NYSSA Equity Research – January 16, 2014 [PDF]

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Idea Transcript


CFA Institute Research Challenge Hosted By: NYSSA

Team O

1

NYSSA Student Research This report is published for educational purposes only by students competing in the CFA Institute Research Challenge.

Colgate Initiation Team O

January 16, 2014

Initiating coverage of Colgate-Palmolive with a BUY

Consumer Sector

BUY $75.00 Trading Data: Last Price (1/15/2014) 52–Week High 52–Week Low Market Cap. (B) Shares Out. (MM) 3 Month Avg. Vol. (MM)

$64.78 $66.49 $52.88 $59.5 936.9 2.958

Earnings Estimates: ($ per share) (Dec) FY15E FY14E FY13E FY12A

Q1 0.78E 0.74E 0.66A 0.62

Q2 0.82E 0.78E 0.70A 0.67

Q3 0.86E 0.80E 0.73A 0.69

Q4 0.91E 0.84E 0.76E 0.70

FY 3.37E 3.15E 2.85E 2.68

12 Month Valuation: Bear

Base

Bull

Historical Multiples

Valuation

$61.73

$68.59

$75.45

Comparable Company

$67.02

$74.46

$81.91

Discounted Cash Flow

$72.69

$80.77

$88.85

Consolidated $67.15 Valuation

$74.61

$82.07

Strong growth presents a positive outlook, current valuation creates upside potential. We are initiating coverage on Colgate Palmolive with a buy rating, with a price target of $75.00, representing a 16% upside from the current price. Colgate Palmolive continues to exhibit strong growth overseas with 80% of sales coming from outside the United States. This bodes well for the company’s outlook, with sales growth of 9% and profit growth of nearly 5% expected over the next 2 years. We believe that at current levels, Colgate Palmolive still has upside potential, which we believe is justified using a blended historical multiples, comparable company multiples, and discounted cash flow analysis valuation. Maximizing shareholder value continues to be a top priority. Colgate Palmolive has consistently focused on returning value to shareholders through dividends, share repurchases, as well as M&A activity. Currently Colgate has a dividend payout ratio of 47%, lagging its peer group, which sits closer to 50%. We believe this supports an increased dividend above profit growth moving forward, as strong cash generation and a strong balance sheet allow Colgate Palmolive to move their payout ratio closer to that of their peers. Additionally, Colgate Palmolive has purchased shares in every quarter since 2002, and is currently in the middle of a repurchase plan of 40 million shares. Based on the current rate of approximately 5 million shares per quarter, the current plan is expected to expire in mid-2015. However based on repurchase activity over the last 12 years, we feel that it is reasonable to expect another repurchase plan that will meet the current rate of buying. Finally, Colgate has strategically acquired household names that will complement their current portfolio. Sanex was the last significant acquisition, and the company is consistently pursuing names that add value at a discounted price. FY13 Outlook: We expect FY13 sales to increase 2.3% to $17.5B, fueled by growth in product expansion and competitive advantage over other companies. Gross margin is expected to increase 70 bps to 59.0%. SG&A expenses as a percent of sales are expected to increase to 40 bps 35.0% in FY13 from 34.6% last year. EBT margin is expected to expand 30 bps in FY13 to 23.8%. Net margin is expected to come in relatively flat, expanding only 20 bps in FY13 when compared to last year’s 15.1%. We estimate EPS of $2.85 for FY13, $3.15 for FY14 and $3.37 for FY15.

2

NYSSA Equity Research – January 16, 2014

Colgate-Palmolive (CL – $64.78) Company Description:

52–Week Price Performance:

Colgate-Palmolive is a 200 year-old American consumer products company with a focus on manufacturing, packaging, and distributing oral, household, healthcare, and pet goods. The company is well known for providing innovative products that are competitively priced and targeted toward multiple demographic segments. They currently operate in over 200 countries and derive 80% of their revenue from outside of the United States. Colgate currently employ 37,700 people

Company: Colgate-Palmolive Ticker: CL

Exhibit 1: Cash Flow: ($MM)

Investment Thesis Highlights:

(Dec) FY15E FY14E FY13E FY12A

Beg

CF-O

$1882.3 $3,955.5 1,195.0 3,796.4 884.0 3,099.0 878.0 3,196.0

CF-I

CF-F

End



2012 Restructuring will help push the company to new heights



Positive management outlook into 2014



Margin expansion is expected to continue due to cost saving efforts by the firm



Aggressive EPS growth due to an active buyback program

Inventory



$1,407.5 1,362.1 1,366.4 1,365.0

Dividends continually increase, and a potential pay-out ratio to increase from 47% to 50%



