1

Date: 10/13/2012

Analyst Name: Ryan Ellingsen

CIF Stock Recommendation Report (Fall 2012)

Company Name and Ticker: Colgate-Palmolive Company (CL)

Section (A) Summary

Recommendation Buy: Hold Target Price: $121.25

Stop-Loss Price: $109.50

Sector: Consumer Staples

Industry: Household & Personal Products

Market Cap (in Billions): 51.2

# of Shrs. O/S (in Millions): 135.99

Current Price: $107.89 52 WK Hi: $109.84

52 WK Low: $86.19 EBO Valuation: 99.14

Morningstar (MS) Fair Value Est.: $97.00

MS FV Uncertainty: LOW MS Consider Buying: $77.60

MS Consider Selling: $121.25

EPS (TTM): 5.05 EPS (FY1): 5.36% EPS (FY2): 5.88% MS Star Rating: 2 Star

Next Fiscal Yr. End ”Year”: 2012 “Month”: December

Last Fiscal Qtr. End: March 2012 Less Than 8 WK: Y N

If Less Than 8 WK, next Earnings Ann. Date:

Analyst Consensus Recommendation: Hold

Forward P/E: 18.13 Mean LT Growth: 8.81% PEG: 1.97 Beta: 0.42

% Inst. Ownership: 72.18%

Inst. Ownership- Net Buy: Y N

Short Interest Ratio: 2.3

Short as % of Float: 1.10%

Ratio Analysis Company Industry Sector

P/E (TTM) 21.33 60.91 40.39

P/S (TTM) 3.00 6.85 3.66

P/B (MRQ) 22.14 0.99 2.05

P/CF (TTM) 16.86 52.14 23.11

Dividend Yield 2.30 1.46 1.71

Total Debt/Equity (MRQ) 232.57 7.14 23.45

Net Profit Margin (TTM) 15.27 10.75 7.26

ROA (TTM) 19.69 1.83 4.05

ROE (TTM) 93.00 3.14 12.31

2

Investment Thesis I propose that we hold on Colgate-Palmolive’s stock because there’s just not enough credentials to enforce a buy. Their expansion is taken into consideration with these margins, however it just seems a little too risky right now and not enough evidence to show it will turn around fast.

Summary Colgate-Palmolive is a personal product company that specializes in toothpaste and also other shampoos & shaving products

Company Profile: Colgate-Palmolive’s main strategy involves extensive global sales through the use of their stellar quality background and reputable brand loyalty

Fundamental Valuation: Colgate-Palmolive has seen some growth, its assumed the abnormal growth rate would last 2 years, yielding an implied price of $99.14

Relative Valuation: The most common consumer staples ratios used are P/E and Dividend Yield. P/E was about 18.13 which was about average compared to it’s competitors and their Dividend Yield was high at 2.30 compared with the industry

Revenue and Earnings Estimates: Revenues are expected to go up along with earnings, with little surprise values.

Analyst Recommendations: Majority of analysts recommend a hold on Colgate-Palmolive’s stock at this time.

Institutional Ownership: Colgate’s institutional owners of >5% make up 18.2% stake in the company

Short Interest: Colgate has become more bullish with the large pretax savings and global expansion, and becoming more bearish with high input cost inflation and competitor’s entry into global expansion.

Stock Price Chart: Stock price for Colgate-Palmolive has been relatively stable and increasing along with the S&P, which is standard for XLP.

3

Section (B) Company Profile (two pages maximum)

Company Summary

Colgate-Palmolive is one of the world’s largest consumer product companies. On top of

their most recognized toothpastes and detergents, they also make shampoos, deodorants, and

other grooming and hygiene related products. On top of that, they also own a specialty pet

food chain called Hill’s which that they sell through pet retailers and vets. Their product lines

extend to multiple parts of the world, in fact, they make almost 75% of their sales outside the

U.S. (29% Latin America, 15.5% Greater Asia, 12% Africa), with their largest of their divisions

being toothpaste.

