Thursday, March 3, 2011

Colgate-Palmolive: $CL valuation update

Colgate-Palmolive ($CL) filed a 10K annual report for 2010 recently so here's an update to the cash flow valuation I posted January 28.  This update incorporates the firm's year-end 2010 data.  I believe $CL is undervalued now at $78/share and fairly valued at $94/share on a cash flow valuation basis.    


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 8.27% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:
YearFCF $Millions
20001170
20011259
20021268
20031466
20041406
20051395
20061345
20071621
20081555
20092702
20102661
Average Annual Growth: approx 10%
CAGR: approx. 9%
Consensus Forecast Industry 5-Year Growth: approx. 13% per year
Consensus Forecast Company 5-Year Growth: approx. 9% per year
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
YearFCF $ Millions
02661
12900
23162
33446
43756
54094
Terminal Value53984

The firm's future cash flows, discounted at a WACC of 8.27%, give a present value for the entire firm (Debt + Equity) of $49,867 million. If the firm's fair value of debt is estimated at $3500 million, then the fair value of the firm's equity could be $46,367 million.  $46,367 million / 494 million outstanding shares is approximately $94 per share and a 20% margin of safety is $75/share.

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

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