Screening Criteria
Obscurity: Market Cap $2,600,079,006 Large cap
Undesirability: P/E 29.0x High (>13)
P/B 3.6x High (>1.2)
Still value this stock because: niche market, sustainable competitive advantage: high barriers to entry (a lot o
search costs is also considered to be high (unless customers really unhappy with them, m
high operating margins as well as stable
dvantage: high barriers to entry (a lot of patents), strong management (diversified in what they offer), high switching costs
customers really unhappy with them, most likely they will not switch), they have high market share and not a lot of competitors
high switching costs
d not a lot of competitors
Calculation of Operating Lease Adjustment
Year Expense PV Expense
1998 21000 19577
1999 20000 17381
2000 17000 13773
2001 12000 9063
2002 8000 5633
Total $ 65,427.13
Calculation of Adjusted Total Debt to Capital
1993 1994 1995
Sales $ 451,694 $ 519,186 $ 723,120
Total Debt $ 190,058 $ 155,293 $ 149,808
Operating Lease % of Sales
Total Debt + Operating Lease $ 225,122 $ 195,596 $ 205,942
Shareholder's Equity $ (29,419) $ 11,012 $ 106,338
Total Capital $ 195,703 $ 206,608 $ 312,280
Total Debt to Capital 115.0% 94.7% 65.9%
Historic Debt to Capital Average
Calcuation of Historic EBIT Margin
1993 1994 1995
Sales $ 451,694 $ 519,186 $ 723,120
EBIT $ 74,113 $ 83,909 $ 108,880
EBIT Margin % 16.4% 16.2% 15.1%
Average 16.1%
Calcuation of Zero Growth Capital Expenditures
1996 1997
Sales $ 789,612 $ 842,833
PP&E $ 174,562 $ 171,127
% PP&E of Sales 22.1% 20.3%
Average 21.2%
1997 Increase in Sales $ 53,221
Actual Capital Expenditures $ 24,349
Growth Capital Expenditures $ 11,286
Zero Growth Capital Expenditures $ 13,063.19
Calculation for NAV PP&E
Original Cost Adjustments Assumptions
Land & Buildings $ 84,780 x (1.03)^15 Appreciation in price
Machinery & Equipment $ 204,241 x 0.7 Medium technology change
Leasehold Improvements $ 8,274 x 0.7 Non-retail, no value growth
Furniture & Fixtures $ 10,639 x 0.7 Useful for long time
Total PP&E
Calcuation of Customer Relations
1993 1994 1995
Sales $ 451,694 $ 519,186 $ 723,120
SG&A $ 95,434 $ 107,854 $ 147,288
1/2 of SG&A $ 47,717 $ 53,927 $ 73,644
SG&A/Sales 10.6% 10.4% 10.2%
Average
Multiplier
Customer Relations
Calcuation of Product Portfolio
1995 1996 1997
Sales $ 723,120 $ 789,612 $ 842,833
R&D $ 14,597.0 $ 15,449.0 $ 15,781.0
R&D/Sales 2.0% 2.0% 1.9%
Average 1.9%
Number of Years 15
Product Portfolio $ 246,424.14
Calculation of Market Value of Debt
1996 1997
LT Debt $ 99,900 $ 48,506
Current Portion of LT Debt $ 2,891 $ 2,641
Total Debt $ 102,791 $ 51,147
1996 - 1997 Average Debt $ 76,969
Interest Expense $ 6,950
Average Coupon 9.03%
Market Value of LT Debt $ 60,254.54
1996 1997
789612 $ 842,833
$ 99,900 $ 48,506
7.8%
$ 161,196 $ 113,933
$ 186,649 $ 257,283
$ 347,845 $ 371,216
46.3% 30.7%
47.7%
1996 1997
$ 789,612 $ 842,833
130072 $ 138,116
16.5% 16.4%
Reproduction Value
$ 132,084
$ 142,969
$ 5,792
$ 7,447
$ 288,292.28
1996 1997
$ 789,612 $ 842,833
$ 164,355 $ 172,795
$ 82,178 $ 86,398
10.4% 10.3%
10.4%
1.5 need to spend a lot of time and money on customers
$ 130,959.10
WACC Calculation
Business Risk Medium High Medium
Optimal Capital Structure 30% 49%
Target Capital Structure
