1

Consumer Staples Stock Recommendation

Mark Bauer and Joe Burch

May 15, 2007

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Agenda

Recap of sector recommendation Current SIM holdings Recommended actions Summary of stock sales Summary of stock buy Conclusion

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Consumer Staples Recommendation

9.6% of S&P 500 7.8% of SIM (1.8% underweight) Defensive (non-cyclical) stocks Good hedge against economic downturn Mature, slow growth companies International growth is important Brand is important to generate high margins Valuations do not suggest that consumer staples is

cheap Maintain underweight position

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Current Holdings

49%

35%

16%

Altria Group Inc.

Anheuser Busch CosInc.

Kraft Foods Inc.

5

Recommendation

Sell 142 BP of Altria Sell 130 BP of Kraft (all) Buy 272 BP of Colgate No change to Anheuser-Busch

CurrentCompany Symbol Shares Price Value % of SIM Sell

Altria Group Inc. MO 13,600 $68.83 $936,088 3.97% 1.42%Anheuser Busch Cos Inc. BUD 13,500 $49.95 $674,325 2.86%Kraft Foods Inc. KFT 9,411 $32.50 $305,858 1.30% 1.30%

$1,916,271 8.14%

ProposedCompany Symbol Shares Price Value % of SIM Buy

Altria Group Inc. MO 8,750 $68.83 $602,263 2.56%Anheuser Busch Cos Inc. BUD 13,500 $49.95 $674,325 2.86%Colgate-Palmolive Co. CL 9,661 $66.21 $639,684 2.72% 2.72%

$1,916,271 8.14%

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Kraft - Food products industry

Industry dominated by large companies such as Kellogg, General Mills, Campbell, Heinz, and Sara Lee

Utilize economies of scale Competition based on price, quality, and variety Strong brand enables higher prices Trends/Issues

Healthy eating and organic foods Regulation and labeling Competition from lower priced private label competitors

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Kraft – Business Analysis

Negatives Operating margins decreased 14% in Q1 2007 from 15.2% to 14.0%

Investments in marketing, quality improvements, systems and distribution architecture, soaring ingredient costs, competition from generic brands

Lost market share on trademark products such as cheese, coffee, and salad dressing

Organic revenue up 3.6% and 2007 guidance is 3-4%Positives Earnings beat consensus estimates by $.02 per share Looking for possible acquisitions to build scale in international

markets, enter new categories, or acquire new technologies Independence from Altria will provide more flexibility for acquisitions

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Kraft – Valuation Analysis

P/Forward E in-line with 5-year mean Slightly expensive relative to S&P 500 and sector Limited upside based on valuation analysis. Priced target of $34

(4% upside) Summary: Not attractive based on valuation

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Kraft – DCF AnalysisDCF Valuation5/15/2007Ticker: KFT Terminal Discount Rate = 9.5%

Terminal FCF Growth = 3.0%

Forecast TerminalYear 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E Value

Revenue 35,730 37,159 38,646 40,192 41,799 43,471 45,101 46,793 48,548 50,247 52,005 % Growth 4.00% 4.00% 4.00% 4.00% 4.00% 3.75% 3.75% 3.75% 3.50% 3.50%

Operating Income 5,717 5,946 6,183 6,431 6,688 6,955 7,216 7,487 7,768 8,039 8,321 Operating Margin 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00%

Interest and Other- net (750) (780) (812) (844) (878) (913) (947) (983) (1,019) (1,055) (1,092) Interest % of Sales -2.10% -2.10% -2.10% -2.10% -2.10% -2.10% -2.10% -2.10% -2.10% -2.10% -2.10%

Taxes (1,589) (1,653) (1,719) (1,788) (1,859) (1,934) (2,006) (2,081) (2,159) (2,235) (2,313) Tax Rate -32.0% -32.0% -32.0% -32.0% -32.0% -32.0% -32.0% -32.0% -32.0% -32.0% -32.0%Minority Interest - - - - - - - - - - -

Net Income 3,377 3,512 3,653 3,799 3,951 4,109 4,263 4,423 4,589 4,749 4,916 % Growth 4% 4% 4% 4% 4% 4% 4% 4% 3% 4%

Add Depreciation/Amort 929 966 1,005 1,045 1,087 1,130 1,173 1,217 1,262 1,306 1,352 % of Sales 2.60% 2.60% 2.60% 2.60% 2.60% 2.60% 2.60% 2.60% 2.60% 2.60% 2.60%Plus/(minus) Changes WC (152) (146) (278) 80 84 87 90 94 97 100 104 % of Sales -0.43% -0.39% -0.72% 0.20% 0.20% 0.20% 0.20% 0.20% 0.20% 0.20% 0.20%Subtract Cap Ex 1,251 1,301 1,353 1,367 1,379 1,391 1,398 1,404 1,359 1,357 1,352 Capex % of sales 3.50% 3.50% 3.50% 3.40% 3.30% 3.20% 3.10% 3.00% 2.80% 2.70% 2.60%

Free Cash Flow 2,903 3,031 3,027 3,558 3,742 3,935 4,128 4,329 4,589 4,800 5,020 YOY growth 4% 0% 18% 5% 5% 5% 5% 6% 5% 5%

Terminal 79,540.6 Terminal Value 79,541 Shares Outstanding 1,654.0 P/E 16.2 NPV of free cash flows 24,159 47% USD EV/EBITDA 9.0 NPV of terminal value 26,768 53% Current Price 32.78 Free Cash Yield 6.31%Projected Equity Value 50,927 Free Cash Flow Yield 5.70% Implied equity value/share 30.79