Global expansion and product innovation

-$758.7 -$2,592.8 $2,456.2 -724.5 -2,354.6 1,882.3 -642.3 -2,115.7 1,195.0 -865.0 -2,301.0 884.0

Exhibit 2: Balance Sheet Items: ($MM) (Dec) FY15E FY14E FY13E FY12A

Cash

Debt

$2,456.2 1,882.3 1,195.0 884.0

$6,229.1 5,856.8 5,406.7 4,926.0

High (5/22/2013): $66.49 Low (12/05/2013): $52.88 Last (12/18/2013): $64.30

Exhibit 3: FINANCIAL SUMMARY — Non-GAAP ($MM except per share data and where indicated)

(Dec) FY15E FY14E FY13E FY12A

Revenue $19,018.5 18,218.5 17,484.0 17,085.0

Gross Profit Margin $11,546.0 11,013.0 10,307.7 9,963.0

60.7% 60.4% 59.0% 58.3%

EBT Tax Profit Margin Expense Rate

Net Profit Margin

EPS

$4,821.9 4,544.3 4,177.2 4,008.0

$3,118.9 2,930.1 2,678.2 2,574.0

$3.37 3.15 2.85 2.68

25.4% 24.9% 23.9% 23.5%

$1,543.0 1,454.2 1,327.0 1,275.0

32.0% 32.0% 31.8% 31.8%

16.4% 16.1% 15.3% 15.1%

WASO 923.9 927.9 933.9 960.2

3

NYSSA Equity Research – January 16, 2014

Third Quarter - 2013 Exhibit 4: Porter’s 5-Forces Model

Threat of New Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Competition in the Industry

Threat of Substitute Products

Final Rating: 2.8 Source: Team Efforts

Exhibit 5: 3Q13 Common-size Income Statement

Due to a multitude of management initiatives, growth continued to spur in 3Q2013. A newly implemented 2-for-1 stock split has now been utilized, cutting share price and making the company more affordable to investors. Share repurchases and restructuring has proven in the past to be beneficial, and it continues to show positive results. Global market share in toothpaste and manual toothbrushes continue to improve, and hold a significant amount of the World’s share of customers, representing 45% and 33.4%, respectively. Mouthwash, which has not been their main driver, continues to improve and they now hold 16.8% of total market share of the product. New products are being heavily invested in directly and indirectly, both through advertisement and other SG&A costs. Colgate has an extensive worldwide pipeline of new products, and the continued effort of their marketing team and global outreach programs will help Colgate get the recognition, and more importantly, the sales that they want to achieve. The restructuring initiative has gone smoothly thus far, and the results posted for 3Q2013 has led to company to reaffirm its belief in long-term prosperity, remaining on track to meet their FY13 goal of 4.5%-5.5% EPS growth. Net sales increased 1.5% to $4,398.0MM, versus $4,332.0MM, primarily attributed to the emerging markets which showed organic sales growing by an aggressive 9.5%. Gross profit expanded 40 basis points to 59.0%, a new all-time high, versus 58.6%. This expansion was due primarily to higher price points and the cost-savings associated with the “Funding-the-Growth” initiative, far offsetting the foreign exchange impact on raw and material packaging costs. SG&A as a percentage of sales increased 40 bps to 35.0%, versus 34.6% last year. This was a result of increased worldwide advertisement, growing by approximately 6% to $478.0MM. EBT margin remained relatively flat, which saw expansion of only 10 bps to 23.9%, versus 23.8%. Net Income and EPS increased 2.9% and 5.2%, respectively, to $680.0MM and $0.73, versus $661.0MM and $0.69, due to the aforementioned cost-saving measures and increased price points.

Source: Company Statements

A Strong Emerging Environment Exhibit 6: China’s share of global middle class (2000vs2030)

Competitors present threats, however market for new participants is limited. Product launches worldwide from competitors is a continuous risk in a market that is driven largely by market share. However, due to brand recognition and relative customer loyalty, there is virtually no market available to new participants. The major players have the ability to outspend, out market, and better innovate their products than any new competition. Population growth will fuel demand in emerging markets. India and China are the two of the most populous countries in the world with 1.2 billion and 1.3 billion people, respectively. If over the long-term Colgate were able to increase its market share by 10% in these countries, it would be the equivalent of 4