Historical Debt-to-Total Capitalization 47.7% between 30-49% is medium
Historical Equity-to-Total Capitalization 52.3%
Financial Risk Medium
Cost of Debt
Cost of Debt 7.27%
Marginal Tax Rate 39.4%
After-tax Cost of Debt 4.4%
Cost of Equity
Equity Risk Premium 5.0% from a medium financial risk
Cost of Equity 12.3%
WACC 8.521%
0-49% is medium
dium financial risk
ROIC Calcuation
EBIT $ 138,116.0
Taxes $ 54,417.7 used taxes of 39.4
NOPLATPA $ 83,698
Net Operating Fixed Assets $ 213,276.0
Net Working Capital $ 87,155.0
Invested Capital $ 300,431.0
ROIC 27.9% implies that we will have a high epv relative to nav
Second Pass ROIC Calcuation
Normalized NOPLATPA $ 104,839.7
Net Operating Fixed Assets $ 803,930.66
Net Working Capital $ 87,155.0
Invested Capital $ 891,085.7
ROIC 11.8%
Calculation of Net Asset Value
Book Value Adjustments Reproduction Value
Assets
Cash & Equivalents $ 35,481.0 $ 35,481.0
Receivables $ 132,325.0 Add Allowance $5,799 $ 139,124.0
Inventories - FIFO $ 58,895.0 Add LIFO Reserve $4,032 $ 62,927.0
Deferred Tax Assets $ 13,285.0 Discount 20% $ 10,628.0
Operating Leases PV Operating Lease, Add 65,427 $ 65,427.1
Property, Plants & Equipment $ 171,127.0 Add $117,165 Reproduction Value $ 288,292.3
Excess Real Estate $ - $ -
Goodwill $ 42,149.0 Add Amortization $20,249 $ 62,398.0
Subsidiaries (Non-Consolidated): $ -
Product Portfolio Add $246,424 Reproduction Value $ 246,424.1
Customer Relations Add $130,959 Reproduction Value $ 130,959.1
Licenses $ 10,430.0 $ 10,430.0
Total Assets $ 463,692.0 $ 1,052,090.7
Liabilities
Short-Term Borrowings $ 26,570.0 $ 26,570.0
Accounts Payable $ 48,843.0 $ 48,843.0
Other Current Liabilities $ 88,197.0 $ 88,197.0
Operating Leases PV Operating Lease, Add 65,427 $ 65,427.1
Long-Term Debt $ 48,506.0 Adjust to MV, Add $11,748.5 $ 60,254.5
Deferred Tax Liabilities $ 16,571.0 Discount 20% $ 13,256.8
Preferred Stock $ - $ -
Minority Interest $ - $ -
Employee Stock Options $ - $ -
Underfunded Pension Fund $ - $ -
Total Liabilities $ 228,687.0 $ 302,548.5
Net Worth $ 749,542.2
Number of Shares Oustanding 42624.2
NAV Per Share $ 17.58
we need to maintain market share, so we need to keep investing in r&d to come up with new ideas
because they are established and have the same customers for so long, product portfolio is going to be weighed more and wo
weighed more and worth more for this company
No Growth Free Cash Flows & Earnings Power Value
Assumptions
Sales Income Statement $ 842,833.0
EBIT (w/ Historic Margin) Sales x 16.1% $ 135,673.2
Less: One Time Adjustment Transaction exp (I/S 1997) $ 840.5
Plus: Adjustment for Operating Leases 76636 x kd $ 4,755.9
Normalized EBIT $ 139,588.6
Less: Taxes 39.4% $ 54,997.9
Normalized NOPLAT $ 84,590.7
Plus: Amortization for Goodwill Balance Sheet $ 20,249.0
Normalized NOPLATPA $ 104,839.7
Depreciation & Amortization Cash Flow Statement $ 45,778.0
Zero Growth Capital Expenditures $ 45,778.0
Normalized Zero Growth Free Cash Flows $ 104,839.7
Enterprise Value $ 1,230,369.0
Cash & Equivalents Balance Sheet $ 35,481.0
Value of Non-Operating Assets (I&A) $ -
(A/T) Value of Excess Real Estate $ -
(A/T) Value of Over (Under) Funded Pension Plan $ -
MV of Debt See calculations $ 60,254.5
