CL - Colgate Final

8/13/2019 CL - Colgate Final

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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 buildingleaders 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 Colgates 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. Its 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 companys core mission. Colgate has been successful in growing their business at


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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. Colgates 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.

Colgates 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 theyve 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. Its 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.

Not only does Colgate sell products in many different countries, but it has strong globalbrand recognition too. The graphs on the next page show Colgates market share in various

international countries and compares it to their competitors.

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GDP Growth by Country

10yr Avg GDP Growth


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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. Colgates 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

Gambles international sales account for thirty seven percent of their total revenues and the

trend is increasing. The international movement could threaten Colgates 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%


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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 Colgates projected stock price is estimated at about $200per 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.

Documents

CL - Colgate Final