NYSSA Equity Research – January 16, 2014 Exhibit 7: India’s rising middle-class population

capturing one third of the current US market in terms of population. Additionally, the Chinese government recently lifted its one child policy. This legislation should fuel population growth further, providing a larger potential customer base. Marketing hygiene to Emerging Market countries is paramount to continued global growth. Currently only 10% of the population in Taiwan, 8% of the population in China, and 5% of the population in India uses deodorant. Marketing personal hygiene has been successful in these markets with the Protex brand, an antibacterial body wash sold in Emerging Markets. The personal hygiene market has strong growth ahead of it in hopes that it will eventually reach the hygiene levels of developed countries. Middle class expansion in Emerging Markets poised to jumpstart specialty products growth. Colgate Palmolive has already seen Emerging Market demand for specialty products such as the Colgate 360 product line in China. As Brazil, India, China, and other Emerging Markets grow their middle class; the expectation is that the specialty products market will continue to accelerate. These economies will make up the majority of middle class demand worldwide in the future.

Exhibit 8: Share of Middle Class Consumption

The end of Quantitative Easing in the US and continued international easing create a difficult currency environment. The US dollar is expected to continue to strengthen as the United States economy accelerates going into 2014 and 2015. Additionally, the Federal Reserve announced the reduction of its monthly bond purchases by $10 billion per month in December, ultimately creating a stronger US dollar. Globally, the European and Japanese markets continue to loosen monetary policy in order to drive growth, and in Japan’s case, inflation. This will result in a decline in growth from foreign currency exchange rates.

Product and Geographic Segment Expansion Exhibit 9: Geographical Revenue Breakdown

The Colgate brand name remains the staple of the company, and despite dominant market share, growth is expected to continue. Colgate holds 45% market share worldwide in the toothpaste market driven by its household name. Penetration in emerging markets before they begin to develop has resulted in Colgate being a world leader in this segment. Share in Latin America is saturated, with Colgate controlling nearly 70% of the market; however markets such as China present opportunities for expansion with a current market share of 35%. Developed markets show promise with increased product innovation. The biggest opportunity for Colgate within the developed markets is the launch of the Optic White line, which encompasses toothpaste, toothbrushes, and mouthwash. These products are considered specialty products and as a result carry a higher selling price. Colgate’s marketing is essential, as it attempts to convince consumers that these are necessary products. Additionally, Colgate

Source: Financial statements and Team Estimates

5

NYSSA Equity Research – January 16, 2014 has begun to heavily market mouthwash, as it is underused in comparison to emerging markets. With the Optic White and the Colgate Advanced Total mouthwash, Colgate is pushing consumers to add mouthwash to their daily regiment, which will result in renewed growth in developed markets. Exhibit 10: Continual Pursuit of Better Business

Sells laundry detergent business in Colombia to Univlever Deal Size: $215MM

Acquires Sanex, a strong multicategory personal care brand Deal Size: $940MM Source: Company Website

Exhibit 11: Pet Nutrition Market Share Expansion

Tailored products and market share gains combine to fuel emerging market growth. Colgate has consistently tailored its products to specific regions, which has helped fuel growth in emerging markets. Examples include green tea toothpaste in China, and anti-cavity preferences in Russia. These regional marketing strategies have resulted in strong market share gains and brand loyalty worldwide, as the Colgate brand is used in 65% of household’s worldwide. Irish Spring and Speed Stick, both remain iconic brands, but customer loyalty is sometimes questioned. Sanex acquisition increases hygiene products such as soap and deodorant hold much less customer loyalty. This stems at least in part from higher product innovation and viral marketing. Although Irish Spring and Speed Stick remain staples for users, it is harder for Colgate to create a firestorm for these products. The global market, however, continues to expand as deodorant and soap are less commonly used in emerging countries. The acquisition of Sanex from Unilever in 2011 adds to Colgate Palmolive’s lineup of specialty high end products, and increases its European exposure in this segment. Home care market stable and brand portfolio is strong. Colgate Palmolive commands the top brands worldwide in this market including Palmolive, Murphy’s oil, and the Paic brand in Europe. These products however will see slower growth as the market is saturated, and value brands attempt to take market share. In addition, consumers are adopting the adage “less is more” which has translated into volume declines across the product lines. Expect Hills Pet Nutrition revamp as product innovation overcomes misinterpreted consumer expectations. The last few years have been difficult for the Hills brand, as the company has failed to execute on product launches stemming from customer dissatisfaction with the name. Hills attempted to increase prices and break into the natural foods market, both of which proved negative to growth and the brands reputation. As Colgate Palmolive has worked hard to remarket the brand, growth is now expected to accelerate with a redesigned Science Diet product, and renewed customer loyalty regarding the slogan “What Vets Feed their Pets.”

