Colgate

Company Overview

The Colgate-Palmolive company is organized into two business segments:

 Oral, Personal Care and Home Care

 Pet Nutrition

Sales of Oral, Personal, and home care products were approximately 40%, 20%, and
20% respectively. Colgate-Palmolive was founded in 1806 and incorporated in 1923 in Delaware
and now has products that are sold in over two hundred countries. Colgate-Palmolive has a
huge global presence with approximately 75% of sales coming from international countries.
They also have a presence in emerging markets with 50% of their sales coming from these
regions. Colgate operates about two hundred and eighty properties in about seventy countries.
There are 38,000 Colgate people worldwide and the company continues to focus on building
leaders and developing its employees. Their global training program has over 600 programs,
over 1,600 certified instructors, and 30,000 participants per year. Colgate continues to push for
strong growth by focusing on consumers and constantly finding ways to connect with
customers and professionals. Colgate has shown positive returns with a high return on capital
of 33% and profit margins of about 15%. Colgate-Palmolive sells consumer staples that
customers will demand regardless of the economy, and will provide consistent gains in the
future.

Business Analysis

The past one year return for Personal and Household products within the
consumer/non-cyclical sector has been about six and a half percent, and during the same
period Colgate has realized a twenty percent stock price appreciation. Colgate has also posted a
positive increase in total revenues having increased their sales by eight percent last year. In the
next five years we expect to see similar growth because of Colgate’s strong focus on its core
products, its strong international presence, and its quality brand recognition.

Colgate has four main operating segments: Oral Care, Personal Care, Pet Nutrition, and
Home Care. Aside from the Colgate brand, some of their other brands include Irish Spring,
Speed Stick, Ajax, and Murphy. As mentioned earlier, Oral Care is predominantly their largest
segment contributing to sales. It’s important to remain focused on core business functions, and
when operations begin expanding at a dramatic rate, as with Colgate, it is very easy to lose
focus on the company’s core mission. Colgate has been successful in growing their business at
an exceptional rate while maintain a focus on Oral Care. It makes up about forty percent of
sales and they are continuing to strategically increase Oral Care revenues. Colgate’s strategies
include aiming to get as close to the customer as possible. By engaging with consumers,
professionals, and customers they are able to continuously innovate new products.

Colgate’s strong international presence will also contribute to its dominant business
going forward. They were early to enter into international markets, having been in many for
almost over seventy years. Seventy five percent of sales are coming from international
countries, it is clear that they’ve chosen an international strategy which we believe will help
them going forward. The chart below shows how some overseas countries, which Colgate is
invested in, compare to the United States. The data compares the ten year average GDP
growth for several different countries. It’s worth pointing out that over the last ten years, the
United States has shown the slowest growth and the BRIC countries have shown the highest.

GDP Growth by Country

12.00
10.00
8.00
6.00
4.00
10yr Avg GDP Growth
2.00
-

Not only does Colgate sell products in many different countries, but it has strong global
brand recognition too. The graphs on the next page show Colgate’s market share in various
international countries and compares it to their competitors.
 In Summary, Colgate maintains about a forty percent market share in the global
toothpaste market. Colgate is far ahead of its competition, based on market share, in a
majority of the emerging market and is extremely well positioned to capture their growth going
forward.

Business Risks

Some of the business risks that we are concerned about are factors based on
competition and non-controllable risks. Colgate’s biggest competitor, Proctor and Gamble, is a
much larger company and controls many more resources that could be used to fend off
competition. Proctor and Gamble spends more than three times the amount Colgate does in
research and development and continues to expand into international markets. Proctor and
Gamble’s international sales account for thirty seven percent of their total revenues and the
trend is increasing. The international movement could threaten Colgate’s non-Oral operating
segments. Colgate has a stronghold internationally in the oral care market but its other
operating segments could be very vulnerable to increased competition from P&G and other
household products and cleaning companies. This is potentially problematic for Colgate, but
they do have a strong focus on Oral care which makes up most of their revenues. They
continue to organically increase product sales whereas P&G focuses on increasing the vastness
of their product lines. Instead of bettering products they create new ones to attract different
consumer segments. Although this strategy does have its positive points, they might lose
customers because of their lack of concern over existing products.

The non-controllable risks include raw materials prices. More recently, commodity
prices have been moving up which might affect the profitability of the business. There is also
exchange rate risk involved since most of the company sales are generated outside the United
States.

Key Financial Ratios

Price/Earnings: 18.7 ROIC: 33%

Price/Sales: 2.7 Dividend Yield: 2.5%

Debt/Equity: 4 52 week range: 78.62-99.84

Profit Margin: 14.5% Market Cap: 47.03B

ROE: 96%
Valuation

The valuation technique that was used to evaluate Colgate-Palmolive was to project
earnings and use a price/earnings multiple to determine the future stock price. The hurtle rate
of return that is used is about fifteen percent per year after taking into account dividends.
Earnings were projected by growing shareholder equity and using the average return on equity
to determine future earnings. The growth rate used to extrapolate shareholder equity, 11.9%,
was calculated based on multiplying ROE by the retention ratio. Using a forward P/E of 20, in 5
years Colgate’s projected stock price is estimated at about $200 per share. Based on this
estimate, the stock should return about 15% per year at the price we paid for it at about $93
per share.