high fixed costs associated with the operating activities, lowering input costs is the most effective way of managing prices. Maintaining these low input costs not only yields a competitive advantage when products are sold to retailers, but produces higher profits margins. Since large amounts of undifferentiated products exist in the personal care product industry, companies are subject to competition in cost leadership. Therefore, it is imperative to lower the cost of their products when selling to large retailers, because the buyers have a high amount of bargaining power. If Colgate-Palmolive’s product costs are too high, the retailers will purchase the competitors product instead. Currently, the personal care product industry is experiencing rising prices in input costs, which affects all companies’ input prices. Furthermore, with energy and commodity prices increasing, input costs are only heading up. According to P &G’s finance chief, Clayt Daley, "commodity and energy cost increases were higher than originally anticipated. Diesel fuel, phosphates and resins, just to name a few, increased significantly during the quarter. To offset this significant commodity and energy cost pressure, we have announced a number of price increases, which go into effect during the January-March quarter (WSJ).” As prices increase consumers are negatively affected as retailers are forced to raise prices. This chain reaction is common amongst all competing firms and forces the consumer to spend more money.
36 | Page
Ratio of Fixed to Variable Costs This ratio is used to explain how well a firm is efficiently utilizing its resources. To calculate this ratio you take the fixed cost, which is the selling, general, and administrative cost and divide them by the variable costs, or the cost of goods sold. Efficient companies focus on minimizing variable cost in order to increase productivity. These ratios are used to compare companies within the same industry. “If the ratio of fixed to variable costs is high, firms have an incentive to reduce prices to utilize installed capacity (Business Analysis). Colgate’s ratio indicates that they need to reduce prices to utilize installed capacity.
Colgate- Clorox Church & Proctor & Palmolive Company Dwight Gamble 2002 .72 .41 .28 .60 2003 .74 .44 .28 .60 2004 .76 .41 .39 .66 2005 .76 .40 .39 .65 2006 .79 .40 .43 .66 2007 .82 .41 .42 .66
Brand recognition Earning higher market share in the industry and advertising help increase brand recognition. This is very important in differentiating a company’s products from the large variety of substitutes. A firm has to provide quality products at low prices in order to build buyer loyalty. This is very important in an industry that has very low switching cost between similar products. Having a higher valued trademark leads to increased shelf-space in retail stores, which attracts consumer’s preferences in purchases.
37 | Page
Through investment in brand recognition, firms are able to support consumer attraction in a certain way and further promote the differentiation principle required for competition.
Research and Development By investing in research and development, firms are able to directly target the particular consumer taste at any current time period. In order for firms to compete on types of products, uniqueness of products, and preference of products research and development is essential. When firms know what the consumer wants, they can target a certain product bundle and emphasize attention towards that product in order to gain market share over competitors. For instance, Colgate-Palmolive might research what toothpaste consumers are particularly interested in: plaque control versus whitening versus mint flavored toothpaste. The following table displays that research and development are very important to the growth of this company. The increase each year is a very noticeable number.
Colgate-Palmolive Research and Development (In Millions*)
2003- 204.8 2004- 229.2 2005- 246.3
(Colgate-Palmolive 2006 10-K)
Firm Competitive Advantage Analysis “Product quality and innovation, brand recognition, marketing capability and acceptance of new products largely determine success in the Company’s business
38 | Page
segments.” (2006 10-K pg 2) Product quality is very important to differentiate their products from other competitors. The Hills Pet Nutrition segment of the business specializes in selling high quality pet food world-wide in over 90 countries. So Colgate utilizes product quality to effectively differentiate its product from other firms such as Iams and Pedigree. Product quality for oral care is a requirement as stated above in the competitive strategy due to high competition amongst companies. In order to effectively promote products, firms have to focus on increasing quality or they might lose potential customers and market share. When assessing Colgate-Palmolive, promotion of quality plays a significant role in adding value to the firm and yields an increase in gross profit margin.
Economies of Scale Colgate-Palmolive fosters what they refer to as a supplier diversity team. They have this team in order to meet investor’s expectations for quality, speed, innovations and cost effectiveness. Lower costs would drive growth for the future of the company. This would allow Colgate to lower their prices and gain a larger market share. It would also reduce the threat of new entrants into the personal products industry since they cannot compete with these low prices. This team also strives to gain these supplier relations with the smaller businesses so they can have higher growth in the company and also higher funding for growth. Colgate has also innovated new different products. Their research and development team has come up with new product lines for things such as oral care toothpaste. The R&D of Colgate strives not only to make the superior product variety better, but also tries to make a simpler product design which would ultimately reduce the input cost of the product as well. With this supplier team trying to be efficient with the speed of product design, it will again lead to Colgate being able to get the products on the shelves faster while also cutting operational costs.
39 | Page
Lower input costs In the personal product industry, we have seen that that’s, such as toothpaste, are not that different from each other. In that case they must compete on a cost leadership basis. Colgate strives to lower their input cost so that they can have that competitive over the industry. They do that by trying be innovative with their product designs and the utilization of their assets. All company’s in this industry use many of the same suppliers so it would be hard to cut costs in that area, however Colgate tries to always find the new supplier that might not be as big, but offers a lower price is always wanted.
Product Innovation Product innovation also contributes to the overall firm’s value. Colgate-Palmolive currently invests material amounts of money towards research and development in order to promote certain product creations. Furthermore, Colgate’s investments in research and development have increased over the past three years. According to Colgate’s 2006 10-k, “company spending related to research and development activities were $241.5 million, $238.5 million, and $223.4 million during 2006, 2005, and 2004, respectively.”, thus, product innovation is an important factor in the personal care product market and companies are required to focus attention towards it. If proper attention is not given, firms are negatively affected and competition is decreased. In addition, knowing what the customer wants at all times contribute to the overall potential profitability of the firm. Also, Colgate-Palmolive has to focus on developing and funding technological innovations (Colgate-Palmolive 2006 10-k). This element allows for an aggressive competing strategy against everyone else in the market and provides additional value to Colgate’s underlying key success factors. Not only is it important to focus this attention, but it is highly recommended to be the first to launch new products. If the firm has strong capabilities in doing so through the distribution channels then they are at an advantage.
40 | Page
Brand Recognition After emphasizing the importance of product quality and innovations, Colgate- Palmolive has to maintain their current market share of $38.17 billion through increasing the reputation of their brand image. With retailer’s strength in bargaining power, Colgate-Palmolive currently has to increase brand recognition so they can maintain positive relationships with retailers. The firm is capable of doing so by implementing aggressive marketing strategies through effective advertising. Within the past 5 years Colgate has had an average total increase of marketing expenses of 11.5% per year. These marketing costs are expensed under selling, general, and administrative costs. Marketing strategies such as advertising or introducing a new product to regain attention from the consumers is considered almost as an investment to the Company by helping increase net sales. Moreover, Colgate states “our ability to compete also depends on the strength of our brands, whether we can attract and retain key talent” (Colgate 10-K) Relationships with “key talents” are vital both at an industry and firm level; thus, Colgate-Palmolive does include brand image in its fundamental strategy. Increase in Marketing Expense 2003 2004 2005 2006 2007 7.5% 10% 12% 11% 17%
The Future: Restructuring Programs At the firm level, Colgate-Palmolive is currently making efforts to streamline manufacturing processes so they can “enhance the Company’s global leadership position in its core businesses (Colgate-Palmolive 2006 10-k).” It is believed that by implementing these efforts, Colgate will increase their competitive abilities and contribute to their cost leadership strategy mentioned as part of the industry’s overall
41 | Page
strategy. The restructuring includes closing warehouses and reducing their workforce by 12% (Colgate-Palmolive 2006 10-k), which leads to decreased operating costs. By lowering the operating costs, the firm is focusing on promoting high gross profit margins, but at the expense of losing workers.
Restructuring Program Expenses Year Expenses ($ millions) 2004 $65.3 2005 $80.8 2006 $153.1 *From Colgate-Palmolive 2006 10-k
As the above table states, the costs of restructuring have recently increased from the years 2004-2006. Therefore, Colgate is currently increasing its focus on these programs to increase savings that range from $325 - $400 million (before tax). So, the firm plans on spending anywhere from $750 - $900 million on the restructuring program to promote long-term growth, which is expected to begin in the year 2008.
42 | Page
Accounting Analysis
Identification of Key Accounting Policies
To identify the key accounting policies of a company one must directly relate them to the previously discussed key success factors. Their disclosure is very high, but there are some discrepancies with their leases due to the fact that they do not record them till year 2008. Colgate’s success factors greatly depend on brand recognition, advertising, research and development, and the power of key retailers and their policies that can affect pricing. Analysis of a firms accounting policies should identify how detailed and how much information they are willing to disclose. For example, in 2004 Colgate implemented a restructuring program that they will continue to implement in future years but they state in their 10-K that they cannot guarantee that it will not exceed expected costs, and if the program fails they will experience significant losses. They list these under selling and administration expenses and have a note underneath that explains how these expenses will in time be beneficial for the company. Goodwill and other intangibles assets are subject to an impairment test every year. This goes to show how Colgate is attempting to give their shareholders all available information even if it is not entirely beneficial to the value of their firm. Some of Colgate’s main supply of income comes from global operations. The Company markets its products in over 200 countries and territories throughout the world. This makes it very important to realize the currency derivative risk and the management risk of exposure. Colgate allocates in their expenses the exchange rates under investment losses. “Investment losses (income) consisted of gains and losses on foreign currency contracts, principally due to declines and increases in the fair value of foreign denominated deposits which are economic hedges of certain foreign currency debt but do not qualify for hedge accounting.” (10-K 2006) They try to reduce the high risk and volatility by managing on a global level the working capital, and implementing various techniques of selective bargaining in local currencies and entering into
43 | Page derivative dealings with ordinary features. The interest rates also play a big part here and are managed in a way to reduce the gap between fixed and floating rates. They accommodate this by issuing debts and interest rate swaps. During times of extreme measures they can use some of their long term or future contracts to reduce the volatility. There is a risk in this that could end in a credit loss but very unlikely since firms they deal with have at least an “AA- or higher long term debt rating.” (10-K 2006) Another issue is their defined benefit pension liabilities and post-retirement expenses. In this area they use for accounting policies very complex and differentiated ways to accrue for accounting purposes. “Defined benefit and other postretirement plans are based on a yield curve constructed from a portfolio of high-quality bonds for which the timing and amount of cash outflows approximate the estimated payouts of the U.S. plans. For the Company’s international plans, the discount rates are set by benchmarking against investment-grade corporate bonds rated AA or better.” (10-K 2006) Another rate they look at with the most judgment for post-retirement is the current medical cost trend rate. This goes to show that with these accounts they stay as recent and up to date with the rates and regulations as possible to show accurate liabilities. Colgate’s defined benefit assumptions are based on actuarial assumptions, and the terminations of plans are then later related and accrual resides in pension and other retiree benefit liabilities. Research and Development, brand recognition, as well as acquisitions of new companies are all very significant for Colgate and other firms in the personal care industry to account for and in an accurate way. Recently Colgate acquired Tom’s of Maine to their line of products. With newly acquired investments they allocate all assets and liabilities at that time based on a fair value of everything assumed. These recent acquisitions also have an impact on the Goodwill. The main increases in net goodwill in 2006 have come from the buying of Tom’s of Maine. In 2006 Goodwill and other intangible assets accounted for nearly 22% of Colgate’s total assets. This is a significant amount and investors should look closely at how the company is evaluating their goodwill from year to year and if it seems to be fairly valued. It is also wise for an
44 | Page
investor to know that “Goodwill and indefinite life intangible assets, such as the Company’s global brands, are subject to annual impairment tests. Other intangible assets with finite lives, such as trademarks, local brands and non-compete agreements, are amortized over their useful lives, ranging from 5 to 40 years…” (colgate.com) Colgate suffered no impairments in 2006. “ The ability to compete also depends on the strength of our brands, whether we can attract and retain key talent, and our ability to protect our patent, trademark and trade dress rights and to defend against related challenges brought by competitors.” (colgate.com). The research and development area of this company is increasing every year and the company’s 10-K openly states this fact as a necessity for the company to grow and to meet its consumer’s needs. Since there are uncertainties of exactly where they research and development is being allocated it is required by the GAAP for it to be expensed. When an enhancement of an existing product or creation of a new product is the result of research and development then the legal fees, trademarks, and patents will all be amortized against its useful life. Colgate can be very conservative in some of their accounting techniques. For example where most firms in the personal products industry would record all shipping and handling costs as cost of sales; Colgate allocates the shipping and handling along with all the other expenses associated with cost of goods sold and selling and administration expense. So instead of taking the route of their total net income they were conservative and fully recorded the costs. This is another thing an investor would need to know to accurately be able to tell the value of a company and how they tend to account for their costs and other liabilities. The relative mix and use of operating leases versus capital leases with Colgate is not very absolute. The total capitalized leases are about $33.3 million where as operating leases exceed $525 million. The firm does not disclose information on why their mix is so volatile. These types of key accounting policies could over or understate the assets and/or expenses if not accounted for thoroughly. It is also unnecessary to disclose any off-balance sheet collateralized debt obligations because the firm does not have any.
45 | Page
Accounting Flexibility
A firm’s accounting flexibility is how companies allow management to estimate different accounting policies while also following the guidelines of the General Accepted Accounting Policies (GAAP). With respect to Colgate, they take into account three important items that affect their accounting decisions: goodwill, employee benefits (mainly post-retirement), and legal and other contingencies. All of these are very flexible and heavily rely on management’s judgment.
Goodwill and Intangible Assets In May of 2006, Colgate purchased 84% of Tom’s of Maine Inc. outstanding shares, a leader in toothpaste and deodorant, and allowed Colgate to excel in the fast growing market of the personal products industry. This acquisition, along with the company’s ownership in Romania and Poland’s subsidiaries, is the main cause for the increase in the net carrying value in intangible assets and goodwill from 2005 to 2006. Goodwill rose 11% within this one year span, while intangible assets rose 6%. We can expect that Goodwill will remain steady unless there is another significant acquisition of a company, like Tom’s of Maine Inc. When Colgate impairs their goodwill and intangible assets they use estimates including future cash flows, growth rate and a selection of discount rates. However, these indefinite intangible assets, such as trademarks and global brands, along with goodwill, are required to have annual impairment tests. The other finite life intangibles are amortized anywhere from 5 to 40 years depending on their useful life. The reason this is important is the flexibility allowed for the managers in making these useful estimates in order to account for goodwill. Managers are put in a situation of trust and must uphold that trust to make the right calls for the company’s future economic status. All in all, firms in this industry show that they are flexible in letting managers make decisions.
46 | Page
2005 2006
Goodwill 1874.7 2081.8
Intangible Assets 783.2 831.1
Total Assets 8507.1 9138.0
Amounts in Millions (2007 10-k)
Employee Benefits Colgate has many employee benefits, whether it is medical, stock-based options, or pension plans. Most of these relate to post-retirement benefits. Firms in not only this industry, but many others, have to remain flexible when dealing with these types of benefits since they deal with estimating expected salaries and other employee related issues. For instance, healthcare benefits need to be very flexible. This is because that everyone does not have the exact same health. Some people might need a surgery while others will not. Regarding medical estimations, Colgate uses a medical cost trend rate in order to estimate for future medical expenses. Colgate uses assumed that in 2005, the rate to increase was approximately 10%. They estimated it would decrease for the next 5 years by 1% each year so that they would ultimately arrive at a 5% increase per year. Pension plans also have to be flexible. According to the 2007 10-K report of Colgate, pension plans and benefits rely on how long the employee has been with the company and their career earnings. So the company has to decide for each
Legal and Other Contingencies These reserves are based on the management’s assessment of any risk of a potential loss. The managers’ assessments are reviewed each period and changes are
47 | Page
made if needed. The accounting decisions of managers have to be very flexible to due how many legal suites there are in a given year. Although the cash flow statement could be dramatically affected by a one-time impact of such legal or contingency issue, the manager’s opinion is what matters most and his responsibility that it will not affect the financial position of the company.
Conclusion Accounting flexibility in firms relies on how managers make judgment calls while also abiding by the GAAP. The reason that Colgate is very flexible in accounting policies is that the company really relies on managers to make decisions. Like in the medical benefits, there are many different cases and the company has to be flexible in order to take care of each one. This also goes a lot with legal proceedings and goodwill. All of these need high flexibility when making accounting assessments.
Accounting Strategy
Disclosing pertinent information to investors is ideal in maintaining a relationship and done in order to abide by GAAP. However, following GAAP is possible through either a high or a low level of disclosure. In order for a firm to generate a high level of disclosure they go beyond just satisfying GAAP. Furthermore, through extensive discussion in areas of the 10-K report and segment reporting a high disclosure is obtainable. The above-identified accounting flexibility allows managers to communicate the true performance of the firm or gives them the power to distort real value. Along with an identified level of disclosure, the company implements either an aggressive or a conservative accounting policy, which affects the way earnings are reported. Within the personal care product market, Colgate-Palmolive maintains a high level of disclosure as it effectively introduces its segments both by category and per global operations. These segments are primarily divided into two categories: oral,
48 | Page personal, and home care; and pet nutrition (Colgate-Palmolive 10-K). Since Colgate relies heavily on its global operations, the oral, personal, and home care segment is then divided amongst the following continents: North America, Latin America, Europe/South Pacific, and Greater Asia/Africa. While disclosing this information is relevant to its global operations, Colgate does so in order to relate valuable information to the investor. Reporting its emphasis on global operations allows investors to take into account the affect of other factors such as interest rates and economic instability in other countries. Plus, introducing its global involvement supports cost leadership, a key policy in competition for market share in the personal care product market. While revealing the above mentioned information in the “Management Discussion & Analysis” section of their 10-K, Colgate also discloses the affect of the 2004 restructuring program on corporate segments opposed to operating segments. Revealing this information prevents assumptions of the programs costs being stated as operating costs, which would lead to overstated expenses; therefore, understating earnings and emphasizing a conservative accounting approach (not to industry standard). Since estimates and formed assumptions are at the manager’s discretion the level of uncertainty increases over time (Colgate-Palmolive 10-K). This discretion leaves room for error as nothing is guaranteed until transactions are finalized. When managers make these estimates they take into account the accounting policies that most affect the firm’s condition and in Colgate’s position, they inform the investor about its significant policies relating to the shipping & handling costs. Unlike other firms in the industry, Colgate records shipping and handling costs as a percentage of selling, general and administrative expenses instead of a cost of sale. By doing so, the gross profit margin is higher as oppose to lower when accounted for in the cost of sales as shown in the following table.
49 | Page
Year Gross Profit Margin (S & H Gross Profit Margin (S & H Costs as Selling, General & Costs as Cost of Sales) Administrative Expenses 2004 55.2% 48.5% 2005 54.4% 46.9% 2006 54.8 % 47.1 %
Including these costs as a percentage of selling, general and administrative expenses highlights the firm as more profitable, which depicts a positive return for interested investors. In addition, factoring in these costs as a percentage of cost of sales would not affect reported earnings because they have already been accounted for. Therefore, the aggressive accounting strategy yields higher reported earnings. When considering disclosure at a quantitative level, Colgate-Palmolive does not disclose numbers that are material in nature with respect to total assets or total current liabilities. Thus, Colgate discloses numbers at a low level and further distorts its financial statements. For instance, they state (per balance sheet) that goodwill accounts for $2,081.8 million in 2006 and $1845.7 million in 2005, which is a material amount in respect to total assets of $9,138.0 and $8,507.1 million in years 2006 and 2005 respectively. Furthermore, Colgate also assigns a material amount of liabilities to the liability account labeled “other accruals,” but does not disclose in any way, shape, or form what these “other accruals” are in their 10-K report. For example, on their 2006 balance sheet, the firm lists that $1,317.1 million in 2006 and $1,123.2 million in 2005 make up the “other accruals” account. In regards to total current liabilities of $3,469.1 million and $2,743.0 million in years 2006 & 2005 respectively, “other accruals” consists of 38 % and 41% of total current liabilities in 2006 and 2005 accordingly. In addition, “other liabilities” also affect total liabilities in a rather large way as this account contributes 16% in 2006 & 13% in 2005 of the total number. These figures represent a large amount of undisclosed liabilities that the firm does not bother mentioning
50 | Page
anywhere within in the 10-K. This undisclosed information affects the firm and investors have no insight to what theses liabilities are; thus, creating a low level of disclosure. Overall, Colgate discloses quantitative information at a high level, but fails to do so quantitatively. Although information in reference to “other accruals” and “other liabilities” are not disclosed, the firm is still considered as a high level disclose firm and takes an aggressive approach in determining its accounting policies. In order to compete in this industry, firms have to take into account the underlying cost leadership principle; thus supporting an aggressive approach in decision-making. Finally, Colgate expresses its true performance within the boundaries of flexibility, and GAAP, but still leaves an area in question when it comes to numbers, which could promote a problem in the future.