Value of Operating Leases Present value $ 65,427.1
MV of Preferred Stock
Minority Interest
Value of Employee Stock Options $ -
Equity Value $ 1,140,168.3
Number of Shares Outstanding 42624.2
EPV Per Share $ 26.75
Screening
EPS Growth 30.3%
EBIT/Share Growth 30.4%
Rev/Share Growth 30.3%
Second Pass ROIC > WACC Yes
Sustainable Competitive Advantage Yes
EPS Growth
1993 1994 1995
EPS 0.66 0.94 1.25
Growth 42.42% 32.98%
Average Growth
EBIT/Share Growth
1993 1994 1995
EBIT $ 74,113 $ 83,909 $ 108,880
Shares Outstanding 684385 552326 578496
EBIT/Share $ 0.11 $ 0.15 $ 0.19
Growth 40.29% 23.89%
Average Growth
Revenue/Share Growth
1993 1994 1995
Revenue $ 451,694 $ 519,186 $ 723,120
Shares Outstanding 684385 552326 578496
Revenue/Share $ 0.66 $ 0.94 $ 1.25
Growth 42.42% 32.98%
Average Growth
Growth Capex
Net PP&E $ 171,127
Net PP&E/Sales 20.3%
Change in Sales $ 53,221
Growth Capex $ 10,806
Zero Growth Capex $ 13,543.12
Growth R&D Expenses
Product Portfolio $ 246,424
Product Portfolio/Sales 29.2%
Change in Sales $ 53,221
Growth R&D Expenses $ 15,560.54
Growth Marketing Expenses
Customer Relations 130959
Customer Relations/Sales 15.5%
Change in Sales $ 53,221
Growth Marketing Expenses $ 8,269.46
No Growth Free Cash Flows
Operating Profit $ 138,116
Less: One Time Adjustment $ 841 1/10 Transaction Expense
Plus: Adjustment for Operating Leases $ 4,756 PV Operating Lease * Kd
Growth R&D Expenses $ 15,561
Growth Marketing Expenses $ 8,269
Adjusted EBIT $ 165,861
Adjusted EBIT Tax $ 65,349
Adjusted NOPLAT $ 100,512
Amortization for Goodwill $ 20,249
Adjusted NOPLATPA $ 120,761
Plus: D&A of Intangibles $ 16,636
Less: Zero Growth Capital Expenditures $ 13,543
Plus: A/T Subsidiary Adjustment $ -
Adjusted Earnings $ 123,854
Enterprise Value $ 1,453,513.96
Cash & Equivalents $ 35,481.0
Value of Non-Operating Assets (I&A) $ -
(A/T) Value of Excess Real Estate $ -
(A/T) Value of Over (Under) Funded Pension $ -
MV of Debt $ 60,254.5
Value of Operating Leases $ 65,427.1
MV of Preferred Stock $ -
Minority Interest $ -
Value of Employee Stock Options $ -
Equity Value $ 1,363,313.3
Number of Shares Outstanding 42624.2
EPV Per Share $ 31.98
Second Pass ROIC Calculation
Normalized NOPLATPA $ 120,761.0
Net Operating Fixed Assets $803,930.66
Net Working Capital $ 87,155.0
Invested Capital $ 891,085.7
ROIC 13.6% second ROIC > WACC
Value of Growth Multiplier & Value With Growth
Growth Rate 2% 3% 4%
VGM 1.11 1.20 1.33
Value With Growth $ 37.03 $ 39.96 $ 44.17
Calculation of Intrinsic Value & Entry Price
EPV $ 31.98
Margin of Safety 33%
Entry Price $ 21.32 no buy because market price right now is 61
Minimum IV $ 47.98 (1.5 is the VGM)
How to find VGM from the market value of 61
market price = vgm *epv
so vgm = market price/epv
1.90744215134459 <-- vgm but from what we calculated from that graph in the textbook, w
so it is over priced
1996 1997
1.63 1.88
30.40% 15.34%
30.3%
1996 1997
130072 $ 138,116
484425 448315
$ 0.27 $ 0.31
42.66% 14.74%
30.4%
1996 1997
$ 789,612 $ 842,833
484425 448315
$ 1.63 $ 1.88
30.40% 15.34%
30.3%
5% 6% 7% 8%
1.53 1.88 2.71 6.70
$ 50.78 $ 62.63 $ 90.06 $ 222.79
ght now is 61
hat graph in the textbook, we have a max growth of 5% and this vgm of 1.9 is saying a growth of 6%
