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Colgate-Palmolive Co: Cash Flow Valuation Update

|Includes: Colgate-Palmolive Co. (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:

Year FCF $Millions
2002 1268
2003 1466
2004 1406
2005 1395
2006 1345
2007 1621
2008 1555
2009 2702
2010 2661
2011 2359

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

Year FCF $Millions
0 2359
1 2571
2 2803
3 3055
4 3330
5 3630
Terminal Value 78737

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

Year FCF $Millions
0 2359
1 2477
2 2601
3 2731
4 2867
5 3011
Terminal Value 62915
  • 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.