COLGATE-PALMOLIVE COMPANY (NYSE: CL) Analysts: Cassandra Smalley & Al Clawson November 13, 2009 Colgate-Palmolive Company Targe Price $93.21 Sector: Consumer Staples Industry: Household Products Current Price: $81.42 52-Week Range: $54.51-82.08 Market Cap: $40.42B Shares Outstanding: 497.19M Avg Daily Volume: 2.575M Institutional: 72.7% P/E Ratio(31Dec 10): 16.72 PEG Ratio (5yr exp): 1.93 Dividend: $1.76 Dividend Yield: 2.2% EPS EST (Yr): $4.85 Beta (1YR vs. S&P): 0.52 Company Profile Colgate‐Palmolive Company (“Colgate”) is a leading global consumer products company that operates in two segments: oral, personal, household care and pet nutrition. Its products are marketed in more than 200 countries and territories. 86% of worldwide revenue stems from the sales of oral, personal and home care products with the balance coming from the sale of pet foods. Oral care products include toothbrushes, toothpaste, oral rinses, tooth whitening systems, dental floss and pharmaceutical products for dentists and other oral health care professionals. Personal care projects include bar and liquid soaps, shampoos, conditioners, body wash and shower gels, deodorants, antiperspirants, and shave products. Home care products include dishwashing products, household cleaners, and fabric conditioners. The Company’s brands include Colgate Total and Max Fresh toothpastes, Colgate 360 toothbrushes, Colgate Plax oral rinses, Colgate Visible White tooth whitening systems, Speed Stick and Lady Speed Stick deodorants, Palmolive and Softsoap brand shower gels, Palmolive shampoo and conditioners, Softsoap liquid hand soap, Palmolive and Ajax dishwashing liquids, Irish Spring, Palmolive, and Protex soaps, Suavitel and Soupline fabric conditioners, and Hill’s Science Diet and Prescription Diet pet nutrition products. Oral, personal and home care sales outside of North America accounted for 67% of total sales in 2008. Sales in Latin America, Europe/South Pacific and Greater Asia/Africa accounted for 31%, 27% and 20% of total oral, personal and home care sales segment sales, respectively. Colgate’s strategic initiatives involve four major goals: getting closer to consumers and professionals, driving innovation, increasing efficiency and effectiveness, and strengthening leadership on a global scale. In order to get closer to consumers, Colgate has initiated integrated marketing communications and creative promotional activities designed to engage customers and send strong messages regarding their oral care. Over 250 clinical studies take place annually around the globe which allow opportunity for academic endorsement and provide opportunities for publication in scientific research journals. The endorsements and publications increase brand exposure and strengthen credibility with professionals and consumers. Colgate is focused on innovation, research and development of new products. The Company increased the number of marketing professionals dedicated to new product development by approximately 50% in the last four years. In an effort to increase efficiency and effectiveness across business units, Colgate recently completed its four year restructuring program resulting in a 25% reduction in manufacturing facilities with five new environmentally efficient facilities which improved the use of energy, water, materials, and land resources1. The Colgate Business Planning system, which is supported by SAP software, integrates commercial planning through execution and evaluates performance with goals. The system has shown a strong return on investment in work processes to date. Overall, the Company is continuing to improve supply chain efficiencies through the use of Enterprise Resource Planning software. Colgate expects to generate annual savings of $350 to $375 million after taxes due to continuing restructuring initiatives12. 2 3 Industry: Household Products/Personal Care Colgate‐Palmolive is a large cap growth stock in the household products industry that competes with Proctor & Gamble, Clorox and Alberto Culver, among others, in the consumer goods sector. The household products sub‐industry is impacted by consumer spending, commodity costs and foreign exchange translation. Consumer spending habits in both the US and international markets is expected to continue to show weakness. The key raw materials that impact the industry are natural gas, oil, pulp and resin. 