Krause Fund Research Spring 2020

Krause Fund Research Spring 2020 Colgate-Palmolive (NYSE:CL) April 17, 2020 Consumer Staples Stock Rating: No Action Research Analysts: Kasey Costa Sheldon Fox Current Price $69 [email protected] [email protected] DCF & EP Intrinsic Value $86

Matt Richards Target Price $70-$90 [email protected]

We are suggesting a NO ACTION recommendation for Colgate- Stock Performance Highlights Palmolive (CL). CL is near their 52-week high due to the increase in 52-week high $77.41 product demand during the COVID-19 outbreak, and it is reasonable to 52-week low $58.49 expect the price to decrease as we emerge from the pandemic. CL is also DCF/EP Intrinsic Value $85.72 a mature company in a highly competitive industry making it difficult DDM Implied Value $60.89 to grow at any significant rate. Their product lines include oral, personal, and home care and pet nutrition, which do not see the same rapid product Share Highlights development taking place in other industries. Market Cap (B) 61.873 Drivers of Thesis Shares Outstanding (M) 854.7 • CL operates in an extremely congested marketplace with no Beta 0.6 concrete plan to deal with the increased level of competition. Dividend Yield 2.5% By focusing almost entirely on strenghtening their existing EPS 2.83 brands, they will potentially miss profitable opportunities that P/E 24.3 arise in the future. • Being such a large company, CL must manage many different facets of their business and are slow to adjust to new consumer Company Performance trends, most notably in the rise of eCommerce sites. Gross Margin 59.12% • With 70% of their profits coming from outside the U.S., CL Operating Margin 23.97% conducts business with many subsidiaries and 3rd parties that Profit Margin 15.08% could damage their reputation. ROA 15.74% • CL is nearing its 52-week high and with the uncertainty Revenue (B) 15.693 currently surrounding the market we believe CL stock is overvalued due to the extreme circumstances we are experiencing. Financial Ratios Risk of Thesis. Current Ratio 0.24 • The harmful economic effects of the COVID-19 pandemic Debt Ratio 0.52 may continue longer than anticipated, resulting in more uncertainty surrounding CL’s future performance whether it be positive or negative.

Company Description Earnings Per Share Colgate-Palmolive Company (CL) is an 2019 2020E 2021E 2022E 2023E 2024E American multinational consumer products $2.89 $2.31 $2.30 $2.35 $2.38 $2.41 company headquartered in Manhattan, New York City. Colgate-Palmolive was founded in 1806 and has around 34,000 around the world. STZ Stock Price Performance vs. S&P 500 (YTD) Colgate-Palmolive operates in approximately

60 locations within the US. Worldwide, they

operate in approximately 260 locations in over 80 countries. They specialize in the production, distribution, and provision of household, health care, Personal Care, and veterinary products. They divide their

business into Oral Care, Personal Care, Home Care, and Pet Nutrition products. They manufacture and market their products under trusted brands such as Colgate, Palmolive, and Elmex. Source: Bloomberg

the year-over-year rate at which the prices of goods Economic Outlook and services are increasing. Therefore, higher inflation Real GDP Growth causes consumer purchasing power to decrease. This The United States’ Real GDP is a measure of plays a large part in the consumer staples industry as overall economic prosperity as it values the the industry has historically had low margins with high various goods and services produced in the U.S. sales volume.5 When inflation rises, it causes an in any given year while accounting for increase in the input prices for the products of these inflation. GDP is often one of the most inclusive companies, leading to even tighter margins. measures as it accounts for all industries and Additionally, some of the increases in input prices are sectors producing for-sale goods in the United pushed onto the consumer, causing consumers to opt States. As a whole, GDP in the United States has for lower quality and less expensive consumer been steadily increasing since the financial crisis products. in 2008-2009, reaching 2.1% in Q4 of 2019 as seen in the graph below.1

Source: Trading Economics6 Inflation in the United States hit an 18-month high of Source: Trading Economics2 2.5% in January 2020, followed by 2.3% in February However, despite the recent steady GDP growth 2020 before dropping to 1.5% in March 2020, all of around 2% annually, we believe that GDP illustrated above. growth in all of 2020 will be significantly lower due to the Coronavirus (COVID-19) outbreak. Looking forward, we expect a short-term increase in inflation due to higher demand for essential products Looking at past pandemics, the best comparison by consumers and hoarding tendencies brought about to the Coronavirus is the Ebola virus outbreak by the Coronavirus. Thus, we expect inflation to be at of 2014. However, it is clear that the Ebola virus 2.5% though Q2 2020 and stabilize around 2% by end was far less severe than the Coronavirus will end of 2020. up being. During the Ebola outbreak, the virus infected 28,000 people worldwide and led to Consumer Price Index (CPI) 11,310 total deaths.3 During the peak of the The CPI reflects how inflation rates affect consumer Ebola virus, US Real GDP growth was as low spending. CPI is determined by a weighted average as -1.1%1. As of today, the number of price from a variety of goods and services. As the CPI Coronavirus’ cases worldwide have increases, the consumer purchasing power and surpassed 2.05 million and resulted in over demand for those goods will decrease. This is 130,000 deaths.4 important for the Consumer Staples sector because as CPI increases, product groups with low margins will We expect Q1 2020 Real GDP growth to drop to suffer as people trim their levels of 1% and continue to fall in Q2 2020 to -9% as spending. However, because the Consumer Staples companies adjust to slower economic activity sector holds a lot of necessities for consumers, it is not worldwide. Looking forward to the third and as drastically affected by lower levels of consumer fourth quarters, we expect -4% growth in Q3 spending. 2020 and –3% growth in Q4 2020. Over the last eight years, CPI has averaged a growth Inflation rate of just below 2%.7 With our expected increase in The inflation rate shows a numerical measure for inflation over the next couple quarters, we anticipate

2 an equal, temporary increase in CPI. We predict a Outlook on Capital Markets CPI growth rate around 3% through the end With a recession almost certainly imminent, even with October before returning to its average over the last the uncertainty regarding its severity at this point, 10 years of 1.9%, assuming the Coronavirus the consumer staples sector will remain relatively safe. outbreak has been mostly mitigated. The consumer staples sector tends to perform comparatively well in times of recession and Unemployment Rate economic hardship because of what consumer staples Currently, the U.S. job market is going through an encompasse: Personal Care, household, and food and unprecedented rise in unemployment levels and beverage products, all of which are things that remain people filing for unemployment brought about by in demand when broader economic challenges are the Coronavirus. In the United States’ most faced. recent recession, the financial crisis of 2008 and 2009, unemployment rate reached around 9.5%.8 Industry Analysis and Trends Overview The household product industry consists of companies that manufacture and sell products to retailers, although some companies are working to create more direct to consumer products and services. With the rise of eCommerce sites like Amazon, many household product companies are utilizing online retailers rather than putting their products in traditional retail stores. Colgate- Palmolive specifically utilizes Walmart for around 11% of net sales generation.11

Product lines in this industry typically include items

like laundry detergent, dish soap, razors, and Source: New York Times 10 cleaning wipes, but there are a large number of With the recent disruption of the economy, millions similar products owned by many companies. These of Americans have been forced out of work and companies typically have ownership of products moved to apply for additional benefits recently that fall more into the personal products category made available for the unemployed. Even such as toothpastes, deodorants, employees with stable full-time jobs are beginning shampoo/conditioner and body wash.11 to file for unemployment because their hours and pay are being cut. The Wall Street Journal has Almost every major household product company reported that unemployment numbers have has products that differentiate themselves increased to above 20 million with more expected from other companies in the industry. For example, if the current economic slowdown should extend Church and Dwight owns Trojan into the summer.9 condoms, Colgate-Palmolive owns Hills Nutrition dog food, and Unilever owns food brands such as The New York Times estimates the current Hellman’s and Breyer’s.12 Household products unemployment rate to be around 13%. This drastic companies differentiate their product lines to increase in the unemployment rate is the fastest and strengthen their brand in the home of their biggest increase in unemployment in the history of consumers. Additionally, in the congested the United States, surpassing the Great marketplace of household products, a lot of the Depression10. With all this considered, we expect company’s main product lines have relatively the United States’ unemployment rate to reach as stagnant profits, increasing only marginally each high as 20% within the next quarter or two. year in revenue. By creating different product lines, they can keep their established products’ stable revenue while exploring less contested markets.

