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Ascendere Associates LLC Steve Castellano

Starbucks Corp. (NasdaqGS: SBUX) Sector: Consumer Discretionary Industry: Restaurants

February 12, 2010 steve@ascenderellc.com

There are not many companies in which nearly every fundamental metric we look at is improving across the board. But they do exist, and one such impressive company is Starbucks Corp.

At the current level, SBUX is a good option for growth investors that expect significant upside to current consensus forecasts -- because we do think there is some chance of this occurring. SBUX is also currently a good stock idea for high turnover portfolios driven by constantly updated relative value decisions, such as the Ascendere Long/Short Model Portfolio. But given our preference for highlighting stock ideas that show good value against sustained operating momentum, we would prefer portfolio managers wait for a better price, closer to $17-19, or at most at 15.2x the consensus FY2011 EPS estimate. Such a purchase price would allow participation in a possible resurgent growth story without being aggressive.

Our target 1yr value is $23, which is below the consensus average target of $25 and derived from a scenario analysis indicating a realistic valuation range of $9-46. For the stock price to reach near the high end of our range, we think the company would have to generate EPS approaching $1.70 in fiscal 2011 and show accelerating growth beyond. In contrast, the consensus EPS estimate for FY2011 is $1.25 and the consensus high is $1.41. While these optimistic scenarios are aggressive, they are also plausible under perfect conditions.

SBUX LTM FY+1 FY+2 LTM 5yr Avg
SBUX LTM FY+1 FY+2 LTM 5yr Avg
SBUX LTM FY+1 FY+2 LTM 5yr Avg
SBUX LTM FY+1 FY+2 LTM 5yr Avg
SBUX LTM FY+1 FY+2 LTM 5yr Avg
SBUX LTM FY+1 FY+2 LTM 5yr Avg
SBUX LTM FY+1 FY+2 LTM 5yr Avg
SBUX LTM FY+1 FY+2 LTM 5yr Avg
SBUX LTM FY+1 FY+2 LTM 5yr Avg
SBUX LTM FY+1 FY+2 LTM 5yr Avg
SBUX LTM FY+1 FY+2 LTM 5yr Avg
SBUX LTM FY+1 FY+2 LTM 5yr Avg

SBUX

LTM

FY+1

FY+2

LTM

5yr Avg

 

Insiders

Stock Price

$22.60

EPS:

$ 0.76

EPS:

$1.10

EPS:

$1.25

ROE:

19.1%

ROE:

30.2%

Own

2.7%

 

EBITDA/

EBITDA/

Number of

Market Cap

$16.8b

P/E:

29.9

P/E:

20.5

P/E:

18.1

Capital

42.8%

Capital 38.3%

Analysts

19

 

Debt to

Enterprise Val

$16.0b

P/CF

11.0

P/CF

9.4

P/CF

8.6

Margin

9.7%

Margin

9.3%

Captial

14.0%

 

Dividend

Beta

1.35

P/S:

1.7

P/S:

1.6

P/S:

1.6

Margin

5.7%

Margin

6.0%

Yield

0.0%

Description: Starbucks Corporation engages in the purchase, roasting, and sale of whole bean coffees worldwide. It offers brewed coffees, related beverages and complementary food items. It also produces and sells various ready-to-drink beverages. Its brand portfolio includes Starbucks, Seattle’s Best Coffee and others.

Starbucks Corp. is bucking the trend We took a quick look at Starbucks in early 2009, and as generalists searching for the best relative opportunity among 3000+ stocks that trade on major U.S. exchanges, were not impressed. Fundamental metrics were trending poorly, international markets were in full fledged recession, and a premium-branded coffee and related items seemed like easy things for the consumer to give up in the quest for newfound frugality. New initiatives announced upon the return of Starbucks' founder Harold Schultz to the CEO role in January 2008 did not seem to be having a measurable effect. The stock peaked close to $40 in December 2006 and traded as low as$7 in 2008.

But March 2009 results marked the turning point. The cumulative effect of new initiatives focused on controlling operating costs, improving operating efficiency, strengthening connections among customers and the closure of 900 stores and the announced lay off of 7000 employees and attrition of thousands more have translated into significant operating momentum which seems likely to continue through 2010 and perhaps beyond.