Business Model, Competition, Environment and Strategy

Some of Colgate-Palmolive’s biggest competitors are Procter & Gamble and Johnson &

Johnson. One way Colgate differentiates itself from the competition is using their large

reputation in quality oral health care, their low prices, and they also use more global marketing

strategy than fellow competitors, they have roughly 45% of the worldwide market share. In

terms of their stage in the product life cycle, they are in the mature stage. Their business cycle

is not cyclical or seasonal, they are extremely defensive due to the fact that hygiene products

are always going to be needed and never going to be cut out of consumer’s budget. One issue

with Colgate being so globally extensive is that they must deal with currency fluctuations and

devaluations.

Revenue and Earnings History

REVENUE

Periods 2010 2011 2012

March 3829.0 3994.0 4200.0

June 3814.0 4185.0 4267.0

September 3943.0 4383.0

December 3978.0 4172.0

TOTAL 15564

EARNINGS PER SHARE

4

Periods 2010 2011 2012

March 0.68786 1.15989 1.22546

June 1.17156 1.2609 1.30272

September 1.21492 1.31091

December 1.24031 1.21026

In general, there are not many patterns in terms of revenue and earnings in relation to

seasonal things; Colgate-Palmolive is always going to be in demand no matter what time of the

year, due to it being essential to daily life. Year to year however, both the revenues and the

earnings have been steadily increasing.

Section (C) Fundamental Valuation (EBO)

Include the following here:

CL

PARAMETERS FY1 FY2 Ltg

EPS Forecasts 5.36 5.88 8.81%

Model 1: 12-year forecasting horizon

(T=12).

Book value/share

(last fye) 4.95

and a 7-year growth

period.

Discount Rate 5.66%

Dividend Payout

Ratio (POR) 46.06%

Please download and save this template to your own storage

device

Next Fsc Year end 2012

You only need to input values to cells highlighted in

"yellow"

Current Fsc Mth

(1 to 12) 10

The rest of the spreadsheet is calculated

automatically

Target ROE

(industry avg.) 16.02%

Please read

"Guidelines_for_FundamentalValuation_ProfLee_Spreadsheet" file

carefully

Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Long-term EPS

Growth Rate (Ltg)

0.0881 0.0881 0.0881 0.0881 0.0881

Forecasted EPS 5.36 5.88 6.40 6.96 7.58 8.24 8.97

Beg. of year

BV/Shr 4.948 7.839 11.011 14.463 18.219 22.305 26.752

Implied ROE

0.750 0.581 0.481 0.416 0.370 0.335

ROE

(Beg. ROE, from

EPS forecasts) 1.083 0.750 0.581 0.481 0.416 0.370 0.335 0.300 0.265 0.230 0.195 0.160

Abnormal ROE

(ROE-k) 1.027 0.694 0.525 0.425 0.359 0.313 0.279 0.244 0.209 0.174 0.139 0.104

5

growth rate for

B

(1-POR)*(ROEt-1) 0.000 0.584 0.405 0.313 0.260 0.224 0.199 0.181 0.162 0.143 0.124 0.105 Compounded

growth

1.000 1.584 2.225 2.923 3.682 4.508 5.407 6.385 7.419 8.481 9.534 10.538

growth*AROE

1.027 1.099 1.167 1.242 1.323 1.411 1.507 1.556 1.548 1.472 1.321 1.092 required rate

(k)

0.057 0.057 0.057 0.057 0.057 0.057 0.057 0.057 0.057 0.057 0.057 0.057 0.057 Compound

discount rate

1.057 1.116 1.180 1.246 1.317 1.392 1.470 1.554 1.642 1.734 1.833 1.936 div. payout rate

(k)

0.461

Add to P/B

PV(growth*AROE) 0.97 0.98 0.99 1.00 1.00 1.01 1.02 1.00 0.94 0.85 0.72 0.56

Cum P/B

1.97 2.96 3.95 4.94 5.95 6.96 7.99 8.99 9.93 10.78 11.50 12.06

Add: Perpetuity

beyond current

yr

(Assume this yr's

AROE forever) 17.16 17.39 17.48 17.60 17.74 17.91 18.10 17.69 16.66 14.99 12.74 9.96

Total P/B

(P/B if we stop est.