3 The main new initiative for many companies in products are not performing well.11 the household products industry is to be sustainable in their production and The rapid growth in eCommerce and the emergence packaging. Specifically, they are working to of alternative retail channels have utilize recyclable packaging and cut greenhouse created, and will continue to create, pricing gas emissions throughout production. Colgate- pressures that could adversely affect not Palmolive is already paving the way only Colgate-Palmolive’s relationships with key by improving ingredient biodegradability and retailers, but all the aforementioned companies.11 A moving toward more sustainable preservative number of players in the industry could suffer systems to improve packaging recyclability.11 if they cannot quickly adapt to shifts in consumer preferences or the amount of activity driven Markets and Competition through eCommerce sources. Colgate-Palmolive’s top competitors are Procter and Gamble, Kimberly Clark, Clorox, Another factor in the competition of this industry is and Church and Dwight, although none of these cannibalization of products. Many of the major companies contain the same business segments companies in this industry have multiple brands as Colgate-Palmolive.12 With such a wide array that compete with each other on the same product of products that these companies offer, some of line. Although this causes increased competition, it which do not correlate with one another, such is valuable for the companies to increase market as Colgate-Palmolive’s Pet Nutrition segment, share as much as possible. Procter and Gamble is many of their business segments do not correlate the main leader in this category as they consistently with one another. have the top market share of their leading product lines such as laundry detergent and dish soap. For example, P&G owns Dawn Dish Detergent which Mkt Cap (Millons) held a 39.1% market share in 2017 and is 27% more than the next dish soap which was Church & Dwight Palmolive.13 Clorox Porter’s 5 Forces & Impact on Industry Procter & Gamble Degree of Rivalry and Competition (High) Kimberly-Clark Colgate-Palmolive experiences extreme Colgate-Palmolive competition worldwide from strong local companies and from larger conglomerates. Both 0 100,000 200,000 300,000 400,000 levels of competition bring unique challenges.

Source: FactSet12 Some of the larger multinational conglomerates have greater resources than CL’s while many of the The household product market is heavily driven local companies have more efficient marketing by competition. This is due in large part to the processes. Additionally, the immense growth in the extremely similar products on the market and the eCommerce space has made it easier for new consumer’s power to switch brands with no competitors to enter the market11. With Colgate- significant costs to them. Despite the companies Palmolive being such a large company, it is hard having different product lines, many of their top- for them to cater to the individual consumer, selling product lines have many causing them to spend large amounts of money on similarities. Thus, it is important that any advertising campaigns that may not be as effective companies operating in this space are able as other company’s campaigns. Additionally, to adjust to new consumer trends in the market because of their size, it is hard for them to as they arise. Some of these companies have respond effectively to changing consumer begun to acquire smaller companies in an effort preferences. CL depends on the strength to compete on a local level where brand of their brands and on their ability to recognition and loyalty may not be as defend their intellectual property, which requires strong. Colgate-Palmolive has begun looking for time and money. additional retailors in specific locations their

4 Threat of Substitutes (High) Bargaining Power of Buyers (High) The number of substitutes in Colgate-Palmolive’s Stemming directly from the high level of business space is extremely high. Because Colgate- competition that CL experiences, buyers have a Palmolive competes in such a congested area, they significant amount of bargaining power. are always fighting to make their products stand With many alternative products to choose from, out on global and local levels. For some of it is very easy for consumers to switch their most basic products such as toothpaste, from a Colgate-Palmolive product to an toothbrushes, and mouth wash, there is not much alternative made by a competitor. There is not they can do in terms of product development a significant difference between a CL product to create more of a competitive advantage with when compared to a competitor’s version, those products. Lastly, with online shopping meaning a small difference in price may becoming more and more prevalent, the door persuade a customer to switch whose products remains wide open for more substitutes to enter the they choose to use. The amount of consumer market. spending through eCommerce mediums has made it easier than ever before for a consumer to Threat of New Entrants (Moderate) compare multiple similar products.11 Since Colgate-Palmolive is such a large company that operates all over the world, it is extremely hard Colgate-Palmolive is well aware of the level of for a new entrant to get to the level of competition they experience and thus directly competing with them. However, many the availability of substitutes for their products. small local companies can and have already To combat this, Colgate-Palmolive has done begun to steal some of Colgate-Palmolive’s their best to rely on their overall brand strength business. Colgate-Palmolive chooses not to devote to attract and retain customers.11 a substantial amount of time and resources into reclaiming lost customers as it does not end up Bargaining Power of Suppliers (Low) being a value-adding process in their broader Colgate-Palmolive makes a strong effort business strategy. to diversify their suppliers to defend against price fluctuations. Being such a large company, Comparison to Direct Competition a slight increase in the cost of their materials will We believe the most attractive companies in the result in a significant increase of their cost of household products industry are companies that goods sold. Thus, the majority of raw and have a strong brand and structure that are capable packaging materials used in CL of dealing with external threats and continue to look products are purchased from other companies for new ways of innovation, especially and are available from multiple sources. No when considering how much the Coronavirus has single raw or packaging material represents, and disrupted worldwide economic activity. no single supplier provides, a significant portion of their total material requirements.11 For certain In the chart on the following page, we have materials, such as resins, essential oils, pulp, compared Colgate-Palmolive to a few of its prime tropical oils, tallow, poultry, corn and competitors. soybeans, Colgate-Palmolive’s suppliers are subjected to strict industrial and governmental standards, causing the barrier of entry to be quite high for new entrants.11 Additionally, when Colgate-Palmolive partners with a new suppler, they must perform their own research to vet them, making it more time intensive and expensive for them to switch suppliers. For all of these reasons, the level of bargaining power that suppliers have is relatively low.

5 Price Mkt Cap PE Ratio PEG Ratio (Millions) PERCENT OF SALES

Colgate- 73.42 62,954 25.0 4.3 Oral Care Products Personal Products Palmolive Home Care Pet Nutrition Kimberly-141.94 48,467 19.0 3.5 Clark 16%

Procter & 124.69 308,683 24.2 3.3 18% 46% Gamble 20% Clorox 193.50 24,207 28.9 7.9

Church & 73.55 18,077 26.8 3.8 Dwight Source: Colgate-Palmolive 10K10 Colgate-Palmolive is a leader in Oral Care with Source: FactSet12 global leadership in the toothpaste and manual Colgate-Palmolive has a relatively high market toothbrush categories. Colgate-Palmolive’s Oral cap for its space. Though it is not the highest, it Care products include CL Maximum Cavity offers a comfortable market cap which shows its Protection, Colgate-Palmolive Total, Colgate- previous success. By establishing such a large Palmolive Triple Action, and Darlie Double Action, market cap, we believe it signals the among others.11 strong business aspects of Colgate-Palmolive. Additionally, it is relatively profitable as Colgate-Palmolive is also a leader in many product indicated by its PE and PEG ratio. categories related to the Personal Care market. They display global leadership in liquid hand soap, Industry Outlook and Summary which it sells under the SoftSoap, Palmolive, and The household products industry is shaped by Protex brands. Colgate-Palmolive’s Personal Care consumer preference and choice. Many of the products also include Protex, Palmolive and Irish products in the industry are identical regardless Spring bar soaps, among others.11 of the company that manufactures them. Consumers choose which products Colgate-Palmolive manufactures and markets a to use for a variety of reasons, not just which one wide array of products for the Home Care market as performs the best. Thus, it is important the well, including Palmolive dishwashing companies within this industry continue to liquids, Murphy’s Oil Soap, and Ajax household establish their brand and push for new cleaners. Colgate-Palmolive is a market leader in innovations in their field. In such a congested fabric conditioners with leading brands industry, it is important that companies create a including Suavitel in Latin America, Soup Line in base of consumers and continue to try to create Europe, and Cuddly in the Southern Pacific products for different niche environments. region.11

Lastly, Colgate-Palmolive is a world leader in Company Analysis specialty Pet Nutrition products for dogs and cats Business Overview with products marketed in over 80 countries Colgate-Palmolive-Palmolive Company (CL) is worldwide. Colgate-Palmolive manages pet foods a leading consumer products company whose primarily under two brands: Hill’s Science Diet and products are marketed in over 200 countries Hill’s Prescription Diet. Hill’s Science diet is around the world. CL was founded in 1806 a series of products for everyday nutritional needs. and has 34,000 employees worldwide14. CL Hill’s Prescription Diet is a range of therapeutic operates in two product segments: Oral, Personal products to help nutritionally manage dogs and cats and Home Care; and Pet Nutrition. that have a disease or condition.11