Impressive operating momentum since early 2009 Since the end of 2008, Starbucks has seen a significant decline in capital spending, operating capital has been reduced, and various measures of profitability and cash flow have drastically improved. In more detail, since December 2008 Starbucks has reduced estimated Operating Capital by $1.6b to $6.9b from $8.6b, while estimated adjusted operating profit has improved

Steve Castellano steve@ascenderellc.com

Ascendere Associates LLC Page 1

more than 3x to $762m from $211m over the same period. Anyway you look at it -- EBIT, adjusted EBITDA, free cash flow -- profitability has surged since December 2008 while the amount of capital required to create this profitability has declined. This

has helped the company generate a ROIC higher than its cost of capital for the first time in several quarters.

put $700m+ in cash on its balance sheet bringing the total to $1.4b cash and short-term investments. In the most recent conference call the company said it expects to conclude work on a distribution strategy for this excess cash in the coming months.

In addition, this has

Starbucks learned valuable lessons in its domestic market CEO Harold Schultz summarized the recent improvements in the company’s January 20, 2010 conference call transcribed by Seeking Alpha for the fiscal first quarter that ended on 12/27/2009:

This was a very satisfying quarter by any standard and follows three successive quarters of continued improvement in our business. Our U.S.-company operated stores reached a significant milestone in Q1 as all regions reported positive comp growth and our U.S.-licensed stores also delivered strong results. As in prior quarters, our business this quarter benefited mightily from continued innovation from the success of our company wide efforts to improve customer experience from our continued laser focus on controlling operating costs and improving operating efficiency and from the impact of decisive actions we took early in

2008.

Given the significant operating improvements seen thus far, maybe it is not a surprise the stock has seen a 165% rally from a March 2009 low of $8.27 to a recent close of $21.91, outperforming the S&P 500 return of 56% and the S&P Discretionary SPDR (XLY) return of 78% over the same period. If estimates are revised further upward, there could be more room for SBUX to move.

Upside possible if company remains focused and if global economies improve We find the current consensus estimates that imply continued improvements for ROIC and solid earnings growth believable and perhaps containing some potential to move even higher, which makes us comfortable with not overly-weighting a negative valuation scenario. The company seems to have learned some valuable lessons in its U.S. market, and has recently started increasing marketing spending to drive revenue on some key growth platforms and initiatives. It is also increasing investment in its well-received VIA instant coffee product and on efforts to "refresh" the designs of existing Starbuck stores. In addition, the company intends to apply the lessons learned in the U.S. to international markets. For now, international efforts appear to be concentrated in the U.K., France, Spain and China.

Starbucks believes China will become its largest market outside of the U.S. If Starbucks can drive revenue in China and other international locations to one-half to two-thirds of the level of growth experienced in its early growth phase in the United States, there could be significant upside to consensus revenue and earnings growth forecasts.

Relative valuation summary Starbucks is currently trading at 20.2x NTM consensus EPS of $1.12 versus a 5yr average of 26.8x and a range of 10.1-53.4x. Fifteen sell side analysts provide targets ranging $13 to $30 and average $25. Nineteen sell side analysts provide FY2011 EPS estimates ranging from $1.15 to $1.41 and average $1.25.

On a relative EV/EBITDA basis, SBUX trades at a slight discount to a peer average, and on a PE basis it is at a premium. Given its high growth prospects and ROIC profile, these multiples are justifiable and actually offer a slightly better adjusted value at this snapshot in time -- but they do not point to an overwhelming bargain.

Scenario analysis We have chosen 4 different scenarios in which to value Starbucks. Numerous underlying factors can be summarized in the long- term earnings growth rates on a 10% WACC and 2.5% terminal growth rate -- 21%, 18%, 8% and negative 3%. A more aggressive 9% WACC and 3% terminal growth rate may be justifiable, and could positively impact our range of targets by about $1-10.

The most realistic but conservative assumption in our opinion is the 8% growth scenario, which suggests the stock deserves to trade at only about 17x the consensus NTM EPS estimate of about $1.12 or at about $19 one year from now.

Ascendere Associates LLC Page 2

Steve Castellano steve@ascenderellc.com

But If SBUX can beat and raise estimates throughout the next two years and get on track to close to 18% earnings growth on average for the next 5 years and moving higher beyond that, perhaps the stock should be more appropriately valued at $30, or about 18x an above-consensus-high FY2012 EPS estimate of $1.70. We are comfortable with these assumptions for this particular scenario because we think they reflect the possibility of continued operating momentum and a growing penchant for China and other countries to embrace a number of American brands.