this period) 19.13 20.34 21.42 22.54 23.69 24.87 26.09 26.67 26.59 25.77 24.23 22.02

Implied price 99.14 105.39 111.00 116.78 122.73 128.85 135.16 138.20 137.74 133.53 125.56 114.08

Check:

Beg. BV/Shr

4.95 7.84 11.01 14.46 18.22 22.31 26.75 31.59 36.71 41.96 47.17 52.14

Implied EPS

5.36 5.88 6.40 6.96 7.58 8.24 8.97 9.49 9.74 9.66 9.21 8.35 Implied EPS

growth

0.097 0.088 0.088 0.088 0.088 0.088 0.058 0.026 -0.008 -0.047 -0.093

Inputs (provide below input values used in your analysis)

EPS forecasts (FY1 & FY2): ____FY!: 5.36____FY2: 5.88_

Long-term growth rate: _______8.81%____________

Book value /share (along with book value and number of shares outstanding):

Book value: ________2375__________

# of shares outstanding: ________480.2_________

Book value / share: _________4.95_________

Dividend payout ratio: _________46.06%_______

Next fiscal year end: _________2012_________

Current fiscal month: _________10___________

Target ROE: _________16.02%_______

Output

6

Above normal growth period chosen: _________2 years____________

EBO valuation (Implied price from the spreadsheet): _______$99.14_________

Sensitivity Analysis

EBO valuation would be (you can include more than one scenario in each of the following):

_______$99.14___ if changing above normal growth period to _____________

_____$111.19______ if changing growth rate from mean (consensus) to the highest estimate

_________9%______

_______$109.24______ if changing growth rate from mean (consensus) to the lowest estimate

________7%_______

_____$104.64________ if changing discount rate to _____6%________

______$111.00________if changing target ROE to ______18.02%_________

7

Section (D) Relative Valuation

CL

Mean FY2

Earnings Estimate Forward Mean LT PEG P/B ROE Value P/S P/CF

Ticker Name Mkt Cap Current Price (next fiscal year) P/E Growth

Rate (MRQ) 5 yr ave Ratio TTM TTM

1 CHD Church & Dwight $ 7,430.00 $ 53.37 $ 2.77 19.27 11.30% 1.71 3.75 16.19% 0.23 2.64 18.93

2 CLX Clorox $ 9,570.00 $ 73.81 $ 4.29 17.21 8.12% 2.12 #DIV/0! 1.76 13.34

3 PG Procter & Gamble $ 187,130.00 $67.94 $ 3.90 17.42 8.52% 2.04 3.01 7.91% 0.38 2.25 15.34

4 JNJ Johnson & Johnson $ 187,400.00 $ 67.97 $ 5.47 12.43 6.69% 1.86 3.10 12.91% 0.24 2.90 15.694

CL Colgate-Palmolive $ 51,160.00 $ 107.89 $ 5.95 18.13 9.20% 1.97 22.21 9.05% 2.45 3.01 14.46

Implied Price based on: P/E PEG P/B Value P/S P/CF

1 CHD Church & Dwight

$114.64

$93.33 $18.22

$10.18 $94.63 $141.24

2 CLX Clorox

$102.37

$115.99 $0.00

#DIV/0! $63.09 $99.53

3 PG Procter & Gamble

$103.65

$111.92 $14.62

$16.73 $80.65 $114.46

4 JNJ Johnson & Johnson $73.93 $101.67 $15.06 $10.56 $103.95 $117.10

High $114.64 $115.99 $18.22 #DIV/0! $103.95 $141.24

Low

$73.93

$93.33 $0.00

#DIV/0! $63.09 $99.53

Median $103.01 $106.80 $14.84 #DIV/0! $87.64 $115.78

As for competition comparison in terms of the relative valuation, Colgate-Palmolive is

about middle in terms of PEG ratio compared with competitors, however it is greater than one

therefore it most likely represents a growth stock. One outlier that is higher in Colgate-

Palmolive compared to their competitors is the value ratio, and I think this is mostly attributing

their significantly above average price to book ratio. In terms of market cap, they are

significantly less than some of their competitors like Johnson & Johnson and P&G, however

their stock is valued much higher. In terms Colgate-Palmolive’s forward P/E and P/CF, they are

about in the middle area in relation to some of their other competitors. One big value is that

Colgate’s price to sales value is the highest out of the five stocks, which means that they might

not be a better investment. Compared with their current price, their implied prices were much

lower, maybe signaling that the stock may be overvalued. In terms of what values are most

important to Colgate’s particular stock, it would be the P/E ratio and the dividend payout.