Source: Company Website

Exhibit 12: Forefront of Colgate

Future Outlook Continuing share buybacks and dividend increases return value to shareholders. Colgate has repurchased shares every quarter since 2002, and currently has approval for the repurchase of 40 million shares. Additionally, dividends have increased at a 7-year growth rate of 11.9%. We expect Colgate to continue to increase its dividend moving forward. The company currently 6

NYSSA Equity Research – January 16, 2014

Exhibit 13: Dividend and Y-o-Y growth

has a payout ratio of 47%. Peers such as Proctor and Gamble however have a payout ratio of 50%. As a result of this as well as strong growth, we expect Colgate to increase its payout ratio to more comparable levels by 2016, which will result in even more value added to shareholders. The company has proved that returning value to shareholders is a top priority, and with FCF expected to grow 7% this should continue. Cost savings from restructuring expected to create margin expansion. Colgate Palmolive is in the midst of its 2012 restructuring plan, with projections of $275.0MM to $325.0MM savings annually through 2016, with cumulative savings to amount to $775MM – $875MM. This aftertax savings will go towards reinvesting in the future of the company, particularly in brand performance and product innovation. The forefront of the restructuring efforts is going toward efficient regional office fruition and an overhaul of the global supply chain and facility to operate at an optimal level.

Source: Company Financial Statements

Exhibit 14: Cash Conversion Cycle

Colgate-Palmolive has strong statements with low levels of debt and will continue this way. Debt currently makes up only about 75% of the firm’s capital structure, with nearly 30 notes outstanding. The firm only issues small notes, with none that have a principal of $1.0B or more and currently have $6.1B outstanding. We expect their debt levels to remain relatively flat, as they have multiple notes maturing during 2014 and 2015. We also do not believe the company will undertake any acquisitions, but will instead rely on organic sales growth, which they can safely fund through cash. If Colgate does need to issue debt they should be able to do so, they have a strong credit rating of AA. However, we do believe that they will hold off issuing debt and instead use cash to grow organically. Cash conversion has begun to normalize after an abnormally high period due to the recent recession. Inventory payable, which represents how fast a company converts its inventory into sales, jumped nearly 4 extra days to convert inventory into sales. Consequently, the cash cycle also increased by 4 days. Calculated by adding days receivable with inventory receivable, minus days payable, the cash cycle is expected to decrease to 73.5 days by 2015.

Source: Team Estimates and Calculation Exhibit 15: Yearly Revenue and CAGR

Management has given guidance to analysts for their full year expectations of 2013. For the full year, we are expecting revenue to increase 2.3% to $17.5B from $17.1B last year, driven primarily by the Greater Asia and Africa region. Gross profit is expected to grow 3.5% to $10.3B, or 59.0% of sales, from $9.7B, or 58.3% of sales, representing an expansion of 70bps. SG&A as a percent of sales is expected to increase by 40 basis points due to increased costs and expenditures in advertisement of new products into emerging and developed markets. Adjusted for restructuring and other onetime expenses, net income is expected to increase to $2.7B, or 15.3% of sales, from $2.6B, or 15.1% of sales, which represents a roughly 4% increase. Revenue poised from continued growth, with a CAGR of 3.1% from 2008 – 2015. We expect 2015 sales to be impressive, with strong sales coming from product expansion and successful geographic penetration. Latin America is expected to be a key player in the future success of Colgate, with growth rates

Source: Company Financial Statements and Team Estimates

7

NYSSA Equity Research – January 16, 2014

Exhibit 16: Gross Margin Expansion

Source: Company Financial Statements and Team Estimates

Exhibit 17: Net Income and CAGR

touching high-single-digit ranges. A change in the business model has provoked management to increase their efforts in the Latin America region, resulting in higher focus and a larger portion of total sales coming from the segment. In addition to Latin America, population and middle-class growth will lead to more persons with the cash needed for hygienic products. The emergence of the middle-class in the developing worlds is a large focus for Colgate, and it is beneficial to both the top-line as well as their mission to serve the global community.