A

$46 stock price target is justifiable under the right conditions, though a bit farfetched at the moment. Such a target

would have to assume flawless execution, faster than anticipated international expansion and a rebound in the global economies so that the company could resume a growth rate seen 5 to 10 years ago. True believers would have to justify

a

target earnings growth rate of 21% compounding to $2.80 by FY2015 and accelerating at a higher rate beyond.

Starbucks runs into additional problems or the economies falter again so that earnings essentially decline 3% on average over the next few years, a fundamentally justifiable target could be $9 today.

If

Simple Microsoft Excel models for SBUX revenue growth and operating margin assumptions that we used to help generate realistic scenarios for optimistic earnings growth are available at our website www.ascenderellc.com.

The current stock price embeds assumptions for continued operating momentum that can drive consensus estimates higher. While that is possible, we recommend waiting for a pullback to the $17-19 level before purchasing this stock. Using a most likely possible target range of $17 to $30 by next year does not provide an overwhelmingly compelling risk/reward with the stock at $22. However, for the portfolio manager that is required to purchase a Consumer Discretionary stock immediately, or is managing a portfolio with high turnover in which decisions can be quickly adjusted (such as the Ascendere Long/Short Model Portfolio), SBUX in our opinion is the best idea at the moment.

Our current estimated stock price target for SBUX is $23, which is outlined in the table below.

for SBUX is $23, which is outlined in the table below. We are aware of our

We are aware of our seemingly contradictory recommendation -- that on a relative basis SBUX is slightly more attractive but on a standalone basis is less so. This raises two basic questions though with very large implications: Is the entire Discretionary sector is embedding overly optimistic assumptions on a global economic recovery? Or will SBUX in retrospect confirm our past observations that in general sell side analyst estimates lag the market rather than anticipate it? It is probably a little bit of both.

Risks Ascendere Associates LLC can makes no guarantee on the accuracy of the data, estimates, assumptions or forecasts in this

report.

solicitation to buy or sale any securities.

Investing in SBUX or any equity entails a high degree of risk, including the risk of total loss. This report is not a

Steve Castellano steve@ascenderellc.com

Ascendere Associates LLC Page 3

About Ascendere Associates LLC

J. Stephen Castellano Steve founded Ascendere Associates LLC to provide custom equity research and financial consulting services for institutional and high net worth clients. Steve has been involved in equity research, strategic studies and financial writing since 1995, and has more than 10 years of experience in equity research analysis. At PaineWebber, Warburg Dillon Read and Credit Lyonnais Securities he developed fundamental equity valuation models and conducted in-depth research on the steel and telecom services industries. At Boston Private Value Investors, he developed quantitative models for stock idea generation and also provided general fundamental equity research coverage. Steve received a MBA from the F. W. Olin School of Business at Babson College (2005) and a BA from Oberlin College (1993). For more information, visit us at www.ascenderellc.com.

Steve’s career history is highlighted below:

Ascendere Associates LLC (2009-Present)

Boston Private Value Investors , Equity Research, Equity Research Analyst (2005-2009)

Pyramid Research, Contract Consultant, Telecom Services (2002-2003)

Credit Lyonnais Securities (USA), Equity Research, Telecom Services, Vice President (2000-2001)

Warburg Dillon Read, Equity Research, Telecom Services, Research Associate (1999-2000)

PaineWebber, Equity Research, Steel and Nonferrous Metals, Research Associate, Editor (1995-1999)

Steve Castellano steve@ascenderellc.com

Ascendere Associates LLC Page 4

Summary of Various ROIC and Efficiency Ratios

Starbucks Corp.

                 

Consumer Discretionary

                 

Restaurants

                 

SBUX

                 

Operating Assets Components

FQ

FQ-1

FQ-2

FQ-3

FQ-4

FQ-5

FQ-6

FQ-7

FQ-8

Net PP&E

2,483

2,536

2,594

2,658

2,823

2,956

2,947

3,052

2,993

Goodwill

263

259

257

261

262

267

235

223

216

Other Intangibles

69

68

68

67

67

67

66

58

42

Other Long-term Assets

704

677

696

691

685

635

647

621

517

Net Working Capital (ex cash)

(552)

(211)

(177)

(150)

(364)

(50)

(138)

(169)

(521)

Cash (estimated requirement)