2009 has seen significant oil and natural gas declines (40%‐60%) over 2008 prices, and 2010 prices are not expected to significantly erase those declines4. The sub‐industry is mature and very competitive, and many companies are vying to capture market share in developing markets. Private labels compete with the branded company labels in many markets. This competition, in addition to the leverage applied by the larger retailers, works to keep product price increases in check. Most companies use 1 Company 2008 Annual Report 2 Company 2008 10‐K 3 Colgate.com 4 Standard & Poor’s Stock Report advertising and product innovation to boost sales and profit margins. Due to the mature markets in developed countries, large multinationals look to developing and emerging markets for growth. Continued global consolidation in retail will benefit the larger industry players as the larger retailers prefer to carry the leading brands. Most of 2009 was impacted by negative foreign exchange translation and weak economies. With economic metrics generally trending higher across the globe and a weaker dollar going forward, multinationals are poised to see increased revenue and EPS in the near term. Earnings Estimates Consensus EPS Trend FY(12/09) Growth % FY(12/10) Growth % Current Estimate (Mean) 4.32 18.0 4.85 12.3 Current Estimate (High) 4.38 19.7 5.07 17.4 Current Estimate (Low) 4.25 16.1 4.61 6.7 30 Days Ago 4.26 16.4 4.76 11.7 60 Days Ago 4.26 16.4 4.76 11.7 90 Days Ago 4.28 16.9 4.76 11.2 Number of Estimates 18 18 Numerical Source: Morningstar.com Earnings Highlights On 10/29/09 Colgate‐Palmolive announced quarterly earnings of $1.12 per share. Over the last 12 quarters the Company’s actual earnings have resulted in four quarters with positive surprises (> 2%), zero quarters with negative surprises (< 2%), and eight quarters in‐line with analyst estimates5. Key Statistics: CL vs. Industry, Sector, and Benchmark Current Trading Multiples CL Industry Sector S&P 500 TEV/Total Revenue 2.9 2.2 1.0 ‐ TEV/EBITDA 11.6 10.6 9.9 ‐ TEV/EBIT 12.8 12.9 13.3 ‐ P/E TTM 19.9 17.4 20.9 61.6 Price/Book (MRQ) 14.6 3.5 2.7 2.3 Numerical Source: Capital IQ Profitability CL Industry Sector S&P 500 Return on Assets % 21.7 7.8 5.7 2.0 Return on Capital % 36.8 11.4 8.3 ‐ Return on Equity % 85.9 20.4 12.8 3.9 Numerical Source: Capital IQ 5 Thomson Reuters StockReports Margin Analysis CL Industry Sector S&P 500 Gross Margin % 59.2 48 28.5 ‐ Net Income Margin % 14.8 11.8 4.0 2.2 Net Income Avail. For Common 14.6 11.7 4.0 2.4 Margin% Levered Free Cash Flow Margin % 22.8 11.5 2.9 ‐ Unlevered Free Cash Flow Margin % 23.0 12.5 3.8 ‐ Numerical Source: Capital IQ Asset Turnover CL Industry Sector S&P 500 Total Asset Turnover 1.5 0.8 1.2 ‐ Fixed Asset Turnover 4.8 4.2 4.2 ‐ Accounts Receivable Turnover 9.1 9.0 13.9 ‐ Inventory Turnover 5.3 5.0 7.2 ‐ Numerical Source: Capital IQ Liquidity/Solvency CL Industry Sector S&P 500 Current Ratio 1.2 1.0 1.1 ‐ Quick Ratio 0.7 0.6 0.6 ‐ Avg Days Payable Outstanding 1.3 62.2 54.8 ‐ Avg Days Sales Outstanding 40.4 40.7 26.3 ‐ Total Debt/Equity % 110.5 66.3 82.1 ‐ Total Debt/Capital % 51.2 39.6 43.6 ‐ LT Debt/Equity % 97.7 46.6 64.4 ‐ LT Debt/Capital % 45.2 27.7 33.0 ‐ EBIT/Interest Expense 55.8 10.4 5.2 ‐ Numerical Source: Capital IQ CAGR 3‐Yr CL Industry Sector S&P 500 Total Revenue% 8.3 5.7 8.9 1.5 Gross Profit% 10.1 6.3 7.6 ‐ Net Income% 19.7 13.2 0.0 ‐36.8 Total Assets% 6.5 2.3 7.7 5.9 Levered Free Cash Flow% 23.8 6.8 13.6 ‐ Unlevered Free Cash Flow% 22.1 6.5 13.9 ‐ Numerical Source: Capital IQ Fundamental Highlights The Company trades with valuation multiples at a slight premium to its industry, but the Company’s net margin has been greater than its sub‐industry average for each of the past five years and exceeds the industry, sector, and S&P 500 on all profitability measures (Return on Assets, Return on Capital, and Return on Equity) by a wide margin. Colgate also has a 23% margin in Unlevered Free Cash Flow in comparison to 12.5% of the industry. The Company’s debt ratios are higher with a Total Debt/Equity ratio of 110.5% versus the industry’s 66.3%; however, the greater margins, unlevered cash flows, and long‐term sustainability of the Company eases this concern. Competitive Analysis CL – Colgate‐Palmolive ACV – Alberto‐Culver ^GSPC – S&P 500 CLX – Clorox PG – Proctor & Gamble Current Trading Multiples CL PG CLX ACV TEV/Total Revenue 2.9 2.7 2.1 1.6 TEV/EBITDA 11.6 11.1 8.8 10.5 TEV/EBIT 12.8 13.1 10.3 11.9 P/E TTM 19.9 17.3 15.0 23.3 Price/Book (MRQ) 14.6 2.8 NM 2.3 Numerical Source: Capital IQ Profitability CL PG CLX ACV Return on Assets % 21.7 7.2 14.9 7.9 Return on Capital % 36.8 9.8 22.0 10.3 Return on Equity % 85.9 17.1 NM 10.2 Numerical Source: Capital IQ Margin Analysis CL PG CLX ACV Gross Margin % 59.2 51.5 44.5 51.3 Net Income Margin % 14.8 17.2 10.4 8.3 Net Income Avail.