Monday, January 9, 2012

Colgate-Palmolive Co: $CL cash flow valuation update

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.

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