900

666

337

295

396

322

350

372

535

Total Operating Assets

3,866

3,996

3,776

3,822

3,868

4,197

4,107

4,157

3,784

LTM EBITDA

1,523

1,336

1,244

1,132

1,119

       

Average Operating Assets

3,865

3,932

3,954

4,030

4,023

       

Back of Envelope ROIC

39.4%

34.0%

31.5%

28.1%

27.8%

       

NasdaqGS:SBUX

Estimate

Estimate

Estimate

Estimate

Estimate

         
 

3/31/11

12/31/10

9/30/10

6/30/10

3/31/10

12/27/2009

9/27/2009

6/28/2009

3/29/2009

12/28/2008

LTM EBITDA

1,839

1,816

1,771

1,677

1,623

1,530

1,343

1,244

1,132

1,123

Avg. Total Capital

4,436

4,249

4,021

3,797

3,683

3,556

3,529

3,538

3,604

3,589

EBITDA / Total Cap

41.5%

42.7%

44.0%

44.2%

44.1%

43.0%

38.1%

35.1%

31.4%

31.3%

LTM EBIT

1,288

1,268

1,227

1,129

1,068

970

780

647

532

517

Avg. Total Capital

4,436

4,249

4,021

3,797

3,683

3,556

3,529

3,538

3,604

3,589

EBIT / Total Cap

29.0%

29.9%

30.5%

29.7%

29.0%

27.3%

22.1%

18.3%

14.7%

14.4%

Earnings from Continuing Operations

870

848

829

793

769

568

391

246

88

172

Average Total Equity

3,932

3,732

3,509

3,289

3,072

2,886

2,714

2,600

2,525

2,449

Return on Equity

22.1%

22.7%

23.6%

24.1%

25.0%

19.7%

14.4%

9.5%

3.5%

7.0%

 

Estimate

Estimate

Estimate

Estimate

Estimate

NasdaqGS:SBUX

3/31/11

12/31/10

9/30/10

6/30/10

3/31/10

12/27/2009

9/27/2009

6/28/2009

3/29/2009

12/28/2008

NOPLAT

948

943

920

835

768

764

618

418

247

212

Economic Charge

716

717

719

717

716

718

695

735

689

719

Economic Profit

232

226

200

118

52

46

(76)

(316)

(442)

(507)

ROIC (NOPLAT / Operating Capital)

13.7%

13.6%

13.2%

11.9%

10.7%

10.2%

7.9%

5.2%

3.0%

2.6%

Sequential growth

1%

3%

12%

11%

5%

28%

52%

73%

17%

-50%

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

Steve Castellano steve@ascenderellc.com

Ascendere Associates LLC Page 5

Steve Castellano steve@ascenderellc.com

Competitor Overview

Ascendere Associates LLC Page 6

Starbucks Corp.

NasdaqGS:SBUX

>---------------------------Calendar Year---------------------------<

 

EV /

EV /

 

Company

Stock

Mkt

Total

Total

Enterprise

Rev

EBITDA

EPS

EPS

PE

PE

Ticker

Name

Price

Val

Cash

Debt

Other

Val

2010E

2011E

2010E

2011E

2010E

2011E

NasdaqGS:SBUX

Starbucks Corp.

$

22.65

$

16,771

$

1,357

$

550

$

13

$

15,977

1.5x

7.7x

$

1.12

$

1.28

20.2x

17.7x

NYSE:MCD

McDonald's Corp.

63.59

68,841

2,202

11,084

-

NYSE:YUM

Yum! Brands, Inc.

33.36

15,617

353

3,266

89

NYSE:THI

Tim Hortons Inc.

29.58

5,339

196

379

1

NYSE:DRI

Darden Restaurants, Inc.

38.99

5,420

62

1,805

0

NYSE:CMG

Chipotle Mexican Grill, Inc.

102.80

3,324

238

4

-

NasdaqGS:PNRA

Panera Bread Co.

73.58

2,298

173

-

(0)

NYSE: EAT

Brinker International Inc.