8

Section (E) Revenue and Earnings Estimates

HISTORICAL SURPRISES

Sales and Profit Figures in US Dollar (USD)

Earnings and Dividend Figures in US Dollar (USD)

Estimates vs Actual Estimate Actual Difference Surprise %

SALES (in millions)

Quarter Ending Jun-12 4,254.68 4,267.00 12.32 +0.29

Quarter Ending Mar-12 4,178.23 4,200.00 21.77 +0.52

Quarter Ending Dec-11 4,183.25 4,172.00 11.25 -0.27

Quarter Ending Sep-11 4,367.13 4,383.00 15.87 +0.36

Quarter Ending Jun-11 4,175.61 4,185.00 9.39 +0.22

Earnings (per share)

Quarter Ending Jun-12 1.33 1.33 0.00 +0.14

Quarter Ending Mar-12 1.24 1.24 0.00 +0.08

Quarter Ending Dec-11 1.29 1.30 0.01 +0.53

Quarter Ending Sep-11 1.30 1.31 0.01 +0.62

Quarter Ending Jun-11 1.25 1.26 0.01 +0.99

In general, Colgate-Palmolive has not really had many surprises, most of their actual

values were very close to their estimates in both the sales and earnings values, but if they were,

they were most likely were higher than expected, with only one quarter having a negative

surprise value of -0.27%. Surprises were about the same in terms of earnings and sales, and

were very small which is good. After comparing with the stock prices, it’s apparent that these

surprise values are much correlated with the stock price. Due to there being relatively stable

stock price growth, it would make sense that there would be little surprise values because of its

predictability.

9

CONSENSUS ESTIMATES ANALYSIS

Sales and Profit Figures in US Dollar (USD)

Earnings and Dividend Figures in US Dollar (USD)

# of Estimates Mean High Low

1 Year

Ago

SALES (in millions)

Quarter Ending Dec-12 16 4,305.71 4,415.90 4,187.00 4,526.20

Quarter Ending Mar-13 8 4,310.61 4,405.40 4,225.00 4,350.31

Year Ending Dec-12 19 17,202.50 17,929.00 16,949.40 17,665.90

Year Ending Dec-13 19 17,979.60 18,964.00 17,517.00 18,404.60

Earnings (per share)

Quarter Ending Dec-12 20 1.39 1.43 1.33 1.47

Quarter Ending Mar-13 11 1.35 1.38 1.32 1.41

Year Ending Dec-12 23 5.36 5.51 5.26 5.54

Year Ending Dec-13 23 5.88 6.14 5.73 6.05

LT Growth Rate (%) 8 8.81 12.00 6.00 9.34

% Difference High % Difference Low

Sales Q-End Dec 12 2.56 -2.76 Q-End Mar-13 2.20 -1.99 Year End Dec-12 4.22 -1.47 Year End Dec-13 5.48 -2.57 EPS Q-End Dec 12 2.88 -4.32 Q-End Mar-13 2.22 -2.22 Year End Dec-12 2.80 -1.87

10

Year End Dec-13 4.42 -2.55 LTG Rate 36 -31.90 There are higher discrepancies among analysts estimates for close quarters for Earnings

per share and sales. There tends to me much less analysts analyzing in the quarters ending in

March. The number of analysts providing the LT growth rate estimate is also lowers than most

of the other revenue and earnings estimates.