6 Corporate Strategy Net sales for Pet Nutrition were $2,525 million in Colgate-Palmolive is primarily focused on 2019, an increase of 6.0% from 2018, largely driven working with their two existing product by volume growth of 3.5% and net selling price segments, Oral, Personal and Home Care: and increases of 4.0%. Organic sales for Hill’s Pet Pet Nutrition, rather than looking for new Nutrition increased 7.5%11. product markets to expand into11. Within these segments, Colgate-Palmolive aims to grow their The increase in Oral Care was primarily rooted primary product categories such as toothpaste in sales growth in the toothpaste category. The and Hill’s Prescription Diet to increase their increase in Personal Care was due to sales growth overall market share. By increasing their market in the skin health, body wash, bar soap, shampoo, share with an already established brand, they and underarm protection categories. However, this hope to reach more consumers all around the growth was partially offset by a decline in sales in world rather than through a specifically targeted the liquid hand soap category. The increase in campaign. Moreover, within CL’s categories of Home Care was due to organic sales growth in the products, they strive to prioritize their efforts liquid cleaner and fabric softener categories. The based on their capacity to maximize the use of increase in Pet Nutrition growth was mainly their organization’s core competencies and due to organic sales growth in the Science Diet and strong global equities and to deliver sustainable Prescription Diet categories.11 long-term growth.11 Being such a large company, it is important they focus on Production Locations and Capacities their greater company’s performance when Colgate-Palmolive owns or leases approximately evaluating decisions to drive growth. With two 320 properties, which include manufacturing, strong and versatile product lines, they strive to distribution, research, and office facilities make them as efficient and profitable as worldwide. Their corporate headquarters is in New possible, which they continue to do each year. York, New York.11

Product Performance In the US, Colgate-Palmolive operates in When analyzing Colgate-Palmolive's product approximately 60 locations, owning 13 of success, there are many factors to take into them. Manufacturing and warehousing facilities account. A few notable items that Colgate- used by the Oral, Personal and Home Care segments Palmolive's emphasizes are net sales, net selling are located in Greenwood, South Carolina, price changes, volume growth, foreign exchange Morristown, Tennessee, and Cambridge, Ohio. The rates, and organic scales, which is defined as net Pet Nutrition segment has major manufacturing and sales excluding the impact of foreign exchange, warehousing facilities in Bowling Green, acquisitions, and divestments. Kentucky, Emporia, Kansas, Richmond, Indiana, and Topeka, Kansas.11 Colgate-Palmolive’s worldwide net sales were $15,693 million in 2019, up 1.0% from Colgate-Palmolive focuses heavily on business 2018, and organic sales increased 4% from outside the United States, operating in 2018. Volume growth increased 2.5% and net approximately 260 locations in over 80 selling price increased 2.0% but was partially countries. For the Oral, Personal and Home Care offset by 3.5% due to negative effects of foreign product segment, Colgate-Palmolive utilizes exchange rates. overseas manufacturing and warehouses in Australia, Brazil, China, Colombia, France, Greece, In the Oral, Personal and Home Care product Guatemala, India, Italy, Mexico, Poland, South segment, net sales were $13,168 million in 2019 Africa, Thailand, Turkey and Venezuela. The Pet as volume growth increased 2.5% and net selling Nutrition segment has major manufacturing and price increased 1.5% with a foreign exchange warehousing facilities in the Czech Republic and rate of -4.0%. Organic sales in the Oral, Personal the Netherlands.11 and Home Care product segment increased 3.5% in 2019.11

7 in our everyday products, more people are REVENUE EXPOSURE BY switching to organic and natural products. It is often ECONOMY TYPE small and/or local brands that provide these products, so their revenue and sales are a lot lower Developed Emerging Frontier Rest of World but still pose a potential threat to the performance of those with larger market shares. 22% Impact of COVID-19 on Operations 50% 8% Being a global company, Colgate-Palmolive must 20% abide by the rules of the different countries it operates in. With that being the case, Colgate-

Palmolive is doing what it can to operate as usual, Source: Colgate-Palmolive 10K10 though that currently looks different depending on the specific location their office or warehouse is The primary research centers for oral and located in. Beyond that, Colgate-Palmolive is Personal Care products are located taking additional precautionary measures during the in Piscataway, New Jersey; the primary research Coronavirus outbreak. CL is mobilizing five of its centers for Home Care products are located manufacturing plants on three continents to produce in Mexico; and the primary research centers for a new soap, which will be specially packaged with Pet Nutrition products are located in Topeka, instructions on proper handwashing to compliment Kansas. The global data center for Colgate- the World Health Organization’s (WHO) Palmolive is also located in Piscataway, New #SafeHands message. CL is planning on producing Jersey. Additionally, Colgate-Palmolive has 25 million bars of soap and donating them through shared business service centers in India, Mexico this movement.15 and Poland.11

Investment Positives & Negatives (SWOT Recent Developments and Trends Analysis) Private labels are becoming a large issue for Strengths companies in the household products industry Colgate-Palmolive’s primary strengths stem from considering the level of indifference between there positioning as a large multi-national products in this category. As retailers begin to company. Having a well-established brand and create their own products to push the larger business model allows CL to streamline many manufacturers out of the space, these manufacturing and selling processes. Additionally, manufacturers lose margins as they must lower because they are such a large company, their profits prices to compete with the private labels. from all over the world are affected by many Fortunately, many people are quite picky when it different things. Though this does increase the comes to keeping themselves and their homes competition they experience, it also means that if clean. Private label products are typically seen as a dramatic event were to cripple a specific market, a lower quality product than a brand-name they will not be as affected as other smaller product, even if that might not be the companies because they possess revenue streams case. Therefore, we believe that household and from many other markets. personal products companies will continue to have control over the private labels into the near- Along those lines, Colgate-Palmolive is very well term future, although it is certainly something diversified in terms of their products and services. companies like Colgate-Palmolive should In a market that sees constant shifts in consumer monitor moving forward. preferences, it is important that Colgate-

Palmolive has different products to reduce the Another recent trend in the household product possible negative effects of changes in consumer market is the prevalence of and desire for demands. information regarding their products. With social media influences and more scientific information warning us about harmful chemicals

8 Weaknesses e-commerce retailers, may lead to pricing pressures Although Colgate-Palmolive’s large brand helps and affect CL’s relationships with retailers and the company in many ways, it is also extremely ultimately consumers of their products. difficult to manage such widespread operations. CL is forced to rely heavily on a variety of third Foreign markets also pose a threat to Colgate- parties, including suppliers, distributors, Palmolive’s success. Approximately 70% and contractors to carry out some essential of Colgate-Palmolive’s net sales originate in business practices. As a result of that, they have markets outside the U.S11, so they constantly have less control over their third parties’ operations, many different environments to monitor. which exposes them to risks regarding their Characteristics that they must pay particularly close reputation and operational legality. attention to are foreign currency fluctuations and changes in raw and packaging materials around the Colgate-Palmolive’s large scale also means world. Additionally, new regulations involving not competition is significant. They must not only only the overall business procedures, but also manage large corporations like themselves environmental regulations from around the world, but must also monitor the business of their could affect manufacturing and selling costs as they competitors in all the markets they operate in. It arise. is difficult to respond quickly to trends and shifts in consumer tastes with operations on such a Valuation Analysis large scale, meaning that many local companies have opportunities to adjust to the consumer Revenue Decomposition changes in demand well before CL might be able We believe that in 2020 total sales inOral, Personal to. and Home Care will grow by 3% and Pet Nutrition will grow by 12%. Although these growth rates are Opportunities significantly higher than the past few years, Colgate-Palmolive has already started we predict that COVID-19 will have positively developing new products to enhance the impacted Colgate-Palmolive's product lines. performance of the current product lines. This CL’s home care portfolio contains brands like can most notably be seen in their Pet Nutrition Softsoap, Palmolive Dish Soap, and Pinho Sol, products as pet owners have shown more care for which includes hand soap, dish soap, and the things they feed their pets. Colgate is well disinfectant cleaners. positioned to continue to profit from these changes as they have the resources and These products have been in high demand since the experience to cater to rising consumer desires. COVID-19 pandemic started and are likely to see an increase in sales. Colgate only has one pet food One recent, yet notable, action is Colgate- Palmolive’s entrance in the professional skin brand, Hill’s. As many people have been stocking care category within their Personal Care business up on non-perishable food items, pet owners have segment with their purchase of Physicians Care been buying more pet food in fear that further shut Alliance, LLC and Elta MD Holdings, Inc. We down of manufacturing facilities will prohibit them believe if they continue to enter new categories from buying it as needed. We think this will significantly increase the amount of sales this with their strong brand recognition, it will help year. The decline in growth for the Oral, Personal, to diversify and increase their profits.11 and Home Care section following five years is Threats predicted in response to the significantly higher The retail landscape continues to be impacted by growth rates in 2020E, starting at –1.94% in 2021E, and falling around –1% for the remaining years. We the rapid growth of eCommerce retailers. Many expect the Pet Nutrition section to grow at a slower more consumers are beginning to shop online. Thus, it is important that CL continues rate as well, but remain positive starting at 10.32% to adapt their business strategy and products to in 2021E, and declining from there to match the meet this shift in consumer behaviors. This rapid patterns from previous years. For total growth after growth in alternative retail channels, specifically 2020, we kept our sales mix similar to historical records while gradually increasing the percentage