Upside/(Downside) to DCF -6.1%

USDTotal Debt 7,650 Total Cash 219 Cash/sh 0.13

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Kraft Summary

Weak results and outlook Moderate upside potential based on

valuation analysis and price target Poor DCF target price Sell entire holding and move money to

higher growth stock

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AltriaPositives Phillip Morris International (PMI) growth is strong (9.5% income growth) Looking to spin-off PMI

Analyst believe spin-off could result in share buybacks and share price increases Key strategic event from Q1: Spin-off of Kraft Focus on growing tobacco business Raised full-year guidance Expecting margin improvement DCF target price is $78 (13% upside)

Negatives Q1 earnings lower than expectations Phillip Morris USA had a weak quarter Domestic cigarette sales volumes declined 6.2%. Decline expected to moderate to 3-4% throughout the year. Risks: Smoking bans, health concerns, litigationConclusion Sell 142 basis points to diversify the staples portfolio and move the money to higher potential stock

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Colgate-Household Products Industry

Very mature industry with many familiar companies vying for market share.

Brand name is a big factor like other industries in the sector.

Competition and leverage from large retailers restrict price increases.

Companies rely on product innovation to bolster sales and profit margins.

Cost control is done effectively and more efficient operations are being employed.

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Colgate-Business Analysis

Positives Gross margin of 56.4% in Q1 2007 compared to 54.5 % in Q1 2006.

Undergoing restructuring plan which includes increased product innovation, more efficient spending on marketing, closing of 1/3 of CL’s factories and more focus on faster growing markets.

Smooth CEO transition is expected. Reuben Mark, CEO since 1984, is retiring on 07/01/07. COO and long-

time Colgate employee will become CEO.

Negatives Modest growth numbers domestically. Cat food recall

Not expected to have a significant impact on Colgate’s financials.

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Colgate

Growth

Notice the higher growth internationally.

Region Sales Increase over PYQ

North America 7.5%

Latin America 14.0%

Europe/

S. Pacific

13.0%

Asia/Africa 13.5%

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Colgate

Market ShareAchieved an all-time high of 37.3% of the

toothpaste market in the U.S.Market leader in 53 of the 71 largest

toothpaste markets worldwide.Growth within developing markets is projected

to rise 2-3 times that of developed markets in near term.

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Colgate - Valuation

Price steadily increasing along the trend line. P/E cheap on an absolute level and inline relative to its

sector. Historical P/E a little higher than sector average.

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DCF Valuation5/15/2007Ticker: CL Terminal Discount Rate = 9.5%

Terminal FCF Growth = 5.0%

Forecast TerminalYear 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E Value

Revenue 13,217 14,208 15,203 16,267 17,365 18,537 19,742 21,025 22,286 23,624 25,041 % Growth 7.50% 7.00% 7.00% 6.75% 6.75% 6.50% 6.50% 6.00% 6.00% 6.00%

Operating Income 2,908 3,197 3,497 3,741 3,994 4,263 4,541 4,836 5,126 5,433 5,759 Operating Margin 22.00% 22.50% 23.00% 23.00% 23.00% 23.00% 23.00% 23.00% 23.00% 23.00% 23.00%

Interest and Other- net (159) (170) (182) (195) (208) (222) (237) (252) (267) (283) (300) Interest % of Sales -1.20% -1.20% -1.20% -1.20% -1.20% -1.20% -1.20% -1.20% -1.20% -1.20% -1.20%

Taxes (900) (991) (1,085) (1,163) (1,242) (1,325) (1,412) (1,503) (1,594) (1,689) (1,791) Tax Rate -32.8% -32.8% -32.8% -32.8% -32.8% -32.8% -32.8% -32.8% -32.8% -32.8% -32.8%Minority Interest - - - - - - - - - - -

Net Income 1,849 2,035 2,229 2,383 2,544 2,716 2,892 3,080 3,265 3,461 3,668 % Growth 10% 10% 7% 7% 7% 6% 7% 6% 6% 6%

Add Depreciation/Amort 397 426 456 488 521 556 592 631 669 709 751 % of Sales 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%Plus/(minus) Changes WC (87) (118) (119) (130) (139) (148) (158) (168) (178) (189) (200) % of Sales -0.66% -0.83% -0.78% -0.80% -0.80% -0.80% -0.80% -0.80% -0.80% -0.80% -0.80%Subtract Cap Ex 449 483 517 553 590 612 651 673 713 732 751 Capex % of sales 3.40% 3.40% 3.40% 3.40% 3.40% 3.30% 3.30% 3.20% 3.20% 3.10% 3.00%

Free Cash Flow 1,708 1,860 2,049 2,188 2,335 2,512 2,675 2,870 3,042 3,248 3,468 YOY growth 9% 10% 7% 7% 8% 6% 7% 6% 7% 7%

Terminal 80,921.9 Terminal Value 80,922 Shares Outstanding 546.7 P/E 22.1 NPV of free cash flows 15,672 37% USD EV/EBITDA 13.6 NPV of terminal value 27,233 63% Current Price 66.21 Free Cash Yield 4.29%Projected Equity Value 42,905 Free Cash Flow Yield 3.98% Implied equity value/share 78.47

Upside/(Downside) to DCF 18.5%

USDTotal Debt 7,650 Total Cash 219 Cash/sh 0.40

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Colgate Summary

Generating higher margins through restructuring plan.

Excellent international growth. Leading share in most major markets. Target price: 80.27, 21.0% upside.

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Recap

Sell 142 BP of Altria Sell 130 BP of Kraft

(all) Buy 272 BP of

Colgate No change to

Anheuser-Busch

,MO ,$936,088

49% ,BUD

,$674,32535%

,KFT ,$305,858

16%

MO

BUD

KFT

MO31%

BUD36%

CL33%

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Questions?