CONSENSUS ESTIMATES TREND

Sales and Profit Figures in US Dollar (USD) Earnings and Dividend Figures in US Dollar (USD)

Current

1 Week

Ago

1 Month

Ago

2 Month

Ago

1 Year

Ago

SALES (in millions)

Quarter Ending Dec-12 4,305.71 4,307.27 4,300.54 4,299.89 4,526.20

Quarter Ending Mar-13 4,310.61 4,310.61 4,299.60 4,303.10 4,350.31

Year Ending Dec-12 17,202.50 17,204.90 17,189.50 17,184.20 17,665.90

Year Ending Dec-13 17,979.60 17,993.30 17,948.80 17,948.40 18,404.60

Earnings (per share)

Quarter Ending Dec-12 1.39 1.39 1.39 1.39 1.47

Quarter Ending Mar-13 1.35 1.35 1.35 1.35 1.41

Quarter Ending Dec-12 5.36 5.36 5.36 5.35 5.54

Quarter Ending Dec-13 5.88 5.87 5.86 5.86 6.05

The consensus trends have appeared to be decreasing in regards to Sales and have also

been decreasing in regards to Earnings. In particular, in the Sales estimates, there has been a

decrease in estimates for each of the updates presented, and are most notable in the Year

11

Ending Dec-13 with the estimates decreasing by almost 500 million. Also with the earnings per

share, the estimates have also been decreasing pretty consistently.

ESTIMATES REVISIONS SUMMARY

Last Week Last 4 Weeks

Number Of Revisions: Up Down Up Down

Revenue

Quarter Ending Dec-12 1 0 3 0

Quarter Ending Mar-13 0 0 1 0

Year Ending Dec-12 1 0 4 0

Year Ending Dec-13 1 0 4 0

Earnings

Quarter Ending Dec-12 1 0 4 0

Quarter Ending Mar-13 0 0 1 1

Year Ending Dec-12 2 0 4 0

Year Ending Dec-13 2 0 5 0

In particular, a majority of the revisions have been up revisions, with most of them

happening in the last four weeks for both earnings and revenue, which is a good thing. In

general, there have been about the same number of revisions for both revenue and earnings,

with slightly more revisions being made in the earnings section.

I believe that Colgate has a good chance of beating analyst consensus estimate due to

the fact that they currently have so much of the market share and that they are very smartly

managed. Despite their falling margins and questions of overvalued stock, their expansionary

moves are investments that will pay off eventually.

12

Section (F) Analysts’ Recommendations

. ANALYST RECOMMENDATIONS AND REVISIONS

1-5 Linear Scale Current

1 Month

Ago

2 Month

Ago

3 Month

Ago

(1) BUY 4 4 4 4

(2) OUTPERFORM 2 2 2 2

(3) HOLD 15 16 16 16

(4) UNDERPERFORM 2 2 2 1

(5) SELL 0 0 0 0

No Opinion 0 0 0 0

Mean Rating 2.65 2.67 2.67 2.61

Overall, a majority of analysts’ recommendations regarding Colgate-Palmolive have

been to hold, and have been consistent in values over the past. One month ago and two

months ago, there was one more analyst than their currently is and were 3 months ago, but for

the most part, analysts recommendations have been the same all across the board in terms of

buy, outperform, hold, and underperform, with little change in revisions. Analysts currently

have been having more bullish opinions, particularly because they know Colgate is a global

leader in oral care with worldwide market shares of roughly 45%. This is somewhat consistent

with Morningstar’s analyst research report, they believe that Colgate is financially sound and

they have excellent management and stewardship and believe that margins will get better

despite the high use of debt financing.

13

14

Section (G) Institutional Ownership

CL

Ownership Activity # of Holders % Beg. Holders Shares % Shares

Shares Outstanding

474,188,430 100.00%

# of Holders/Tot Shares Held 1,292 100.00% 351,515,883 74.13%

# New Positions 7 0.54%

# Closed Positions 7 0.54%

# Increased Positions 58 4.49%

# Decreased Positions 78 6.04%

Beg. Total Inst. Positions 1,292 100.00% 351,557,689 74.14%

# Net Buyers/3 Mo. Net Chg -20 42.65% -41,806 -0.01%

Ownership Information % Outstanding

Top 10 Institutions % Ownership 29.20%

Mutual Fund % Ownership 1.45%

Float % 99.11%

> 5% Ownership

Holder Name % Outstanding Report Date State Street Global Advisors

(US) 7.7

6/30/2012

Fidelity Management & Research Company

5.3 6/30/2012

Vanguard Group, Inc. 5.20 6/30/2012

15

On a net basis, there has been a large decrease in net buyers of around 20 net buyers,

accounting for a -0.01% change in shares since March. This could indicate a move towards a

bearish attitude; however analysts have continued to take a holding standpoint on Colgate-