9 of sales from the Pet Nutrition segment. This is free rate is unusually low compared to historical due to their higher growth rate , continued brand numbers at just 0.67%. As the markets begin to loyalty that is expected coming out of stabilize coming out of the COVID-19 pandemic, the COVID-19 pandemic, and management’s we can expect that this rate will increase. Having a focus on expanding the Pet Nutrition segment. higher risk-free rate directly effects the cost of Overall total growth will grow at a constant rate equity we used to calculate the WACC of CL. The of 0.18%. higher the risk-free rate, the higher the cost of equity, the higher WACC. If we raise our discount Cost of Goods Sold rate, then the present value of our assumptions will Since CL sells products that are considered be lower, which will decrease our overall valuation staples, there is a direct relationship between in the future. how much a product costs to produce and the selling price. Our cost of goods sold (COGS) was Weighted Average Cost of Capital (WACC) forcasted by looking at historical ratios between Once our cost of debt and cost of equity had been COGS and net sales. In the most recent year of measured, we then calculated WACC based on the published financial data, CL’s COGS as a weight of each in the capital structure. For market percentage of net sales was 37.58%. Since we value of equity, we used the current share price of expect a bigger portion of total sales to come $69.04 and multiplied it by 854.7 million shares from their pet nutrition lines, we anticipate these outstanding to arrive at a market value of equity of operations will become more efficient and will $59,008 million. For market value of debt, we ultimately lower their COGS percentage summed short-term debt, long-term debt, and the compared to overall sales. present value of operating leases to arrive at $9,753 for the market value of total debt. Ultimately, cost of equity was weighted at 85.82% and cost of debt Cost of Debt at 14.18%. Using these inputs, our WACC equated We calculated a cost of debt of 2.13% to 4.05%.

Debt Rating: AA- Dividend Payout Ratio Pre-Tax Cost of Debt: 2.73% The dividend payout ratio is determined by taking Marginal Tax Rate: 22% the dividend price and dividing it by the recurring EPS. Colgate-Palmolive has a steadily increasing According to the S&P Global Credit Ratings, expected dividend starting at $1.72 in 2020. In 2021 Colgate-Palmolive has a debt rating of AA-. Our and through the rest of our projections, we expect pre-tax cost of debt was equal to a corporate the dividend payout ratio to be constant year-over- bond due to mature in June of 2028. year at 78%. This ratio is slightly higher than previous years because the maturity of the company Cost of Equity will make it difficult for the stock price to continue We calculated a cost of equity of 4.37% increasing. CL will likely increase dividends to ensure an adequate return for their investors. Beta: 0.60 Equity Risk Premium: 6.16% Continuing Value of Growth in NOPLAT Risk-Free Rate: 0.67% Our NOPLAT increases slightly each year for a couple particular reasons. Colgate-Palmolive’s We used the Capital Asset Pricing Model portfolio includes staple products that are in high (CAPM) to determine our companies cost of demand during the COVID-19 pandemic, so their equity. The equity risk premium was derived stock price has been beating the S&P in recent using historical data, and the risk-free rate used weeks. This puts CL near their 52-week high, which came from the 10-year treasury yield. we think it is fairly valued because we expect they will meet or beat earnings this quarter. We also Risk-Free Rate think this will leave a positive lasting impression on Due to the current state of the economy, the risk- the brand, which is one reason we have NOPLAT

10 increasing in our forcast. We chose a growth rate DDM of 0.5% because CL is a mature company that Our DDM valuation follows our expectations for has loyal customers. This also matches what future dividend payments and the rate we expect their historical data tells us, and factors in that them to grow. With Colgate-Palmolive being a they are no longer growing rapidly due to the mature company and not showing significant maturity of the company and industry as a whole. growth rates anymore, many shareholders rely on We expect CL to continue adding brands to its consistant dividends to justify their investments. portfolio in hopes of increasing their market We expect dividends to be at $1.72 per share for share. 2020 and slowly increase over time. To calculate the CV of these cash flows, we took our forecasted P/E multiple in the CV year (25.35) and multiplied Valuation Models it by our forecasted EPS in the CV year (2.47). This We completed four valuation models: discounted gave us our implied stock price to be discounted cash flow (DCF), economic profit (EP), dividend back to the present value. Our implied share price discount model (DDM), and the relative of today is $60.89. valuation model. Using these models, we constructed a target price range of $70- Relative Valuation $90. When completing our relative valuation model, we compared four companies and specifically focused DCF and EP Valuation on EPS and P/E ratios. The companies we chose as For our DCF and EP models, we used a six-year comparables were Kimberly-Clark (KMB), Proctor time horizon (ending 2026E) due to the maturity & Gamble (PG), Clorox (CLX), and Church & of the company and its consistent cash Dwight (CHD). EPS and P/E values and multiples flows. These models required our forecasting of were taken from FactSet and used to compare WACC, cost of equity, CV return on invested against those of CL. We do not feel that this model capital (ROIC), and CV of NOPLAT. is the most appropriate way to value CL as KMB, PG, and CLX have much higher current stock DCF prices. The EPS of both KMB and CLX are almost After forecasting our cash flows for the six-year three times higher than CL, and PG is a significantly period, we used the unlevered discount rate higher maket share than its competitors. of WACC to determine their present value. Next, we subtracted net debt, PV of operating leases, Key Takeaways PV of ESOP, pension deficit, and non- We find the most value and accuracy in the DCF controlling interest, giving us the value of and EP models that we constructed. We believe that equity. Lastly, we divided by the number of these two models give the most comprehensive shares outstanding, which gives us the intrinsic assessment of what to expect from Colgate- value of the last fiscal year at $85.72. Palmolive in all aspects of the business. With the amount of inputs that went into these valuations, we EP find these to have the highest level of accuracy for Much like the DCF, we used the same time expectations moving forward. period of six years to calculate EP model. Our continuing value under this model takes place in Sensitivity Analysis 2026. Once all of our years were discounted Our sensativity analysis tables are composed of a appropriately, we added back invested capital number of variables that could significantly impact and subtracted net debt, PV of operating leases, final valuation numbers. Most specifically, these PV of ESOP, pension liabilities, and non- tables measure the degree of change in intrinsic controlling interest. This gave us our value of value of the DCF and EP models. Some variables equity and we divided by the number of shares have more severe impacts than others, so outstanding, giving us today’s implied price of understanding the reasoning is important to our $85.72. overall valuation.

11 Beta and Equity Risk Premium Due to volatility in the stock market, we can expect the equity risk premium to fluctuate in the short-term. This datatable demonstrates how sensitive CL’s stock price is, assuming all inputs are unchanged, when equity risk premium changes with the beta. As markets stabilize, the marekt risk premium will drop, so we find it most informative to focus on the top values in the Capital Expenditures and Marginal Tax Rate table below. Colgate-Palmolive is already operating at a mature level because they have been a player in this industry since the early 1800’s. For this reason, significant capital expenditures will have minimal impact on the future value of the company. Regardless of new products that come to market, the internal development of those products will not have a large impact on their profitability.

Risk-Free Rate and CV Growth of NOPLAT The risk-free rate used in our valuation was the yield of the 10-year treasury note at the date of this report. Because of the effects COVID-19 has had on the economy, the yield is significantly lower than what it would be in a stable economy. We expect this yield to increase in the future as we emerge from this pandemic. Note the scale of changes that can take place with 0.25% change in the CV growth of NOPLAT rate. We believe our forecasted CV growth rate of 0.5% is reflective of the competitive nature of the industry and the potential growth opportunities for CL in the coming years.

COGS as % of Net Sales and SG&A Expenses as % of Net Sales Since CL sells a variety of household products, we thought it would be helpful to the relationship between cost of goods sold and selling, general, and administrative expenses. Both ratios are similar at around 36%, but as either one slightly increases the value of the stock decreases, and visa versa. We are expecting these ratios to remain consistant as our Net Sales slightly increase over time.