Strong management initiatives will lead to an increased effort of decreasing costs of their operation through programs such as “Funding the Growth”. Gross margin will break another margin record in the coming years. Colgate for the first time will break their gross margin record and retain over 60% of all of it sales after the initial deduction of the cost of goods sold. Gross margins will continue expanding due to 2 main reasons: “Funding the Growth” and an intricate pricing model. Funding the growth is global initiative by Colgate where they seek pretax savings in all key areas of their business. This initiative not only adds value to the firm, but is key to retain business. For example, to provide better service to customers in the Pacific Northwest, Colgate initiated the opening of a sustaining distribution center in Portland, Oregon. Not only did the creation of the facility help satisfy their customer’s needs, but it also provided Colgate with lower transportation costs and Carbon dioxide (CO2) emissions. Funding the growth contributes roughly $400MM $700MM each year. Additionally, the improved pricing model gives management a better understanding of how to keep competitive prices while keeping the health and the value of the brand up. The higher pricing is inversely related to the unit volume growth, meaning, the larger the volume, the higher the margins.

Source: Company Financial Statements and Team Estimates

Exhibit 18: EPS and CAGR

The bottom-line is that investors will be rewarded by Colgate. Net income is growing at a CAGR of just about 6.0% with no signs of slowing. This is primarily due the aforementioned cost-saving measures as well as revenue growth far outpacing COGS growth. Colgate has taken measures to ensure that they are increasing efficiency and productivity of their entire operations, from cash conversion to net income. Net income for 2014 and 2015 are expected to grow to $2.9B and $3.1B, respectively. This represents a 9.4% and a 6.4% increase on a year-over-year comparison. EPS excluding restructuring costs and one-time items are also expected to increase, and more dramatically, due to higher net income and lower diluted shares as a result of an active buyback program by management. Anticipated EPS for 2014 is $3.15, 10.6% increase from $2.85 in 2013. 2015 is expected to grow 6.9% from its levels in 2014 to $3.37. CAGR for 2008 – 2015 is around an impressive 8.3%

Source: Company Financial Statements and Team Estimates

8

NYSSA Equity Research – January 16, 2014

Valuation Exhibit 19: FCF Equation

Discounted Cash Flow EBIT is expected to continue growth into 2020, due to high sales and higher margins, although we are cautious and believe it may be slightly less aggressive growth. EBIT is growing 4.5% every year from 2017 – 2020, slightly less than the 6-8% range in the 3 years prior. As the developing markets and the middle-class begin to mature, the sales of Colgate-Palmolive should see continued success in the sales department. Furthermore, cost cutting efforts provided by have been stated work, both on a strategic pricing level, and on an effective initiative effort.

Exhibit 20: WACC Structure and Calculation

WACC Calculation Cost of Equity Beta Risk Free Rate Risk Premium Cost of Debt % Equity % Debt WACC

The WACC is composed of the cost of equity and cost of debt, which hold about 91% and 9% of the capital structure, respectively. Cost of equity is calculated by the risk free rate plus the equity risk premium multiplied by the beta. Our risk-free rate, the 20-year treasury, was 3.66%. The return of the market that we used was 13.34%, giving us a risk premium of 9.68%. Beta was calculated using the returns of the market versus the returns of ColgatePalmolive, leading to a value of .49. This yielded a cost of equity of 8.43%. The cost of debt was taken from Bloomberg actual computation, yielding us a cost of debt of 2%. When weighted with our capital structure, this gave us a WACC of 7.85%.

8.43% 0.49 3.66% 9.68% 2.00% 91.00% 9.00% 7.85%

Source: Bloomberg and U.S. Treasury

Exhibit 21: Discounted Cash Flow Valuation

Valuation PV of UFCF PV of TV Enterprise Value Net Debt Equity Value Diluted Shares Current Price Implied Valuation % Upside

$24,487.7 $54,432.7 $78,920.3 $3,974.5 $74,945.9 927.9 $64.30 $80.77 25.61%

Source: Team Estimates and Calculation

The present value of free cash flow is calculated by multiplying the discount factor by projected free cash flow. Furthermore, you use your perpetual growth rate, 2%, to project your terminal value, and then discount it back to present value terms using the last projected years discount factor. Then, adding together the sum of the present value of all free cash flow, plus the present value of the terminal value, minus your net debt, you are left with your intrinsic value. When you divide it by your projected diluted shares, you are left with your implied target price. Our DCF yielded an implied target price of $80.77, representing a potential 26% upside. Using a sensitivity table, we find the range of potential price targets if perpetual growth rate or the WACC would change. Both WACC and perpetual growth rate deviate by 50 bps.