Qualitative Analysis of Disclosure
Colgate does a fairly good job of disclosing the value of their firm and the practices they perform. Qualitative Disclosure is the amount of information a company discloses in their 10-K report. This information comes from the financial statements and the Management Discussion and Analysis section (MD&A). The MD&A section of the annual report “provides an opportunity to help analysts understand the reasons behind a firms performance changes” (Business Analysis and Valuation). The amount and quality of disclosure “can make it more or less easy for an analyst to assess the firm’s accounting quality and to use its financial statements to understand business reality.” A higher level of disclosure gives an analyst more confidence to invest in a company because more information is available to analyze. When there is a lower level of disclosure analyst are less likely to invest and lose confidence in the company. Colgate-Palmolive does a fairly good job in disclosing their information whether it has positive or negative effects on the company. Colgate discloses information regarding research and development, distribution, raw materials, competition and trademarks. Colgate’s 10-K explains that “strong research and development capabilities and alliances
51 | Page
enable Colgate to support its many brands with technologically sophisticated products to meet consumers’ oral, personal and home care and pet nutrition needs.” It is also disclosed that no single customer accounts for 10% or more of the company’s sales and our company’s products are generally marketed by a direct sales force at each individual operating subsidiary or business unit. (Colgate’s 2006 10-K) There are some areas of concern regarding Colgate’s 10-K disclosure of Goodwill and Other liabilities. Goodwill consists of about 23% of our company’s total assets and that number is increasing by about one or two percent each year. Although Colgate purchased Tom of Maine Inc. in 2006, goodwill should not be increasing the year after. An increase in goodwill will effectively decrease the value of our company and will potentially raise red flags. Other liabilities consists of about 15% of our company’s total liabilities and disclosure of these other liabilities in the 10-K cannot be found anywhere. This raises a red flag and a huge question of where these other liabilities are coming from. Colgate also discloses the risks they face associated with significant international operations. According to Colgate’s 10-K, significant competition in our industry could adversely affect our growth and profitability if we are unable to compete effectively. Information regarding our pension benefit plan and property leases seems to be somewhat limited and is a minimal percentage of our company, but compared to other firms in the industry our level of disclosure seems to be above-average.
Quantitative Analysis of Disclosure The depth and quality of a firm’s disclosure can easily show or not show how well a company is doing financially. Diagnostics ran by an analysts can let an investor know if the company is manipulating the numbers to make them look better off than they really are. For example the firm can disclose physical indexes that show over time how the firm is operating and to what extent they are bringing in cash flows, assets and if they’re being overstated and then if they are burying the liabilities and expenses. Then with this information an investor should be able to compare over a cross-section
52 | Page
of the same information but with other firms in that same industry. The cross-sectional diagnostic will show whether or not the manipulation is just within a firm or if it is a common discrepancy throughout an industry. When looking at the statistics or a graph of internal comparison analyst will be able to tell within a year time span the extent, if any, of the manipulation.
Core Sales Manipulation Diagnostic
The Core Sales Diagnostic is a set of tools we used to help us get a better look at our companies sales compared to the other company’s sales in the industry. We took the net sales and divided them by the cash from sales, accounts receivable, and inventory for Colgate-Palmolive, Proctor & Gamble, Clorox Company, and Church & Dwight. These ratios were computed for the previous 5 years to give us an insight to our company along with our main competitors in the industry. After computing Colgate- Palmolive and their main competitor’s ratios we are now able to compare Colgate’s sales to other companies and look for any trends, discrepancies, or errors that might lead to potential red flags. Net Sales/Cash from Sales
(Numbers are from Morningstar.com and Colgate’s 10-k) 53 | Page
The net sales to cash from sales ratio gives us an idea of how much cash is collected from sales in a given period. The desired ratio should be close to 1, meaning that the amount of sales in a period should be very close, if not equal, to the amount of cash we are expecting to receive in that given period. The graph above displays the trend that each firm in the industry has a ratio close to 1 for the previous 5 years (with the exception of Proctor & Gamble in 2006 and 2007). An increase in Proctor & Gamble’s (PG) ratio might be a result from a huge increase in sales. In 2005, PG experienced about an 800 million dollar decrease in free cash flow, but in 2006 that number increased about 2.167B. Between 2005 and 2006, Colgate’s ratio increased by about .02. This increase is probably a result of Colgate’s purchase of Tom’s of Maine, Inc., which noticeably increased our sales. After analyzing the graph, Colgate- Palmolive’s ratio remains close to 1 throughout the previous 5 years and therefore we have found no signs of any accounting errors or distortions that would lead to any potential read flags. Net Sales/Net Accounts Relievable
(Morningstar.com and Colgate’s 10-K 54 | Page
The net sales to accounts receivable ratio displays how much of our net sales are credit transaction. A low ratio indicates that fewer sales are on credit. The graph above shows that Colgate has the fewest amounts of credit transactions. Colgate’s growth has been increasing more and more each year. Due to this they are now going to be able to increase their cash flows which will result in them being able to use less credit transactions and invest their own “cash” without having to pay back as much interest as would have if were using creditors. The companies in this industry all have about the same ratio, but Proctor & Gamble’s ratio is noticeably higher. The reason they have a higher number is because they have a greater number of net sales than any other firm and therefore will inevitably have more credit transactions. Proctor & Gamble’s drop from about 13.5 to 9 in 2006 indicates that they had a huge increase in receivables or an increase in net sales. In 2006 their net sales increased by about 12B and their accounts receivable only increased by 1.6M. The graph displays that the firms in this industry follow the same trend. As we look at the ratios we can see that there have not been any significant changes for our firm, and therefore we have concluded that Colgate-Palmolive has not deceived the value of their company through changes in their net sales or accounts receivable. Net Sales/Inventory
18 16 14 12 Co l gat e 10 Cl o r o x 8 Pr oct or & Gambl e 6 Church & Dwight 4 2 0 2003 2004 2005 2006 2007
(Morningstar.com and Colgate’s 10-K)
55 | Page
The net sales to inventory ratio displays the amount of inventory relative to net sales. The ratio can decrease due to an increase in inventory or a decrease in net sales, and vice versa. This can also be affected by warranties and unearned revenues. Compared to the other firms, Colgate’s ratio follows closely with the trend. In 2006, Clorox experienced a decrease in their inventory by about 30 million and that cause their ratio to drastically increase. This should raise a red flag for Clorox. The graph above displays that the industry trend for net sales to inventory ratio is decreasing. After looking at the inventory for each company, it is clear that the level of inventory is increasing each year. Increase in outstanding warranties have caused Colgate-s ratio to decrease in the past few years. Colgate needs to find ways to better keep their sales to inventory more stable because this could cause show later on manipulation in outher accounts. Colgate- Palmolive had some small increases and decreases in their inventory throughout the past 5 years, but there is no concern about manipulation since Colgate follows the trend of the industry.
Conclusion The quantitative quality of disclosure assessed by the sales manipulation diagnostic shows that Colgate-Palmolive has not attempted to deceive the overall value of their company. These graphs above display how Colgate is performing in comparison with other companies in the industry. Colgate tends to follow the trend of the industry and there were no areas found where manipulation or major distortions would occur.
Expense Manipulation Diagnostics Investigating expense diagnostic ratios for a firm allows us to see if management is hiding some expenses, in order to look better on the books. By analyzing the last five years we can compare Colgate-Palmolive expense ratios to trends from other competitors in the industry. If these ratio diagnostics show any abnormality from industry-wide trends we can assume there is a potential “Red Flag”. The following
56 | Page
section will examine these expense diagnostic ratios and see if Colgate-Palmolive is reporting realistic accounting information.
Asset Turnover (Sales/Assets)
(Morningstar.com and Colgate’s 10-K)
Asset Turnover is a firm’s net sales / total assets. Firms invest a lot of resources into their assets, so it is crucial for a firm to use those assets as efficiently as possible. If you see an abrupt change in this ratio there’s a good chance there has been some manipulation, because it is difficult to drastically change your asset productivity. So a large change in this ratio could indicate a large write-off of assets or over/under stating assets. Colgate-Palmolive has a stable asset turnover ratio trend line that has fluctuated between 1.2-1.35, which indicates there probably hasn’t been any manipulation. In 2007 there was a small declining in the asset turnover ratio. This is probably a result from the restructuring program started in 2004. This should only be of little concern for investors because Colgate stated “Savings are projected to be in the range of $325 and
57 | Page
$400 ($250 and $300 after-tax) annually by 2008.”(Colgate-Palmolive 10-K) So the asset turnover ratio should have a steady increase after the restructuring program is completed.
Changes in Operating Cash Flows / Operating Income
(Morningstar.com)
By comparing operating cash flows to operating income this will shows us how much operating income is supported by cash operations. This ratio should be as close to 1:1 as possible to demonstrate that cash flows from operations match well with operating income. If the number of the ratio is small this indicates that the majority of a firm’s cash flows were created from its operating activities and not it’s investing or financing activities. Colgate-Palmolive has maintained a low and stable operating cash flows / operating income ratio over the past five years. The analysis of this ratio doesn’t show any evidence of manipulation, and that Colgate-Palmolive’s cash provided from operations is supported by operating income, which indicates a strong company.
58 | Page
Change in Cash Flows from Operating Activities / Net Operating Assets
(Morningstar.com)
The ratio of changes in CFFO/NOA uses cash flows from operations to show firm’s return on operating assets. It also determines if a firm is utilizing its fixed assets constructively. A high ratio is preferred and indicates that a firm is utilizing its assets to create cash flow. Colgate-Palmolive has the highest ratio in this industry, and has sustained this ratio for the past five years. This shows that Colgate-Palmolive has kept the same accounting mechanisms for recording these activities and reliably conveys this information to the investor. This analysis does not raise any “Red Flag’s”
59 | Page
Total Accruals / Change in Sales
1.2 1 0.8 0.6 0.4 Colgate-Palmolive 0.2 Ch u r ch & Dw i gh t 0 Clorox -0.2 2003 2004 2005 2006 2007 -0.4 -0.6
(Morningstar.com)
“The accrual basis accounting records revenues when they are earned and realized, and expenses when they are incurred.” (investorwords.com) Accruals includes estimations, so this could possibly be an area managers could manipulate to make the company look better. We have to challenge this ratio to make sure Colgate-Palmolive is consistent with industry trends. Total accruals are the difference between earnings and cash flows from operations. Colgate-Palmolive has a low ratio meaning that the majority of their sales are purchased with cash. This is better for a company because there is a smaller likelihood for defaults on credit transactions. A company that has a low ratio is more favorable because more sales are purchased with cash than through credit Colgate-Palmolive’s ratio also had been stable over the last five years, but as one can see from the graph above Colgate’s ratio has greatly increased from 2006 to 2007 by nearly 80%. Although their ratio is still low it is above their average for them which could lead to accounting distortions.
60 | Page
Pension Expense/SG&A Expenses
The pension expense / SG&A expense ratio informs investors how much of a firm’s pension plan accounts for its’ selling, general and administrative expense. This ratio should be low because a firm doesn’t want to have a large portion of expenses going to retired workers. Resources that are given to retired workers will not help increase the profitability of a firm, so firms should maintain a low ratio. Colgate- Palmolive has maintained a stable ratio over the past five years ranging from 4.6% - 3.8%. This indicates that Colgate-Palmolive is not misusing its resources in the pension program. The steady trend over the five years also demonstrates that Colgate-Palmolive has not manipulated any of the pension expenses. If there was a sharp jump in the graph then there would be a potential “Red Flag”.
Conclusion The expense diagnostic ratio analysis shows that Colgate-Palmolive has not manipulated its financial statements to make the company appear stronger. The asset
61 | Page
turnover ratio’s consistency showed Colgate-Palmolive sales are supported by the firms’ assets. So their accounting policies have been properly depreciating and writing off assets to accurately portray asset at their true market value. The operating cash flows / operating income ratio illustrates that Colgate-Palmolive’s cash provided from operations is adequately supported by its’ operating income, and has sustained a consistent ratio for the past five years. The cash flow from operation / net operating assets ratio explains that Colgate-Palmolive is utilizing its operating assets more efficiently than competing firms. All the information from these graphs illustrates the consistency in their accounting policies. The information follows closely with other trends set by competitors in this industry. Therefore from this analysis there has not been any manipulation in any of these areas of Colgate-Palmolive’s accounting policies.
Identifying Potential “Red Flags” An analysis of the diagnostic ratios for Colgate-Palmolive should reveal any manipulation or distortions that may arise in the financial statements. In the analysis of the ratios and disclosure for Colgate, very few red flags have been discovered, but there are some areas that need to be discussed. There were small increases and decreases throughout the graphs, but in respect to the industry, they follow the trend quite well. As explained earlier, the only areas of concern deal with goodwill and other liabilities. Other liabilities on the balance sheet take up a noticeable percentage, about 15%, of our total liabilities, but have not been mentioned throughout the 10-K report. Colgate’s failure to disclose this information could lead to a decrease in value of their company. Goodwill has increased from $1,846 million in 2005 to $2,082 million in 2006. This increase in goodwill has continuously left an overstated asset on the balance sheet that takes away from the value of this company. In conclusion, we have decided that Colgate’s goodwill has been overstated for the previous five years.
62 | Page
Undo Accounting Distortions Finally, in order to evaluate a firm’s “true economic performance” accounting distortions have to be restated so the “real” numbers of the firm can be evaluated. In Colgate-Palmolive’s case, goodwill has been a constant growing intangible asset that leads to overstating total assets. For instance just since the 2004 Restructuring Program there has been a $782 million increase in Goodwill. Thus, impairment of goodwill is required to present the actual numbers at current value. Since Colgate overstates goodwill, we must take the ending goodwill balance at the end of 2002, $1182.8 million, and amortize it over the next five years. Furthermore, the Goodwill in the following years also has to be amortized over a related five year period. Colgate’s 2007 10-K shows an ending balance of Goodwill in 2007 of $2,272 million. In comparison, the impaired GW ending balance of $393.88 million is a significant decrease and is left to be appropriated over the 2008 – 2011 time period. Lowering GW by the respected amount increases both Total Assets and Total Stockholder’s Equity over the appropriate amortization life.
Goodwill as a Percentage of Total Assets - Before Restatement
2002 2003 2004 2005 2006 2007 Colgate 16.7% 17.4% 21.8% 21.7% 22.8% 22.5%
Goodwill as a Percentage of Total Assets - After Restatement
2002 2003 2004 2005 2006 2007 Colgate 12.9% 10.1% 10.7% 6.2% 3.9% 3.3%
In addition, the declining GW balance coexists with a decreasing percentage representation of Total Assets as seen in the above tables. Over the six-year period, GW declines from a 12.9% representation of Total Assets to a significantly less 3.3% model.
63 | Page
Consequently, impairing Goodwill when it is a material amount of assets is needed in order to evaluate the underlying value of the firm. In Colgate’s case, GW represented a large portion, higher than 20%, of its related Total Assets. Therefore, impairment was required.
64 | Page
Ratio Analysis, Forecast Financials, and Cost of Capital Estimation
Financial Analysis Ratio analysis and cash flow analysis are the two main tools used to analyze the financial performance of a company. The ratio analysis is made up of three types of ratios that measure a firm in different ways. These three measurements are liquidity, profitability, and capital structure. By using these ratios an analyst can compare the firms past performance with its present, and also against other firms’ performance. These can also provide enough information for forecasting future performance. By looking at the financial statements of a firm and their peers we will be able to better understand where the firm stands in their industry. Also these ratios and cash flow analysis gives an investor a better understanding of how the firm uses and disposes of their finances. “The goal of financial analysis is to assess the performance of a firm in the context of its stated goals and strategy.” (Business Analysis and Valuation)
Liquidity Analysis The ratios for liquidity analysis assess the firm’s ability to repay their short term and current liabilities. Ratios such as inventory turnover, receivables turnover, and working capital show how efficient the firms operates. The greater these ratios are the more efficient the company is with their operations. The current ratios and quick ratios are key indexes of a firm’s short term liquidity.( Business Analysis and Valuation) If the quick asset ratio is greater than one it indicates that a firm has enough cash from its assets to cover all of its current liabilities.
65 | Page
Current Ratio
Current ratio is found by dividing a firm’s current assets by their current liabilities. This ratio shows the ability of a firm to be able to cover their liabilities; their short term liquidity. Most covenants require under most circumstances for a firm to hold a current ratio of 1 or greater. Lenders must look at the company’s financial statements first though because the ratio can have distortions in it. For example, while Church & Dwight have had on average a higher current ratio they have also had an increase in sales over the past few years, but their profit margins a operating profit margins are the lowest in their industry. This distortion can be created by the firm holding assets that may be hard to liquidate. Colgate-Palmolive’s average current ratio since 2003 has been 1.02. Last year there was a 14% increase in Colgate’s current ratio. This increase was due to their “worldwide net sales in 2007, going up 12.5% from 2006 driven by volume growth of 6.5%, net selling price increases of 1.0% and a positive foreign exchange impact of 5.0%.” (10-K 2007) Colgate’s increase in profits and ability to maintain an average of at least a 1 for their current ratio should help them keep lenders financially supporting them when needed. In their 2007 10-K Colgate states that the Company
66 | Page
expects cash flow from operations and existing credit facilities will be sufficient to meet foreseeable business operating and recurring cash needs (including dividends, capital expenditures, planned stock repurchases and restructuring payments). The Company’s strong cash-generating capability and financial condition also allow it broad access to financial markets worldwide.
Quick Ratio
The quick asset ratio is very similar to the current ratio except for that it helps cover the problem of assets that may not be as liquid. It assumes that the firms accounts receivable are liquid. (Business Analysis & Valuation) To figure the quick asset ratio we take the firm’s cash, short-term investments, and accounts receivable and divide by the current liabilities. From 2003 to 2007 Colgate-Palmolive’s average quick ratio has been .61 which is right along the same average with their competitors. Church & Dwight have the leading ratio with it being at an average of .8. This is due to their sales having an increase of 33% in just the last quarter. Most of the firms in this industry though, including Colgate-Palmolive are all still ahead of them in sales and gross and operating profit margin.
67 | Page
A/R Turnover
Accounts receivable turnover is figured by dividing the firm’s sales by accounts receivable. This is just one of the ratios that help show how efficiently a company is utilizing its working capital. A high or increasing accounts receivable turnover is usually a positive sign - showing the company is successfully executing its credit policies and quickly turning its Accounts Receivables into cash. A possible negative aspect to an increasing Accounts Receivable Turnover is the company may be too strict in its credit policies and missing out on potential sales. (spireframe.com) Colgate-Palmolive has the lowest turnover amongst its competitors with an average since 2003 of 8 and has been decreasing since 2005. This means that they are collecting cash slower than their competitors and have less cash on hand. They state in their 2007 10-K that higher balances in accounts receivable were due primarily to higher net sales in 2007. The main competitor in the industry, Proctor & Gamble, has a significantly higher turnover than Colgate with an average of 14. This indicates that they may have a firmer grasp on their credit and collection policies than their competitors. In this industry though
68 | Page
accounts receivable only accounts for about a tenth of total assets and may not be a good indicator for creditors to look at.
Days Sales Outstanding
Days Sales Outstanding shows the amount of days on average it takes for a firm to collect their accounts receivable. The lower the number the better because it shows how quickly a firm collects cash and can then reinvest. It can give insight into the changes that occur within an organization's receivable balance; indicating whether a change occurred because of a positive or negative fluctuation in sales during that period. (credit-to-cash-advisor.com) The days sales outstanding correlates with the above accounts receivable turnover inversely. A firm wants for their turnover to be higher and days outstanding to be lower. The average days outstanding for this industry are approximately 36 days. It takes Colgate on average, since 2003, 45 days to collect their receivables compared to 27 days by their main competitor, Procter & Gamble. Colgate has the lowest turnover and the highest days outstanding. This shows that it takes them a longer time to collect the cash from their accounts receivable, and leads them to have less cash on hand to turn around and reinvest. However, in 69 | Page
Colgate’s 2007 10-K their statements show that days sales outstanding decreased slightly as compared to 2006.
Inventory Turnover
Inventory turnover is figured by taking a firm’s cost of goods sold and dividing by their inventory. It is an indicator on how efficient a company sells and replaces their inventory. The higher the number, the more efficiently the firm is operating because they have less money tied into inventory. Colgate-Palmolive’s average inventory turnover rate since 2003 is 5.58 in an industry where the average turnover rate is 6.75. Clorox has been the leader for the past 4 years in inventory turnover by far with an average of approximately 8.5. Most of the inventory in this industry has a definite but prolonged shelf life and do not turnover as quickly. This can, at times, make the personal goods industry rate be lower than other industry’s turnover rate. Those firms that can generate a given level of profit with a lower level of investment in inventory will generate higher cash flows and better return on invested capital. (SupplyChain Digest) Overall this turnover ratio has no real trend to it. In some years, the inventory will be higher at the end of the year than other years. Since inventory is kept on a 70 | Page demand basis, these levels can fluctuate from year to year causing the inventory turnover to increase or decrease.