12 Important Disclaimer This report was created by students enrolled in the Applied Equity Valuation class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

13 1 “U.S. Economy at a Glance.” U.S. Economy at a Glance | U.S. 14 “History.” Colgate, www.colgatepalmolive.com/en- Bureau of Economic Analysis us/about/history. (BEA), www.bea.gov/news/glance. 15 “Palmolive's Response to the Coronavirus Pandemic: Colgate- 2 “United States GDP Growth Rate1947-2019 Data: 2020-2022 Palmolive.” Colgate, www.colgatepalmolive.com/en- Forecast: Calendar.” United States GDP Growth Rate | us/how-colgate-palmolive-is-responding-to-the- 1947-2019 Data | 2020-2022 Forecast | Calendar, coronavirus-pandemic. tradingeconomics.com/united-states/gdp-growth.

3 “2014-2016 Ebola Outbreak in West Africa.” Centers for Disease Control and Prevention, Centers for Disease Control and Prevention, 8 Mar. 2019, www.cdc.gov/vhf/ebola/history/2014-2016- outbreak/index.html.

4 “CoronavirusCases:” Worldometer, www.worldometers.info/co ronavirus/.

5 Miller, Madison. “Consumer Staples Sector: Overview and Funds.” ValuePenguin, ValuePenguin, 6 Aug. 2019, www.valuepenguin.com/sectors/consumer-staples.

6 “United States Inflation Rate1914-2020 Data: 2021-2022 Forecast: Calendar.” United States Inflation Rate | 1914- 2020 Data | 2021-2022 Forecast | Calendar, tradingeconomics.com/united-states/inflation-cpi.

7 “Consumer Price Index Historical Tables for U.S. City Average.” U.S. Bureau of Labor Statistics, U.S. Bureau of Labor Statistics, www.bls.gov/regions/mid- atlantic/data/consumerpriceindexhistorical_us_table.htm.

8 “Bureau of Labor Statistics Data.” U.S. Bureau of Labor Statistics, U.S. Bureau of Labor Statistics, data.bls.gov/timeseries/LNS14000000.

9 Morath, Eric, and Sarah Chaney. “U.S. Jobless Claims Top 20 Million Since Start of Shutdowns.” The Wall Street Journal, Dow Jones & Company, 16 Apr. 2020, www.wsj.com/articles/u-s-unemployment-claims- likely-continued-at-record-levels-11587029401.

10 Wolfers, Justin. “The Unemployment Rate Is Probably Around 13 Percent.” The New York Times, The New York Times, 3 Apr. 2020, www.nytimes.com/2020/04/03/upshot/coronavirus- jobless-rate-great-depression.html.

11 FY2019 Colgate-Palmolive Form 10K, https://investor.colgatepalmolive.com/static- files/f1007fb2-6211-4279-90ee-36f20d6a4a63

12 “ColgatePalmolive Snapshot.” FactSet, https://my.apps.factset .com/navigator/company-security/snapshot/CL-US

13 “The University of Iowa Libraries.” Off Campus Access - The University of Iowa Libraries, www-statista- com.proxy.lib.uiowa.edu/statistics/729880/sales-share- manual-dish-detergent-brands-in-the-united-states/

Colgate-Palmolive Company (CL) Revenue Decomposition

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E Sales Oral, Personal & Home Care $ 13,162 $ 13,156 $ 13,168 $ 13,563 $ 1 3,300 $ 13,159 $ 13,017 $ 12,875 $ 12,732 $ 12,588 Pet Nutrition 2292 2388 2525 2,828 3,120 3,290 3,460 3,632 3,803 3,976 Total 15454 15544 15693 16391 16420 16449 16477 16507 16535 16564

Percentage Oral, Personal & Home Care 85.17% 84.64% 83.91% 82.75% 81.00% 80.00% 79.00% 78.00% 77.00% 76.00% Pet Nutrition 14.83% 15.36% 16.09% 17.25% 19.00% 20.00% 21.00% 22.00% 23.00% 24.00%

Growth (%) Oral, Personal & Home Care 1.79% -0.05% 0.09% 3.00% -1.94% -1.06% -1.08% -1.09% -1.11% -1.13% Pet Nutrition 1.24% 4.19% 5.74% 12.00% 10.32% 5.45% 5.18% 4.95% 4.73% 4.53% Total 1.70% 0.58% 0.96% 4.45% 0.18% 0.18% 0.17% 0.18% 0.17% 0.17% Figures in millions of USD

Colgate-Palmolive Company (CL) Income Statement

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E Sales 15,454 15,544 15,693 16,391 16,420 16,449 16,477 16,507 16,535 16,564 Cost of Goods Sold 5,656 5,827 5,897 6,091 6,102 6,031 6,000 5,969 5,938 5,907 Depreciation & Amortization 475 511 519 545 572 601 631 662 696 730 Gross Income 9,323 9,206 9,277 9,755 9,746 9,817 9,847 9,875 9,902 9,926 SG&A Expense 5,408 5,356 5,515 5,659 5,669 5,679 5,689 5,699 5,709 5,718 EBIT (Operating Income) 3,915 3,850 3,762 4,096 4,077 4,139 4,158 4,176 4,193 4,208 Nonoperating Income - Net 58 -32 -95 123 123 123 123 123 123 123 Interest Expense 153 193 192 164 202 193 175 153 129 109 Unusual Expense - Net 333 161 174 443 443 443 443 443 443 443 Income Taxes 1,313 906 774 901 853 868 876 885 894 902 Consolidated Net Income 2,174 2,558 2,527 2,465 2,457 2,512 2,540 2,572 2,604 2,631 Minority Interest 150 158 160 160 160 160 160 160 160 160 Net Income 2,024 2,400 2,367 2,305 2,297 2,352 2,380 2,412 2,444 2,471 Per Share EPS (recurring) 2.54 2.88 2.89 2.31 2.30 2.35 2.38 2.41 2.44 2.47 EPS (diluted) 2.28 2.75 2.75 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Dividends per Share 1.59 1.66 1.71 1.72 1.80 1.83 1.85 1.88 1.90 1.93 Shares Outstanding (millions) 874.7 862.9 854.7 863 871 880 888 897 905 913 Figures in millions of USD except per share data

Colgate-Palmolive Company (CL) Balance Sheet

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E Assets Cash & Short-Term Investments 1,535 726 883 1,129 1,282 1,261 1,222 1,284 1,253 1,310 Short-Term Receivables 1 ,480 1 ,400 1 ,440 1 ,548 1,551 1,553 1,556 1,559 1,562 1,564 Inventories 1 ,221 1 ,250 1 ,400 1 ,309 1,312 1,314 1,316 1,319 1,321 1,323 Other Current Assets 4 03 4 17 4 56 575 5 76 5 77 5 78 5 79 5 80 5 81 Total Current Assets 4 ,639 3 ,793 4 ,179 4 ,561 4,720 4,705 4,672 4,740 4,715 4,778 Net Property, Plant & Equipment 4 ,072 3 ,881 3 ,750 3 ,774 4,315 4,855 5,394 5,931 6,467 7,001 Goodwill 2 ,218 2 ,530 3 ,508 3 ,508 3,508 3,508 3,508 3,508 3,508 3,508 Other Intangible Assets 1 ,341 1 ,637 2 ,667 2 ,667 2,667 2,667 2,667 2,667 2,667 2,667 Deferred Income Taxes 1 88 1 52 1 77 181 1 85 1 89 1 94 1 98 2 03 2 07 Other Assets 2 18 1 68 7 53 497 4 98 4 99 5 00 5 01 5 01 5 02 Total Assets 1 2,676 1 2,161 1 5,034 1 5,187 15,893 16,424 16,934 17,545 18,061 18,663 Liabilities & Shareholders' Equity ST Debt & Curr. Portion LT Debt 1 1 1 2 5 14 513 4 88 4 44 3 85 3 26 2 74 2 14 Accounts Payable 1 ,212 1 ,222 1 ,237 1 ,233 1,235 1,237 1,239 1,241 1,244 1,246 Income Tax Payable 3 54 4 11 3 70 273 2 58 2 63 2 66 2 68 2 71 2 73 Other Current Liabilities 1 ,831 1 ,696 1 ,917 1 ,841 1,844 1,848 1,851 1,854 1,857 1,861 Total Current Liabilities 3 ,408 3 ,341 4 ,038 3 ,860 3,826 3,791 3,740 3,689 3,645 3,594 Long-Term Debt 6 ,566 6 ,354 7 ,333 6 ,978 6,337 5,495 4,652 3,908 3,063 2,317 Deferred Tax Liabilities 2 04 2 35 5 07 518 5 30 5 43 5 55 5 68 5 80 5 93 Other Liabilities 2 ,255 2 ,034 2 ,598 2 ,065 2,069 2,072 2,076 2,080 2,083 2,087 Total Liabilities 1 2,433 1 1,964 1 4,476 1 3,421 12,762 11,901 11,023 10,244 9,372 8,591 Common Stock & Additional Paid-in Capital 1 ,466 1 ,466 3 ,954 4 ,532 5,111 5,689 6,267 6,845 7,424 8,002 Retained Earnings 2 0,531 2 1,615 2 2,501 2 3,322 24,104 24,912 25,717 26,523 27,327 28,127 Accumulated Other Comprehensive Income ( 3,855) ( 4,188) ( 4,273) (4,273) ( 4,273) ( 4,273) ( 4,273) ( 4,273) ( 4,273) ( 4,273) Unearned Compensation ( 5) ( 3) ( 2) ( 2) (2) (2) (2) (2) (2) (2) Treasury Stock ( 20,181) ( 21,196) ( 22,063) (22,063) ( 22,063) ( 22,063) ( 22,063) ( 22,063) ( 22,063) ( 22,063) Total Shareholders' Equity ( 60) ( 102) 1 17 1 ,516 2,877 4,263 5,646 7,030 8,413 9,791 Accumulated Minority Interest 3 03 2 99 4 41 250 2 55 2 60 2 65 2 71 2 76 2 82 Total Equity 2 43 1 97 5 58 1 ,766 3,132 4,523 5,911 7,300 8,689 10,072 Total Liabilities & Shareholders' Equity 1 2,676 1 2,161 1 5,034 1 5,187 15,893 16,424 16,934 17,545 18,061 18,663 Figures in millions of USD