17.81

1,797

110

591

-

77,724

 

3.3x

8.6x

 

$

4.43

 

$

4.82

14.4x

13.2x

18,619

1.7x

7.4x

$

2.40

$

2.69

13.9x

12.4x

5,523

2.5x

8.5x

$

1.88

$

2.11

15.7x

14.0x

7,162

1.0x

7.1x

$

2.87

$

3.19

13.6x

12.2x

3,089

1.8x

9.1x

$

4.11

$

4.89

25.0x

21.0x

2,125

1.4x

7.9x

$

3.38

$

3.90

21.8x

18.9x

2,278

0.7x

5.7x

$

1.46

$

1.56

12.2x

11.4x

EV /

EV /

   

Rev

EBITDA

 

EPS

 

EPS

PE

PE

Calendar Year Comps

2010E

2011E

 

2010E

 

2011E

2010E

2011E

NasdaqGS:SBUX

1.5x

7.7x

$

1.12

$

1.28

20.2x

17.7x

Peer Average

1.8x

7.8x

   

16.7x

14.7x

Peer Min

0.7x

5.7x

12.2x

11.4x

Peer Max

3.3x

9.1x

25.0x

21.0x

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

Steve Castellano steve@ascenderellc.com

Ascendere Associates LLC Page 7

Steve Castellano steve@ascenderellc.com

Sensitivity Analysis

Ascendere Associates LLC Page 8

Sensitivity Analysis Starbucks Corp. Consumer Discretionary Restaurants NasdaqGS:SBUX $ 22.60 2/12/2010 Resurgent
Sensitivity Analysis
Starbucks Corp.
Consumer Discretionary
Restaurants
NasdaqGS:SBUX
$
22.60
2/12/2010
Resurgent
Optimistic
Implied
Pessimistic
>--------------------10-year Historical Range--------------------<
2000s
Low
Average
Median
High
YTD
Scenario +8
Scenario +3
Consensus
Scenario -3
Adjusted Present Value current
$
42
$
28
$
17
$
9
Adjusted Present Value +12 months
$
46
$
30
$
19
$
11
Unlevered equity discount rate
10.2%
10.2%
10.2%
10.2%
Tax shield discount rate
6.3%
6.3%
6.3%
6.3%
Levered equity discount rate
10.2%
10.2%
10.2%
10.2%
After tax cost of debt
4.4%
4.4%
4.4%
4.4%
WACC
10.0%
10.0%
10.0%
10.0%
Risk free rate
3.5%
3.5%
3.5%
3.5%
Market risk premium
7.1%
7.1%
7.1%
7.1%
Terminal growth rate
2.5%
2.5%
2.5%
2.5%
Equity beta
1.35
1.35
1.35
1.35
Industry asset beta, company levered
1.32
1.32
1.32
1.32
Industry asset beta
0.94
0.94
0.94
0.94
Next 5yr Sales CAGR
10.0%
6.7%
3.7%
0.7%
Next 5yr Free Cash Flow CAGR
12.6%
8.1%
2.1%
-2.5%
Next 5yr EPS CAGR
21.1%
17.6%
8.1%
-2.8%
ROIC FY2010E
27.4%
27.4%
27.4%
27.4%
ROIC FY2011E
42.7%
43.4%
31.8%
20.5%
ROIC FY2015E
82.7%
66.9%
43.0%
24.6%

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

Steve Castellano steve@ascenderellc.com

Ascendere Associates LLC Page 9

>--------------------10-year Historical Range--------------------<

2000s

Low

Average

Median

High

YTD

Scenario +8

Scenario +3

Consensus

Scenario -3

Gross Margin Expansion

4.4%

4.4%

2.9%

1.4%

   
 

SG&A + R&D Margin FY2010E

37.4%

39.3%

39.6%

40.7%

37.5%

43.0%

43.0%

43.0%

43.0%

SG&A + R&D Margin FY2015E

41.0%

41.0%

44.0%

47.0%

SG&A Margin Expansion

-2.0%

-2.0%

1.0%

4.0%

EBITDA Margin FY2010E

12.2%

15.6%

15.8%

18.3%

18.3%

17.7%

17.7%

17.7%

17.7%

EBITDA Margin FY2015E

23.9%

23.9%

19.4%

14.9%

EBITDA Margin Expansion

6.2%

6.2%

1.7%

-2.8%

EBIT Margin FY2010E

6.3%

9.6%

9.6%

13.2%

13.2%

12.0%

12.0%

12.0%

12.0%

EBIT Margin FY2015E

18.4%

18.4%

13.9%

9.4%

EBIT Margin Expansion

6.4%

6.4%

1.9%

-2.6%

Debt FY2010E

5

404

177

1,270

550

557

557

557

557

Debt FY2015E

557

557

557

557

Cash FY2010E

118

445

339

1,357

1,357

1,871

1,872

1,872

1,872

Cash FY2015E

10,574

10,159

7,663

5,511

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

Steve Castellano steve@ascenderellc.com

Ascendere Associates LLC Page 10

Sensitivity Analysis

Starbucks Corp.