Inventory Days
Days in inventory is figured by taking a full calendar year and dividing by the inventory turnover. It explains how long it takes inventory to turnover into sales (Investopedia). Just like the relationship with accounts receivable turnover and days outstanding, it too usually has an inverse relationship with inventory turnover. It is important for a firm to try to keep their inventory low because, working capital tied up in inventory can’t be used for more productive purposes that could generate higher returns or growth for the company. (SupplyChain Digest) The companies that have a higher turnover have the lower days in inventory. Colgate’s days supply of inventory on average is 62 days. The inventory days coverage ratio increased to 73 in 2007 as compared to 69 in 2006 to ensure continued product supply during plant closings under the 2004 Restructuring Program. (2007 10-K) According to SupplyChain Digest the average days in inventory have increased by about 2% across all the industries in the
71 | Page past year. This could be an indication of how the economy was slowing down and consumers having less incentive to spend money.
Working Capital Turnover
2003 2004 2005 2006 2007 Clorox -72.47 -18.49 -17.01 -37.75 -12.21 Colgate 193.79 1150.43 808.29 -728.45 83.48 Proctor & Gamble 15.15 -10.216 -12.05 15.7 -11.224 Church & Dwight 18.51 10.73 20.5 17.42 8.945
Working capital turnover is the difference between a firm’s current assets and current liabilities divided by sales. This shows an investor how well/efficient a firm runs its operations in relation to its accounts receivable, inventory, and accounts payable. In simple terms, it’s how much sales are produced from a firm’s working capital. The
72 | Page
average working capital turnover in this industry is between -20 and 20 while Colgate- Palmolive ranges from 1200 to -750. This graph shows that Colgate-Palmolive was nowhere near the norm for its industry until 2007. According to Colgate’s prior 10-K’s the reason for the high volatility in their working capital is due to the sudden changes brought with the 2004 Restructuring Program. “When a firm has a significantly high working capital turnover they are at a credit risk. Often it buys in large amounts and pays its bills promptly. But it has no reserve funds to serve as a cushion against hard times.” (WSJ) The Company’s working capital as a percentage of net sales improved to 2.2% in 2007 as compared with 2.3% in 2006. The Company’s working capital changes were driven by higher levels of payables and accruals, primarily due to the timing of tax payments and higher advertising, offset by higher accounts receivable and inventory balances. (2007 10-K) Overall we see a dramatic decline in our working capital turnover from 2004 to 2006. This was because of the new program Colgate implemented in that year along with increases various expenses. However, in 2007; it went back to the level with its competitors.
Conclusion After looking at Colgate-Palmolive’s ratios and comparing them with their competitors, it is fair to say that they are, on average, a liquid company. This is due to their most recent sales and profits being for the most part very positive. Their working capital was, for a while, very off from its competitors but has since increased to the norm. Their current and quick asset ratio is around 1 which is average when viewed upon by covenants. Days’ supply of inventory has been increasing over the past view years which means their inventory is remaining on shelves longer before being sold. We can see that in our inventory turnover is getting smaller in the respective years, resulting in a larger days supply of inventory. After looking at all the liquidity ratios and comparing them to the industry, we will conclude that Colgate Palmolive’s liquidity is average.
73 | Page
Profitability Analysis
The profitability analysis shows their ability and effectiveness to turn profits. In this analysis, all of the ratios have a common denominator of sales. In effect, we can ultimately say that the biggest driver of profits is a company’s sales. The six ways in which we measure the profitability of a company comes from the asset turnover, return on equity, return on assets, operating profit margin, gross profit margin, and net profit margin. These ratios help us show an investor how well managers use the funds invested by shareholders, how well the company generates money from their assets, and their financial leverage.
Gross Profit Margin
Gross profit margin measures the percent of total sales revenue that the firm retains after subtracting the cost of goods sold. It shows how much revenue is left over after accounting for the cost of goods. It is a basic indication of how financially healthy 74 | Page a company is. It is calculated by taking the revenue minus cost of goods sold divided by revenue. An increase in the ratio represents a decrease in cost of goods sold relative to the revenue. Here, firms want a higher gross profit margin ratio. From 2006 to 2007, gross profit margin rose from 54.8 percent to 56.2 percent, respectively. In 2007, their gross profit benefited from a continued focus on cost-savings programs, lower charges related to the 2004 Restructuring Program and the shift toward higher margin products( 2007 10-K). This offset such costs as materials and shipping and packaging. The decrease from 2004 to 2005 was due to the high costs associated with the ongoing 2004 Restructuring Program. Colgate has steadily remained at the top of the industry for gross profit margin, with their fiercest competitor, Proctor and Gamble, right behind them.
Net Profit Margin
75 | Page
Net profit margin is the firm’s net income divided by sales. This ratio is different from the gross profit margin because it takes into account all the firms expenses to get the net income versus jus subtracting out the cost of goods sold. Here, a high ratio is preferred which will show a high net income relative to the firm’s sales. Colgate did not have the same results here as they did with their gross profit margin, compared to their other three competitors. As shown, they would continually increase one year, and decrease the next. They stayed right around 12-15 percent for all 5 years. Church and Dwight continued to underperform their competitors as they also did with the gross profit margin. Clorox jumped from 13.2 percent in 2004 to 24.98% in 2005, which substantially outperformed the market in 2005.
Operating Profit Margin
The operating profit margin is the operating income as a percent of the firms sales. This calculation is important to the firm since it is an indication of how well a firm
76 | Page can pay off things such as operating expenses and interest on their debt. It also shows how much profit is made (from the operations part of a company) on each dollar of sales. It is calculated by taking the firms operating income divided by the sales. A high rate is desired to show that their income from operations is performing as it should, relative to the sales. The current industry leader in operating profit is Proctor and Gamble. They currently have a 20.59 percent margin. However, in 2003 Colgate was at the top. Their sudden decrease in 2004 was due to a 2 percent decrease in operating income while having a 6.55 percent increase in their sales. This led to the big dip in their operating profit margin. This decline once again relates to their 2004 restructuring program. Their operating income was quite low from 2003 to 2004 and we can see this margin to start to level out at the end of 2007. Church and Dwight have been steadily increasing their profit margin by have more of an increase in net cash from operations in relation to the percentage increases in sales. In 2003, operating income was 10.6% of sales while in 2007; it was up to 13.7% of sales. So we are seeing an upward trend in Church and Dwight’s operating profit margin. Proctor and Gamble has stayed quite constant throughout all five years. Asset Turnover
77 | Page
Asset turnover is calculated by divided the sales in one year by the total assets in the previous year. This ratio tells managers and investors how well the firm is utilizing its assets to generate sales. A higher ratio would be preferred in this situation because it would be producing more revenue for every dollar spent on assets. Generally, increasing the sales would increase the turnover. However, if the assets from the previous year increase at a higher rate, this would cause the asset turnover to decline. Colgate was on average, the top of its industry in asset turnover for all 5 years. They had an average of a 1.29 turnover which means that for every $1 of assets produced $1.29 of sales. Although from 2006 to 2007, Colgate’s sales increased, their assets rose at a higher rate in 2006, causing the turnover to decline.
Return on Assets (ROA)
Return on assets shows the return that a firm in receiving from their assets. It is calculated by dividing net income by the total assets. This is a very important number for a firm for two reasons. First, the firm can see what return they are making on their assets that they currently have. If it’s not a sufficient return, they might decide to
78 | Page
terminate it. More importantly, they use this number for new projects. It is very helpful to use this ratio to observe what this new asset might add to their return. If the return on assets rate is above the rate of borrowing, they should accept the new asset. Colgate’s trend for their return on assets remains very steady, staying right around 17 percent. Their actual 5 year average was 17.16 percent which was the industry leader, with Clorox a close second. Clorox had a substantial increase, however; from 2004 to 2005 which put them at the top of the industry during these years. This was due to them doubling their net income which significantly increased their ROA.
Return on Equity (ROE)
Return on equity is the measurement of how profitable a firm is with the funds that have been invested by investors. It is calculated by dividing the net income by the shareholders equity. Companies might also choose to do find the change in ROE. To calculate this you would divide the beginning of the year shareholders equity by the end of the year shareholders equity. This will show investors the change in profitability of the firm in that year. In 2004, Colgate took a huge dip on their ROE due to 2004
79 | Page
Restructuring Program. They spent a lot of internal funds, and incurred a lot of initial charges which reduced the net income dramatically. Colgate again outperformed their competitors staying right around 1 from 2005 to 2007.
Conclusion After collecting all the data for the profit side of the company, we can come to a conclusion on how well Colgate performed with respect to their competitors in the industry. Colgate has outperformed the industry in their return on equity, return on assets, and asset turnover. They stayed fairly competitive in the areas of net profit margin and operating profit margin. We can tell that in 2003, they outperformed the industry in these two areas; however the 2004 restructuring program a direct effect on both of these profit margins.
Capital Structure Analysis Capital structure is the way in which a firm is financed, whether it is through debt or equity. Usually we refer to the debt-to-equity ratio when we talk about the capital structure of a business. Usually a firm doesn’t finance their company solely on one or the other. It comes from a combination of the two. In this section we will show ratios that include: Debt-to-equity, times interest earned, debt service margin and also the internal and sustainable growth rates.
80 | Page
Times interest Earned (TIE)
Times interest earned is the calculation of the ability of a firm to meet their debt obligations. This ratio is stated before taxes and usually tells us how many times the company can cover the interest charges. It is calculated by dividing the earnings before interest and taxes by the interest expense. A higher ratio will show that the firm has more ability to pay off the interest on debt. After analyzing this graph, Colgate has always remained above the industry average. Their earnings compared to the interest expense they pay on debt shows that they outperform the industry by having more ability of paying off these interest charges. Since this ratio includes their earnings before interest and taxes and also their interest expense, either one of these could have hindered the ratio in a negative or positive way.
81 | Page
Debt Service Margin
2003 2004 2005 2006 2007 Clorox 9.94 6.126 7.513 Colgate 5.92 5.58 3.95 5.11 2.84 Proctor & Gamble 14.1 8.56 5.71 4.36 6.96 Church & Dwight 4.19 55.91 32.79 11.86 6.52
This ratio measures the adequacy of cash provided by operations to cover required annual installment payments on the principal amount of long-term liabilities (Financial Analysis Notes). This is calculated by taking the cash flow from operations in one year by the current portion of long-term debt in the previous year. Like the times interest earned, the firm desires a higher ratio to allow them to pay off this debt. Colgate’s debt service margin stays relatively consistent, remaining around 4-5 from 2003-2006. However in 2007, it dropped to 2.84, which shows that its ability to pay off 82 | Page the current portion of long term liabilities. This means that for every $2.84 that was generated from the cash from operations, $1 of this was used to pay the long term debt that will mature within the next year. This drop is not positive because creates more pressure to pay off debt using other cash flows. Compared to other firms in the industry, they remained fairly competitive except for Church and Dwight, who increased dramatically in 2004 and stayed at the top until 2007.
Debt-to-Equity ratio
2003 2004 2005 2006 2007 Clorox 2 1.49 -7.54 -24.18 20.44 Colgate 7.43 5.96 5.3 5.48 3.423 Proctor & Gamble 1.7 2.3 2.52 1.16 1.07 Church & Dwight 1.55 2.35 1.82 1.702 1.34
Debt to equity is the measure of a firm’s leverage which is calculated by dividing the total liabilities by the shareholders equity. It indicates whether the firm uses more 83 | Page
debt or equity to finance its assets. A higher ratio generally means that a company is financing their assets with debt. Colgate-Palmolive has been decreasing their debt-to- equity over the past 5 years. It started out with a ratio of 7.43 and has been slowly declining. At the end of 2007, it has a ratio of 3.42 which means that is still using more debt than equity to finance its assets. Compared to other firms, like Proctor and Gamble and Church and Dwight, this number is still above the average. However, the 2004 restructuring program that Colgate-Palmolive implemented is still progressing. In result, we should continue to see a steady decline in the debt-to-equity ratio. They will continue to use more and more funds from their earnings rather than using debt. Just by the 10 percent increase in retained earnings of Colgate from 2006 to 2007, they are well on their way to using less debt to finance their assets.
Conclusion When analyzing Colgate’s capital structure, we see a steady decline in the debt to equity which is a positive element of the firm. However, we also can see a downward trend in the debt service margin which indicates their declining ability to pay off long term debt. Overall though, Colgate-Palmolive is above the industry average with respect to servicing the interest charges they incur and how they finance their company.
Internal Growth Rate and Sustainable Growth Rate Analysis The sustainable growth rate (SGR) and the internal growth rate (IGR) shows the maximum amount that a firm can grow. The SGR is directly affected by the ROE and dividend payout ratio. The IGR is affected by the ROA and the debt to equity ratio. These ratios are important because they are the drivers of these growth rates. If a firm wants to grow more than what its SGR shows, you would imagine these ratios would also fluctuate.
84 | Page
Internal Growth Rate
2003 2004 2005 2006 2007 Clorox 8.26% 8.76% 22.35% 7.49% 8.41% Colgate 12.87% 10.57% 8.58% 7.95% 9.43% Proctor & Gamble 6.60% 8.57% 7.57% 8.09% 4.36% Church & Dwight 6.93% 6.32% 5.69% 6.22% 5.45%
The internal growth rate is the “highest level of growth achievable for a business without obtaining outside financing (www.investopedia.com).” The IGR as calculated:
IGR = ROA * (1-(Dividends/Net Income))
Colgate-Palmolive, up until recently, had a declining internal growth rate throughout the years signifying its expenditures related to the 2004 restructuring program and its acquisition of Tom’s of Maine (a natural soap company). These activities signify the IGR’s declines in years 2005 and 2006 by 1.99% and .63%,
85 | Page
respectively. Although it was declining, compared to the industry average Colgate’s IGR has been fairly steady introducing its ability to internally grow compared to its competitors. The stable IGR was due to the return on assets, which drives IGR, to be between 1.659 and 2 ( a .341 margin) throughout the last five years. Furthermore, Colgate-Palmolive is able to utilize its return on assets; thus, efficiently producing high levels with their given assets compared to its competitors. Overall Colgate’s internal growth rate has been quite steady and competitive in the industry. Their average was 9.89% which means their maximum growth without any outside financial help would be a little less than 10%. Sustainable Growth Rate
2003 2004 2005 2006 2007 Clorox 24.83% 21.81% -152.7% -173.6% 180.3% Colgate 108.5% 73.61% 54.06% 51.43% 41.71% Proctor & Gamble 17.82% 28.30% 26.65% 17.45% 9.01% Church & Dwight 17.69% 21.19% 16.02% 16.81% 12.78%
86 | Page
A company’s sustainable growth rate is the rate at which the firm grows with having to borrow outside funds. It is calculated by taking the debt to equity ratio and adding it to one. You then multiply it by the internal growth rate. A higher rate is desired here for a company to grow without have to increase their financial leverage. Colgate’s sustainable growth rate is steadily declining from 2003 to 2007. From 2003 to 2004 we see a 50 percent reduction in the sustainable growth rate which means they have to borrow more outside funds relative to their overall growth. This again relates back to their restructuring program in 2004. The discrepancies on our sustainable growth rates (going from 108% in 2003 to 41.71% in 2007) are due to the distortions of the return on assets in the internal growth rate equation along with the times interest earned and debt to equity ratios.
Financial Statement Forecasting Forecasting the financial statements provides an estimate of the future performance of a firm. Before you begin to forecast future financial statements you have to make a common size income statement and balance sheet for the past 5 years. The information in the common sized statements comes from Colgate-Palmolive’s 2007 10-K. The common sized financial statement makes it easier to interpret the information being analyzed, and provides a more accurate valuation of the firm. We also analyze industry trends when we are coming up with forecasting assumptions. Over time industries will tend to move together, which provides a valuable tool when forecasting a firms future activities. The following sections will talk about our forecasted assumptions for the next ten years. These assumptions came from well thought out growth rates.
Income Statement Forecasting financial statements begins with the income statement because it is the foundation to all our forecasting assumptions. We forecasted our income statement
87 | Page
for ten years based on Colgate-Palmolive’s past 5 year sales growth and also trends within the industry. First, we have to make a common sized income statement, which makes it easier to analyze the past performance of the firm. The common sized income statement takes every line item on the income statement as a percentage of total revenues. All of the information that is going to be forecasted relies heavily on the accuracy of our forecasted total revenues. Since we compute all our other forecasted financial information from this rate. After we came up with a sales growth that was consistent with Colgate-Palmolive’s past 5 years and with the industry average, we can compute Cost of Goods Sold, Gross Profit, Operating Income, and Net Income as a percentage of total revenue.
The average of our sales growth over the past five years has been approximately 7.4%, which is consistent with all of Colgate-Palmolive’s competitors. This has been a stable growth rate over the past five years, so we are confident that this figure accurately portrays Colgate-Palmolive’s future sales. The SGR has declined over the past 3 years, by 12.35%, which is directly driven by the other capital structure ratios such as the times interest earned and debt to equity ratio. The next item we forecasted is cost of goods sold, which also gave us our gross profit. Since sales less cost of goods sold equals a firm’s gross profit. We found that Colgate-Palmolive’s cost of goods sold was 44% and gross profit was 56% of their total sales. These figures are the firms’ historical averages over the past five years. Through analyzing the industries profitability ratios, we can see that Colgate-Palmolive’s gross profit margin is slightly larger than the industry average. This indicates that Colgate- Palmolive is running its business activities more efficiently than its competitors, which means its following its cost leadership strategy. The selling, general and administrative expenses historical value averages 35% of total sales over the past five years. These figures were consistent over the past five years so we believe this assumption to be accurate. Next we forecasted net income for the next ten years. The past five years Net Income’s growth rate fluctuated significantly. Making forecasting these figures difficult. The restructuring program that began in 2004 is the main reason for this. So starting in
88 | Page
2008 the benefits from the restructuring program will begin, causing a more stable income. So we averaged the past couple of years and came up with net income as 14% of total sales. This resulted in a growth rate of 1.8% in our forecasted net income over the next ten years.
89 | Page
annsprcmo hr,dltd00%00%00%00%0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 5.50% 0.03% 5.30% 6.38% 1.14% 6.38% 1.30% 6.27% 44.00% 1.19% 44.00% Earnings share, diluted common per 1.13% 44.00% 44.00% 1.25% 35.00 44.00% 35.00% 0.88% 100.00% Earnings share, basic common per 44.00% 35.00% 100.00% 44.00% 35.00% 1.52% 100.00% 100.00% 44.00% 35.00% 0.61% 100.00% 44.00% 35.00% 100.00% 0.85% 100.00% 44.00% 35.00% 100.00% -43.80% 35.00% -0.15% 100.00% 100.00% -45.20% 35.00% taxes 100.00% income for Provision -45.60% 36.06% 100.00% -44.90% 100.00% 35.59% -45.00% 100.00% 34.40% 100.00% 34.25% 33.28% expense, net Interest expense, net (income) Other expenses Selling, and administrative general Slaes Cost of Sales Net Common Size IncomeStatement e noe1.5 25%1.6 10%1.0 27%1.0 35%1.0 40%1.0 40%1.0 40%14.00% 14.00% 14.00% 14.00% 14.00% 14.00% 13.60% 13.50% 13.00% 12.70% 12.60% 11.06% 18.00% 11.86% 18.00% 20.50% 12.54% 18.00% 20.50% 14.35% 18.00% 20.50% 18.00% 20.50% 18.00% 20.50% 18.00% 20.50% 18.00% 20.50% 18.00% 56.00% 20.00% 18.00% 56.00% 20.00% 18.10% 56.00% 19.50% 16.36% 56.00% 19.24% 18.24% 56.00% 17.65% 18.92% 56.00% 19.44% 20.62% 56.00% 20.05% 56.00% 21.87% Income Net 56.00% 56.00% 56.20% 5480.00% 54.40% 55.10% 55.00% taxes income before Income profit Operating Gross Profit 0320 200 2004 2003 5 0620 0820 0021 02201 2012 2011 2010 2009 2008 2007 2006 3 04201 2014 5 062017 2016 35.00% %
90 | Page
Balance Sheet The balance sheet for a firm summarizes its’ assets, equity and liabilities. Forecasting the Balance sheet is more difficult than forecasting the income statement, but can be achieved by relating the two financial statements through profitability ratios. The asset turnover ratio is crucial to relating the income statement to the balance sheet. For Colgate-Palmolive their asset turnover has averaged 1.33 over the past five years. Asset turnover equals sales divided by last years’ total assets. So to get total assets for 2008, we took our forecasted sales from 2009 and divided it by the average asset turnover. Once we found the total assets then we can forecast the rest of the line items on the balance sheet. We forecasted current assets as 36.8% and non-current assets were 63.2% of total assets. These are the historical averages over the past five years, and have been relatively stable. Next we will forecast liabilities and Owners Equity. We are mainly focused on accurate owners equity forecasted values because we are doing an equity valuation of the firm. So the liabilities are not as important, and will just be a “plug in number” to make sure the balance sheet is balanced. Over the past five years there has been a steady growth rate in owner’s equity of 19%. This is the growth rate we used to forecast ten years of the owners equity. Our firm pays dividends also, so we forecasted dividends and then subtracted them from Colgate-Palmolive’s owner’s equity.