Exhibit 22: Sensitivity of Value per Share

WACC

$80.77 6.4% 6.9% 7.4% 7.9% 8.4% 8.9% 9.4%

0.5%

1.0%

$79.91 $75.36 $71.47 $68.11 $65.18 $62.60 $60.32

$85.62 $80.19 $75.62 $71.72 $68.34 $65.40 $62.81

S ensitivity of S hare Value Growth Rate 1.5% 2.0% 2.5% $92.51 $85.94 $80.48 $75.89 $71.96 $68.57 $65.61

$100.99 $92.86 $86.25 $80.77 $76.15 $72.21 $68.80

$111.67 $101.38 $93.21 $86.56 $81.06 $76.42 $72.45

3.0%

3.5%

$125.53 $112.11 $101.76 $93.55 $86.88 $81.34 $76.68

$144.26 $126.03 $112.54 $102.15 $93.90 $87.19 $81.63

Historical Multiples The historical multiple valuation uses the P/E and EV/EBITDA metric, both of which are equally weighted for this valuation method. Price to 9

NYSSA Equity Research – January 16, 2014 earnings has continued to expand, with price appreciation far outpacing EPS producing, and considering EPS has done remarkably well, P/E will continue to do well with it. EV/EBITDA has also expanded rapidly, with enterprise value growing at a CAGR of nearly 13% historically from 2008, and should continue to grow at about 10% for the next two years. P/E and EV/EBITDA is going to experience large expansions from its historical averages. P/E historical 5-year average is at about 17.0X, and we expect it to expand to 21.8X in 2014. EV/EBITDA historical 5-year average is at about 10.7X, and we expect it to expand into to 13.2X in 2014. We calculate our historical comp valuation as follows: Using projected metrics, we arrived at a price target of $68.59

Exhibit 23: Historical Multiple Valuation

Metric P/E EV/EBITDA Total

Multiple 21.8X 13.2X

Weight 50.0% 50.0% 100.0%

Source: Team Estimates & Calculation

FY2014E BEAR 30.87 30.87 $61.73

FY2014E BASE 34.30 34.30 $68.59

FY2014E BULL 37.73 37.73 $75.45

Comparable Companies The competitors that were selected are within consumer staples industry and have relatively similar size. Each company has multiple consumer segments in which they generate revenue from, which parallel Colgate. The largest of the competitors, Proctor and Gamble, has a significantly larger market capitalization at $219.0B. On the other end of the spectrum, Kimberly Clark is a more direct competitor with similar market capitalization of 40 Billion. Due to the combination of varying size companies in the consumer staples sector, the industry is adequately described through the use of these competitors. Proctor and Gamble, its relatively large competitor, has much different revenue segments. For example, P&G has roughly 61% of their revenue from developed markets, whereas Colgate is heavily invested in developing countries. P&G also receives 39% of their revenue from North America, whereas Colgate generates 80% of their sales from locations outside of the United States. Due to the fact that P&G is so large, their strategy is to focus on maintaining market share instead of rapid growth, which is a focus on Colgate within emerging markets.

Exhibit 24: Comparable Comps Valuation

Comparable Valuation EV/EBITDA

$79.12

P/E

$69.81

Consolidated Valuation

$74.46

Upside:

15.8%

Using both a P/E and EV/EBITDA ratio, we used the mean competitor multiples to derive a price target. Mean P/E for the comparable companies stood at 22.1X, while mean EV/EBITDA for the comparable companies stood at 14.8X. We arrived at a price target of $74.46

Source: Team Calculation

Exhibit 25: Comparable Comps Statistics

Market Valuation Ticker Mean Median

Market Enterprise Cap Value $69.72B $77.76B

NTM Financial Sales $26.32B

EBITDA $6.00B

EBIT $4.13B

NTM Financial Margins Net Income $2.94B

EBITDA (%) 15.6%

NTM Multiples

EBIT Net Income (%) (%) 12.3% 8.4%

EV/ EBITDA 14.8X

Price/ Earnings 22.1X

$34.12B

$36.57B

$10.55B

$2.71B

$1.55B

$1.02B

16.8%

12.8%

10.0%

15.1X

20.6X

Max

$218.93B

$244.53B

$84.17B

$18.41B

$15.42B

$11.31B

21.9%

18.3%

13.4%

17.5X

28.6X

Min

$7.40B

$9.39B

$5.62B

$0.54B

$0.31B

-$0.04B

5.1%

2.9%

-0.4%

12.6X

19.7X

10 Source: Bloomberg and Company Website

NYSSA Equity Research – January 16, 2014

Exhibit 26: Consolidated Company Graph

Consolidated Valuation All things considered, an equally weighted valuation was used to consolidate the three valuation methods. All were relevant to future growth prospects and multiple expansion, justifying a strong growth in the short- and long-term life of the investment. We are reiterating a BUY for ColgatePalmolive, ticker CL, with a price target of $75. Exhibit 27: Consolidated Company Valuation