Consumer Discretionary

Restaurants

NasdaqGS:SBUX

$

22.60

2/12/2010

Resurgent

Optimistic

Implied

Pessimistic

>--------------------10-year Historical Range--------------------<

2000s

Low

Average

Median

High

YTD

Scenario +8

Scenario +3

Consensus

Scenario -3

   
     

EPS FY2011E

(+2 FY)

0.40

0.76

0.71

1.28

1.28

1.67

1.69

1.22

0.78

EPS FY2015E

2.80

2.42

1.59

0.94

Justified PE FY2010E

(+1 FY)

20.2

42.6

28.1

17.5

10.2

Justified PE FY2011E

(+2 FY)

17.7

27.5

17.9

15.5

14.2

Sales FY2010E

(+1 FY)

 

10,259

10,264

10,264

10,264

Sales FY2011E

(+2 FY)

 

10,756

10,902

10,594

10,286

Justified EV / Sales FY2010E

(+1 FY)

3.1

2.0

1.2

0.7

Justified EV / Sales FY2011E

(+2 FY)

2.9

1.9

1.2

0.7

EBITDA FY2010E

(+1 FY)

 

1,820

1,821

1,821

1,821

EBITDA FY2011E

(+2 FY)

 

2,472

2,506

1,958

1,438

Justified EV / EBITDA FY2010E

(+1 FY)

17.1

11.3

6.9

3.8

Justified EV / EBITDA FY2011E

(+2 FY)

12.6

8.2

6.4

4.8

Free Cash Flow FY2010E

(+1 FY)

 

1,332

1,357

1,046

751

Free Cash Flow FY2011E

(+2 FY)

 

26

17

10

6

Justified EV / Free Cash Flow FY2010E

(+1 FY)

 

23.4

15.2

12.0

9.1

Justified EV / Free Cash Flow FY2011E

(+2 FY)

 

25.8

17.1

10.4

5.7

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

Steve Castellano steve@ascenderellc.com

Ascendere Associates LLC Page 11

Steve Castellano steve@ascenderellc.com

WACC Assumptions

Ascendere Associates LLC Page 12

Peer Group Cost of Capital Starbucks Corp. McDonald's Corp. Yum! Brands, Inc. Tim Hortons Inc.
Peer Group Cost of Capital
Starbucks Corp.
McDonald's Corp.
Yum! Brands, Inc.
Tim Hortons Inc.
Darden Restaurant
Chipotle Mexican G
Panera Bread Co.
Company
NasdaqGS:SBUX
NYSE:MCD
NYSE:YUM
NYSE:THI
NYSE:DRI
NYSE:CMG
NasdaqGS:PNRA
Average
Cost of Equity:
Beta S&P (5-yr monthly)
1.35
0.65
1.05
0.84
0.93
1.18
0.87
0.98
Industry average beta, levered
0.94
1.02
1.05
0.96
1.12
0.92
0.92
0.99
Current Risk Free Rate (US 10yr bond)
3.5%
3.5%
3.5%
3.5%
3.5%
3.5%
3.5%
3.5%
Equity Risk Premium
7.1%
7.1%
7.1%
7.1%
7.1%
7.1%
7.1%
7.1%
Cost of Equity
10.2%
10.8%
11.0%
10.4%
11.5%
10.1%
10.1%
10.6%
Cost of Debt:
Estimated Cost of Debt
4.9%
4.4%
5.7%
5.2%
5.1%
10.4%
0.0%
5.1%
Normalized Tax Rate
37.5%
37.5%
37.5%
37.5%
37.5%
37.5%
37.5%
37.5%
After Tax Cost of Debt
3.1%
2.8%
3.5%
3.2%
3.2%
6.5%
0.0%
3.2%
Capital Structure:
Debt to Equity Ratio
3.5%
16.3%
21.3%
7.3%
34.4%
0.1%
0.0%
11.8%
Unlevered Beta
1.32
0.59
0.93
0.80
0.77
1.18
0.87
0.92
Cost of Capital
Equity
16,132
67,902
15,303
5,218
5,248
3,167
2,237
16,458
Debt
557
11,084
3,266
379
1,805
4
0
2,442
Market Value of Total Capitalization
16,689
78,986
18,569
5,597
7,052
3,171
2,237
18,900
Weighting
Equity
96.7%
86.0%
82.4%
93.2%
74.4%
99.9%
100.0%
90.4%
Debt
3.3%
14.0%
17.6%
6.8%
25.6%
0.1%
0.0%
9.6%
Cost
Equity
10.2%
10.8%
11.0%
10.4%
11.5%
10.1%
10.1%
10.6%
Debt
3.1%
2.8%
3.5%
3.2%
3.2%
6.5%
0.0%
3.2%
Weighted Average Cost of Capital (WACC)
10.0%
9.6%
9.7%
9.9%
9.4%
10.1%
10.1%
9.8%

