Colgate-Palmolive Company: Financial Research Report

Company Overview

Colgate-Palmolive Company leads in the Personal and Household Products industry; it produces consumer products that are sold in at least 200 different countries and regions all over the world (Colgate.com, 2011). The company was established in 1806, and in 1923 it was incorporated under Delaware’s State laws (Colgate.com, 2011). The firm carries out its operations in two segments of the market: “Pet Nutrition, and Personal, Oral and Home Care” (Colgate.com, 2011). The company is an international leader in the Oral Care market with products such as toothbrush and toothpaste brands, dentists’ products like dental floss along with pharmaceuticals (Colgate.com, 2011).

The firm also leads in some Personal Care brands with huge international market share in liquid-hand soap; these products include “Soft-soap and Palmolive shower gels brand, Protex and Irish Spring bar soaps, Lady Speed Stick as well as Speed Stick antiperspirants and deodorants, and Palmolive” (Colgate.com, 2011).

Colgate makes and also markets variety of Home Care products, including “Ajax and Palmolive dishwashing liquids, Murphy’s Oil Soap and Ajax and Fabuloso household’s cleaners” (Colgate.com, 2011). The firm leads in the fabric conditioners market with main brands such as Soupline in European region and Suavitel in the Latin America region (Colgate.com, 2011). In the Pet Nutrition market sector, the firm leads the world in the field of pet nutrition brands for cats and dogs with brands being sold to at least 95 economies around the globe (Colgate.com, 2011). Hill’s Pet Nutrition market segment sells pet foods mainly under Hill’s Prescription Diet and Hill’s Science Diet trademarks (Colgate.com, 2011).

The Personal, Oral and Home Care market segment usually operates in Latin America, North America, Greater Africa/Asia, and South Pacific/Europe (Colgate.com, 2011); all these regions market to various distributors, wholesale and retail clients. In the financial year ended 2010, Colgate accounted for 22%, 43%, 22% and 13% as sales for Personal products, Oral products, Home Care brands and Pets food products respectively (Colgate.com, 2011). Geographically, the Oral Care brand is a considerable segment of the Colgate’s business in Asia and Africa, consisting of about 70% of revenue in these regions for 2010; currently, Colgate Co. has acquired Sanex Personal Care one of the Unilever PLC brand (Colgate.com, 2011).

Ratio Analysis. Source: Morningstar.com. (2011).

Ratios
2010 2009 2008
Profitability Ratios
Gross Margin 59.14% 58.77% 56.27%
Operating Margin 22.42% 23.59% 19.70%
Return on Assets 19.75% 21.70% 19.48%
Return on Equity 78.37% 97.74% 102.21%
Return on capital employed 36.03% 39.32% 35.17%
Liquidity Ratios
Current ratio 1.00 1.06 1.26
Quick ratio 0.56 0.62 0.73
Gearing Ratio
Debt/Equity 1.05 0.96 2.06
Efficiency Ratios
Inventory Turnover (times) 5.23 5.25 5.66
Receivables Turnover (times) 9.62 9.53 9.37
Cash Conversion Cycle (days) 40.64 43.3 45.49
Investment Ratios
Earnings per share $ 4.31 4.37 3.66
Book value per share $ 5.24 5.62 3.26

The gross margin as shown by the table above increased by 5.1% in 2010 compared to 2008 this implies that the firm was efficient in controlling the cost of production while operating margin ratio also increased by 13.81% in 2010 compared to 2008. This means that the firm was efficient in controlling the operating expenses although in 2009, Colgate was more efficient than in 2010 which imply that the firm was inefficient in 2010 compared to 2009. The firm was inefficient in utilization of the long-term funds or permanent funds to generate returns to the shareholders as measured by return on capital employed, return on assets and return on equity since these ratios have reduced by 8.4%, 9% and 19.8% respectively in the year 2010 with reference to 2009.

Liquidity as measured by current ratio and quick ratio (Drake, 2009) show a decline in the Colgate’s liquidity position from 2008 to 2010. The quick ratio decline as compared to current ratio decline shows that the firm holds a significant amount of its current assets in stock. The situation implies that the firm will not be able to meet the short-term maturity obligation on time as the current liabilities are not subsequently and sufficiently covered by the current assets.

Gearing level as measured by debt/equity ratio (Microstrategy.com, 2011) show a decline in the firm’s financial risk from 2008 to 2009 but in 2010 the financial risk increased by 9.4% compared to 2009. This means that Colgate was highly geared in 2008 and 2010 as the ratio was more than 100% but in 2009 it was less geared as the ratio was less than 100%.

Inventory Turnover, receivables Turnover and Cash Conversion Cycle measure the efficiency with which a firm uses its assets to generate sales and they are generally referred as efficiency ratios or activity ratios (Meir, 2008). These ratios show how efficiently a firm has managed its short-term asset and liabilities that is working capital (Meir, 2008). The Receivables Turnover ratio has increased throughout the years from 2008 to 2010; this implies that the firm has been more efficient in its credit management because the higher the ratio the more efficient the firm is in its credit management (Meir, 2008).

The Inventory Turnover has reduced throughout the three years by 7.6% which implies that the firm’s efficiency of converting stock into sales has deteriorated; it also means that the company held more idle stock in 2010. The firm’s Cash Conversion Cycle has also reduced throughout the years this means that in 2010 the firm used fewer days to finance its working capital and also lower investment is needed in working capital.

The firm’s shareholders expected to generate lower earnings per share in 2008 and 2010 than in 2009 meaning that for every share invested in the firm generated $4.31, $4.37 and $3.66 in 2010, 2009 and 2008 respectively. In 2010 for instance, if the company was liquidated and all assets sold at the book value a shareholder would have received $5.24 per share held in 2010 which was lower compared to 2009 and higher compared to 2008.