91 | Page
Common Size Balance Sheet
Asset s 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Current Assets Cash and cash equivalent s 3.55% 3.69% 4.00% 5.36% 4.24% Re ce i vab l e s 16.34% 15.22% 15.39% 16.67% 16.62% 16.60% 16.60% 16.60% 16.60% 16.60% 16.60% 16.60% 16.60% 16.60% 16.60% Inventories 9.60% 9.75% 10.06% 11.04% 11.58% Other current assets 3.88% 2.94% 2.95% 3.06% 3.34% Total current assets 33.38% 31.59% 32.41% 36.12% 35.78% 36.85% 36.85% 36.85% 36.85% 36.85% 36.85% 36.85% 36.85% 36.85% 36.85%
Property, plant and equipment, net 33.99% 30.53% 29.91% 29.50% 29.82% Goodwill, net 17.37% 21.81% 21.70% 22.78% 22.47% Other intangible assets, net 7.99% 9.60% 9.21% 9.09% 8.35% Ot her asset s 7.26% 6.47% 6.78% 2.50% 3.57% Total Non Current Assets 66.62% 68.41% 67.59% 63.88% 64.22% 63.15% 63.15% 63.15% 63.15% 63.15% 63.15% 63.15% 63.15% 63.15% 63.15% 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 and Shareholders’ Equity Current Liabilities Not es and loans payable 1.39% 1.46% 2.02% 1.91% 1.54% Current portion of long-term debt 4.20% 4.91% 4.19% 8.50% 1.37% Accounts payable 10.08% 9.41% 10.30% 11.38% 10.55% Accrued income t axes 2.46% 1.67% 2.53% 1.77% 2.60% Ot her accruals 14.57% 12.28% 13.20% 14.41% 15.22% Total current liabilities 32.70% 29.74% 32.24% 37.96% 31.28% 32.50% 32.50% 32.50% 32.50% 32.50% 32.50% 32.50% 32.50% 32.50% 32.50%
Long-t er mLong Ter m Debt 35.90% 33.65% 34.30% 29.77% 31.86% Deferred i Deferred Income Taxes 6.10% 5.55% 6.52% 3.39% 2.61% Other liab Other Liabilities 13.44% 11.95% 11.06% 13.44% 11.64% Total liabilities 88.14% 80.89% 84.13% 84.56% 77.39% 81.00% 81.00% 81.00% 81.00% 81.00% 81.00% 81.00% 81.00% 81.00% 81.00%
Commitments and contingent liabilities
Shareholders’ Equity Preference Stock 3.92% 2.98% 2.98% 2.44% 1.95% Common stock, $1 par value (1,000,000,000 shares authorized, 732,853 9.80% 7.98% 8.62% 8.02% 7.25% Additional paid-in capital 15.06% 11.91% 12.51% 13.33% 15.01% Retained earnings 99.39% 89.56% 105.42% 105.53% 105.10% 103.00% 103.00% 103.00% 103.00% 103.00% 103.00% 103.00% 103.00% 103.00% 103.00% Accumulated other comprehensive income -24.96% -19.67% -21.21% -22.78% -16.48% 103.20% 92.77% 108.31% 106.55% 112.82% Unearned compensat ion -4.43% -3.35% -3.33% -2.75% -2.16% Treasury st ock, at cost -86.91% -75.86% -89.11% -88.36% -88.05% Total shareholders’ equity 11.86% 13.56% 15.87% 15.44% 22.61% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% Total liabilities and shareholder's equ 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%
92 | Page
Statement of Cash Flows Forecasting statement of cash flows is the final step in forecasting the financial statements. This is the most difficult to forecast because cash flows are very hard to predict. The only two line items we will forecast in the statement of cash flows are the cash flows from operations and cash flows from investing activities. To forecast cash flows from operations we used three expense diagnostic ratios. These include CFFO / Operating Income, CFFO / Net Sales, and CFFO Net Income. Once these are calculated you use the one with the most structure, because it will be the most accurate assumption for our forecasted figures. CFFO / Net Sales clearly had the most structure of any of these ratios, so this ratio is the best for forecasting future operating cash flows. This figure ranged between 16%-18%. So we averaged this ratio at 17% and multiplied this value by the forecasted net sales. Next we calculated cash flows from investing activities as the change in long term assets. This is an appropriate method because as non-current assets increase, cash is being used to buy these items. Cash is received whenever the firm sells these non-current assets, causing a positive cash inflow.
Cost of Capital Estimation
It can be very difficult to estimate a company’s cost of capital. To estimate cost of capital we need to estimate our cost of equity and our cost of debt.
Cost of Equity (Ke) Cost of equity can be very difficult to estimate and there are different methods, or approaches, that can be used when measuring the cost of equity. We estimated our cost of equity using the capital asset pricing model (CAPM). This approach “expresses the cost of equity as the sum of a required return on riskless assets plus a premium for
93 | Page
beta or systematic risk” (Business Analysis & Valuation). We needed to determine a return on riskless assets, a market premium, and a beta risk. To determine our required return on riskless assets we used the St. Louis Federal Reserve Website to get Treasury Bill rates and found a 3.75% rate. We estimated a market risk premium of about 8%, although “many analysts assume that the market risk premium is around 7% (Business Analysis). We began this approach by finding the historical monthly stock prices of Colgate for the past 5 years from Yahoo Finance and we also used the S & P 500 prices from Yahoo Finance for the same dates. We then calculated the returns for each month on both sets of prices. Using the interest rates from the St. Louis Federal Reserve Website for the 3 month, 6 month, 2 year, 5 year, and 10 year treasuries, we were able to match up the interest rates with the monthly stock prices and calculate our market risk premium. βeta Next, we needed to determine a beta. We then ran 5 regressions for the each of the 5 interest rates over the horizons of 24, 36, 48, 60, and 72. These regressions gave us a beta, an adjusted r squared, a t-stat, a p-value, and from there we were able to calculate our cost of equity. These regressions also show us how stable beta is across the yield curve. We determined that our best adjusted R Square was .1268 and that gave us a beta of .455 on the 3 month rate at 36 months. The adjusted R Square of .1268 told us that only about 12.68% of Colgate’s return could be explained by the market risk premium. The beta for Colgate Palmolive on Yahoo Finance was .46 so our regression analysis compared very favorably. Our beta was pretty stable throughout the horizons for the 24, 36, 48, 60, and 72 months. The biggest change we noticed was about .2. Our 36 month horizon does the best job of explaining beta. We have our highest explanatory power of about 12.68% at this return horizon. Even though this return horizon gives us our best beta, our cost of equity at this point is still very low. If you notice on the 2 year regression at the 36 month return horizon, the
94 | Page
explanatory power and beta are very similar. As a result of low cost of equity, we plan to use a different approach in estimating a new cost of equity.
Cost of Equity = Riskless rate of return + Beta risk * (Market Risk premium + Size premium)
Ke= Rf + Beta (MRP + Size Premium) Ke= .0375 + .455 (.08) Ke= .0739 or 7.39%
After computing the cost of equity equation we found that our cost of equity was very low. Our cost of equity was 7.39%. After determining such a low cost of equity, we decided to use the “back door method” to acquire a new cost of equity. For the back door method we took our P/B-1 (17.94) and multiplied by our growth rate (.12) which gave us an answer of 2.1528. We then took our return on equity (.95) and added it to 2.1528 to get 3.1028. Finally, we divided 2.1528 by 3.1028 to get our new cost of equity of 16.38%. This percentage is a more realistic number than our previous 7.39% cost of equity.
3 Month Regression Beta Adj r2 t-stat p-value Ke 72 0.285 0.039 1.969 0.053 0.06 60 0.354 0.029 1.660 0.102 0.066 48 0.555 0.079 2.241 0.03 0.082 36 0.455 0.127 2.467 0.019 0.074 24 0.32 0.038 1.387 0.18 0.063
95 | Page
6 Month Regression p- Beta Adj r2 t-stat value Ke 72 0.285 0.039 1.97 0.053 0.057 60 0.35 0.029 1.661 0.102 0.063 48 0.555 0.079 2.243 0.03 0.079 36 0.455 0.127 2.467 0.019 0.071 24 0.319 0.038 1.383 0.18 0.060
2 Year Regression t- p- Beta Adj r2 stat value Ke 72 0.292 0.042 2.03 0.046 0.051 60 0.371 0.033 1.728 0.089 0.057 48 0.558 0.082 2.286 0.027 0.072 36 0.444 0.124 2.44 0.020 0.063 24 0.313 0.037 1.376 0.183 0.053
5 Year Regression p- Beta Adj r2 t-stat value Ke 72 0.29 0.041 2.009 0.048 0.056 60 0.365 0.031 1.706 0.093 0.062 48 0.562 0.082 2.28 0.027 0.077 36 0.455 0.128 2.481 0.018 0.069
96 | Page
24 0.318 0.0378608471.38024 0.181377 0.05794
10 Year Regression t- p- Beta Adj r2 stat value Ke 72 0.29 0.041 2.016 0.048 0.058 60 0.366 0.032 1.711 0.092 0.064 48 0.558 0.082 2.282 0.027 0.0796 36 0.452 0.129 2.485 0.018 0.071 24 0.319 0.040 1.402 0.175 0.061
Cost of Debt (Kd) The cost of debt is determined by the interest rate on the debt. We began by searching through Colgate’s 10-K report to find these interest rates. According to their 10-K, the long-term interest rate on debt is 8% and the current rate is 4.20%. We used about a 6% interest rate on the other liabilities and the deferred taxes portion of the long-term liabilities section (St Louis). After using these interest rates and calculating a weighted average, we determined that the weighted average cost of debt for Colgate is estimated at 6.16%.
97 | Page
Amount Weight Rate Weighted Average Current Liabilities Notes and Loans Payable 155.9 1.99% 4.20% .0836 Current Portion of L.T. 138.1 1.76% 8.00% .1408 Debt Accounts Payable 1066.8 13.63% 4.20% .5725 Accrued Income Taxes 262.7 3.36% 4.20% .1411 Other Accruals 1539.2 19.67% 4.20% .8261 Total Current Liabilities 3162.7 40.41%
Long-Term Debt 3221.9 41.17% 8.00% 3.2936 Deferred Income Taxes 264.1 3.38% 6.00% .2028 Other Liabilities 1177.1 15.04% 6.00% .9024 Long Term Liabilities 4663.1 59.59%
Total Debt (Liabilities) 6.1629% 7825.8 100%
98 | Page
Weighted Average Cost of Capital (WACC) Our cost of debt and cost of equity estimates are now going to be used to help calculate our weighted average cost of capital (WACC). The before tax WACC is 9.60%, and our after tax WACC is 8.373%. For the market value of equity we used our firm’s market cap. We used our firm’s total liabilities for the market value of liabilities. We were able to assume our market value of assets using our liabilities and owners’ equity.
Vd $3973 millions Ve $7826 millions Total $11,789 millions Ke 16.38% Kd 6.16%
Tax rate 30%
Before Tax 9.60% After Tax 8.373%
CAPM Rf 3.75 Treasury rate Market Risk Premium .08 assumed Beta .455 Estimate from 3 month regression 36 month horizon
Estimated Ke 16.38%
99 | Page
Conclusion After collecting data and calculating ratios on our firm and their competitors within the industry it is apparent that Colgate-Palmolive has had an increase in profits over the past few years. Colgate has the highest asset turnover out of all of its competitors and has been increasing each year which shows that their sales and market share are also growing. Due to all the data collected showing Colgate to consistently gain market share and increase their growth they appear to be able to continue positively at this rate.
100 | Page
Valuations
Analysis of Valuations After all the research and analysis of our firm, the industry, the key accounting policies and the financials, we are now ready to run a valuation of Colgate-Palmolive. This valuation will consist of running different types of models to determine whether our firm is undervalued, fairly-valued, or overvalued. Each of these models will give us a different share price that we will use. These valuation models include the discounted dividends model, the discounted free cash flow model, the residual income model, the long-run residual income model, and the abnormal earnings growth model. The rest of this section will explain each model in more detail along with the results from each model.
Method of Comparables The method of comparables is a valuation model that formulates a firm’s share price from the calculation of the industry’s average. The industry average was calculated from Colgate-Palmolive’s top competitors. These competitors consist of Proctor & Gamble, Clorox, and Church & Dwight. The information about Colgate’s competitors came from yahoofinance.com. When computing the industry we excluded any of the outliers that would skew the industry’s average. After computing the industry average we then can calculated Colgate-Palmolive’s share price. Although this valuation is relatively easier than other models, it is not as effective because it is rare for a firm to operate at the industry average. However it does give investors some insight if the share is over or under valued.
101 | Page
Trailing Price to Earnings PPS EPS Trailing P/EIndustry Colgate’s Share Average Price Colgate-Palmolive 73.68 3.2 23.05 Proctor & Gamble 66.8 3.31 20.21 Clorox 59.94 3.51 17.08 20.13 64.35 Church & Dwight 56.75 2.46 23.11
The trailing price to earnings ratio is calculated by dividing the price per share by the historical earnings per share. By adding the industry’s price to earnings ratios, excluding Colgate-Palmolive, and dividing it by the number of competitors derives the industry average. Then using the industry average and multiplying it by Colgate-Palmolive’s earnings per share gives you Colgate’s new price per share of $64.35. Comparing this share price to the market share price of $73.68, illustrates that Colgate-Palmolive is overvalued.
Forward Price to Earnings PPS EPS Forward P/EIndustry Colgate’s Share Average Price Colgate- 73.68 4.28 17.21 Palmolive Proctor & 66.8 3.88 17.22 16.6 71.05 Gamble Clorox 59.94 4.08 14.68 Church & 56.75 3.17 17.9 Dwight
The forward price is calculated the same as the trailing price to earnings except that forecasted prices are used instead of current prices. This resulted in the industry
102 | Page
average falling to 16.6, which is slightly lower than Colgate’s forward P/E. So multiplying Colgate-Palmolive’s earnings per share by the industry average gives a share price of $71.05. This model shows that Colgate-Palmolive is fairly valued.
Price to Book Value Ratio PPS BPS P/B Industry Colgate’s Share Average Price Colgate- 73.68 4.1 17.97 Palmolive Proctor & 66.8 21.72 3.08 3.28 13.45 Gamble Clorox 59.94 -3.99 NA Church & 56.75 16.31 3.48 Dwight
The price to book ratio is computed by taking the price per share divided by the book value per share. This ratio has little to do with the market value of a share because it is the accounting value of a share. It does not take into account future business performance, so it is not a very useful valuation of a share price. When calculating the industry average we excluded Clorox because they had a negative book value per share. We found the industry average was 3.28 and multiplied that by Colgate’s BPS, and came up with a share price of $13.45. In this case, the model shows Colgate-Palmolive is significantly overvalued.
103 | Page
Price Earnings Growth PPS EPS PEG Industry Colgate’s Share Average Price Colgate- 73.68 4.28 1.72 Palmolive Proctor & 66.8 3.88 1.62 1.6 54.78 Gamble Clorox 59.94 4.08 1.59 Church & 56.75 3.17 1.6 Dwight
The price earnings growth model, the P.E.G. ratio, calculates the firm’s stock price by using the P/E ratio and dividing it by the expected earnings growth rate. The industry average of 1.6 is then multiplied by Colgate-Palmolive’s estimated earnings growth rate of 8%. Then we multiplied that by Colgate’s earnings per share and came up with a share price of $54.78. Comparing this share price with the actual price shows Colgate-Palmolive’s share price is overvalued.
Dividends to Price PPS DPS D/P Industry Colgate’s Share Average Price Colgate- 73.68 1.6 .022 Palmolive Proctor & 66.8 1.6 .024 .019 84.21 Gamble Clorox 59.94 1.6 .027 Church & 56.75 .32 .01 Dwight
104 | Page
This method is used by taking the dividends per share and dividing it by the price per share for all of Colgate-Palmolive’s competitors to give us our D/P ratio. The D/P ratio was found by dividing dividends per share by price per share. Then we took an average of the industries D/P ratios to find Colgate-Palmolive’s price per share. We divided Colgate’s dividend per share by the industry’s D/P ratio and came up with a share price of $84.21. This model illustrate that Colgate-Palmolive actual share price is undervalued.
Price to EBIDTA PPS EBIDTA P/EBIDTA Industry Colgate’s Share (Billions) Average Price Colgate- 73.68 3.200 23.03 Palmolive 28.49 91.17 Proctor & 66.8 19.320 3.46 Gamble Clorox 59.94 1.120 53.52 Church & Dwight 56.75 .369 153.79
EBIDTA is an acronym meaning earnings before interest, taxes, depreciation, and amortization. By dividing current price per share by EBIDTA for all competitors, an industry average of 24.89 was calculated. Church & Dwight was excluded from the industry average because it is an outlier. The other two competitors P/EBIDTA ratio are not very close to Colgate-Palmolive’s ratio either, so this model does not have very much explanatory power. We multiplied Colgate’s EBIDTA by the industry’s P/EBIDTA average and found Colgate-Palmolive’s share price of 91.17. This model indicates that Colgate is significantly undervalued; however the industry average is not consistent with Colgate-Palmolive’s ratio. So this model is unrealistic and unreliable.
105 | Page
Enterprise Value to EBIDTA EV EBIDTA EV/EBIDTA Industry Colgate’s Share (Billions) Average Price Colgate- 40.8 3.200 12.75 Palmolive 11.45 36.64 Proctor & 238.02 19.320 12.32 Gamble Clorox 11.42 1.120 10.19 Church & 4.37 .369 11.84 Dwight
Enterprise Value to EBIDTA is calculated by dividing enterprise value by earnings before interest, taxes, depreciation, and amortization. Enterprise Value was calculated by adding the market value of equity to the book value of liabilities, and then subtracting cash and financial investments. We computed the industry’s EV/EBIDTA average of 11.45 and then we multiplied that by Colgate-Palmolive’s EBIDTA to get a share price of $36.64. This model suggests that Colgate-Palmolive is overvalued.
Price to Free Cash Flow PPS FCF/S P/FCF Industry Colgate’s Share Average Price Colgate- 73.68 2.24 32.89 Palmolive 24.69 55.3 Proctor & 66.8 2.25 29.69 Gamble Clorox 59.94 3.25 18.44 Church & Dwight 56.75 1.98 28.66
106 | Page
The price to free cash flows is another ratio model that determines an estimated share price. This model divides price per share by free cash flows. First, we calculated free cash flows by adding/subtracting operating cash flows and investing cash flows together. Then we divided that figure by the total shares outstanding to get a per share basis. Next we calculated the industry P/FCF ratio average of 24.69, and then multiplied that by Colgate’s FCF/S to get a share price of $55.30. This model indicates that Colgate-Palmolive is overvalued.
Conclusion After calculating Colgate-Palmolive’s share price using different methods of comparables, we can conclude that Colgate is significantly overvalued. The P/FCF, EV/EBIDTA, P.E.G., and trailing P/E models all indicate that Colgate-Palmolive is overvalued. The D/P and P/EBIDTA models however indicated that Colgate is undervalued. This method of comparables is not a reliable valuation method because it assumes all firms in an industry operate the same way, which is not true. So, in order, to accurately value Colgate-Palmolive we will rely on other valuation models to do so.
Dividend Discount Model
The Dividend Discount model gives us a way to estimate the value of a firm by estimating the dividends we expect the firm to pay in the future. The dividends for Colgate have been growing at a rate of about 10%. We took this growth rate and forecasted dividends per share for the next 10 years. After forecasting dividends, we multiplied our dividends per share by the present value, to discount each year back, to arrive at our present value dividend for each year. Next, we calculated our terminal value of perpetuity by taking our expected dividend per share in year 11 and dividing that by our cost of equity minus our growth rate. Our TV of Perpetuity came out to 61.69.