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

Steve Castellano steve@ascenderellc.com

Ascendere Associates LLC Page 13

$17 Current Fair Value Price Derived in Part by Consensus Average Estimates

Steve Castellano steve@ascenderellc.com

Ascendere Associates LLC Page 14

 

Consensus

                   

Implied by consensus

FY2009

FY2010

FY2011

FY2012

FY2013

FY2014

FY2015

FY2020

   

9/27/2009

9/27/2010

9/27/2011

 

9/27/2012

9/27/2013

9/27/2014

 

9/27/2015

9/27/2020

 

Income Statement

                   
 

Acquired sales

-

-

-

 

-

-

-

 

-

-

 

Disposed Sales

-

-

-

 

-

-

-

 

-

-

 

Total sales

9,775

10,264

10,594

 

11,028

11,470

11,928

 

12,286

14,243

 

Total sales growth

0.00%

5.00%

3.22%

 

4.10%

4.00%

4.00%

 

3.00%

3.00%

 

Gross margin

 

55.8%

55.0%

57.0%

 

57.6%

57.7%

57.8%

 

57.9%

58.0%

 

SG&A margin

 

41.1%

43.0%

44.0%

 

44.0%

44.0%

44.0%

 

44.0%

44.0%

 

EBITDA

 

1,992

1,821

1,958

 

2,111

2,202

2,302

 

2,384

2,777

 

EBITDA margin

 

20.4%

17.7%

18.5%

 

19.1%

19.2%

19.3%

 

19.4%

19.5%

 

EBIT

 

1,429

1,236

1,376

 

1,505

1,571

1,646

 

1,708

1,994

 

EBIT margin

 

14.62%

12.04%

12.98%

 

13.64%

13.70%

13.80%

 

13.90%

14.00%

 

Other recurring income

-

-

-

 

-

-

-

 

-

-

 

Nonrecurring income

-

-

-

 

-

-

-

 

-

-

 

Net interest expense

(18)

(9)

13

 

35

58

82

 

106

241

 

Tax rate

30.1%

33.0%

33.0%

 

33.0%

33.0%

33.0%

 

33.0%

33.0%

 

Earnings from Continuing O

986

822

930

 

1,032

1,092

1,158

 

1,215

1,497

 

Shares outstanding

746

763

763

 

763

763

763

 

763

763

 

EPS from Continuing Opera

1.32

1.08

1.22

 

1.35

1.43

1.52

 

1.59

1.96

 

Dividend per share

-

-

-

 

-

-

-

 

-

-

 

Dividends

-

-

-

 

-

-

-

 

-

-

 

Cash Flow Statement

                   
 

Cash from Operations

1,389

1,747

1,606

 

1,716

1,790

1,862

 

1,923

2,310

Cash

Cash from Investing

(446)

(542)

(551)

 

(585)

(621)

(658)

 

(692)

(885)

 

Cash from Financing

(1)

(0)

(0)

 

-

-

-

 

-

-

 

Change in Cash

942

1,206

1,055

 

1,131

1,170

1,204

 

1,231

1,425

 

Free Cash Flow to the Firm

                 
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
           

Adj working capital investm

NOPAT (adjusted for leases

Economic Profit

EP as % of Operating Capit

Adjusted Present Value

Unlevered equity discount ra

   
         
         
         

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

Steve Castellano steve@ascenderellc.com

Ascendere Associates LLC Page 15

 

Consensus

                 
     

