ModernGraham Valuation: Colgate-Palmolive (CL)

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Company Profile (obtained from Google Finance): Colgate-Palmolive Company (Colgate) is a consumer products company whose products are marketed in over 200 countries and territories throughout the world. It operates in two segments: Oral, Personal and Home Care and Pet Nutrition. Oral Care business products include Colgate Total, Colgate Sensitive Pro-Relief, Colgate Max Fresh, Colgate Optic White and Colgate Luminous White toothpastes, Colgate 360° manual toothbrushes and Colgate and Colgate Plax mouth rinses. Colgate’s Oral Care business also includes dental floss and pharmaceutical products for dentists and oral health professionals. Its Personal Care products also include Palmolive, Softsoap and Sanex brand shower gels, Palmolive, Irish Spring and Protex bar soaps and Speed Stick, Lady Speed Stick and Sanex deodorants and antiperspirants. It sells liquid hand soap under the Palmolive, Protex and Softsoap brands. Colgate, through its Hill’s Pet Nutrition segment (Hill’s), manufactures pet nutrition products for dogs and cats.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $52
MG Opinion Overvalued
Value Based on 3% Growth $37
Value Based on 0% Growth $22
Market Implied Growth Rate 8.70%
Net Current Asset Value (NCAV) -$7.63
PEmg 25.90
Current Ratio 1.02
PB Ratio 34.13

Balance Sheet – 9/30/2013 

Current Assets $4,600,000,000
Current Liabilities $4,491,000,000
Total Debt $4,677,000,000
Total Assets $13,439,000,000
Intangible Assets $3,958,000,000
Total Liabilities $11,655,000,000
Outstanding Shares 925,210,000

Earnings Per Share – Diluted

2013 (estimate) $2.51
2012 $2.74
2011 $2.60
2010 $2.26
2009 $2.28
2008 $1.83
2007 $1.63
2006 $1.26
2005 $1.24
2004 $1.19
2003 $1.25
2002 $2.19

Earnings Per Share – Modern Graham (Calculating EPSmg)

2013 (estimate) $2.54
2012 $2.48
2011 $2.28
2010 $2.03
2009 $1.82
2008 $1.54

Conclusion:

Colgate-Palmolive has achieved moderate growth over the historical period, but does not meet the requirements of either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the company’s current ratio is too low and the company is trading at too high a PEmg ratio and a too high PB ratio.  For the Enterprising Investor, the company’s current ratio is too low and the company’s debt to net current assets ratio is too high.  As a result, the company is too risky for either investor type and may only be considered as a speculative possibility.  From a valuation standpoint, the market is implying a growth rate of 8.70%, and while the company has grown its EPSmg (normalized earnings) from $1.54 in 2009 to an estimated $2.54 for 2014, that growth does not quite support the market’s estimation.  As a result, the company appears to be overvalued at this time.

What do you think?  Is Colgate-Palmolive overvalued?  Is the company not suitable for either Defensive Investors or Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

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Disclaimer:  The author did not hold a position in Colgate-Palmolive at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill

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