107 | Page
To get the present value of the terminal value of perpetuity we had to discount it back to present year dollars. We multiplied 61.69 by the present value in year 11 to get 11.61. We then added this value to the present value of each year to arrive at our estimated price per share of $22.10. Finally, we multiplied our estimated share price by 1 + our growth rate, and then took it to the 3/12’s power to arrive at a time consistent price of $22.96. This share price is with an 8% growth rate and a cost of equity of 16%. When comparing this time consistent price with our observed price of $77.41, it is very clear that Colgate is severely overvalued. Our sensitivity analysis displays that this model is sensitive to the inputs used. To achieve a price of $76.06, which is very close to our observed price, we would need to increase our growth rate from 8% to about 15%, leaving cost of equity around 16%. We would also have to decrease our cost of capital from 16% to about 11% to get a share price close to our observed price. Undervalued- >89.03 Fairly valued Overvalued <65.03
Growth Rate 0.02 0.04 0.06 0.08 0.1 0.12 23.75 25.72 28.91 35.00 51.26 0.14 22.40 24.01 26.39 30.25 37.63 Ke 0.16 18.70 19.66 21.00 22.96 26.16 0.18 15.97 16.57 17.37 18.47 20.10 0.20 13.88 14.27 14.77 15.43 16.35
Discounted Free Cash Flows Model The Discounted Free Cash Flows model uses expected future cash flows and discounts them back to the current time period which allows for a valuation of the firm. The cash
108 | Page
flow model is rooted in basic theory of present value. The present value of our future cash flows will give us an estimated price per share. Unlike other models, this free cash flow model uses weighted average cost of capital (WACC). This model uses before tax WACC, cash flow from operations, cash flow from investment, book value of debt, and the growth rate of the terminal value perpetuity to estimate a price per share. We first took our forecasted cash flows from operations and subtracted them from our cash flows from investing activities to get our free cash flows of the firm. We then multiplied each year by the present value of each year to get our present value year by year free cash flows. We then added the present value of the terminal value perpetuity to it to get the value of the firm. After that we subtracted the book value of liabilities to get the estimated market value of equity. Once we found our estimated market value of equity, we then divided by the number of shares outstanding to get our intrinsic price. We then took our intrinsic price and multiplied it by 1 plus our WACC, then took it to the 3/12’s power to get our time consistent price. Undervalued- >89.03 Fairly valued Overvalued <65.03
Growth 0 0.03 0.045 0.06 0.075 0.09
0.06 57.12 136.19 294.32 n/a n/a n/a
WACC
BT 0.07 37.74 84.12 149.05 408.78 n/a n/a
0.08 23.3 52.95 86.84 171.56 764.59 n/a
0.09 12.15 32.22 52.3 92.45 212.91 n/a
0.1 3.29 17.45 30.33 52.87 102.46 300.82
0.11 n/a 6.41 15.14 29.11 55.05 119.91
0.12 n/a n/a 4 13.24 28.65 59.46 109 | Page
The sensitivity analysis performed above shows Colgate to be overvalued, undervalued, or fairly valued depending on which before tax WACC and the growth rate was applied. Our initial WACC was .06 and our growth rate was 0. This gave us a share price of $57.12 was indicates that the value of this company is overvalued. It is important to explain that a very small change in any of these inputs results in a very large change in the share price. A growth rate of 6% with a before tax WACC of .06 gave us a negative number and we marked that as N/A. These large changes in price with small input changes explain that this model is very sensitive.
Residual Income Model
The Residual Income model is one of the best valuation models used to value a firm. This models main objective is to measure a company’s stock price. The residual income model basically predicts the value of a firm. The sensitivity of this model is relatively low compared to the discounted dividends model and the free cash flow model. The residual income can either be positive or negative. A positive number adds value and a negative number reduces the value of the firm.
This model compares the actual net income of the firm with the benchmark income of the firm. The difference between these earnings is called the residual income. The residual income is then multiplied by the present value factor to give us our year by year present value of residual income. We then took the sum of those values for each year and added them to our book value of equity and the terminal value perpetuity to get our market value of equity. Once we estimated our market value of equity we divided it by the number of shares outstanding to get arrive at our initial share price. We then calculated our time consistent share price of $24.66. This share price was estimated using a cost of equity of .17 and a growth rate of 0. With a time consistent share price of $24.66 and an observed price of $77.41, it is clear that Colgate-Palmolive is overvalued.
110 | Page
Undervalued > 89.30 Fairly Valued Overvalued < 65.03
GrowthRate 0 -0.1 -0.2 -0.3 -0.4 -0.5 0.09 57.17 44.4 40.43 38.5 37.36 36.61 0.11 43.86 36.89 34.42 33.16 32.39 31.87
Ke 0.13 35.12 31.22 29.68 28.68 28.34 28 0.15 29.05 26.85 25.9 25.37 25.04 24.81 0.17 24.66 23.43 22.86 22.53 22.32 22.17 0.19 21.38 20.71 20.39 20.19 20.07 19.97 0.21 18.87 18.53 18.36 18.26 18.19 18.14
The sensitivity analysis performed above shows that Colgate is overvalued at every point in the analysis. The sensitivity of this model is very low and that can lead to these values being significantly low. If you notice, a small change in the growth rate does not lead to a big difference in the share price. It would take a positive growth rate and a reasonable cost of equity to achieve a share price that is even close to the observed share price. This model supports the conclusion that Colgate is overvalued.
Long Run ROE Residual Income Model The Long Run ROE Residual Income model uses the book value of equity, return on equity, cost of equity, and a growth rate to determine the value of a company. This is a fairly accurate model. The cost of equity we used was 16%. To determine our
111 | Page long run return on equity, we used our forecasted financials. Our return on equity came out to about 94% which is unusually high. We used a growth rate of 8% and a book value of equity of 2,286.2 (in millions). Once we arrived at our inputs, we were now able to calculate our long run return on equity perpetuity. We used the following equation:
= BVEo * (1+ (ROE-Ke) / (Ke-g))
After using our inputs in this equation, we arrived at a market value of equity of $24,548.07. We then divided this number by our shares to get an initial share price of $48.15. We made this price time consistent by multiplying it by 1+ our growth rate and taking that to the 3/12 power. We arrived at a time consistent price of $49.97. After comparing this price with our observed price of $77.41, it is easy to see that Colgate is overvalued. Next, we will analyze the sensitivity of these three tables to determine how accurate our assumption is.
Undervalued > 89.30 Fairly Valued Overvalued < 65.03
growth rate 0.02 0.04 0.06 0.08 0.1 0.12 0.124 39.67 48.05 61.66 87.65 156.96 919.32 Ke 0.144 38.81 46.98 60.26 85.61 153.22 896.90 0.164 37.95 45.91 58.86 83.57 149.48 874.48 0.184 37.08 44.85 57.46 81.54 145.75 852.06 0.204 36.22 43.78 56.06 79.50 142.01 829.63
112 | Page
ROE 0.92 0.93 0.94 0.95 0.96 0.97 0.124 85.61 86.63 87.65 88.67 89.69 90.71 Assume 8% Ke 0.144 58.86 59.56 60.26 60.96 61.66 62.36 0.164 44.85 45.38 45.91 46.45 46.98 47.51 0.184 36.22 36.65 37.08 37.51 37.95 38.38 0.204 30.38 30.74 31.10 31.46 31.83 32.19
ROE 0.92 0.93 0.94 0.95 0.96 0.97 0.05 35.47 35.88 36.28 36.69 37.10 37.51 0.06 38.57 39.02 39.46 39.91 40.36 40.81 Growth 0.07 42.35 42.85 43.35 43.85 44.35 44.85 0.08 47.09 47.65 48.21 48.77 49.33 49.89 0.09 53.17 53.81 54.45 55.10 55.74 56.38 0.1 61.29 62.04 62.78 63.53 64.28 65.03
The sensitivity analysis of the tables above, support our earlier findings that Colgate is overvalued. Even after we change the growth rates, cost of equity, and return on equity, we still find it very difficult to achieve our observed share price of $77.41. A growth rate of 8% gives us our best estimate of the share price. In conclusion, this model’s sensitivity analysis proves that Colgate-Palmolive is overvalued.
113 | Page
Abnormal Earnings Growth Model
The abnormal earnings growth model (AEG) is used to find a share price with a high degree of accuracy. This model uses forecasted net income, forecasted dividends, dividend reinvestment plan (DRIP), and core earnings. This model is tied in to the residual income model because changes in the residual income should equal the abnormal earning growth year by year. A failure to have these numbers match up could be the result of an internal flaw.
We first started by estimating our drip income, which is dividends of the previous year times our cost of equity. Next, we added our net earnings to our drip income to get our cumulative dividend income. From there, we subtracted our benchmark income to get our abnormal earnings growth for each year. The AEG YBY numbers should equal our change in residual income. These values matched up for Colgate.
2009 2010 2011 2012 2013 2014 2015 2016 2017 AEG (30.21) (29.85) (29.19) (28.17) (26.73) (24.81) (22.33) (19.20) (15.33) YBY Change (30.21) (29.85) (29.19) (28.17) (26.73) (24.81) (22.33) (19.20) (15.33) in Residual income
We then took our annual residual income and multiplied it by the present value factor to determine our present value residual income of each year. Next we forecasted out our annual residual income for 2018 and arrived at a number of 1,337. We then took that number and divided it by our cost of equity minus our growth rate to discount it back to 2009. Using that number we multiplied it by the present value factor of year
114 | Page
10 to get our terminal value perpetuity. Next, we added our terminal value of perpetuity to our book value of equity, plus each year’s present value of residual income to arrive at our market value of equity. From there, we divided by our shares to get our initial share price of $23.71. We then made it time consistent to get a price of $24.66.
Undervalued > 89.30 Fairly Valued Overvalued < 65.03
Growth rate 0 -0.1 -0.2 -0.3 -0.4 -0.5 0.09 67.69 59.68 57.19 55.97 55.26 54.79 0.11 45.93 42.95 41.9 41.36 41.03 40.81
Ke 0.13 33.58 32.57 32.17 31.95 31.82 31.73 0.15 25.9 25.69 25.6 25.54 25.51 25.49 0.17 20.79 20.9 20.95 20.98 20.99 21.01 0.19 17.22 17.44 17.55 17.62 17.66 17.69 0.21 14.62 14.87 14.99 15.07 15.13 15.16
The sensitivity analysis performed on the AEG model explains that Colgate is fairly valued when using a cost of equity of 9% and a growth rate of 0. As the cost of equity increases and the growth rate decreases, Colgate’s share price decreases. The AEG model is sensitive to changes of the cost of equity and the growth rate. In order to achieve the observed share price of $77.41, the cost of equity would have to decrease from 9% to about 8%, with a growth rate of 0, giving us a new price at
115 | Page
$85.37. We can conclude that when using the AEG model, Colgate-Palmolive is moderately overvalued. Credit Analysis A firm’s credit worthiness is important to investors in order to evaluate a level of security in a firm. In any industry, the Altman Z-Score is used to evaluate the level of bankruptcy associated with the given firm under analysis. According to the textbook, Business Analysis and Valuation, companies with a Z-Score of between 1.81 and 2.67 are “labeled the gray area” as they are neutral in which direction they will go. Therefore, a Z-Score of 3 or higher represents a credit worthy institution that does not fear bankruptcy. Colgate-Palmolive has the highest constant Z-Scores throughout time and can be seen in the following tables.
Z-Score Ratio 2003 2004 2005 2006 2007 Colgate 7.19 6.57 7.01 6.68 6.80 Proctor & Gamble 6.69 4.85 5.00 2.46 3.03
Clorox 4.46 4.73 4.27 4.49 3.17
Church & 5.05 3.18 3.44 3.16 3.38 Dwight
Colgate maintains the highest Z-Scores from 2003 through 2007 compared to its industry competitors. Furthermore, their significantly high Z-Scores present their bankruptcy avoidance and also represent their no-failure rate. It can be seen that the industry as a whole is stable.
116 | Page
Analyst Recommendation
After extensive research of Colgate-Palmolive, we have concluded that this company is highly overvalued. We were able to come to this conclusion based on our research of the industry analysis, the , the financial analysis, forecasting the financial statements, and after several valuation models. We believe that Colgate-Palmolive stock should be sold following our research and analysis.
We researched the industry of personal products by comparing Colgate with three of their major competitors by using the Five Forces Model. The competitors we compared Colgate with include Proctor & Gamble, Clorox Company, and Church & Dwight. This industry is very competitive and these companies must compete on cost leadership and product differentiation to be efficient and effective. Although there is high rivalry among existing firms in this industry, Colgate-Palmolive does a good job at staying with the industry average.
Our accounting analysis reveals that Colgate-Palmolive does a fairly good job of disclosure in their 10-K report. Our only areas of concern deal with goodwill and section on the balance sheet titled other liabilities. Other liabilities consist of a large portion of total liabilities, but Colgate does not disclose what these other liabilities are. After running many diagnostic ratios, we have concluded that Colgate does not appear to manipulate their financial statements.
We forecasted out the next ten years for Colgate’s financial statements using an 8% growth rate. There were no major problems found in the forecasts. Our forecast showed a steady growth of our net income. We ran a number of valuation models to determine whether Colgate was undervalued, fairly valued, or overvalued. Many of the
117 | Page valuation models displayed that Colgate was highly overvalued, while the long run residual income model showed that Colgate was moderately overvalued.
Colgate-Palmolive has an observed price of about $77.41. After all our research and analysis, we suggest that this company’s stock be sold. We believe that Colgate’s stock price will slowly start to decline within the next few months.
118 | Page
Appendix
10 Year Regression
Regression Statistics Multiple R 0.234205169 R Square 0.054852061 Adjusted R Square 0.041349948 Standard Error 0.042678192 Observations 72
ANOVA Significance df SS MS F F Regression 1 0.007399515 0.007399515 4.062479648 0.047686671 Residual 70 0.127499966 0.001821428 Total 71 0.134899481
Standard Lower Uppe Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% - - Intercept 0.006630937 0.005029694 1.318357983 0.191681405 0.003400471 0.016662344 0.003400471 0.01666 X Variable 1 0.290956772 0.144355345 2.015559388 0.047686671 0.003049117 0.578864426 0.003049117 0.57886
Regression Statistics Multiple R 0.219238729 R Square 0.04806562 Adjusted R quare 0.031652958 tandard Error 0.042485368 Observations 60
ANOVA Significance df SS MS F F Regression 1 0.005286087 0.005286087 2.92856948 0.092368079 Residual 58 0.104690375 0.001805006 otal 59 0.109976462
Coefficients Standard t Stat P-value Lower 95% Upper 95% Lower Upper
119 | Page
Error 95.0% 95.0% ntercept 0.007475803 0.005592943 1.336649144 0.186556982 -0.00371969 0.018671296 -0.00371969 0.018671296 - - X Variable 1 0.366068255 0.213911584 1.711306366 0.092368079 0.062122299 0.794258809 0.062122299 0.794258809
Regression Statistic
Multiple R 0.318850043 R Square 0.10166535 Adjusted R Square 0.082136336 Standard Error 0.040191477 Observations 48
ANOVA Significance df SS MS F F Regression 1 0.008409314 0.008409314 5.20586186 0.027186193 Residual 46 0.074306321 0.001615355 Total 47 0.082715635
Standard Lower Uppe Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% - - Intercept 0.008607988 0.005803795 1.483165342 0.1448501 0.003074446 0.020290421 0.003074446 0.020290 X Variable 1 0.558543921 0.244799772 2.281635786 0.027186193 0.065787544 1.051300298 0.065787544 1.051300
Regression Statistics Multiple R 0.392072424 R Square 0.153720786 Adjusted R quare 0.12883022 tandard Error 0.026494142 Observations 36