Financial Projection

Percentage of Sales can be used to predict the income statement and balance sheet items. Assume that sales increase by 4.12% per year in the next three years based on the 3-year average growth ratio. This means that all items of the income statement that is revenue, EBIT, net income and earnings per share (Meir, 2008) will increase; the same case will apply to the balance sheet items like current and long-term liabilities, current and long-term assets and owner’s equity.

Performa Income Statement.
2011 2012 2013
USD in Million
Revenue 16205 16902 17614
Cost of Revenue 6622 6907 7198
Gross Profit 9583 9995 10416
Operating expenses 5950 6206 6468
EBIT 3,633 3,789 3,948
Interest expense 67.7 70.6 73.6
Other income expense 7 7.5 8
EBT 3,558 3,711 3,867
Income Taxes 1163 1213 1264
Other income 0 110 56
Net income 2,395 2,608 2,659
Earnings per share 4.92 5.36 5.47
Performa Balance sheet.
2011 2012 2013
USD in million
Assets
Current Assets 3884 4051 4221
Non-current Assets 7749 8082 8422
11,632 12,132 12,643
Current Liabilities 3882 4049 4219
Non-current liabilities
External Financing needed 2606 2723 3009
6,488 6,772 7,228
Shareholders’ Equity 5,070 5,283 5,334
11,558 12,054 12,562

Stock Price Analysis. Source: Morningstar.com. (2011).

On August 14, 2006 as shown by the Chart 1 above, Colgate-Palmolive Company share price was at $59.66 which increased throughout the remaining months of the year and also throughout 2007; on December 14, 2007 the price reached the peak for that period at $80.64 and a volume of 2.5 million was traded and the price started to decrease (Colgate.com, 2011).

On October 24, 2008 the share price attained the lowest price of $55.94 which was actually the lowest price for the five years period where a volume of 4.2 million was traded the same day (Colgate.com, 2011). The company stock price continued to increase and attained a high price of $85.21 on December 4, 2009 implying that the market was more bullish in 2009. On April 2, 2010 the share price attained $85.81 which was the highest price to be attained in the last five years (2006 to 2010). On July 8, 2011 the share price attained its highest price with reference to the last five years at $88.42 (Colgate.com, 2011).

In 2006 and 2007 the S&P 500 index had an upward trend but at the end of the financial year 2007 the index had started to decrease to reach the lowest value in 2009. In the same period the shares took an upward trend again throughout the remaining months in 2009 and also in 2010 but presently, the index are taking a downward trend as shown by Chart 2 above.

Colgate stock was performing slightly below the market (S&P 500 index) in the late 2006 but in first quarter of the year 2007 the stock outperformed the market. In the second quarter and the two months of the third quarter of the year 2007 the stock was underperforming compared to the Index as shown by Chart 3 above. From September 2007 to date the stock has been performing better than the S&P 500 Index. As shown by Chart 3 above the movement on both the Colgate’s stock and S&P 500 Index is almost the same that is any reaction in the market is also affecting the stock and that’s why they are moving in the same direction as they are positively correlated.

Based on my opinion Colgate stock is good for investment; an investor can undertake or include the stock in his or her portfolio for several reasons; first, the Colgate-Palmolive Company has acquired Sanex Personal Care one of the Unilever PLC brands, this implies that it has added more products to its portfolio. The acquired brand will increase the firm’s market share and profitability which will eventually increase the earnings per share. Many potential investor will be attracted by this high profitability and thus the demand for the firm’s stock will increase therefore leading to increased share price.

Secondly, the acquisition of this brand means the firm has diversified risks thus reducing the level of risk therefore making it safe for any investor to invest in the company’s stock since he or she has confidence in the company. Lastly, the stock has recently been performing better than the market (S&P 500 Index) meaning that there is high likelihood of making higher returns in form of capital gains if one invests in the Colgate’s stock.

References

Colgate. (2011). Colgate-Palmolive Company: 2010 Annual Report.

Drake, P.P. (2009). Financial ratio analysis. Web.

Meir, L. (2008). Financial ratio analysis. Web.

Microstrategy. (2011). Financial Analysis. Web.

Money. (2011). S&P 500 Index. Web.

Morningstar. (2011). Colgate-Palmolive Company CL. Web.

Appendices

Table 1: Performa Income Statement.

Performa Income Statement
2010 Relationship to sales 2011 2012 2013
USD in million
Revenue 15,564 100% 16205 16902 17614
Cost of Revenue 6,360 40.86% 6622 6907 7198
Gross Profit 9,204 59.14% 9583 9995 10416
Operating expenses 5,715 36.72% 5950 6206 6468
EBIT 3,489 3,633 3,789 3,948
Interest expense 65 0.42% 67.678 70.58821 73.55997
Other income expense 6 7 7.5 8
EBT 3,418 3,558 3,711 3,867
Income Taxes 1,117 7.18% 1163 1213 1264
Other income -110 0 110 56
Net income 2,191 2,395 2,608 2,659

Table 2: Performa Balance sheet.

Performa Balance sheet
2010 Relationship to sales 2011 2012 2013
USD in million
Assets
Current Assets 3,730 23.97% 3884 4051 4221
Non-current Assets 7,442 47.82% 7749 8082 8422
11,172 11,632 12,132 12,643
Current Liabilities 3,728 23.95% 3882 4049 4219
Non-current liabilities 4,769 0
External Financing needed 2606 2723 3009
8,497 6,488 6,772 7,228
Shareholders’ Equity 2,675 0 5,070 5,283 5,334
11,172 11,558 12,054 12,562

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