Consolidated Valuation DCF Historical Comps Weighted Source: Team Estimates and Calculation

2014 Bear

2014 Base

2014 Bull

$72.69 $61.73 $67.02 $67.15

$80.77 $68.59 $74.46 $74.61

$88.85 $75.45 $81.91 $82.07

Source: Team Estimates and Calculation

Risks Associated with Colgate-Palmolive Venezuela 

February 2013 the government of Venezuela devalued its currency, which will adversely affect our business and results of operations for 2013  In 2010, the results of operations were adversely impacted by the designation of Venezuela as hyperinflationary and the subsequent currency devaluations in Venezuela in that year International Sales   

80% of Net Sales originate outside of the US ForEx rates on international currency may have negative effects on revenue Political or economic instability, social or labor unrest or changing macroeconomic conditions in our markets

Volatility  

Raw materials and packaging materials such as resins, tropical oils, essential oils, tallow, poultry, corn and soybeans are subject to wide price variations Increase in costs and availability of commodities as well as the cost of energy, transportation, and other services can impact profit margins if higher pricing cannot be achieved for Colgate goods

11

NYSSA Equity Research – January 16, 2014

Appendix  Financial Statements  Revenue Growth Model..…………………………………………………………………………………………………………………13  Income Statement 

Projected Income Statement – Quarterly.……………………………………………………………………….…………14



Margin Expansion and EPS Growth – Quarterly……..…………………………………………………………………..15



Projected Income Statement – Yearly….…………………………………………………………..………………………..16

 Balance Sheet 

Key Ratio Analysis………….………………………………………………………………………………………………………..…17



Balance Sheet Assumptions……………………………………………………………………………………………………….18



Projected Yearly Balance Sheet..………………………………………………………………………………………………..19

 Projected Yearly Cash Flow…………………………………..………………………………………………………………………….20  Valuation  Discounted Cash Flow 

Discounted Cash Flow Analysis…………………………………………………………………………………………………..21



Discounted Cash Flow Sensitivity……………………………………………………………………………………………….22

 Historical Multiple……..…………………………………………………………………………………………………………………….23  Comparable Companies…….…………………………………………………………………………………………………………….24  Consolidated Valuation & Share Price Potential…………………………………..………………………………………………….25  Supplemental Information  Porters 5-Forces Model…..……………………………………………………………………………………………………………….26  In-depth DuPont Analysis……..………………………………………………………………………………………………………….27  Market Share Analysis 

Oral Care & Personal Care………………………………………………………………………………………………………….28



Home Care & Pet Food……………………………………………………………………………………………………………….29

 Management….………………………………………………………………………………………………………………………………..30

 Disclosure….……………………………………………………………………………………………………………………………………..31

12

NYSSA Equity Research – January 16, 2014

Appendix 1: Revenue Growth Model

Source: Company Statements & Team Estimates 13

NYSSA Equity Research – January 16, 2014

Appendix 2A: Projected Income Statement - Quarterly

Source: Company Statements & Team Estimates 14

NYSSA Equity Research – January 16, 2014

Appendix 2B: Margin Expansion and EPS Growth - Quarterly

Source: Company Statements & Team Estimates 15

NYSSA Equity Research – January 16, 2014

Appendix 2C: Projected Income Statement - Yearly

Source: Company Statements & Team Estimates 16

NYSSA Equity Research – January 16, 2014

Appendix 3A: Key Ratio Analysis

Source: Bloomberg & Team Estimates 17

NYSSA Equity Research – January 16, 2014

Appendix 3B: Balance Sheet Assumptions

Source: Company Statements & Team Estimates 18

NYSSA Equity Research – January 16, 2014

Appendix 3C: Projected Yearly Balance Sheet

Source: Company Statements & Team Estimates 19

NYSSA Equity Research – January 16, 2014

Appendix 4: Projected Yearly Cash Flow

Depreciation and CapEx Revenue Capex

$15,329.8 684.0

Additions as a % of Sales

Amortization Amortization as % of CapEx

Depreciation Depreciation as % of CapEx

Debt Payments and Proceed Growth Debt Payments and Proceed Growth Growth %

Debt Payments and Proceed Growth Growth %

$15,326.8 575.0

$15,564.0 550.0

$16,734.0 537.0

$17,085.0 565.0

$17,484.0 699.4

$18,218.5 728.7

19018.4904 760.7

4.5%

3.8%

3.5%

3.2%

3.3%

4.0%

4.0%

4.0%

87.0

(15.0)