Palmolive. There are three institutions that make up the owners with more than a 5% stake in

the company, them being State Street Global Advisors, Fidelity Management & Research

Company, and Vanguard Group, Inc. Together, they make up about 18.2% of shares

outstanding. Overall, institutional ownership above 5% does not appear to have a large impact

on Colgate-Palmolive, even though there are a very large amount of holders.

Section (H) Short Interest (two pages)

Settlement Date Short Interest Avg Daily Share Volume Days to Cover

9/28/2012 5,007,973 2,231,516 2.244202

9/14/2012 6,240,545 2,547,328 2.449840

8/31/2012 5,087,194 1,213,267 4.192972

8/15/2012 5,244,586 1,613,481 3.250479

7/31/2012 6,747,494 1,943,355 3.472085

7/13/2012 8,184,674 1,382,513 5.920143

6/29/2012 8,019,196 1,939,745 4.134150

6/15/2012 8,144,544 1,824,359 4.464332

5/31/2012 7,041,008 2,161,558 3.257376

5/15/2012 7,067,603 2,343,958 3.015243

4/30/2012 5,868,593 2,328,379 2.520463

4/13/2012 5,220,350 3,398,873 1.535906

3/30/2012 5,812,686 1,995,988 2.912185

3/15/2012 6,023,561 1,737,852 3.466096

2/29/2012 6,139,701 1,912,478 3.210338

2/15/2012 5,415,658 1,748,062 3.098093

1/31/2012 4,660,150 3,257,694 1.430506

1/13/2012 7,980,830 3,587,538 2.224598

12/30/2011 7,174,455 1,790,921 4.006014

12/15/2011 7,136,646 1,936,425 3.685475

11/30/2011 6,562,007 2,070,853 3.168746

16

11/15/2011 6,565,101 2,441,859 2.688567

10/31/2011 6,524,748 2,806,331 2.325010

10/14/2011 7,390,050 2,261,589 3.267636

Avg Vol Avg Vol Shares Float (3 month) (10 day) Outstanding

1,790,380 1,382,190 474.17M 471.48M

Shares Short Short Ratio Short % of Float Shares Short

17

(Most recent date) (Most recent date) (Most recent date) (2 weeks prior)

5.01M 2.30 1.10% 6.24M

Over the past year, Colgate-Palmolive has had both increases and decreases in their

number of days to cover, suggesting moves toward a more bearish response because of the

lack of predictability. Over the last year, the sentiment has turned more of a bearish response.

The 1.10% short of float indicates a small level of negative sentiment.

Some of the bullish sentiment that has come about in the past few years relates to the

fact that their savings program, Funding the Growth, has generated hundreds of millions in

pretax savings, and that they dominate the global market. Some bearish sentiment has come

from the high input cost inflation and that P&G has started to expand into parts of Mexico and

Brazil.

18

Section (I) Stock Charts

CL: Dark Blue

S&P500: Red

Non-Cyclical: Green

PG: Light Purple

JNJ: Dark Purple

A three months price chart

VOLUME

A one year price chart

VOLUME

19

A five year price chart

VOLUME

Based off of the three month price chart, Colgate-Palmolive prices have been lower than the

S&P 500, higher than Johnson & Johnson, lower than P&G, and about the same with their

sector.

Based off of the one year price chart, Colgate-Palmolive prices have been a little under the S&P

500, have been rising above both Johnson & Johnson and P&G, and have also been greater than

their sector

Based off the five year chart, Colgate-Palmolive prices have been greater than the S&P 500,

Johnson & Johnson, and P&G, and have been about the same as their sector

From these three charts it has been clear that Colgate-Palmolive’s prices have been increasing

along with their sector, and their sector has been doing much better than the S&P 500.