ANOVA Significance df SS MS F F Regression 1 0.004335084 0.004335084 6.175865623 0.018031039 Residual 34 0.023865946 0.00070194 120 | Page
Regression Statistics Multiple R 0.286449776 R Square 0.082053474 Adjusted R Square 0.040328632 Sotaltandard 35 0.02820103 Error 0.028942056
Observations 24 Standard Lower Upper Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% AnNOVAtercept 0.011707804 0.004417484 2.650333308 0.012117626 0.002730397 0.020685211 0.002730397 0.02068521 X Variable 1 0.452441548 0.18205959 2.485128895 0.018031039 Significance0.082451948 0.822431149 0.082451948 0.822431149 df SS MS F F Regression 1 0.001647256 0.001647256 1.966537683 0.174769475 Residual 22 0.018428137 0.000837643 Total 23 0.020075393
Standard Lower Upper Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% ntercept 0.015748174 0.005907775 2.665669157 0.014123673 0.003496198 0.02800015 0.003496198 0.02800015 - - X Variable 1 0.319411812 0.227771738 1.402332943 0.174769475 0.152957859 0.791781483 0.152957859 0.791781483
5 Year Regression
Regression Statistics Multiple R 0.233505374 R Square 0.05452476 Adjusted R quare 0.04101797 tandard Error 0.042685581 Observations 72
ANOVA Significance df SS MS F F Regression 1 0.007355362 0.007355362 4.03684095 0.04837447 Residual 70 0.127544119 0.001822059 otal 71 0.134899481
Standard Lower Upper Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% - - ntercept 0.006481032 0.005031332 1.28813451 0.201940969 0.003553642 0.016515706 0.003553642 0.016515706 X Variable 1 0.290379984 0.144525958 2.009189128 0.04837447 0.002132053 0.578627914 0.002132053 0.578627914
121 | Page
Regression Statistics Multiple R 0.218548016 R Square 0.047763235 Adjusted R Square 0.03134536 Standard Error 0.042492115 Observations 60
ANOVA Significance df SS MS F F Regression 1 0.005252832 0.005252832 2.909221489 0.093424918 Residual 58 0.10472363 0.00180558 Total 59 0.109976462
Standard Lower Uppe Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0 - - Intercept 0.007331383 0.005611741 1.306436365 0.196561241 0.003901738 0.018564504 0.003901738 0.01856 - - X Variable 1 0.364712545 0.213826885 1.70564401 0.093424918 0.063308465 0.792733556 0.063308465 0.79273
Regression Statistics Multiple R 0.318691337 R Square 0.101564168 Adjusted R Square 0.082032955 Standard Error 0.04019374 Observations 48
ANOVA Significance df SS MS F F Regression 1 0.008400945 0.008400945 5.200095082 0.027267052 Residual 46 0.07431469 0.001615537 Total 47 0.082715635
Standard Lower Uppe Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% Intercept 0.008474341 0.005806193 1.45953469 0.151213836 -0.00321292 0.020161602 -0.00321292 0.020161 X Variable 1 0.562037257 0.246467388 2.280371698 0.027267052 0.065924143 1.05815037 0.065924143 1.05815 122 | Page
Regression Statistics Multiple R 0.391460701 R Square 0.15324148 Adjusted R Square 0.128336818 Standard Error 0.026501644 Observations 36
ANOVA Significance df SS MS F F Regression 1 0.004321568 0.004321568 6.153124186 0.018227479 Residual 34 0.023879462 0.000702337 Total 35 0.02820103
Standard Lower Uppe Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% Intercept 0.011666044 0.004419253 2.639822933 0.012432545 0.002685043 0.020647046 0.002685043 0.020647 X Variable 1 0.455500348 0.183628833 2.48054917 0.018227479 0.082321664 0.828679033 0.082321664 0.828679
Regression Statistics Multiple R 0.282299458 R Square 0.079692984 Adjusted R Square 0.037860847 Standard Error 0.028979244 Observations 24
ANOVA Significance df SS MS F F Regression 1 0.001599868 0.001599868 1.905066052 0.181377593 Residual 22 0.018475525 0.000839797 Total 23 0.020075393
Standard Lower Uppe Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% Intercept 0.015690004 0.005915557 2.652328963 0.014550624 0.003421889 0.027958119 0.003421889 0.027958 - - X Variable 1 0.318074319 0.230448342 1.380241302 0.181377593 0.159846288 0.795994927 0.159846288 0.795994
123 | Page
2 Year Regression
Regression Statistics Multiple R 0.235756577 R Square 0.055581164 Adjusted R Square 0.042089466 Standard Error 0.042661728 Observations 72
ANOVA Significance df SS MS F F Regression 1 0.00749787 0.00749787 4.11965677 0.046190507 Residual 70 0.127401611 0.001820023 Total 71 0.134899481
Standard Lower Uppe Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% - - Intercept 0.006316545 0.005030578 1.255630094 0.213425264 0.003716626 0.016349716 0.003716626 0.016349 X Variable 1 0.292042792 0.14388515 2.029693763 0.046190507 0.005072912 0.579012672 0.005072912 0.579012
Regression Statistics Multiple R 0.221237499 R Square 0.048946031 Adjusted R Square 0.032548549 Standard Error 0.042465717 Observations 60
ANOVA Significance df SS MS F F Regression 1 0.005382911 0.005382911 2.98497235 0.08936244 Residual 58 0.104593551 0.001803337 Total 59 0.109976462
124 | Page
Standard Lower Uppe Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% - - Intercept 0.006971346 0.005652327 1.233358546 0.222417182 0.004343016 0.018285708 0.004343016 0.018285 - - X Variable 1 0.371059231 0.214769736 1.727707252 0.08936244 0.058849102 0.800967563 0.058849102 0.800967
Regression Statistics Multiple R 0.319375112 R Square 0.102000462 Adjusted R Square 0.082478733 Standard Error 0.04018398 Observations 48
ANOVA Significance df SS MS F F Regression 1 0.008437033 0.008437033 5.224970673 0.0269201 Residual 46 0.074278602 0.001614752 Total 47 0.082715635
Standard Lower Uppe Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% - - Intercept 0.007767645 0.005825405 1.333408492 0.188963527 0.003958288 0.019493578 0.003958288 0.019493 X Variable 1 0.557761741 0.244009532 2.285819475 0.0269201 0.066596035 1.048927448 0.066596035 1.048927
Regression Statistics Multiple R 0.385925351 R Square 0.148938377 Adjusted R Square 0.123907152 Standard Error 0.026568897 Observations 36
ANOVA Significance df SS MS F F Regression 1 0.004200216 0.004200216 5.950103574 0.020087732 Residual 34 0.024000814 0.000705906
125 | Page
Total 35 0.02820103
Standard Lower Uppe Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% Intercept 0.011062056 0.004445551 2.488343187 0.017894325 0.00202761 0.020096502 0.00202761 0.020096 X Variable 1 0.444559413 0.182250005 2.439283414 0.020087732 0.074182844 0.814935983 0.074182844 0.814935
Regression Statistics Multiple R 0.281501573 R Square 0.079243136 Adjusted R Square 0.037390551 Standard Error 0.028986326 Observations 24
ANOVA Significance df SS MS F F Regression 1 0.001590837 0.001590837 1.893386902 0.182667468 Residual 22 0.018484556 0.000840207 Total 23 0.020075393
Standard Lower Uppe Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% Intercept 0.015371459 0.005923409 2.59503591 0.016526204 0.003087061 0.027655857 0.003087061 0.027655 - - X Variable 1 0.313330068 0.22771015 1.376003961 0.182667468 0.158911877 0.785572013 0.158911877 0.785572
6 Month Regression
Regression Statistics Multiple R 0.229214736 R Square 0.052539395 Adjusted R Square 0.039004244 Standard Error 0.042730375 Observations 72
ANOVA Significance df SS MS F F Regression 1 0.007087537 0.007087537 3.881699826 0.052771886 126 | Page
Residual 70 0.127811944 0.001825885 Total 71 0.134899481
Standard Lower Uppe Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% - - Intercept 0.006262873 0.005039853 1.2426698 0.218136213 0.003788797 0.016314543 0.003788797 0.016314 - - X Variable 1 0.285500735 0.144909299 1.970202991 0.052771886 0.003511746 0.574513215 0.003511746 0.574513
Regression Statistics Multiple R 0.213136814 R Square 0.045427302 Adjusted R Square 0.028969152 Standard Error 0.042544202 Observations 60
ANOVA Significance df SS MS F F Regression 1 0.004995934 0.004995934 2.7601706 0.102034567 Residual 58 0.104980528 0.001810009 Total 59 0.109976462
Standard Lower Uppe Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% - - Intercept 0.007178222 0.005645649 1.271460872 0.208639911 0.004122772 0.018479216 0.004122772 0.018479 - - X Variable 1 0.353985681 0.213067756 1.661376116 0.102034567 0.072515768 0.78048713 0.072515768 0.78048
Regression Statistics Multiple R 0.313937611 R Square 0.098556824 Adjusted R Square 0.078960233 Standard Error 0.040260954 Observations 48
ANOVA df SS MS F Significance 127 | Page
F Regression 1 0.00815219 0.00815219 5.02928417 0.029783681 Residual 46 0.074563445 0.001620944 Total 47 0.082715635
Standard Lower Uppe Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% - - Intercept 0.008289054 0.005820016 1.424232014 0.161128155 0.003426031 0.020004138 0.003426031 0.020004 X Variable 1 0.55547546 0.247691891 2.242606557 0.029783681 0.05689755 1.05405337 0.05689755 1.05405
Regression Statistics Multiple R 0.389608157 R Square 0.151794516 Adjusted R Square 0.126847296 Standard Error 0.026524278 Observations 36
ANOVA Significance df SS MS F F Regression 1 0.004280762 0.004280762 6.084626465 0.018833322 Residual 34 0.023920268 0.000703537 Total 35 0.02820103
Standard Lower Uppe Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% Intercept 0.011663572 0.004423082 2.636978709 0.012519057 0.002674789 0.020652355 0.002674789 0.020652 X Variable 1 0.454888816 0.184411627 2.466703562 0.018833322 0.080119303 0.82965833 0.080119303 0.82965
Regression Statistics Multiple R 0.282806896 R Square 0.07997974 Adjusted R Square 0.038160638 Standard Error 0.028974729 Observations 24
ANOVA
128 | Page
Significance df SS MS F F Regression 1 0.001605625 0.001605625 1.912516894 0.180560537 Residual 22 0.018469768 0.000839535 Total 23 0.020075393
Standard Lower Upper Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% Intercept 0.015734843 0.005914462 2.660401423 0.014290836 0.003469 0.028000686 0.003469 0.0280006 - X Variable 1 0.319751752 0.231211959 1.382937777 0.180560537 -0.1597525 0.799256004 0.1597525 0.7992560
3 Month Regression
Regression Statistics Multiple R 0.229078893 R Square 0.052477139 Adjusted R Square 0.038941098 Standard Error 0.042731778 Observations 72
ANOVA Significance df SS MS F F Regression 1 0.007079139 0.007079139 3.876845496 0.052916278 Residual 70 0.127820342 0.001826005 Total 71 0.134899481
Standard Lower Uppe Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% - - Intercept 0.006227809 0.005040767 1.235488256 0.220779291 0.003825684 0.016281302 0.003825684 0.016281 - - X Variable 1 0.285351052 0.144923973 1.968970669 0.052916278 0.003690694 0.574392797 0.003690694 0.574392
Regression Statistics Multiple R 0.213008209 R Square 0.045372497 Adjusted R Square 0.028913402 Standard 0.042545423 129 | Page
Error Observations 60
ANOVA Significance df SS MS F F Regression 1 0.004989907 0.004989907 2.756682395 0.102246424 Residual 58 0.104986555 0.001810113 Total 59 0.109976462
Standard Lower Uppe Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% - - Intercept 0.007129633 0.005652841 1.261247811 0.21226903 0.004185757 0.018445023 0.004185757 0.018445 - - X Variable 1 0.354019311 0.213222773 1.660325991 0.102246424 0.072792437 0.780831059 0.072792437 0.780831
Regression Statistics Multiple R 0.313707699 R Square 0.098412521 Adjusted R Square 0.078812793 Standard Error 0.040264177 Observations 48
ANOVA Significance df SS MS F F Regression 1 0.008140254 0.008140254 5.021116699 0.029910134 Residual 46 0.074575381 0.001621204 Total 47 0.082715635
Standard Lower Uppe Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% - - Intercept 0.008201282 0.005822787 1.408480414 0.165712315 0.003519381 0.019921944 0.003519381 0.019921 X Variable 1 0.555087581 0.247720161 2.24078484 0.029910134 0.056452767 1.053722394 0.056452767 1.053722
Regression Statistics Multiple R 0.389614998 R Square 0.151799846 Adjusted R 0.126852783 130 | Page
Square Standard Error 0.026524194 Observations 36
ANOVA Significance df SS MS F F Regression 1 0.004280912 0.004280912 6.084878379 0.018831054 Residual 34 0.023920118 0.000703533 Total 35 0.02820103
Standard Lower Uppe Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% Intercept 0.011598728 0.004424006 2.621770502 0.012991162 0.002608066 0.020589389 0.002608066 0.020589 X Variable 1 0.454981185 0.184445255 2.466754625 0.018831054 0.080143331 0.829819039 0.080143331 0.829819
Regression Statistics Multiple R 0.283329775 R Square 0.080275762 Adjusted R Square 0.038470114 Standard Error 0.028970067 Observations 24
ANOVA Significance df SS MS F F Regression 1 0.001611567 0.001611567 1.920213346 0.17972128 Residual 22 0.018463826 0.000839265 Total 23 0.020075393
Standard Lower Uppe Coefficients Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0% Intercept 0.015701425 0.005913622 2.655128387 0.014460033 0.003437324 0.027965527 0.003437324 0.027965 - - X Variable 1 0.320394656 0.231212081 1.385717628 0.17972128 0.159109849 0.799899161 0.159109849 0.799899
131 | Page
rvso o noetxs620. 200 2005 taxes income for Provision 2004 2003 Statement Income annsprcmo hr,dltd24 2.3 2.46 Earnings commonshare, per diluted oto ae ,5. ,4. ,9. ,3. 6,042. 5,536.1 5,191.9 4,747.2 4,456.1 sales Cost of annsprcmo hr,bsc26 2.4 2.60 Earnings commonshare, per basic neetepne e 141119. 124.1 expense,net Interest eln,gnrladamnsrtv xess3,296. expenses Selling,and administrative general te icm)epne e 1.)9. 92185. 69.2 90.3 (15.0) expense, net (income) Other e ae ,0. 054211,396. 10,584.2 9,903.4 sales Net e noe1,421. Income Net prtn rft2,166. profit Operating noebfr noetxs2,041. taxes income before Income rs rft5,447. Gross profit 1,327.1 $ 3 6 9 0 3 3 1,351.4 $ ,0. ,7. 2,001. 2,079.0 2,160. 2,002.4 2,215.0 2,122.1 3,624. 5,837. 675. 3 7 6 0 3 5 1,353.4 $ ,2. 4,355.2 6,701. 3,920.8 6,205.0 2. 4. 759.1 648.4 727.6 158. 136.0 .32.4 2.5 2.43 2.54 9 1,737.4 $ 12,237. 8 7 5 9 6 7 6 7 6 00 3 1,876.3 13% 0.08 $ 13,789.70 4,973.0 2,496.5 2,653.1 7,747.4 156.6 121.3 2007 3.20 3.35 3 0 0 0 0 rw h Growt .8100 0.08 .83%5308 ,0.16,264.5 5,800.51 5,370.84 36% 0.08 8,367.1 56% 6,525.6 0.08 44% 0.08 A sm oeat Forecast ssume 0 2,996.3 20% % 2,026.50 $ 4828 6043 7310 8707 0215 1825 3631 5537 7556 29,770.93 27,565.67 25,523.77 23,633.12 21,882.52 20,261.59 18,760.73 17,371.05 16,084.31 14,892.88 0820 0021 0221 04201 2014 2013 2012 2011 2010 2009 2008 .605 0.5 0.56 0.56 9 5 9 8 2,188.62 $ 3,236.0 9,036.5 7,611.5 7,047.74 6 7 2,363.71 $ ,9.43745 4,076.5 3,774.54 3,494.94 9,759.4 5 9 6 6 2,552.81 $ 0502 1334 2241 3276 4399 5470 16,726.06 15,487.09 14,339.90 13,277.68 12,294.15 11,383.47 10,540.25 ,6.17,306.9 6,765.71 8,220.4 0.5 6 8 2,757.04 $ ,7.29,588.3 8,878.12 .605 .60.5 0.56 0.56 0.56 0 7 2,977.6 $ ,0.24,754.8 4,402.62 7,891.5 3 7 3,215.81 $ 0354 1138 2085 13,044.87 12,078.59 11,183.88 10,355.44 8,522.8 0 3 5 3,473.07 $ ,3.25560 5,989.72 5,546.04 5,135.22 9,204.6 8 6 5 3,750.92 $
132 | Page 9,941.0 062017 2016 .60.56 0.56 5
$ 10,736.33 0.12
rvso o noetxs62%63%63%53%55%6 %6 %6 %6 %6 6% 6% 1% 6% 1% 6% 1% 6% 1% 6% 1% 6% 1% 6% 44% 0.02% 1% 36% 100% 6% 44% 1% 100% 36% 0.02% 6% 0.02% 44% 100% 1% 36% 44% 0.02% 100% 1% 0.02% 36% 5.50% 44% 100% 36% 44% 0.02% 100% 0.02% 5.30% 1.14% 36% 100% 44% 36% 0.02% 100% 44% 0.02% 6.38% 1.30% 36% 100% 44% 100% 0.03% 36% 0.88% 44% 6.38% 1.19% 36% 100% 1.52% 6.27% 1.13% -43.80% Earnings share, common diluted per 36.06% 100% 0.61% -45.20% 1.25% Earnings share, common basic per 35.59% 0.85% 100% -45.60% 34.40% -44.90% -0.15% 100% taxes income for Provision 34.25% -45% 100% 33.28% expense, net Interest expense, (income) net Other expenses Selling, and general administrative Cost Slaes of Sales Net Common Size Income Statement e noe1.5 25%1.6 10%1.0 3 3 3 3 3 3 3 3 3 13% 13% 13% 13% 13% 13% 20% 13% 20% 13% 56% 20% 13% 56% 20% 13% 20% 56% 20% 12.60% 56% 20% 56% 11.06% 20% 56% 20% 56% 11.86% 20% 56% 18.10% 12.54% 56% 19.24% 56% 16.36% 14.35% 17.65% 18.24% 56.20% 19.44% 18.92% 54.8 20.05% 20.62% 54.40% Income Net 21.87% 55.10% 55% taxes income before Income profit Operating Gross Profit 200 3 2004 200 5 200 6 200 7 0820 0021 0221 0421 062017 2016 2015 2014 2013 2012 2011 2010 2009 2008
133 | Page
