1 Consumer Staples Stock Recommendation Mark Bauer and Joe Burch May 15, 2007

2 Agenda Recap of sector recommendation Current SIM holdings Recommended actions Summary of stock sales Summary of stock buy Conclusion

3 Consumer Staples Recommendation 9.6% of S&P % of SIM (1.8% underweight) Defensive (non-cyclical) stocks Good hedge against economic downturn Mature, slow growth companies International growth is important Brand is important to generate high margins Valuations do not suggest that consumer staples is cheap Maintain underweight position

4 Current Holdings

5 Recommendation Sell 142 BP of Altria Sell 130 BP of Kraft (all) Buy 272 BP of Colgate No change to Anheuser-Busch

6 Kraft - Food products industry Industry dominated by large companies such as Kellogg, General Mills, Campbell, Heinz, and Sara Lee Utilize economies of scale Competition based on price, quality, and variety Strong brand enables higher prices Trends/Issues  Healthy eating and organic foods  Regulation and labeling  Competition from lower priced private label competitors

7 Kraft – Business Analysis Negatives Operating margins decreased 14% in Q from 15.2% to 14.0%  Investments in marketing, quality improvements, systems and distribution architecture, soaring ingredient costs, competition from generic brands Lost market share on trademark products such as cheese, coffee, and salad dressing Organic revenue up 3.6% and 2007 guidance is 3-4% Positives Earnings beat consensus estimates by $.02 per share Looking for possible acquisitions to build scale in international markets, enter new categories, or acquire new technologies Independence from Altria will provide more flexibility for acquisitions

8 Kraft – Valuation Analysis P/Forward E in-line with 5-year mean Slightly expensive relative to S&P 500 and sector Limited upside based on valuation analysis. Priced target of $34 (4% upside) Summary: Not attractive based on valuation

9 Kraft – DCF Analysis

10 Kraft Summary Weak results and outlook Moderate upside potential based on valuation analysis and price target Poor DCF target price Sell entire holding and move money to higher growth stock

11 Altria Positives Phillip Morris International (PMI) growth is strong (9.5% income growth) Looking to spin-off PMI  Analyst believe spin-off could result in share buybacks and share price increases Key strategic event from Q1: Spin-off of Kraft Focus on growing tobacco business Raised full-year guidance Expecting margin improvement DCF target price is $78 (13% upside) Negatives Q1 earnings lower than expectations Phillip Morris USA had a weak quarter Domestic cigarette sales volumes declined 6.2%. Decline expected to moderate to 3-4% throughout the year. Risks: Smoking bans, health concerns, litigation Conclusion Sell 142 basis points to diversify the staples portfolio and move the money to higher potential stock

12 Colgate-Household Products Industry Very mature industry with many familiar companies vying for market share. Brand name is a big factor like other industries in the sector. Competition and leverage from large retailers restrict price increases. Companies rely on product innovation to bolster sales and profit margins. Cost control is done effectively and more efficient operations are being employed.

13 Colgate-Business Analysis Positives Gross margin of 56.4% in Q compared to 54.5 % in Q  Undergoing restructuring plan which includes increased product innovation, more efficient spending on marketing, closing of 1/3 of CL’s factories and more focus on faster growing markets. Smooth CEO transition is expected.  Reuben Mark, CEO since 1984, is retiring on 07/01/07. COO and long- time Colgate employee will become CEO. Negatives Modest growth numbers domestically. Cat food recall  Not expected to have a significant impact on Colgate’s financials.

14 Colgate Growth  Notice the higher growth internationally. RegionSales Increase over PYQ North America7.5% Latin America14.0% Europe/ S. Pacific 13.0% Asia/Africa13.5%

15 Colgate Market Share  Achieved an all-time high of 37.3% of the toothpaste market in the U.S.  Market leader in 53 of the 71 largest toothpaste markets worldwide.  Growth within developing markets is projected to rise 2-3 times that of developed markets in near term.

16 Colgate - Valuation Price steadily increasing along the trend line. P/E cheap on an absolute level and inline relative to its sector. Historical P/E a little higher than sector average.

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18 Colgate Summary Generating higher margins through restructuring plan. Excellent international growth. Leading share in most major markets. Target price: 80.27, 21.0% upside.

19 Recap Sell 142 BP of Altria Sell 130 BP of Kraft (all) Buy 272 BP of Colgate No change to Anheuser-Busch

20 Questions?