FY2009

FY2010

FY2011

FY2012

FY2013

FY2014

FY2015

FY2020

     

9/27/2009

9/27/2010

9/27/2011

9/27/2012

9/27/2013

9/27/2014

9/27/2015

9/27/2020

 

Balance Sheet

                 
 

Cash

 

666

1,872

2,927

4,058

5,228

6,432

7,663

14,407

 

Accounts Receivable

 

271

263

249

247

250

257

263

303

 

Inventory

 

665

545

514

510

517

531

544

626

 

Other Current Assets

 

434

419

395

392

398

408

418

481

Total Current Assets

 

2,036

3,099

4,085

5,206

6,393

7,628

8,887

15,817

 

Gross PP&E

 

5,701

6,242

6,793

7,378

7,999

8,657

9,349

13,368

 

Net PP&E

 

2,536

2,493

2,461

2,440

2,429

2,431

2,447

2,771

 

Other Fixed Assets

 

581

581

581

581

581

581

581

581

Total Fixed Assets

 

3,118

3,074

3,042

3,021

3,010

3,012

3,028

3,352

Total Assets

 

5,153

6,173

7,127

8,227

9,403

10,640

11,915

19,169

 

Accounts Payable

 

267

242

245

254

266

 

277

 

285

 

330

 

Other NIB Current Liabilities

1314

1537

1557

1617

1689

1758

1810

2096

Total NIB Current Liabilities

1581

1779

1803

1871

1955

2035

2094

2426

 

Total Debt

557

557

557

557

557

557

557

557

 

Capital Leases

-

-

-

-

-

-

-

-

Minority Interest

-

-

-

-

-

-

-

-

Shareholder Equity

3,046

3,867

4,798

5,829

6,921

8,079

9,294

16,217

Total Capital

3,614

4,436

5,366

6,398

7,489

8,647

9,862

16,785

 

Other Non Current Liabilities

(42)

(42)

(42)

(42)

(42)

 

(42)

 

(42)

 

(42)

Total Liabilities and SE

5,153

6,173

7,127

8,227

9,403

10,640

11,915

19,169

 

Working Capital

               
 

Current Assets Less Adj Cash

1,739

1,957

1,983

2,058

2,151

2,239

2,304

2,668

 

Current Liabilities Less Debt

1,581

1,779

1,803

1,871

1,955

2,035

2,094

2,426

Adj Net Working Capital

158

178

180

187

196

204

209

243

 

NWC as a % of Sales

1.6%

1.7%

1.7%

1.7%

1.7%

1.7%

1.7%

1.7%

 

Adj Working Capital Turnover

62

61

59

60

60

 

60

 

60

 

60

 

Cash Cycle

               
 

Days Inventory in Stock

56

48

42

40

39

 

38

 

38

 

38

 

Days Sales Outstanding

10

 

10

 

9

 

8

 

8

 

8

 

8

 

8

 

Days Payables Outstanding

23

21

20

20

20

 

20

 

20

 

20

Cash Cycle

43

37

32

29

27

 

26

 

26

 

26

 

Operating Efficiency

               
 

NI / Sales

10.1%

8.0%

8.8%

9.4%

9.5%

9.7%

9.9%

10.5%

 

Sales / Operating Assets

287%

340%

366%

394%

422%

446%

462%

502%

 

Operating Assets / Equity

1.1

0.8

0.6

0.5

0.4

 

0.3

 

0.3

 

0.2

 

Operating ROE

32.4%

21.2%

19.4%

17.7%

15.8%

14.3%

13.1%

9.2%

 

Accounting Efficiency

               
 

(EBITDA - Capex) / Net Interes

86.4

135.4

NMF

NMF

NMF

NMF

NMF

NMF

 

Debt/Equity

 

18%

16%

13%

10%

9%

 

7%

 

6%

 

4%

 

Debt/Total Capital

 

15%

14%

11%

9%

8%

 

7%

 

6%

 

3%

 

NI / Sales

 

10.1%

8.0%

8.8%

9.4%

9.5%

9.7%

9.9%

10.5%

 

Sales / Assets

 

189.7%

181.2%

159.3%

143.7%

130.1%

119.0%

108.9%

77.5%

 

Assets / Equity

 

1.7

1.9

1.7

1.6

1.5

 

1.4

 

1.4

 

1.2

 

ROE

 

32.4%

27.0%

24.1%

21.5%

18.7%

16.7%