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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • Colgate-Palmolive Co: cash flow valuation update 0 comments
    Jan 9, 2012 8:40 PM | about stocks: CL
    Current Price: ~ $90/share
    Projected Yield: ~ 2.58%




    Colgate-Palmolive is one of the world's largest consumer product companies. In addition to its namesake toothpaste and detergents, the firm manufactures shampoos, shower gels, deodorants, and shaving products. It also owns specialty pet food maker Hill's, which sells its products through veterinarians and specialty pet retailers. Colgate products are sold around the world; about three fourths of sales come from outside the United States.    


    I estimated the firm's WACC today at 5.68% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:
    Year
    FCF $Millions
    2001
    1259
    2002
    1268
    2003
    1466
    2004
    1406
    2005
    1395
    2006
    1345
    2007
    1621
    2008
    1555
    2009
    2702
    2010
    2661
    TTM
    2469

    Average Annual Growth FCF: ~ 11%
    CAGR FCF: ~ 9%
    Consensus Forecast Industry 5-Year Growth: ~ 12% per year
    Consensus Forecast Company 5-Year Growth: ~ 9% per year

    Scenario 1
    The company's FCF through 9 months ending 9/30/2011 is $1733 million; $2311 million annualized.  Starting at $2311 million FCF, assuming the company achieves a 5-year growth rate in FCF of 9% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:

    Discounted Cash Flow Valuation
    Year
    FCF $Millions
    0
    2311
    1
    2519
    2
    2746
    3
    2993
    4
    3262
    5
    3556
    Terminal Value
    68237

    The firm's future cash flows, discounted at a WACC of 5.68%, give a present value for the entire firm (Debt + Equity) of $64459 million. If the firm's fair value of debt is estimated at $6400 million, then the fair value of the firm's equity could be $58059 million.  $58059 million / 487 million outstanding shares is approximately $119 per share and a 20% margin of safety is $95/share.


    Scenario 2
    All else being equal, discount the firm's future cash flows at a WACC of 7.00%:

    Discounted Cash Flow Valuation
    Year
    FCF $Millions
    0
    2311
    1
    2519
    2
    2746
    3
    2993
    4
    3262
    5
    3556
    Terminal Value
    55368

    The firm's future cash flows, discounted at a WACC of 7.00%, give a present value for the entire firm (Debt + Equity) of $51696 million. If the firm's fair value of debt is estimated at $6400 million, then the fair value of the firm's equity could be $45296 million.  $45296 million / 487 million outstanding shares is approximately $93 per share and a 20% margin of safety is $74/share.


    Sources
    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Stocks: CL
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