Colgate-Palmolive Company (CL)

Conclusion

Colgate-Palmolive makes toothpaste, personal care and home care products, and sells pet food under the Hill's brands. The shares trade at 97.94 USD, giving a market capitalisation of 77.9 billion USD and an enterprise value of 84.0 billion USD.

The verdict is overvalued. The fair value band runs from 62.89 to 94.34 USD with a midpoint of 78.61 USD, and the margin of safety is -19.7% at the current price. The discounted cash flow value is 80.47 USD per share, and the fair value from historical multiples is 76.76 USD. Against their own ten-year medians, the P/E stands at 37.9x versus 28.9x, a premium of 31.1%, and EV/EBITDA at 21.8x versus 17.4x, a premium of 25.1%. The reverse DCF implies growth of 6.5% a year, while revenue has grown at 4.35% a year over five years and free cash flow per share at 3.1%.

What holds the case up is a return on invested capital of 36.7% against a WACC of 8.4%, a ROIC minus WACC of 28.3%, and free cash flow conversion of 1.8x over the last twelve months. What would break it is the five-year EPS growth of -3.5% a year, a current ratio of 0.96, and the analyst estimate revisions, with nine downward and one upward change to next year's estimates over the last 30 days.

Financial health

Financial strength is green, held up by an Altman Z-score of 7.08, net debt to EBITDA of 1.6x and interest coverage of 12.9x. The current ratio of 0.96 and quick ratio of 0.52 are weaker and sit below 1. Debt to equity is 26.8%. The Altman model was designed for manufacturers, and Colgate is one, so its safe zone reading applies directly. The insolvency risk is medium, about 5.5% by the estimate of the Ohlson model over one to two years. That estimate is based on the 2025 year-end statements, the most recent annual figures in the data.

Earnings quality

Earnings quality is green. Free cash flow conversion is 1.8x over the last twelve months and 1.3x over five years, and the accrual ratio of -12.8% shows cash earnings running ahead of reported profit. Stock-based compensation is 1.0% of revenue, and free cash flow after it is 3.58 billion USD. The share count has fallen at a compound rate of 1.2% a year over five years, which reflects buybacks. The Piotroski score is 6 out of 9. The Beneish M-score is not available. Colgate beat earnings estimates in all eight of the last quarters, with an average surprise of 3.9%. Estimate revisions are negative for next year, with nine downward and one upward change over 30 days.

Profitability

Profitability is green. The gross margin is 60.6% against a ten-year median of 59.7%. The operating margin is 20.5% against a median of 23.0%, and the net margin is 9.7% against a median of 13.7%, so both sit below their history. Operating margin has moved by 12.6% over the year, which signals limited stability. ROIC is 36.7% against a WACC of 8.4%, a ROIC minus WACC of 28.3%, and the five-year median ROIC is 31.3%. Return on equity of 712.9% is not a useful guide. The DuPont split shows a net margin of 10.5%, an asset turnover of 1.25 and an equity multiplier of 44.7x, so leverage and a very small equity base inflate the figure.

Growth

Growth is yellow, with one good, two neutral and one bad assessment. Revenue compounds at 4.3% over three years, 4.35% over five years and 2.4% over ten years, and revenue grew in nine of the last ten years. Earnings per share grew 7.3% a year over three years, but fell 3.5% a year over five years and rose 5.6% a year over ten. Free cash flow per share compounds at 26.4% over three years, 3.1% over five and 6.1% over ten. For next year, the consensus estimate points to earnings growth of 4.5%.

Valuation

Valuation is red. The verdict is overvalued, with a margin of safety of -19.7%. The P/E of 37.9x is 31.1% above its ten-year median of 28.9x, and EV/EBITDA of 21.8x is 25.1% above its median of 17.4x. Price to free cash flow of 20.5x is 11.2% below its median of 23.1x, and price to sales of 3.66x is 5.2% below its median of 3.86x. Price to book of 270.3x is far above its median of 125.2x, a premium of 115.9%, because of the thin equity base. The discounted cash flow value of 80.47 USD uses a discount rate of 8.87%, first-stage growth of 4.35% and terminal growth of 2.5%. The terminal value makes up 55.8% of that value. The reverse DCF implies growth of 6.5%, against revenue growth of 4.35% and free cash flow per share growth of 3.1% over five years. The fair value band is built on fixed assumptions, including a 5% equity risk premium, and is not a price target. The dividend yield is 2.35%, the forward yield 2.18%, and the payout on free cash flow 48.3%.

Risks

Several weak numbers could hurt the case. A five-year EPS decline of -3.5% a year suggests that past profit growth has not kept pace with revenue. Net margin of 9.7% against a median of 13.7% and operating margin of 20.5% against 23.0% would weaken if pricing or costs turned against the company. A current ratio of 0.96 leaves little cushion on short-term obligations. Negative estimate revisions for next year could mean earnings expectations fall further. The Ohlson insolvency estimate of about 5.5% is low in absolute terms but is medium on this model's scale. The Beneish M-score and the debt maturity schedule are not available. Revenue by segment is also not available, so the analysis cannot separate Oral, Personal and Home Care from Pet Nutrition. The analysis also depends on fixed assumptions in the fair value band and DCF, so the conclusions should be read as an order of magnitude.