Colgate-Palmolive Company (CL) Historical Cash Flow Statement

Fiscal Years Ending Dec. 31 2015 2016 2017 2018 2019

Operating Activities Net Income 1548 2586 2174 2558 2527 Adjustments Depreciation & Amortization 449 443 475 511 519 Deferred Income Taxes -51 56 108 27 17 Other Funds 1125 -36 412 115 5 Funds from Operations 3071 3049 3169 3211 3068 Changes in Working Capital -122 92 -115 -155 65 Net Operating Cash Flow 2949 3141 3054 3056 3133 Investing Activities Capital Expenditures -691 -593 -553 -436 -335 Net Assets from Acquisitions -13 -5 0 -728 -1711 Sale of Fixed Assets & Businesses 230 60 44 1 1 Purchase/Sale of Investments -143 42 44 -13 -53 Other Funds -68 -3 -6 6 -1 Net Investing Cash Flow -685 -499 -471 -1170 -2099 Financing Activities Cash Dividends Paid -1355 -1380 -1405 -1448 -1473 Change in Capital Stock -1204 -889 -892 -909 -704 Issuance/Reduction of Debt, Net 421 164 -29 -179 1448 Other Funds -138 -128 -124 -143 -141 Net Financing Cash Flow -2276 -2233 -2450 -2679 -870

Exchange Rate Effect -107 -64 87 -16 -7 Miscellaneous Funds 0 0 0 0 0

Net Change in Cash $ ( 119.00) $ 345.00 $ 220.00 $ ( 809.00) $ 157.00

Free Cash Flow 2,258 2,548 2,501 2,620 2,798 Free Cash Flow per Share 2 3 3 3 3 Free Cash Flow Yield (%) 3.73 4.33 3.73 5.04 4.72 Figures in millions of USD

Colgate-Palmolive Company (CL) Forecasted Cash Flow Statement

Fiscal Years Ending Dec. 31 2020E 2021E 2022E 2023E 2024E 2025E 2026E Net Income 2,305 2,297 2,352 2,380 2,412 2,444 2,471 Depreciation and Amortization 5 45 5 72 6 01 6 31 6 62 6 96 7 30 Change in Deferred Taxes 7 8 8 8 8 8 8 Changes in Short-Term Receivables (108) (3) (3) (3) (3) (3) (3) Changes in Inventories 91 (2) (2) (2) (2) (2) (2) Changes in Other Current Assets (119) (1) (1) (1) (1) (1) (1) Accounts Payable (4) 2 2 2 2 2 2 Income Tax Payable (97) (15) 5 2 3 3 2 Other Current Liabilities (76) 3 3 3 3 3 3 Operating Cash Flows 2,545 2,861 2,965 3,021 3,085 3,149 3,212 Purchase of Property, Plant and Equipment (569) (1,114) (1,141) (1,170) (1,200) (1,231) (1,264) Other Assets 256 (1) (1) (1) (1) (1) (1) Cash From Investing Activities (313) (1,115) (1,142) (1,170) (1,200) (1,232) (1,265) ST Debt & Curr. Portion LT Debt (1) (25) (45) (59) (59) (52) (59) Long-term Debt (355) (641) (842) (843) (744) (845) (746) Other Liabilities (533) 4 4 4 4 4 4 Issuance of Common Stock 578 578 578 578 578 578 578 Dividends Paid (1,484) (1,514) (1,544) (1,575) (1,607) (1,639) (1,672) Accumulated Minority Interest (191) 5 5 5 5 5 6 Cash From Financing Activities ( 1,986) ( 1,593) ( 1,844) ( 1,890) ( 1,822) ( 1,949) ( 1,889) Net Cash 2 46 1 54 (21) (39) 6 2 (31) 5 7

Beginning of the Year Cash 8 83 1,129 1,282 1,261 1,222 1,284 1,253 End of the Year Cash 1,129 1,282 1,261 1,222 1,284 1,253 1,310

Figures in millions of USD

Colgate-Palmolive Company (CL) Common Size Income Statement

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Cost of Goods Sold 36.60% 37.49% 37.58% 37.16% 37.16% 36.66% 36.41% 36.16% 35.91% 35.66% Gross Income 60.33% 59.23% 59.12% 59.51% 59.35% 59.69% 59.76% 59.82% 59.88% 59.93% SG&A Expense 34.99% 34.46% 35.14% 34.52% 34.52% 34.52% 34.52% 34.52% 34.52% 34.52% EBIT (Operating Income) 25.33% 24.77% 23.97% 24.99% 24.83% 25.16% 25.24% 25.30% 25.36% 25.40% Nonoperating Income - Net 0.38% -0.21% -0.61% 0.75% 0.75% 0.75% 0.75% 0.75% 0.74% 0.74% Interest Expense 0.99% 1.24% 1.22% 1.00% 1.23% 1.17% 1.06% 0.92% 0.78% 0.66% Unusual Expense - Net 2.15% 1.04% 1.11% 2.70% 2.70% 2.69% 2.69% 2.68% 2.68% 2.67% Income Taxes 8.50% 5.83% 4.93% 5.50% 5.19% 5.28% 5.32% 5.36% 5.41% 5.44% Consolidated Net Income 14.07% 16.46% 16.10% 15.04% 14.96% 15.27% 15.42% 15.58% 15.75% 15.89% Minority Interest 0.97% 1.02% 1.02% 0.98% 0.97% 0.97% 0.97% 0.97% 0.97% 0.97% Net Income 13.10% 15.44% 15.08% 14.06% 13.99% 14.30% 14.45% 14.62% 14.78% 14.92%

