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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
    Jul 12, 2012 10:13 PM | about stocks: CL

    Current Price: ~ $104/share
    Projected Yield: ~ 2.39%

    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's products are sold around the world; about three quarters of sales come from outside the United States.

    Estimated WACC for the firm today is 5.02% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    20021268
    20031466
    20041406
    20051395
    20061345
    20071621
    20081555
    20092702
    20102661
    20112359

    Average Annual Growth FCF: ~ 9%

    CAGR FCF: ~ 7%
    Consensus Forecast Industry 5-Year Growth: ~ 12% per year

    Consensus Forecast Company 5-Year Growth: ~ 9% per year

    Internal Growth Rate: ~ 12%

    Scenario 1

    • Start at $2359 million FCF
    • Assume a 5-year growth rate in FCF of 9% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    02359
    12571
    22803
    33055
    43330
    53630
    Terminal Value78737

    The firm's future cash flows, discounted at a WACC of 5.02%, give a present value for the entire firm (Debt + Equity) of $74824 million. If the firm's fair value of debt is estimated at $5292 million, then the fair value of the firm's equity could be $69532 million. $69532 million / 477 million outstanding shares is approximately $146 per share and a 20% margin of safety is $117/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 5% per year, then 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    02359
    12477
    22601
    32731
    42867
    53011
    Terminal Value62915
    • Present Value of the entire firm (Debt + Equity): $61025 million
    • Value of Equity: $55733 million or $117/share
    • 20% margin of safety is $94/share

    Sources

    Morningstar.com

    Yahoo! Finance

    Colgate.com

    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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