Shareholders’ Equit Current Liabilities Current Assets s Asset 31, December As of Dollars in Millions ExceptPer Share Amounts te iblOhrLaiiis10. 07791312. 1177.1 1227.7 941.3 1097.7 1005.4 Liabilities Other liabil Other Deferred i Liabilities andLiabilities Shareholders’ Equit te ses5315125728361. 2272 228 844.8 3089. 2081.8 577 831.1 2684.9 3015.2 1845.7 561.2 783.2 2696.1 1891.7 543.1 832.4 2544.1 1299.4 2647.7 597.6 LongLong-term Term Debt 2542.2 assets Other assets, net intangible Other net Goodwill, net and equipment, plant Property, Commitments and contingent liabilities andCommitments contingent Consolidated Balance Adjustments) Sheets(Before n oe n on aal 136143171. 134.3 103.6 489. 340.7 319.6 andNotes loans payable 265.3 Cash and cash equivalents eanderig 4382. 98194. 10627. 197. 1517.7 9643.7 222.7 1218.1 8968.1 253.7 1064.4 264.1 4663.1 732.9 8223.9 1093.8 274 4258 309.9 732.9 7433 1126.2 554.7 4414 292.9 732.9 6493. 509.6 4696.8 732.9 5837 4146.3 456 732.9 Retained earnings capital paid-in Additional 5750 shares 732,853,180 issued) shares(1,000,000,000 authorized, Commonstock, $1 parvalue Stock Preference 5933 Liabilities Current Non Total 4982.3 Taxes Income Deferred Assets NonCurrent Total te urn ses290. assets current Other conspybe73684486113. 1066.8 138.1 1039.7 876.1 215. 776.7 864.4 153.1 356.7 753.6 183.8 451.3 314.4 taxes Accrued income Accounts payable debt long-term of portion Current te cras19 17612. 3711539.2 1317.1 1123.2 1127.6 1090 845. 1680.7 718.3 accruals Other 1523.2 1309.4 1319.9 1222.4 Inventories Receivables respectively) and $41.7, $46.4 (lessof allowances rauysok tcs 69. 66. 78 87. -8903.7 -218.9 -8073.9 -251.4 -7581 -1666.8 -283.3 -6965.4 -2081.2 -307.6 -6499.9 -1804.7 -331.2 -1806.2 -1866.8 cost at Treasury stock, compensation Unearned income comprehensive other Accumulated oa iblte 5177427. 6591.7 liabilities Total oa urn ses2496. assets current Total oa urn iblte 45423. 7336. 12743.845.049.45365.8 4996.14 4651.90 4331.38 3162.7 3469.1 2743 2730.7 2445.4 liabilities current Total oa ses77. 62980. 181121740 22.813558.0 12623.88 11754.08 10112 9138 8507.1 8672.9 7478.8 assets Total Total shareholders’ equit shareholders’ Total Total liabilities and shareholder's equit y y y y 4889182. 7478.8 78281. 24493. 11408.8 9736.2 9214.4 8518.4 7718.2 8. 25415. 40928. 232 385 560 2766.6 2576.03 2398.54 2233.28 2286.2 1410.9 1350.1 1245.4 887.1 200 3 5 5 79925. 313618. 3301 2757.1 2739.9 5. 5. 7. 338.1 279.9 251.2 254.9 0420 200 2005 2004 5 5 5 5 57193 01 15.81638 13558.0 12623.88 11754.08 10112 9138 8507.1 5. 0841171 1008.4 855.8 1772. 85892.01253 08.21746 26.91648 14611.6 13604.89 12667.49 11794.69 10982.02 10225.34 9520.80 7825.8 3221.9 7727.1 2720.4 7157 2918 5 5 7. 155.9 161. 174.1 6 5 5 262.7 428.7 0720 200 2008 2007 5 5 5 5 5 ATO 1.26 17.91691 38.61504 57.616829.7 15670.16 14590.46 13585.16 12649.13 11777.59 427 919 519 154 9875.9 9195.49 8561.91 7971.98 7422.70 5365.8 4996.14 4651.90 4331.38 08200 2008 9 9 201 201 0 0 5 5 46.41688 69.61090 97.72876 22347.40 20807.64 19373.97 18039.07 16796.16 15638.88 14561.34 22347.40 20807.64 19373.97 18039.07 16796.16 15638.88 14561.34 01201 2011 201 2011 5 5 5 913 112 474 3681.0 3427.42 3191.27 2971.39 8235.02 7667.62 7139.31 6647.40 6189.38 5762.93 8235.02 7667.62 7139.31 6647.40 6189.38 5762.93 2 2 5 00.71316 23.61100 14112.39 13140.03 12234.66 11391.67 10606.77 201 201 3 3 5 18075.1 201 201 4 4 5 5 91.22892 22392.1 20849.26 19412.72 18101.40 16854.19 15692.91 201 201 5 5 5 3953.4 201 201 6 6 5
1344246.01 | Page 2017 2017
odil e 73%2.1 17%2.8 24%2.0 20%2.0 20%2.0 20%2.0 20%2.0 22.00% 22.00% 22.00% 22.00% 22.00% 22.00% 22.00% 22.00% 22.00% 3.57% 22.00% 22.47% 2.50% 8.35% 22.78% 6.78% 9.09% 29.82% 21.70% 6.47% 9.21% 29.50% 21.81% 7.26% 9.60% 29.91% 17.37% 7.99% 30.53% 33.99% Current Liabilities andLiabilities Shareholders’Equit assets Other assets, net intangible Other net Goodwill, net and equipment, plant Property, Current Assets s Asset te iblOhrLaiiis1.4 19%1.6 34%11.64% 13.44% 11.06% 11.95% 13.44% Shareholders’ Equit Commitments and contingent liabilities Liabilities Other liabil Other ogtr Ln emDb 59%3.5 43%2.7 31.86% 29.77% 34.30% 33.65% 35.90% i Deferred Long Term Debt Long-term Common Size Balance Adjustments) Sheet(Before n oa o urn ses6.2 84%6.9 38%6.2 31%6.5 31%6.5 31%6.5 31%6.5 31%63.15% 63.15% 100.00% 63.15% 100.00% 100.00% 63.15% 100.00% 63.15% 100.00% 100.00% 63.15% 1.54% 100.00% 1.37% 63.15% 100.00% 100.00% 63.15% 36.85% 100.00% 63.15% 36.85% 63.15% 1.91% 36.85% 8.50% 36.85% 100.00% 36.85% 36.85% 64.22% 36.85% 2.02% 4.19% 36.85% 100.00% 36.85% 36.85% 63.88% 1.46% 100.00% 4.91% 11.58% 3.34% 35.78% 67.59% 100.00% 1.39% 11.04% 4.20% 3.06% 36.12% 4.24% 68.41% 16.60 100.00% 16.60% 10.06% 16.60% 2.95% 16.60% 32.41% 5.36% 16.60% 66.62% 16.60% 9.75% 2.94% 31.59% 4.00% debt 16.62% long-term of portion Current 9.60% andNotes loanspayable 3.88% 33.38% 3.69% 16.67% assets Total 3.55% Assets Non Current Total 15.39% 15.22% assets current Total 16.34% assets current Other Inventories Receivables (lessand respectively) $46.4 $41.7, allowances of Cash and cash equivalents 1000000sae uhrzd 3,5,8 hrsise)98%79%86%80%7.25% 8.02% 8.62% 7.98% 9.80% shares 732,853,180 shares(1,000,000,000 issued) authorized, Common value $1par stock, Ttllaiiis8.4 08%8.3 45%7.9 10%8.0 10%8.0 10%8.0 10%8.0 10%81.00% 81.00% 81.00% 81.00% 81.00% 81.00% 81.00% 81.00% 81.00% 81.00% 77.39% 2.61% 84.56% 46.11% 3.39% 84.13% 46.60% 80.89% 6.52% 51.89% 88.14% 51.15% 5.55% A 55.44% A 6.10% Stoc Preference liabilities Total Total NonCurrent Liabilities Taxes Income Deferred A A eanderig 93%8.6 0.2 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 103.00% 103.00% 103.00% 103.00% 103.00% 103.00% 103.00% 103.00% 103.00% 103.00% 105.10% 105.53% 32.50% 105.42% 32.50% 32.50% 32.50% 89.56% 32.50% 32.50% 32.50% 32.50% 32.50% 99.39% 32.50% 15.22% 31.28% 14.41% 37.96% 13.20% 32.24% Retained earnings 12.28% 29.74% 14.57% 32.70% liabilities current Total accruals Other rauysok tcs 8.1 7.6 8.1 8.6 -88.05% -2.16% -88.36% -2.75% -89.11% -3.33% -75.86% -3.35% -86.91% -4.43% equit shareholders’ Total cost Treasury at stock, Unearned compensation Total liabilities and shareholder's equit dtoa adi aia 50%1.1 25%1.3 15.01% -16.48% 13.33% -22.78% 12.51% -21.21% 11.91% -19.67% 15.06% 2.60% -24.96% 10.55% 1.77% 11.38% income comprehensive 2.53% other ccumulated 10.30% capital paid-in dditional 1.67% 9.41% 2.46% 10.08% taxes ccrued income payable ccounts y k y y y 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 100.00% 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% 0.0 27%183%165%112.82% 106.55% 108.31% 92.77% 103.20% 18%1.6 58%1.4 26%1.0 90%1.0 90%1.0 90%1.0 90%1.0 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% 22.61% 15.44% 15.87% 13.56% 11.86% .2 .8 .8 .4 1.95% 2.44% 2.98% 2.98% 3.92% 200 3 200 4 200 5 200 6 200 7 200 8 200 9 0021 0221 201 2013 2012 2011 2010 66%1.0 66%16.60% 16.60% 16.60% 16.60% % 4 201 5 201 6 201
7 135 | Page
FO/ a s e Sal / CFFO FO/ prtn noe0860870860830811001291381481491541641841872.003 1.877 1.804 1.644 1.564 1.489 1.418 1.308 1.229 1.3 1.080 0.831 1.32 0.843 1.32 0.806 1.24 0.32 0.827 0.816 CFFOGross / Profit CFFO Income Operating / CFFONI / feto xhnert hne nCs n aheuvlns45 .0(82)67 18.20 6.70 (18.20) 1.50 4.50 Cash in increase cash and Net equivalents Effectexchange of changes rate on Cash and cash equivalents ahadcs qiaet tbgnigo er179 6.0396 4.0489.50 340.70 319.60 265.30 167.90 Cash and cash equivalents year end of at Cash year andof beginning cash at equivalents ahFo ais20 200 2003 Cash Ratios Flow the Compan the ESOP on payments Principal by guaranteed debt, paid Interest Income taxes paid Supplemental Cash Flow Information Financing Activities ActivitiesInvesting ActivitiesOperating Principal payments on debt on payments Principal Purchases of t reasury share reasury t of Purchases Dividends paid investors outside to Payments Proceeds issuance from debt of rcesfo ae fmreal euiisadivsmns8.0173 00 0.00 (1.20) (20.00) 10.00 (127.70) 147.30 (43.20) 85.10 her Ot investments and securities marketable sales of Proceeds from investments and securities Purchases marketable of rcesfo xrieo tc pin n xestxbnft 93 04 71 6.0489.30 364.40 47.10 70.40 79.30 Proceeds exercise from stock and options of excessbenefits tax amn o custos e fcs curd00 807)(85)(200.00) (38.50) (800.70) 0.00 Salelines non-core and product of propert cash of acquired net acquisitions, Payment for Capital expenditures A income Net djustments to reconcile net income to net net to income net reconcile to djustments y Cash ef fect s of changes in: in: changes s of fect ef Cash tc-ae opnainepne(88)2.04.0116.90 145.40 328.70 41.10 111.60 (46.50) 329.30 29.30 (147.90) 38.30 327.80 (48.80) (26.70) 53.80 315.50 (107.20) Stock-basedexpense compensation lines product salenon-core on tax Gain of before Depreciation and amortization cash of net Restructuring, .801 .60.1 0.16 0.17 0.18 s 5 eevbe 1.0 56)(41)(116.00) (24.10) (5.60) (14.40) Inventorie Receivables Other non-current assets andliabilitie non-current Other A cash provided by operations: by cash provided ccounts payablesaccrual andother .0 .8 .7 .8 .8 .0 .0 .9 .9 .9 .9 .9 .9 0.294 0.295 0.296 0.297 0.298 0.298 0.299 0.300 0.301 0.289 0.284 0.272 0.288 0.301 4 s y Net cash used in investing activitie cash investing Net used in Net cash Net byoperation provided Netcash used infinancing activitie 200 5 200 5 5 6 s s s 0720 0921 0121 03201 2013 2012 2011 2010 2009 2008 2007 .601 .40.1 0.14 0.16 1.2 0.16 s s 7 .515 .617 .120 .02.3 2.20 2.05 1.91 1.78 1.66 1.55 1.45 1572)(1.0 1544)(,5.0 (1,754.40) (1,059.00) (1,524.40) (611.10) (1,557.20) ,6.01743 ,8.01815 ,0.021.22704.03 2517.72 2,203.70 1,821.50 1,784.40 1,754.30 1,767.70 ,2.01371 ,5.01,353.40 1,351.40 1,327.10 1,421.30 840)(5.0 2103)(1,332.00) (2,100.30) (753.90) (804.00) 568)(3.0 672)(677.80) (607.20) (536.20) (506.80) 176)(,9.0 207)(2.0 583)-0 50-9 50-0 65-5 70-5 -760 -750 -750 -750 -625 -600 -560 (884.70) -490 -580 -600 (796.20) (528.30) (637.90) (620.40) (554.90) (220.70) (1,090.40) (117.60) 321)(4.0 392)(476.40) (389.20) (348.10) (302.10) 2.01265 ,2.01,471.10 2,021.90 1,246.50 229.20 6.0396 4.0495 428.70 489.50 340.70 319.60 265.30 2.03.0256 55.00 215.60 37.00 149.90 152.70 127.60 80.10 188.70 3.0 01 71 .08.60 8.20 17.10 60.10 (38.10) 3.0132 4.0168.30 647.90 149.90 584.30 123.20 593.80 131.50 498.10 74 43 11 148.80 21.10 54.30 97.40 50 .014 .0(17.40) 2.20 1.40 1.80 15.00 31)(61)(68)(118.50) (46.80) (76.10) (3.10) 35 98 70 45.00 37.00 29.80 23.50 0320 200 2004 2003 7 .701 .70.1 0.17 0.17 0.17 .0(97)00 - 0.00 (89.70) 0.00 7 4 5 201 0.1 5 7 5 201 2007 2006 .22.71 0.17 2.52 0.17 6 2017 (1,737.80) (1,269.40) 1,513.10 1,737.40 (749.60) (111.50) (583.10) (66.50) (11.00) (60.80) (26.50) (48.60) 109.70 366.20 110.30 333.90 163.40 646.50 53.90 21.30 41.41960 78.41372 90.92131 22.324122276 28157.73 26217.63 24411.2 22729.23 21163.16 19704.99 18347.29 17083.14 15906.09 14810.14 57732704.03 2517.723 932223.1 2551.45 2238.119 1963.262 1.887289692 056 142711.6 450718.314.8 1923.331 1748.483 1589.53 1445.027 1313.661 1194.237 1085.67 986.9728 897.248 815.68 0820 0021 0221 201 2013 2012 2011 2010 2009 2008 0820 0021 0221 04201 2014 2013 2012 2011 2010 2009 2008 . .6196219 .45 .7862849 .1973494 3.772716 3.429742 3.117947 2.834498 2.576816 2.34256 2.1296 1.936 1.76 1.6 5 5 941431.3 398839.3 3863.9 3597.737 3349.848 3119.039 2904.134 3863.9 3597.737 3349.848 3119.039 2904.134 5 986931.7 700340.0 92695600.37 4912.609 4309.306 3780.093 3315.871 2908.659 7 7 4 199345.9 4786.814 4456.996 4149.903 4786.814 4456.996 4149.903 201 5 5 062017 2016 201 5 6 6384.427 2017
136 | Page
CL 2003 2004 2005 2006 2007 WC 51,100,000.0 8,300,000.00 14,100,000.00 -45,910,000.00 455,800,000.00 TA 7,478,800,000.00 8,672,900,000.00 8,507,100,000.00 9,138,000,000.00 10,112,000,000.00 R/e 7,433,000,000.00 8,223,900,000.00 8,968,100,000.00 9,643,700,000.00 10,627,500,000.00 EBIT 1,917,800,000.00 2,122,100,000.00 2,215,000,000.00 2,160,500,000.00 2,653,100,000.00 MVE 39,720,000,000.00 39,720,000,000.00 39,720,000,000.00 39,720,000,000.00 39,720,000,000.00 BVL 6,591,700,000.00 7,427,500,000.00 7,157,000,000.00 7,727,100,000.00 7,825,800,000.00 Sales 9,903,400,000.00 10,584,200,000.00 11,396,900,000.00 12,237,700,000.00 13,789,700,000.00
PG 2003 2004 2005 2006 2007 WC 2,862,000,000.00 -5,032,000,000.00 -4,710,000,000.00 4,344,000,000.00 -6,686,000,000.00 TA 43,706,000,000.00 57,048,000,000.00 61,527,000,000.00 135,695,000,000.00 138,014,000,000.00 R/E 13,692,000,000.00 13,611,000,000.00 31,004,000,000.00 35,666,000,000.00 41,797,000,000.00 EBIT 6,969,000,000.00 8,721,000,000.00 9,147,000,000.00 11,294,000,000.00 13,406,000,000.00 MVE 213,700,000,000.00 213,700,000,000.00 213,700,000,000.00 213,700,000,000.00 213,700,000,000.00 BVL 27,520,000,000.00 39,770,000,000.00 43,052,000,000.00 72,987,000,000.00 71,254,000,000.00 SALES 43,377,000,000.00 51,407,000,000.00 56,741,000,000.00 68,222,000,000.00 76,476,000,000.00
Clorox 2003 2004 2005 2006 2007 WC -500,000,000.00 -225,000,000.00 -258,000,000.00 -123,000,000.00 -395,000,000.00 TA 3,652,000,000.00 3,834,000,000.00 3,617,000,000.00 3,616,000,000.00 3,666,000,000.00 R/E 2,565,000,000.00 2,846,000,000.00 3,684,000,000.00 3,939,000,000.00 185,000,000.00 EBIT 690,000,000.00 722,000,000.00 650,000,000.00 526,000,000.00 630,000,000.00 MVE 7,860,000,000.00 7,860,000,000.00 7,860,000,000.00 7,860,000,000.00 7,860,000,000.00 BVL 2,437,000,000.00 2,294,000,000.00 4,170,000,000.00 3,772,000,000.00 3,495,000,000.00 SALES 3,986,000,000.00 4,162,000,000.00 4,388,000,000.00 4,644,000,000.00 4,847,000,000.00
C&D 2003 2004 2005 2006 2007 WC 57,168,000.00 136,257,000.00 84,728,000.00 111,666,000.00 277,564,000.00 TA 1,119,617,000.00 1,877,998,000.00 1,962,117,000.00 2,334,154,000.00 2,532,490,000.00
137 | Page
R/E 435,677,000.00 510,480,000.00 618,071,000.00 740,130,000.00 891,868,000.00 EBIT 111,851,000.00 171,753,000.00 212,776,000.00 252,102,000.00 305,034,000.00 MVE 3,600,000,000.00 3,600,000,000.00 3,600,000,000.00 3,600,000,000.00 3,600,000,000.00 BVL 681,123,000.00 1,317,968,000.00 1,265,239,000.00 1,470,317,000.00 1,452,225,000.00 SALES 1,056,874,000.00 1,462,062,000.00 1,736,506,000.00 1,945,661,000.00 2,220,940,000.00
Colgate 2003 2004 2005 2006 2007 - 1.2(WC/TA) 0.0081992 0.0011484 0.0019889 0.0060289 0.0540902 1.4(RE/TA) 1.3914264 1.3275214 1.4758660 1.4774765 1.4713706 3.3*(EBIT/TA) 0.8462240 0.8074496 0.8592235 0.7802200 0.8658258 .6*(MVE/BVL) 3.6154558 3.2086166 3.3298868 3.0842101 3.0453117 1*(SALES/TA) 1.3241964 1.2203761 1.3396927 1.3392099 1.3636966
Z-SCORE 7.1855018 6.5651121 7.0066580 6.6750876 6.8002948
Proctor&Gamble 2003 2004 2005 2006 2007 - - - 1.2(WC/TA) 0.0785796 0.1058477 0.0918621 0.0384156 0.0581332 1.4(RE/TA) 0.4385851 0.3340240 0.7054724 0.3679752 0.4239845 3.3*(EBIT/TA) 0.5261909 0.5044752 0.4905992 0.2746616 0.3205457 .6*(MVE/BVL) 4.6591570 3.2240382 2.9782588 1.7567512 1.7994779 1*(SALES/TA) 0.9924724 0.9011184 0.9222130 0.5027599 0.5541177
Z-SCORE 6.6949850 4.8578080 5.0046814 2.9405634 3.0399927
138 | Page
Clorox 2003 2004 2005 2006 2007 - - - - - 1.2(WC/TA) 0.1642935 0.0704225 0.0855958 0.0408186 0.1292962 1.4(RE/TA) 0.9832968 1.0392280 1.4259331 1.5250553 0.0706492 3.3*(EBIT/TA) 0.6234940 0.6214397 0.5930329 0.4800332 0.5671031 .6*(MVE/BVL) 1.9351662 2.0557977 1.1309353 1.2502651 1.3493562 1*(SALES/TA) 1.0914567 1.0855503 1.2131601 1.2842920 1.3221495
Z-SCORE 4.4691202 4.7315932 4.2774655 4.4988271 3.1799618
C&D 2003 2004 2005 2006 2007 1.2(WC/TA) 0.0612724 0.0870653 0.0518183 0.0574080 0.1315215 1.4(RE/TA) 0.5447825 0.3805499 0.4410030 0.4439219 0.4930386 3.3*(EBIT/TA) 0.3296737 0.3018027 0.3578588 0.3564189 0.3974792 .6*(MVE/BVL) 3.1712334 1.6388865 1.7071873 1.4690710 1.4873728 1*(SALES/TA) 0.9439603 0.7785216 0.8850165 0.8335615 0.8769788
Z-SCORE 5.0509223 3.1868260 3.4428839 3.1603813 3.3863909
139 | Page
Cost of debt
Amount Weight Rate Weighted Average Current Liabilities Notes and Loans Payable 155.9 1.99% 4.20% .0836 Current Portion of L.T. 138.1 1.76% 8.00% .1408 Debt Accounts Payable 1066.8 13.63% 4.20% .5725 Accrued Income Taxes 262.7 3.36% 4.20% .1411 Other Accruals 1539.2 19.67% 4.20% .8261 Total Current Liabilities 3162.7 40.41%
Long-Term Debt 3221.9 41.17% 8.00% 3.2936 Deferred Income Taxes 264.1 3.38% 6.00% .2028 Other Liabilities 1177.1 15.04% 6.00% .9024 Long Term Liabilities 4663.1 59.59%
Total Debt (Liabilities) 6.1629% 7825.8 100%
140 | Page
Weighted Average Cost of Capital
Vd $3973 millions Ve $7826 millions Total $11,789 millions Ke 16.38% Kd 6.16%
Tax rate 30%
Before Tax 9.60% After Tax 8.373%
CAPM Rf 3.75 Treasury rate Market Risk Premium .08 assumed Beta .455 Estimate from 3 month regression 36 month horizon
Estimated Ke 16.38%
141 | Page
Method of Comparables
PPS EPS Trailing P/EIndustry Colgate’s Share Average Price Colgate-Palmolive 73.68 3.2 23.05 Proctor & Gamble 66.8 3.31 20.21 Clorox 59.94 3.51 17.08 20.13 64.35 Church & Dwight 56.75 2.46 23.11
PPS EPS Forward P/EIndustry Colgate’s Share Average Price Colgate- 73.68 4.28 17.21 Palmolive Proctor & 66.8 3.88 17.22 16.6 71.05 Gamble Clorox 59.94 4.08 14.68 Church & 56.75 3.17 17.9 Dwight
PPS BPS P/B Industry Colgate’s Share Average Price Colgate- 73.68 4.1 17.97 Palmolive Proctor & 66.8 21.72 3.08 3.28 13.45 Gamble Clorox 59.94 -3.99 NA Church & 56.75 16.31 3.48 Dwight
142 | Page