93.0

232.0

102.0

125.9

131.2

136.9

12.7%

-2.6%

16.9%

43.2%

18.1%

18.0%

18.0%

18.0%

261.0

366.0

283.0

189.0

323.0

349.7

364.4

380.4

38.2%

63.7%

51.5%

35.2%

57.2%

50.0%

50.0%

50.0%

($2,320.0)

($3,950.0)

($4,719.0)

($4,429.0)

($5,011.0)

($5,462.0)

($5,789.7)

($5,992.3)

N/A

70.3%

19.5%

-6.1%

13.1%

9.0%

6.0%

3.5%

$2,515.0

$3,424.0

$5,015.0

$5,843.0

$5,452.0

$5,942.68

$6,239.81

$6,364.61

N/A

36.1%

46.5%

16.5%

-6.7%

9.0%

5.0%

2.0%

Source: Company Statements & Team Estimates 20

NYSSA Equity Research – January 16, 2014

Appendix 5A: Discounted Cash Flow Analysis

Source: Bloomberg, Company Statements, & Team Estimates 21

NYSSA Equity Research – January 16, 2014

Appendix 5B: Discounted Cash Flow Sensitivity

Source: Team Calculation 22

NYSSA Equity Research – January 16, 2014

Appendix 6: Historical Multiple

Source: Bloomberg, Company Statements, & Team Estimates 23

NYSSA Equity Research – January 16, 2014

Appendix 7: Comparable Companies

Source: Bloomberg, Company Statements, Team Estimates 24

NYSSA Equity Research – January 16, 2014

Appendix 8: Consolidated Valuation and Share Price Potential

Source: Yahoo! & Team Estimates 25

NYSSA Equity Research – January 16, 2014

Appendix 9: Porters 5-Forces Model Threat of New Entrants

Threat of New Entrants (1) 1. 2. 3. 4.

Extremely high barrier to entry Large Economies of Scale Capital intensive R&D Extensive regulation for products

Bargaining Power of Suppliers

Bargaining Power of Buyers

Bargaining Power of Suppliers (1) 1. 2. 3.

Multitude of suppliers worldwide Existence of long term contracts Significant long term supplier relationships

Competition in the Industry

Final Rating: 2.8

Bargaining Power of Buyers (5) 1. 2. 3. 4. 5.

Threat of Substitute Products

Diversified global demand Competitive pricing may give buyers the edge 80% of sales originate outside of the United States Long term contracts with Colgate Not one buyer represents more than 10% of Colgate revenue

Competition in the Industry (4) 1. 2. 3. 4.

Few competitors, yet they are major companies with significant resources Economies of scale High exit barriers Well established reputation of current brands & companies

Threat of Substitute Products (3) 1. 2. 3. 4.

Fair amount of competitor products Rise in generic brands through difficult economic climate Large amount of R&D and product development by companies in industry Significant regulation of products

The scale of the interaction: 0

No Interaction

2

Low

4

High

1

Insignificant

3

Average

5

Very High

Source: Team Assumptions 26

NYSSA Equity Research – January 16, 2014

Appendix 10: In-depth DuPont Analysis

Source: Company Statements & Team Estimates 27

NYSSA Equity Research – January 16, 2014

Appendix 11A: Market Share Analysis

Source: Bloomberg & Company Statements 28

NYSSA Equity Research – January 16, 2014

Appendix 11B: Market Share Analysis (Cont’d)

Source: Bloomberg & Company Statements 29

NYSSA Equity Research – January 16, 2014

Appendix 12: Management Hierarchy

Ian Cook (CEO)

Fabian Garcia (COO)

Peter BronsPaulsen (CEO Hill's)

Don Buchner (VP Hill's)

Franck J Moison (COO)

Alain Semeneri (VP Development)

Dennis Hickey (CFO)

Jesper Andersen (VP North America)

Elyse Kane (VP North America)

Andrew Hendry (CLO)

Andrea Bernard (VP Legal)

Marty Collins (VP Legal)

Source: Company Website 30

NYSSA Equity Research – January 16, 2014

Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as an officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with NYSSA, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

CFA Institute Research Challenge

31

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