Colgate-Palmolive Company (CL) Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E Common Size , % of Sales Assets Cash & Short-Term Investments 9.93% 4.67% 5.63% 6.89% 7.81% 7.67% 7.41% 7.78% 7.58% 7.91% Short-Term Receivables 9.58% 9.01% 9.18% 9.44% 9.44% 9.44% 9.44% 9.44% 9.44% 9.44% Inventories 7.90% 8.04% 8.92% 7.99% 7.99% 7.99% 7.99% 7.99% 7.99% 7.99% Other Current Assets 2.61% 2.68% 2.91% 3.51% 3.51% 3.51% 3.51% 3.51% 3.51% 3.51% Total Current Assets 30.02% 24.40% 26.63% 27.82% 28.75% 28.60% 28.35% 28.72% 28.51% 28.85% Net Property, Plant & Equipment 26.35% 24.97% 23.90% 23.02% 26.28% 29.52% 32.74% 35.93% 39.11% 42.26% Goodwill 14.35% 16.28% 22.35% 21.40% 21.36% 21.33% 21.29% 21.25% 21.22% 21.18% Other Intangible Assets 8.68% 10.53% 16.99% 16.27% 16.24% 16.21% 16.19% 16.16% 16.13% 16.10% Deferred Income Taxes 1.22% 0.98% 1.13% 1.10% 1.13% 1.15% 1.18% 1.20% 1.23% 1.25% Other Assets 1.41% 1.08% 4.80% 3.03% 3.03% 3.03% 3.03% 3.03% 3.03% 3.03% Total Assets 82.02% 78.24% 95.80% 92.66% 96.79% 99.85% 102.77% 106.29% 109.22% 112.67% Liabilities & Shareholders' Equity ST Debt & Curr. Portion LT Debt 0.07% 0.08% 3.28% 3.13% 2.97% 2.70% 2.33% 1.97% 1.65% 1.29% Accounts Payable 7.84% 7.86% 7.88% 7.52% 7.52% 7.52% 7.52% 7.52% 7.52% 7.52% Income Tax Payable 2.29% 2.64% 2.36% 1.67% 1.57% 1.60% 1.61% 1.63% 1.64% 1.65% Other Current Liabilities 11.85% 10.91% 12.22% 11.23% 11.23% 11.23% 11.23% 11.23% 11.23% 11.23% Total Current Liabilities 22.05% 21.49% 25.73% 23.55% 23.30% 23.05% 22.70% 22.35% 22.05% 21.70% Long-Term Debt 42.49% 40.88% 46.73% 42.57% 38.59% 33.40% 28.23% 23.67% 18.52% 13.99% Deferred Tax Liabilities 1.32% 1.51% 3.23% 3.16% 3.23% 3.30% 3.37% 3.44% 3.51% 3.58% Other Liabilities 14.59% 13.09% 16.56% 12.60% 12.60% 12.60% 12.60% 12.60% 12.60% 12.60% Total Liabilities 80.45% 76.97% 92.24% 81.88% 77.72% 72.35% 66.90% 62.06% 56.68% 51.87% Common Equity 9.49% 9.43% 25.20% 27.65% 31.12% 34.58% 38.03% 41.47% 44.90% 48.31% Total Shareholders' Equity -0.39% -0.66% 0.75% 9.25% 17.52% 25.91% 34.27% 42.59% 50.88% 59.11% Accumulated Minority Interest 1.96% 1.92% 2.81% 1.53% 1.55% 1.58% 1.61% 1.64% 1.67% 1.70% Total Equity 1.57% 1.27% 3.56% 10.77% 19.07% 27.50% 35.88% 44.23% 52.55% 60.81% Total Liabilities & Shareholders' Equity 82.02% 78.24% 95.80% 92.66% 96.79% 99.85% 102.77% 106.29% 109.22% 112.67%

Colgate-Palmolive Company (CL) Weighted Average Cost of Capital (WACC) Estimation

Cost of Equity: Risk-Free Rate 0.67% Beta 0.60 Equity Risk Premium 6.16% Cost of Equity 4.37%

Cost of Debt: Risk-Free Rate 0.67% Implied Default Premium 2.06% Pre-Tax Cost of Debt 2.73% Marginal Tax Rate 22% After-Tax Cost of Debt 2.13%

Market Value of Common Equity: MV Weights Total Shares Outstanding 854.7 Current Stock Price $69.04 MV of Equity $ 59,008 85.82%

Market Value of Debt: Short-Term Debt & Current Portion LTD 5 14 Long-Term Debt 7,333 PV of Operating Leases 1,906 MV of Total Debt $ 9,753 14.18%

Market Value of the Firm $ 68,761 100.00%

Estimated WACC 4.05%

Colgate-Palmolive Company (CL) Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth of NOPLAT 0.50% CV Year ROIC 27.16% WACC 4.05% Cost of Equity 4.37%

Fiscal Years Ending Dec. 31 2020E 2021E 2022E 2023E 2024E 2025E 2026E

DCF Model: Free Cash Flow (FCF) 2,353 2,238 2,465 2,502 2,418 2,528 Continuing Value (CV) 91,304 PV of FCF 2,262 2,068 2,188 2,134 1,983 1,993 71,958

Value of Operating Assets: 84,586 Non-Operating Adjustments Less: Net Debt 7,491 Less: PV of Operating Leases 1,906 Less: PV of ESOP 4 05 Less: Pension Deficit 7 56 Less: Non-controlling Interest 2 50 Value of Equity 73,778 Shares Outstanding 8 63 Intrinsic Value of Last FYE $ 85.48 Implied Price as of Today $ 85.72

EP Model: Economic Profit (EP) 2,879 2,868 2,878 2,863 2,847 2,827 2,809 Continuing Value (CV) 79,151 2,767 2,649 2,555 2,443 2,335 2,228 62,380

Total PV of EP 77,357 Invested Capital (last FYE) 7,229 Value of Operating Assets: 84,586 Non-Operating Adjustments Less: Net Debt 7,491 Less: PV of Operating Leases 1,906 Less: PV of ESOP 4 05 Less: Pension Liabilities 7 56 Less: Non-controlling Interest 2 50 Value of Equity 73,778 Shares Outstanding 8 63 Intrinsic Value of Last FYE $ 85.48 Implied Price as of Today $ 85.72

Colgate-Palmolive Company (CL) Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2020E 2021E 2022E 2023E 2024E 2025E 2026E

EPS $ 2 .31 $ 2 .30 $ 2 .35 $ 2 .38 $ 2 .41 $ 2 .44 $ -

Key Assumptions CV growth of EPS 0.50% CV Year ROE 25.24% Cost of Equity 4.37%

Future Cash Flows P/E Multiple (CV Year) $ 2 5.35 EPS (CV Year) $ 2 .47 Future Stock Price $ 6 2.66 Dividends Per Share 2.31 2.30 2.35 2.38 2.41 2.44 2.47 Discount Period 1 2 3 4 5 6 6 Discounted Cash Flows 2.21 2.11 2.07 2.01 1.95 1.89 48.49

Intrinsic Value as of Last FYE $ 6 0.72 Implied Price as of Today $ 6 0.89

Colgate-Palmolive Company (CL) Relative Valuation Models

EPS EPS Est. 5yr Ticker Company Price 2020E 2021E P/E 20 P/E 21 EPS gr. PEG 20 PEG 21 KMB Kimberly-Clark $133.15 $6.27 $6.30 21.23 21.13 6.398 3.32 3.30 PG Procter & Gamble $117.81 $1.79 $1.80 65.86 65.53 1.825 36.09 35.91 CLX Clorox $181.38 $6.38 $6.41 28.42 28.28 6.510 4.37 4.34 CHD Church & Dwight $68.86 $2.45 $2.46 28.08 27.94 2.502 11.23 11.17 Average 35.90 35.72 13.75 13.68

CL Colgate-Palmolive Company (CL)$69.04 $2.31 $2.30 29.9 30.1 2.41 12.4 12.5

Implied Relative Value: P/E (EPS20) $ 82.75 P/E (EPS21) $ 82.03 PEG (EPS20) $ 76.46 PEG (EPS21) $ 75.80

Colgate-Palmolive Company (CL) Key Management Ratios

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E

Liquidity Ratios: Current Ratio (Current Assets/Current Liabilities) 0.22 0.25 0.24 0.31 0.31 0.31 0.31 0.31 0.31 0.31 Quick Ratio ((Cash Equivalents+AR)/Current Liabilities) 0.43 0.42 0.36 0.40 0.41 0.41 0.42 0.42 0.43 0.44 Cash Ratio (Cash & Cash Equivalents/Current Liabilities) 0.45 0.22 0.22 0.29 0.34 0.33 0.33 0.35 0.34 0.36

Asset-Management Ratios: Total Asset Turnover (Sales/Total Assets) 1.22 1.28 1.04 1.08 1.03 1.00 0.97 0.94 0.92 0.89 Fixed Asset Turnover (Sales/Fixed Assets) 3.80 4.01 4.18 4.34 3.81 3.39 3.05 2.78 2.56 2.37 Inventory Turnover (Sales/Inventory) 12.66 12.44 11.21 12.52 12.52 12.52 12.52 12.52 12.52 12.52

Financial Leverage Ratios: Debt to Equity (Total Liabilities/ Stockholder's Equity) -207.22 -117.29 123.73 8.85 4.44 2.79 1.95 1.46 1.11 0.88 Equity Ratio (Total Equity/Total Assets) 0.02 0.02 0.04 0.12 0.20 0.28 0.35 0.42 0.48 0.54 Debt Ratio (Total Debt/Total Assets) 0.52 0.52 0.52 0.49 0.43 0.36 0.30 0.24 0.18 0.14