PPS EPS PEG Industry Colgate’s Share Average Price Colgate- 73.68 4.28 1.72 Palmolive Proctor & 66.8 3.88 1.62 1.6 54.78 Gamble Clorox 59.94 4.08 1.59 Church & 56.75 3.17 1.6 Dwight
PPS DPS D/P Industry Colgate’s Share Average Price Colgate- 73.68 1.6 .022 Palmolive Proctor & 66.8 1.6 .024 .019 84.21 Gamble Clorox 59.94 1.6 .027 Church & 56.75 .32 .01 Dwight
PPS EBIDTA P/EBIDTA Industry Colgate’s Share (Billions) Average Price Colgate- 73.68 3.200 23.03 Palmolive 28.49 91.17 Proctor & 66.8 19.320 3.46 Gamble Clorox 59.94 1.120 53.52 Church & Dwight 56.75 .369 153.79 143 | Page
EV EBIDTA EV/EBIDTA Industry Colgate’s Share (Billions) Average Price Colgate- 40.8 3.200 12.75 Palmolive 11.45 36.64 Proctor & 238.02 19.320 12.32 Gamble Clorox 11.42 1.120 10.19 Church & 4.37 .369 11.84 Dwight
144 | Page
Residual Income Perpetuity GrowthRate (g) Derive) Equity (You of Cost Initial Observed Share Price (4/20/2008) Price consistent time Price Share Initial divide by shares MVE 12/31/07 Terminal Value Perpetuity YBY RI PV of Total Book Value Equity (Millions) YBY PV RI pv facto Change in Residual Income Annual ResidualIncome Annual NormalIncome (Becnhmark) Growth Rate Book Value Equity (Millions) (Millions) Dividends Total Net Income (Millions) Dollars of All in Items Millions r 12088.94 1636.95 6504.99 77.41 24.66 23.71 509.8 263367 ,7.75676 ,5.68342 ,5.11,9.81,1.61,4.516,468.63 14,641.05 12,916.46 11,290.18 9,757.61 3947 8,314.24 6,955.66 5,677.62 4,475.97 3,346.71 2286 0720 0921 0121 0321 0521 072018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 0.17 012345678910 0 ,7.01047 9.2763 2.3537 3.2392 1.9262.53 310.89 369.21 1,337.65 439.42 1,261.94 523.79 1,277.27 1,296.48 625.03 1,318.80 3,750.92 746.32 1,343.62 3,473.07 891.42 1,370.35 3,215.81 1,064.77 1,398.52 2,977.60 1,271.60 1,427.71 2,757.04 1,457.56 2,552.81 1,487.77 2,363.71 2,188.62 2,026.50 1,876.39 8.2589 6.1952 ,8.61434 ,5.91993 ,9.02,488.98 2,195.80 1,919.33 1,923.33 1,658.79 1,748.48 1,413.42 1,589.53 1,182.46 1,445.03 965.20 1,313.66 760.91 1,194.24 1,085.67 568.94 986.97 388.62 897.25 815.68 .507 .205 .603 .302 .40.21 0.24 0.28 0.33 0.39 0.46 0.53 0.62 0.73 0.85 3.1 2.5 2.9 2.7 2.3 2.1 2.3 1.0 (15.33) (19.20) (22.33) (24.81) (26.73) (28.17) (29.19) (29.85) (30.21) .92.82.12.92.92.719.97 20.07 20.19 20.39 20.71 18.8 21.38 0.21 0.19 .52.52.52. 53 50 24.81 25.04 31.87 36.61 25.37 32.39 37.36 25.9 33.16 38.5 34.42 26.85 40.43 36.89 29.05 44.4 43.86 0.15 57.17 0.1 0.11 0.09 .72.62.32.62.32.222.17 22.32 22.53 22.86 23.43 24.66 0.17 3 35.1 7 2 0-0.1-0.2-0.3-0.4-0.5 vraud<65.03 Overvalued valued Fairly Undervalued 18.5 31.2 .702 .001 .601 0.13 0.14 0.16 0.17 0.20 0.23 0.27 3 2 - >89.03 18.3 29.6 6 8 18.2 28.6 6 8 18.1 28.3 9 4 18.1 2 4 8 7868.56 perp
145 | Page
Growth Rate Cost Initail Equity of observed shareprice Initial Share Price Divide by shares shares byDivide (Millions) Dividends Total MODEL AEG PV AEG YBY AEG PV PV Factor MVE Return Perp Capitalization ModelTotal Adj. PerpEarnings Perp TV AEG YBY AEG PV of Total Perp) (of Earnings Core Drip Income Time Consistent Price Consistent Time Net IncomeNet (Millions) Change in Residual Income inChange Residual AEG YBY AEG Normal (Benchmark) Income Cumulative Income Dividend 77.41 0720 0921 0121 0321 05201 2015 2014 2013 2012 2011 2010 2009 2008 2007 0.17 -0.5 012 20.20315078 10299.56627 21.01191187 -6.07216714 -119.393567 ,7.92065 ,8.22337 ,5.12770 ,7.03258 ,7.73,750.9 3,473.07 3,215.81 2,977.60 2,757.04 2,552.81 2,363.71 2,188.62 2,026.50 1,876.39 1750.93 1876.39 1.8897.2 815.68 509.8 0.17 ,9.82310 ,6.92755 ,8.93257 ,8.93724 4,063.49 4,048.16 3,762.49 3,743.29 3,483.79 3,461.46 3,225.73 3,200.92 2,986.79 2,960.06 2,765.54 2,737.37 2,560.69 2,531.50 2,371.01 2,341.16 2,195.38 2,165.17 3.7125 6.9145 203.0 184.56 167.79 152.53 138.67 (25.82 (30.21 22 53 88 22.9 18.88 15.32 12.22 0.8 5 5 ) ) 8.71056 ,9.41336 ,4.31595 ,4.81,923.33 1,748.48 1,589.53 1,445.03 1,313.66 1,194.24 1,085.67 986.97 2.1 (18.23 (21.81) (29.19 (29.85) .306 .304 .903 .80.24 0.28 0.33 0.39 0.46 0.53 0.62 0.73 0.1 0.11 0.09 0.21 0.19 0.17 0.1 5 3 3 59 29 194.64.340.81 54.79 41.03 55.26 41.36 55.97 41.9 57.19 42.95 59.68 45.93 67.69 14.6 07 092.52.82.921.01 20.99 20.98 20.95 20.9 17.2 20.79 35 25 21 19 18 31.73 31.82 31.95 32.17 32.57 33.58 592.92. 55 55 25.49 25.51 25.54 25.6 25.69 25.9 01-. 03-. -0. -0.4 -0.3 -0.2 -0.1 0 2 2 4 ) ) vraud<65.03 Overvalued Fairly valued Undervalued 1.3 1.9 96)(.4 54)(3.73) (5.47) (7.44) (9.67) (12.19) (24.81 (15.03) (26.73) (28.17) 48 49 50 51 15.16 17.69 15.13 17.66 15.07 17.62 14.99 17.55 14.87 17.44 5 5 - >89.03 76 29 89 58 53.65 45.85 38.97 32.92 27.61 2 6 223.3 2 78910 ) 245.6 2.3 1.0 (15.33 (19.20) (22.33) 5 270.2 2 5 6 297.24 072018 2017 2 ) -24.9468935 -16.7144186
146 | Page
eptiyGot ae()0.08 77.45 0.164 22.96 Perpetuity Growth Rate (g) Initial Costof Equity (you derived) Price Share Observed Time ConsistentEstimated Price I/hr . .619 .323 .828 .234 .74.15 3.77 3.43 3.12 2.83 2.58 2.34 2.13 1.94 1.76 1.6 PV Facto DIV/share eeatvlainie 10 9 8 7 6 5 4 3 2 1 0 item valuation relevant Initial Costof Equity .164 = VDvYY15 .313 .812 .410 .209 .10.86 0.91 0.96 1.02 1.08 1.14 1.21 1.28 1.35 1.43 1.51 10.23 54.35 11.88 Perpetuity PV TV Perpetuity TV YBY Div total PV PV Div YBY siae rc e hr e 120 22.10 Dec 31 2007 Per Share Price Estimated Assuming Discounted Dividends Discounted r AC.9 d.66Ke=.164 Kd=.0616 WACC=.096 0720 0921 0121 0321 0521 072018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 .5 .3 .3 .4 .6 .0 .4 .9 .5 .1 0.188 0.219 0.255 0.297 0.345 0.402 0.468 0.545 0.634 0.738 0.859 1 Ke 0.20 0.18 0.16 0.14 0.12 Sensitivity AnalysisSensitivity Growth Rate 38 42 47 54 16.35 20.10 15.43 26.16 18.47 14.77 37.63 22.96 17.37 51.26 14.27 30.25 21.00 13.88 16.57 35.00 26.39 15.97 19.66 28.91 18.70 24.01 22.40 25.72 23.75 .200 .600 0.1 0.08 0.06 0.04 0.02 Overvalued valued Fairly Undervalued 54.35 begin perp begin
<65.03 - >89.03 4.56 11
147 | Page
LR ROELR RI MODEL iieb hrs5980243.24.85.67.0120 829.63 919.32 0.12 142.01 156.96 0.1 79.50 87.65 852.06 56.06 145.75 61.66 0.08 81.54 43.78 48.05 0.06 874.48 57.46 896.90 149.48 36.22 39.67 0.04 153.22 83.57 44.85 0.204 0.124 85.61 8% = Growth Assuming 2 0.02 Box 58.86 37.08 60.26 45.91 0.184 46.98 37.95 38.81 0.164 1 Box 0.144 48.15 509.8 0.16 24548.07 Ke BVE*(1+((ROE-Ke)/(Ke-g)) 49.97 24548.07 0.94 NI(t)/Equity(t-1) 0.08 Price Share Observed 2007) Price(Dec.31 Consistant Time 2286.2 Initial Share Price Shares by Divide Proof Equity of Value Market Rate Growth Earnings Forward Avg Ke Proof ROE Average yr 5 Equity of value Book Initial $77.41 rwh00 23 28 33 38 43 44.85 44.35 43.85 43.35 42.85 42.35 0.07 62.36 61.66 Growth 60.96 60.26 59.56 58.86 0.144 Ke .0 03 07 11 14 18 32.19 38.38 31.83 47.51 37.95 31.46 46.98 90.71 37.51 31.10 46.45 89.69 37.08 30.74 45.91 88.67 36.65 30.38 45.38 87.65 36.22 0.204 44.85 86.63 0.184 0.164 85.61 0.124 .95.75.15.55.05.456.38 49.89 55.74 49.33 40.81 55.10 37.51 48.77 40.36 54.45 37.10 48.21 39.91 53.81 36.69 47.65 39.46 53.17 36.28 47.09 39.02 0.09 35.88 0.08 38.57 35.47 0.06 0.05 . 12 20 27 35 42 65.03 64.28 63.53 62.78 62.04 61.29 0.1 .209 .409 .60.97 0.96 0.95 0.94 0.97 0.93 0.96 0.92 0.95 0.94 0.93 0.92 growth rate ROE ROE Overvalued Fairl Undervalued y valued
<65.03 - >89.03
148 | Page
Observed ShareObserved Price 04/20/08) (As of Perpetuity Growth Rate (g) Initial WACC Book Value Debt & Preferred Stock WACC(BT) ConsistentTime Price Intristic (model) price at 12/31/2007 Divide by # of shares TMVE Book Value Debt & Preferred Stock MV Time Zero PV TV Perp PV YBY FCF Total PERP TV PV FCF YBY PV PV Factor growth annnual FCF FCF Firm Cash Flow From Investing Activities Cash From Flow Operations (Millions) Discounted Free Cash Flow A .300500 .7 0.09 0.075 0.06 0.045 0.03 0 G 28,700 31,576 60,275 39,724 20,551 39,724 71 .91.53.25. 24 212.91 92.45 764.59 171.56 52.3 86.84 32.22 52.95 12.15 23.3 408.78 0.09 77.41 149.05 0.08 84.12 37.74 0.07 0.096 WACC BT 57.12 56.30 509.8 200 0.06 01 0 7 ACA)087 d001 e0.1638 Ke 0.0616 Kd 0.8373 WACC(AT) 8919 803422.5 069925.4 056227.6 131129.6 2248.55191 2194.165 0.55839478 2133.141 0.591898 2070.968 0.627412 2095.662 0.665057 2054.847 0.704961 2026.999 0.747258 2026.953 0.792094 1890.384 0.839619 1809.1698 0.889996 0.9433962 977 140 441 590 798 927 139 399 770 068 4268.423 4026.81 3707.00 3399.90 3113.97 2972.74 4786.81401 2749.85 4456.996 2559.04 4149.903 3863.97 2414.13 3597.737 2124.03 3349.848 1917.72 3119.039 2904.134 2704.035 2517.72 200 60-8 40-6 60-2 70-5 70-760 -750 -750 -750 -625 -600 -560 -490 -580 -600 8 200 9 2 0021 201 2011 2010 .164 51 91 50 119.91 55.05 29.11 15.14 6.41 0.1 0.11 0.0 . 3.2 0.1 2 6 3 .6040046 .8050070 .9830002 0.08627409 0.090324 0.091823 0.047509 0.081055 0.074563 0.060024 57.1 9 2 4 Overvalued Fairly valued Undervalued 136.1 17.4 2 5 9 5
<65.03 294.32 - 30.3 201 >89.03 32 86 59.46 28.65 13.24 4 6 3 3 28 0.6300.82 102.46 52.87 0421 0621 2018 2017 2016 2015 2014 7 8 9 71140.3808 0perp 10
149 | Page
Colgate-Palmolive 2003 2004 2005 2006 2007 LIQUIDITY Current Ratio 1.02 1.003 1.005 0.952 1.144 Quick Asset Ratio 0.608 0.6005 0.6014 0.5802 0.669 A/R Turnover 8.1 8.02 8.706 8.035 7.156 A/R Days 44.6 44.9 44.8 43.8 43.2 Inventory Turnover 6.206 5.164 6.067 5.49 5.03 Inventory Days 58.3 58.7 62.9 66.1 62.7 Working Capital Turnover 193.79 1150.43 808.29 -728.45 83.48
PROFITABILITY Gross Profit Margin 0.5502 0.5515 0.5544 0.5476 0.5946 Operating Expense Ratio Operating Profit Margin 0.2817 0.2005 0.1943 0.1765 0.1717 Net Profit Margin 0.1426 0.1253 0.1449 0.1104 0.137 Asset Turnover 1.324 1.22 1.34 1.339 1.248 Return on Assets 0.2001 0.1774 0.1558 0.159 0.1659 Return on Equity 4.056 1.495 1.085 1.002 1.074 Asset Turnover - After Restatement 1.35 1.33 1.19 1.26 1.28 ROA Restatement 0.194 0.166 0.142 0.139 0.161 ROE Restatement 2.422 0.959 0.637 0.522 0.566
CAPITAL STRUCTURE Debt to equity ratio 7.43 5.96 5.3 5.48 3.423 Times interest earned 17.54 17.73 16.29 13.35 16.31 Debt service margin 5.92 5.58 3.95 5.11 2.84 IGR 12.87% 10.57% 8.58% 7.95% 9.43% SGR 108.50% 73.61% 54.06% 51.43% 41.71% Debt to equity ratio - After Restatement 4.76 3.50 2.76 2.52 1.88
P & G LIQUIDITY Current Ratio 1.23 0.773 0.812 1.22 0.782 Quick Asset Ratio 0.7226 0.4304 0.4223 0.6213 0.39 A/R Turnover 14.728 12.65 13.558 11.91 11.32 A/R Days 25.8 25.2 26.5 26.5 29.5 Inventory Turnover 6.08 5.69 5.55 5.265 5.379 Inventory Days 58.5 58.5 61.7 62.2 65.2 Working Capital Turnver 15.15 -10.216 -12.05 15.7 -11.224
PROFITABILITY Gross Profit Margin 0.4896 0.5122 0.501 0.5145 0.5302
150 | Page
Operating Expense Ratio Operating Profit Margin 0.181 0.1912 0.1926 0.1942 0.2059 Net Profit Margin 0.1195 0.1261 0.1279 0.1273 0.1378 Asset Turnover 0.9924 0.9011 0.9222 0.5027 0.5411 Return on Assets 0.1174 0.1409 0.1214 0.1411 0.0735 Return on Equity 0.3493 0.3803 0.4007 0.4969 0.1585
CAPITAL STRUCTURE Debt to equity ratio 1.7 2.3 2.52 1.16 1.07 Times interest earned 14 15.62 13.102 11.84 11.85 Debt service margin 14.1 8.56 5.71 4.36 6.96 IGR 6.60% 8.57% 7.57% 8.09% 4.36% SGR 17.82% 28.30% 26.65% 17.45% 9.01%
Clorox LIQUIDITY Current Ratio 0.655 0.823 0.808 0.891 0.723 Quick Asset Ratio 0.437 0.5457 0.5222 0.5548 0.4498 A/R Turnover 8.609 9.047 10.67 10.67 10.48 A/R Days 41.7 39 36.2 33.2 33.7 Inventory Turnover 8.428 7.93 7.718 9.19 8.919 Inventory Days 42.8 43.2 45.7 41.8 39.8 Working Capital Turnver -72.47 -18.49 -17.01 -37.75 -12.21
PROFITABILITY Gross Profit Margin 0.4814 0.4654 0.4319 0.4218 0.4336 Operating Expense Ratio Operating Profit Margin 0.2062 0.2069 0.1789 0.1675 0.1771 Net Profit Margin 0.1237 0.1319 0.2498 0.0956 0.0993 Asset Turnover 1.056 1.085 1.213 1.284 1.315 Return on Assets 0.1358 0.1503 0.2859 0.1227 0.1325 Return on Equity 0.3641 0.4519 0.7117 -0.8029 2.801
CAPITAL STRUCTURE Debt to equity ratio 2 1.49 -7.54 -24.18 20.44 Times interest earned - - 9.94 6.126 7.513 Debt service margin 4.66 2.61 3.82 4.22 4.01 IGR 8.26% 8.76% 23.35% 7.49% 8.41% - - SGR 24.83% 21.81% 152.70% 173.60% 180.30%
151 | Page
Church & Dewight LIQUIDITY Current Ratio 1.24 1.38 1.21 1.25 1.49 Quick Asset Ratio 0.793 0.875 0.772 0.769 0.977 A/R Turnover 9.74 8.74 9.19 8.409 7.39 A/R Days 36 34.2 37.2 39.3 39.4 Inventory Turnover 8.77 6.237 7.039 7.58 5.98 Inventory Days 41.2 45.8 50.6 54.1 55.1 Working Capital Turnover 18.51 10.73 20.5 17.42 8.945
PROFITABILITY Gross Profit Margin 0.309 0.3648 0.3667 0.3911 0.4214 Operating Expense Ratio Operating Profit Margin 0.1059 0.1175 0.1225 0.1295 0.1445 Net Profit Margin 0.0766 0.0609 0.0708 0.0714 0.07136 Asset Turnover 0.9441 0.7785 0.8853 0.8337 0.8137 Return on Assets 0.0819 0.0795 0.0655 0.0708 0.0617 Return on Equity 0.2329 0.2029 0.2196 0.1995 0.1667
CAPITAL STRUCTURE Debt to equity ratio 1.55 2.35 1.82 1.702 1.34 Times interest earned 5.48 4.15 4.825 4.67 5.18 Debt service margin 4.19 55.91 32.79 11.86 6.52 IGR 6.93% 6.32% 5.69% 6.22% 5.45% SGR 17.69% 21.19% 16.02% 16.81% 12.78%
152 | Page
STTO13 .311 .612 0220 0420 062007 2006 2005 2004 2003 2002 1.28 1.26 TL 1.19 11990.12 10798.28 1.33 9751.02 9547.68 1.35 7975.24 7,323.76 T/O ASST TA O .901 .401 .62020 0320 0520 2007 11990.12 10798.28 2006 9751.02 2007 9547.68 1.88 2005 2006 7975.24 2.52 7323.76 2004 2005 2003 0.57 7825.8 2004 7727.1 2,002.00 0.52 2.76 2003 & SE TL After 4164.32 0.16 1737.4 2002 3071.18 455,800,000 7157 7,825,800,000 1353.4 11,990,120,000 0.14 3.50 13,789,700,000 0.64 7,727,100,000 10,798,280,000 -45,910,000 2,653,100,000 4164.32 12,237,700,000 9,751,020,000 10,627,500,000 2594.02 7,157,000,000 39,720,000,000 1737.4 11,396,900,000 3071.18 10,112,000,000 7427.5 9,547,680,000 2,160,500,000 14,100,000 10,584,200,000 7,427,500,000 9,643,700,000 39,720,000,000 1351.4 1353.4 9,138,000,000 2,215,000,000 4.76 39,720,000,000 8,968,100,000 0.96 0.14 39,720,000,000 8,300,000 2120.18 2,122,100,000 8,507,100,000 9,903,400,000 & SE TL Before 7,975,240,000 8,223,900,000 6,591,700,000 8,672,900,000 2594.02 6591.7 11990.12 1327.1 39,720,000,000 10798.28 1,917,800,000 1351.4 1383.54 7,433,000,000 7,478,800,000 2.42 51,100,000 0.17 2120.18 Rstd TA* 1421.3 9751.02 Sales 1327.1 BVL 1383.54 586.86 MVE 0.19 EBIT 9547.68 R/e 1421.3 TA WC 586.86 7975.24 CL D/E TE 7323.76 TL ROE TE NI ROA TA NI oa 3.6464 7.814.216.817.230387114. 30111. 2286.2 1410.9 1350.1 1245.4 887.1 350.3 1878.12 1660.28 1243.92 874.78 496.44 236.56 Sales Total -CR sd693786278496571986127356.212118 6.122975365 3.045312 1.150089 3.084210118 6.537618938 1.133300859 0.730204 1.240897 0.66025793 6.257582449 1.250308382 3.329886824 1.168790547 0.045618 6.9632748 -0.005101924 3.208616627 1.108562499 0.749613887 1.287592478 3.6154558 0.001735203 1.241768273 0.733469283 1.205890855 0.001043185 0.793548533 1.304813397 0.007688797 Z-SCORE Rstd 1*(SALES/TA*) .6*(MVE/BVL) 3.3*(EBIT/TA*) 1.4(RE/TA*) 1.2(WC/TA*) TL/TE t-1 NI/ TE t-1 NI/ TA Restatement After - Z-Score Debt to Equity - After Restatement Return on Equity Restatement - After Return On Assets - After Restatment se unvr-AtrRsaeetSls At120 0320 0520 2007 2006 2005 2004 2003 2002 Sales/ t-1 TA Asset Restatement - After Turnover After Before GW 9,294.3 1182.8 4.4829 ,1.2617 2.2338 ,2.67952 ,4.89710 0782 11,990.12 Increase TA 10,798.28 9,751.02 9,547.68 7,975.24 7,323.76 236.56 393.88 421.52 236.56 601.78 236.56 1,016.92 236.56 802.96 236.56 946.24 ,0 ,0 ,0 ,0 2,007 2,006 2,005 2,004 2,003 0220 0420 0620 0220 0420 062007 2007 2006 2006 2007 2005 2006 2004 2005 2005 2003 2004 2002 2004 2003 2007 2002 2003 2006 2007 2006 2005 2002 2005 2004 2004 2003 2003 2002 2002 0 ,9.01817 ,4.02018 ,7.07,087.20 2,272.00 2,081.80 1,845.70 1,891.70 1,299.40 5.8298 5.8298 5.820 0320 0520 2007 2006 2005 2004 2003 2002 259.88 259.88 259.88 259.88 259.88 9903.4 0320 0520 2007 2006 2005 2004 2003 Restatement Analysis 0542 1369 2277 13,789.70 12,237.70 11,396.90 10,584.20 7.4383 7.4383 3.6464 7.81239 ,6.81,878.12 1,660.28 1,243.92 874.78 496.44 236.56 378.34 378.34 378.34 378.34 6.4391 369.14 369.14 369.14 1.6416.36 416.36 454.4 TE Before TE 454.4 After Before TA TE After TE 76969. 47575 7717825.8 7727.1 7157 7427.5 6591.7 6736.9 07277. 62980. 1810112 9138 8507.1 8672.9 7478.8 7087.2 8.61335 ,2.82540 ,7.84,164.32 3,071.18 2,594.02 2,120.18 1,383.54 586.86 0220 0420 062007 2006 2005 2004 2003 2002 4888672.9 7478.8 ,0.09,138.0 8,507.10 0 10,112.00
153 | Page
References
Business Analysis & Valuation Wall Street Journal.com Morningstar.com St.Louis.com Investopedia.com SupplyChain Digest Colgate-Palmolive 2007 10-K Credit-to-cash advisor.com Spirefire.com Proctor & Gamble 10-K Clorox 10-K Church & Dwight 10-K Colgate.com Yahoofinance.com CNNmoney.com
154 | Page