Workshop Re-Introduction:

The purpose of this workshop is to discuss SSG judgments and methods, and to demonstrate that comparisons are a good way to make decisions and to evaluate judgments. 

Each of the four sessions compares the Consensus SSG from the Online Stock Study Series at the BI website with two SSGs of mine (one with S&P data and the other with Hemscott data, but with the same judgments) and with Take Stock.  One innovative feature of the Online Stock Study is that judgments were made by a consensus decision of the participants.

Please let me know what you think about these two issues:

(1) Do you agree or disagree (for the most part) with the specific methods used by these Stock Studies to make SSG judgments?  Are there any methods that you routinely use which were not discussed?

(2) Do you agree or disagree (for the most part) with the specific judgments made by these Stock Studies?  Is consensus decision-making a useful technique?

Last week, the workshop discussed Staples (SPLS) and Proctor and Gamble (PG); this week, Colgate-Palmolive (CL) and CVS-Caremark (CVS) will be covered.

Workshop Session #3:

Colgate-Palmolive was the third Online Stock Study at the Better Investing (BI) website and was led by Avi Horwitz, Vice-President of the New York City BI Chapter and a Vice-President of the BI Volunteer Advisory Board.  Thanks Avi for volunteering to lead this study.

The materials available for downloading include the audio-visual presentation and related PDF slides, Consensus SSG, 10-5-07 Value Line, and a summary of the 12-8-07 S&P Stock Report.  The Consensus SSG is also summarized in a short article in the May issue of Better Investing magazine and in a two-page report on the “First Cut” page of the BI website.

Company Background:

Colgate-Palmolive (CL) is a consumer products company whose products are sold in over 200 countries and territories throughout the world.  65% of its total sales comes from outside North America.  Value Line says that Latin America is the company’s largest market with 25% of sales and 31% of operating profits

The company operates in two product segments: Oral, Personal and Home Care, and Pet Nutrition.  At the end of 2007, sales of Oral, Personal and Home Care products accounted for 40%, 23% and 24% respectively (87% total) of worldwide sales.

According to Hoovers.com and Yahoo Finance, CL’s top three direct competitors (not peer group members) are: Church & Dwight, Clorox, and Procter & Gamble.

SSG Comparisons:

Here’s the BI Consensus SSG compared to two of mine (one with S&P data and the other with Hemscott data, but both with the same judgments) and with Take Stock.

** I updated the BI Consensus SSG on 4-23-08 to get current data and the current price, but did not change any of its judgments.  In the interim, a new year of data had been added and 2002 was no longer part of the High and Low PEs for the last 5 years so I could no longer continue to treat 2002 as an outlier.

Discussion – BI Consensus SSG:

- Like Ken Peters who led the SPLS study, one of the first things Avi did was to check the SSG quality of CL.  He checked if Sales and EPS were growing, if Pre-Tax Profits were stable or growing, and if Return on Equity was stable or growing.

** The quality of CL was assessed relatively by using the BI Online SSG, in comparison to peer group members (Avon and Estee Lauder), peer group averages, and to industry averages.  By comparison, CL’s relative trends looked good or at least better than these baselines. 

** However, Pre-Tax Profit Margin and Return on Equity, SSG Section 2A and 2B, were not assessed numerically.  As a result, the wild numbers for the Consensus SSG’s ROE were not discussed (five years 2002-2006 near or over 100% with 2002 at 320% !?!) and the ROE downtrend was overlooked. 

** A downtrend in SSG Section 2A or 2B was once thought to be a barbed-wire barrier that should not be crossed and that the SSG should not be completed.  See: NAIC/BI Stock Selection Handbook, pages 20, 99 (2003 edition).  However, the BI Online SSG, a feature separate from the Online Stock Study, makes an exception for ROE when companies are paying off debt.  The exception is not quantified or further explained, and seems vague enough to swallow the (old) rule.

- Even though sales only grew 3.3% over the last 10 years, Avi found accelerating growth from 2003 and that CL looked good in comparison to its industry and peer group averages.