Profitability Ratios: Gross Margin (Gross Profit/Sales) 60.33% 59.23% 59.12% 59.51% 59.35% 59.69% 59.76% 59.82% 59.88% 59.93% Operating Margin (Operating Income/Sales) 25.33% 24.77% 23.97% 24.99% 24.83% 25.16% 25.24% 25.30% 25.36% 25.40% Profit Margin (Net Income/Sales) 13.10% 15.44% 15.08% 14.06% 13.99% 14.30% 14.45% 14.62% 14.78% 14.92% Return on Assets (Net Income/Total Assets) 15.97% 19.74% 15.74% 15.18% 14.45% 14.32% 14.06% 13.75% 13.53% 13.24% Return on Equity (Net Income/Total Equity) 832.92% 1218.27% 424.19% 130.53% 73.33% 52.01% 40.27% 33.05% 28.12% 24.54%

Payout Policy Ratios: Dividend Payout Ratio (Dividend/EPS Recurring) 0.63 0.58 0.59 0.75 0.78 0.78 0.78 0.78 0.78 0.78

Colgate-Palmolive Company (CL) Sensitivity Tables

COGS as a % of Net Sales Risk Free Rate

8 5.72 34.16% 35.16% 36.16% 37.16% 38.16% 39.16% 40.16% 8 5.72 0.37% 0.47% 0.57% 0.67% 0.77% 0.87% 0.97%

% 31.52% 9 5.35 9 2.13 8 8.90 8 5.68 8 2.45 7 9.23 7 6.00 -0.25% 7 8.82 7 6.83 7 4.91 7 3.07 7 1.31 6 9.61 6 7.98

32.52% 9 5.37 9 2.14 8 8.92 8 5.70 8 2.47 7 9.25 7 6.02 P 0.00% 8 3.13 8 0.91 7 8.80 7 6.77 7 4.83 7 2.96 7 1.17

a 33.52% 9 5.38 9 2.16 8 8.94 8 5.71 8 2.49 7 9.26 7 6.04 0.25% 8 8.04 8 5.57 8 3.20 8 0.95 7 8.80 7 6.74 7 4.76

t e

34.52% 9 5.40 9 2.18 8 8.95 8 5.73 8 2.50 7 9.28 7 6.05 h 0.50% 9 3.70 9 0.91 8 8.25 8 5.72 8 3.31 8 1.02 7 8.82

w f

E 35.52% 9 5.42 9 2.19 8 8.97 8 5.74 8 2.52 7 9.29 7 6.07 0.75% 1 00.29 9 7.10 9 4.08 9 1.21 8 8.50 8 5.91 8 3.45

r G

& 36.52% 9 5.43 9 2.21 8 8.98 8 5.76 8 2.54 7 9.31 7 6.09 1.00% 1 08.06 1 04.37 1 00.89 9 7.61 9 4.51 9 1.57 8 8.78

V S 37.52% 9 5.45 9 2.22 8 9.00 8 5.78 8 2.55 7 9.33 7 6.10 C 1.25% 1 17.36 1 13.02 1 08.96 1 05.15 1 01.56 9 8.18 9 4.99

Capital Expenditures Beta 8 5.72 418.7 468.7 518.7 568.7 618.7 668.7 718.7 8 5.72 0.30 0.40 0.50 0.60 0.70 0.80 0.90

19.00% 8 8.98 8 8.86 8 8.75 8 8.63 8 8.51 8 8.39 8 8.27 5.56% 1 84.00 1 42.13 1 14.75 9 5.44 8 1.11 7 0.05 6 1.26

t i

a 20.00% 8 8.02 8 7.90 8 7.78 8 7.66 8 7.54 8 7.42 8 7.30 5.76% 1 78.45 1 37.51 1 10.80 9 2.00 7 8.06 6 7.32 5 8.79

e x

21.00% 8 7.05 8 6.93 8 6.81 8 6.69 8 6.57 8 6.45 8 6.33 r 5.96% 1 73.19 1 33.14 1 07.08 8 8.77 7 5.20 6 4.76 5 6.47

l k

22.00% 8 6.08 8 5.96 8 5.84 8 5.72 8 5.60 8 5.48 8 5.36 s 6.16% 1 68.21 1 29.02 1 03.57 8 5.72 7 2.51 6 2.35 5 4.29

g 23.00% 8 5.10 8 4.98 8 4.87 8 4.75 8 4.63 8 4.51 8 4.39 6.36% 1 63.49 1 25.12 1 00.26 8 2.85 6 9.98 6 0.08 5 2.24

i a

24.00% 8 4.13 8 4.01 8 3.89 8 3.77 8 3.65 8 3.53 8 3.41 u 6.56% 1 59.00 1 21.42 9 7.12 8 0.13 6 7.58 5 7.94 5 0.31

M q 25.00% 8 3.15 8 3.03 8 2.91 8 2.79 8 2.67 8 2.55 8 2.43 E 6.76% 1 54.73 1 17.92 9 4.16 7 7.56 6 5.32 5 5.92 4 8.49

Colgate-Palmolive Company (CL) Value Driver Estimation

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E

NOPLAT: Sales 15454 15544 15693 16,391 16,420 16,449 16,477 16,507 16,535 16,564 Cost of Goods Sold 5181 5316 5378 6,091 6,102 6,031 6,000 5,969 5,938 5,907 SG&A 5408 5356 5515 5,659 5,669 5,679 5,689 5,699 5,709 5,718 Depreciation & Amortization 475 511 519 545 572 601 631 662 696 730 Implied Interest 39 40 41 33 34 35 36 37 38 39 EBITDA 4429 4401 4322 4,129 4,111 4,174 4,194 4,213 4,231 4,247 Adjusted Taxes: Marginal Tax Rate 37.7% 26.2% 23.4% 22.00% 22.00% 22.00% 22.00% 22.00% 22.00% 22.00% Income Tax Expense 1313 906 774 901 853 868 876 885 894 902 Tax Shield on Interest Expense 58 51 45 36 44 42 39 34 28 24 Non-service related postretirement costs 44 23 25 5 5 5 5 5 5 5 Less: Total Adjusted Taxes 1415 979 844 942 902 915 920 924 928 931 Add: Deferred Tax Provisions -108 -53 -19 -15 -15 -15 -15 -15 -15 -15 NOPLAT 2906 3368 3459 3172 3194 3243 3259 3274 3288 3301

Invested Capital (IC): Operating Current Assets Cash 1535 726 883 1129 1282 1261 1222 1284 1253 1310 Accounts Receivable 1480 1400 1440 1548 1551 1553 1556 1559 1562 1564 Inventory 1221 1250 1400 1309 1312 1314 1316 1319 1321 1323 Other Current Assets 403 417 456 575 576 577 578 579 580 581 Non-Interest Bearing Operating Current Liabilities Less: Accounts Payable 1212 1222 1237 1233 1235 1237 1239 1241 1244 1246 Less: Other Current Liabilities 1831 1696 1917 1841 1844 1848 1851 1854 1857 1861 1596 875 1025 1487 1641 1620 1582 1644 1614 1672

Plus: Net PPE 4072 3881 3750 3774 4315 4855 5394 5931 6467 7001

Plus: Net Intangable Assets 1341 1637 2667 2449 2438 2427 2415 2402 2389 2375 Plus: Other Assets 218 168 753 497 498 499 500 501 501 502 Plus: PV of Operating Leases 1551 1591 1632 1906 2179 2452 2724 2995 3266 3535 Less: Other Long-Term Operating Liabilities 2255 2034 2598 2065 2069 2072 2076 2080 2083 2087 Invested Capital 6523 6118 7229 8047 9003 9781 10538 11394 12153 12998

Free Cash Flow (FCF): NOPLAT 2906 3368 3459 3172 3194 3243 3259 3274 3288 3301 Change in IC 183 -405 1110 818 955 778 757 856 759 845 FCF 2722 3773 2348 2353 2238 2465 2502 2418 2528 2456

Return on Invested Capital (ROIC): NOPLAT 2906 3368 3459 3172 3194 3243 3259 3274 3288 3301 Beg. IC 6340 6523 6118 7229 8047 9003 9781 10538 11394 12153 ROIC 45.83% 51.64% 56.53% 43.88% 39.69% 36.02% 33.32% 31.07% 28.86% 27.16%

Economic Profit (EP): Beg. IC 6340 6523 6118 7229 8047 9003 9781 10538 11394 12153 x (ROIC - WACC) 45.83% 51.64% 56.53% 39.83% 35.64% 31.97% 29.27% 27.02% 24.81% 23.11% EP 2905.65 3368.50 3458.69 2879.30 2868.06 2878.48 2862.91 2847.39 2826.66 2808.55