- To estimate future sales growth, the group was given five choices: 10-year historical sales growth; most recent quarter; growth in the last 4 years; Value Line’s estimate [which was actually sales per share, not sales] or an open-ended “other.”  The Consensus was 7.5%, sales growth in the last 4 years.

- To estimate future EPS growth, participants were also given five choices: 10-year historical EPS growth; most recent quarter; same as recent sales growth on the premise that EPS can’t grow faster than sales over the long term; Value Line’s estimate; and an open-ended “other” which also included their own Preferred Procedure.  The Consensus chose 7.5%, the same as recent sales growth.

- Avi also shared the particulars of his Preferred Procedure, which worked out to 10.4% estimated EPS, but the group (oddly) was not given this particular choice.

- Participants then estimated the Projected Average PE (not the Projected High and Low PEs) and were presented with four choices: ave PE last 5 years; ave PE from 2006; ave PE from 2005 and 2006; and “other.”  The Consensus was 20.30, the average PE from 2005 and 2006 which is the same as treating 2002-03-04 as outliers.  Thus, with outliers eliminated, the Consensus got 22.4 as the average High PE and 18.3 as the average Low PE which were then used as the Forecast High and Low PEs.

- After deciding to use EPS for the last 4 quarters, participants were asked to make their last judgment call, the Forecast Low Price.  They were given four choices: the Average Low PE x Low EPS, what I call the growth company option; the Average Low Price for the last 5 years; the Recent Severe Low Price; and the Price that the Dividend will Support.  The Consensus chose $59.50, the growth company option.

- CL was not a SSG Buy either when the BI Stock Study was done on 12-20-07 or on 4-23-08 when I updated the data and price.  However, note that the price fell slightly during those four months while the Upside/Downside Ratio for the Consensus SSG increased substantially from 0.8 to 2.5.

Discussion – Armin’s SSG and Take Stock:

- When I did my SSG, the analysts were very close in estimating long-term EPS at around 11.00% with Zacks low at 10.85%, and Value Line and FactSet CallStreet high at 12.00%.  S&P was 11.00%, Reuters was 11.04% and First Call was 11.05%.  Reuters less 1 Standard Deduction was 11.04 – 1.10 = 9.94% and that was the basis for my SSG’s 10.00% forecast.

-  By comparison, the Consensus SSG’s 7.5% estimated EPS was lower than every analyst, even lower than the lowest estimate (8.8%) by the 10 analysts at Reuters.  Only Take Stock was lower at 4.3%.

- Even with 10.00% estimated EPS, my SSGs showed that CL was not a Buy and it fell far short of the minimum required NAIC/BI criteria of a 3.0 Upside-Downside Ratio and a 15% Total Return.

Conclusions about Comparisons:

(1) The Consensus SSG’s Forecast High Price of $93.60 was lower than the low end of VL’s $100-120 estimated High Price when the study was done and, four months later, remains even lower than Take Stock’s Forecast High Price of $97.53.

(2) Comparisons sometimes can be misleading and that happened when the Consensus SSG compared CL’s ROE to its peers and to its industry average, but did not evaluate CL’s super-strange ROE numbers and downtrend over the last 5 years.

(3) A quick glance at the comparison table reveals that Take Stock seems out-of-whack: its estimated EPS (4.3%) is way less than the Consensus SSG (7.5%) and my SSG (10.0%); its Forecast High Price ($97.53) is even less than the low end of VL’s High Price estimate ($115-140); and its Quality ranking (2.10, unacceptable) is completely different than S&P’s (A+).

(4) Data Comparisons: With Hemscott data, CL’s ROE with beginning equity looks even wilder as its 5 year average is a mind-boggling 1134% compared to S&P’s 166%.  Its numbers were so outrageous that Take Stock provided no 5 year average whatsoever, but its summary did say that ROE looked “strong” without explanation (which also seems outrageous).

Armin Fields

The last session of the Comparing SSGs workshop will discuss the BI Online Stock Study for CVS Caremark (CVS).  It will take place in this forum on Wednesday, May 14.

Bob: