Valuation Project

Team:
Salomon Cojab
Patrick Fong
Kevin Jin
Deeprendra Mookim
Gurpreet Singh

Companies:
Grupo Bimbo - Buy
EMC - Buy
WAB Sell
Spark Networks - Buy
Monster - Buy

Grupo Bimbo, S.A.B. de C.V. (BMV: BIMBO A)

1. Company Overview
Bimbo is a baked goods and packaged food company with the bulk of its operations in its home
country, Mexico, and in the US. The company also operates in the rest of Latin America and in
Spain, with both of those totaling about 15% of revenues. Bimbo is one of the largest Mexican
companies and has begun expanding in the $408Bn global baked goods market. Their growth has
come from both geographic expansion as well as through acquisitionsshowcased by their
acquisition of Canadian snack cake company Saputo, Inc. Other recognizable brands under their
umbrella include Arnold bread, Sarah Lee, and Entenmanns.
2. DCF Valuation
For our Bimbo DCF valuation, we used the two-stage FCFF model since the company is large and
has stable cash flow. Although it is not a young high-growth firm, the large potential for Bimbos
expansion drove a high growth rate estimate for the next six years. Although it may be unlikely that
they expand their European operations, the Latin American market provides huge upside given its
relatively small sales given the size of the region. Furthermore, Latin Americans tend to have some
similar tastes, so it is a natural expansion option.
Length of High Growth Period =

Forever

Growth Rate =

17.04%

3.88%

Debt Ratio used in Cost of Capital Calculation=

57.56%

30.00%

Beta used for stock =

0.95

0.80

Peso Riskfree rate =

3.88%

3.88%

Risk Premium =

7.07%

7.07%

Cost of Debt =

6.13%

5.50%

Effective Tax rate (for cash flow) =

19.28%

30.00%

Marginal tax rate (for cost of debt) =

30.00%

30.00%

Return on Capital =

14.20%

12.20%

Reinvestment Rate =

120.00%

31.81%

Bimbos expansionary goals are reflected in their reinvestment rate for the next six years. The
acquisition of a Canadian company, a market which is as of now untested, shows that the company
wishes to grow aggressively in the near-term. This, combined with their acquisition of Ecuadors
Supn, has helped Bimbos net profit rise from 429.8Mn Pesos to 906.8Mn Pesos year-on-year for
the first quarter. Bimbos positive momentum and growth prospects led us to a DCF value of 56.20
Pesos per share, compared to the share price of 41.96 Pesos as of May 11th, 2015.
3. Relative Valuation

Multiples Approach

Our comparable company analysis used 92 firms in the packaged foods sector, screened with Capital
IQ. We picked EV/EBITDA as our multiple for comparison because of the importance of sales and
gross margin in the sector. The median comparable company trades at 13.7 EV/EBITDA, while
Bimbo has a multiple of 11.8. Using the median EV/EBITDA, the enterprise value for Bimbo is
308,353.85 Pesos, yielding an equity value of 245,032.00 Pesos, or 52.10 Pesos/share, or 24.16%
higher than the current stock price of 41.60 Pesos.

Regression Approach
After trying multiple combinations of variables, the three that produced the highest significance and
R-squared when regressed on EV/EBITDA were the effective tax rate, Capital IQs predicted
forward P/E (NTM), and Price to Boov Value. The regression results were as follows:
Model Summary
S R-sq
R-sq(adj) R-sq(pred)
8.56184 57.11% 55.52%
39.60%

Coefficients
Term
Coef SE Coef T-Value P-Value VIF
Constant
1.30 2.78 0.47 0.642
Effective Tax Rate (%) -0.1617 0.0682 -2.37 0.020 1.03
Forward P/E - Capital IQ 0.7767 0.0838 9.27 0.000 1.15
Price to BV
0.232 0.240 0.97 0.336 1.15

Regression Equation
EV/EBITDA = 1.30 - 0.1617 Effective Tax Rate [LTM] (%)
+ 0.7767 Forward P/E - Capital IQ [NTM] + 0.232 Price to BV

Therefore, the regression valuation for Bimbo was as follows:

EV/EBITDA= 1.30 0.1617 (41.1) + 0.7767 (31.6) +0.232 (3.6) = 20.02.
Given this EV/EBITDA, the implied share price for Bimbo is 82.48 Pesos, or 96.56% above the
current trading stock price of 41.60 Pesos.
4. Market Regression
The emerging market regression equation for EV/EBITDA is:
EV/EBITDA = 23.44 + 6.27(0.1703) 10.29(0.2499) 16.82(0.4111) = 15.02
This implies a stock price of $58.51 Pesos, 40.64% above the current stock price.
5. Final Analysis

Valuation Type
Bimbo Actual
DCF
Median EV/EBITDA
Regression
Market Regression

Result % Undervalued
41.60
56.20
35%
52.10
25%
82.48
98%
58.51
41%

Bimbos global growth prospects and strong ROC drive our conclusion that its undervalued. Given
the results of each type of valuation we ran, we see recommend a buy on the firm. Their entry into
the Canadian market as well as into other regions of Latin America shows promise and, given their
successful track record with acquisitions, we believe that Bimbo will continue to grow into a global
giant in the baked and package goods sector. For the next six years, we recommend watching the
reinvestment rate as it will be significant driver of growth in the near and medium term. Beyond an
intrinsic value, we see Bimbo as a relative bargain to its peers and the overall market, so we
recommend a buy on Bimbo.

EMC Corporation (NYSE: EMC)

1. Company Overview
EMC is an American multinational corporation headquartered in Hopkinton, Massachusetts, United
States. EMC offers data storage, information security, virtualization, analytics, cloud computing and
other products and services that enable businesses to store, manage, protect, and analyze data.
EMC's target markets include large companies and small- and medium-sized businesses across
various vertical markets.
2. DCF Valuation
We used a two stage FCFF discount model for EMC given that EMCs a relatively large company
growing at a moderate pace and is expected to mature as the cloud, virtualization, and flash trends
reach saturation. Thus, we expect growth to decline in the future as new flash and cloud players
enter the market. Nevertheless, we believe that EMC is positioned to grow with the overall market
(GDP growth after 5 years of high growth) and sustain a competitive advantage over time (strong
ROC versus WACC).
Base Year
Current EBIT
$4,228.00
BV of Debt
$5,495.00
BV of Equity
$22,004.00
Net Cap Ex
$1,573.60
Change in NWC
($943.00)
Length of High Growth Period =

Forever

Growth Rate =

8.09%

2.25%

Debt Ratio used in Cost of Capital

11.97%

9.51%

1.06

1.00

Riskfree rate =

2.25%

2.25%

Risk Premium =

6.56%

6.56%

Cost of Debt =

3.25%

3.25%

Effective Tax rate (for cash flow) =

22.80%

35.00%

Marginal tax rate (for cost of debt) =

35.00%

35.00%

Return on Capital =

15.74%

15.74%

Reinvestment Rate =

51.39%

14.30%

Cost of Captial

8.36%

8.17%

Beta used for stock =

The key inputs that drive the DCF are the growth rates and the return on capital. We expect EMC
to grow with the overall economy after 5 years of strong grow as it is well positioned for new trends
in cloud computing and virtualization. Both of these markets are growing faster than GDP and we
expect EMC to grow share. Moreover, we expect ROC to continue forward at historical rates, given

the stickiness of the product and the large scale advantages it has over new entrants. Its incredibly
hard for new entrants to win significant share in the IT industrydata storage is mission critical and
IT employees are reluctant to change something that is working even if new entrants tout arguably
better applications.
Plugging these numbers into the model, we get an enterprise value of $54,583, which implies a
market value of $27.32 per share after making adjustments including net cash, options, and minority
interest. This compares to a closing price of 26.93.
Sensitivity Analysis:

Cost
of Capital
Stable Phase

$27.32
7%
7.50%
8%
8.50%
9%

1.00%
$26.96
$25.05
$23.41
$21.99
$20.74

Stable Growth Rate

1.50%
2%
$29.23
$31.95
$26.97
$29.24
$25.06
$26.98
$23.42
$25.07
$21.99
$23.43

2.50%
$35.28
$31.96
$29.25
$26.99
$25.07

3%
$39.43
$35.29
$31.97
$29.26
$27.00

3. Relative Valuation
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations

0.508213
0.258281
0.236465
9.944816
71

Intercept
Est. Annual Revenue Growth - 2 Yr % - Capital IQ [Latest] (%)
Debt/Total Capital
Base

Coefficients Standard Error

t Stat
P-value
14.5236136
2.278910241 6.373052 1.87407E-08
56.9115027
15.0473068 3.782172
0.0003305
-20.7186067
11.44199576 -1.81075 0.074596891

Low er 95% Multiple Upper 95% Multiple

Enterprise Value
Cash

$87,701.7
13,472.0

$40,394.9
13,472.0

$135,008.5
13,472.0

Debt
Minority Interest
Options Value
Equity Value
Shares Outstanding
Share Price

5,495.0
7,384.0
426.7
$87,868.0
1,942.1
$45.24

5,495.0
7,384.0
426.7
$40,561.2
1,942.1
$20.89

5,495.0
7,384.0
426.7
$135,174.9
1,942.1
$69.60

71 Companies were used as comparable companies. We regressed based on EV/EBITDA ratios,

which generated the strongest R-Squared, with est. 2-year annual revenue growth and debt/total
capital as independent variables. We also looked at effective tax rate, but the variable was not close
to being significant and we ultimately took it off the regression. Our regression led to a 25.8% RSquared. Based on our regression, we imply a base price of $45.24 per share. The 95% range implies
a stock price of $20.89 at the lower 95% end and $69.60 at the upper 95% end.
4. Market Regression

According to Professor Damodarans market regression:

EV/EBITDA= 19.09 + 9.59 g - 5.00 DFR - 16.67 Tax Rate
Based on EMC, this implies a market multiple of 15.3x EV/EBITDA. Adjusting enterprise value
down to equity value, we get a value of $44.55 per share. This number is incredibly close to our base
relative valuation in part 3.
5. Final Analysis - Buy
Current Price
DCF Base
DCF Low
DCF High
Relative EV/EBITDA
Market EV/EBITDA

Price
$26.9
$27.3
$20.7
$39.4
$45.2
$44.6

ROI

1.4%
(23.0%)
46.4%
68.0%
65.4%

Based on our DCF valuation, we believe that the market is appropriately valuing the company at $27
a share. When we sensitize our growth and cost of capital assumptions, we get an implied value of
between $20.74 and $39.43.
Looking at our relative valuation, if we are playing the pricing game, we think there is an asymmetric
risk reward profile in terms of what the company should trade at given its comparable firms and
given overall market valuations. Both the market regression and our relative regression imply a
valuation of about $45 a share.
With high-flying tech valuations especially in the software space, we remain weary in playing the
pricing game but we think that the game will last for the foreseeable future. Thus, we feel
comfortable putting a buy recommendation on EMC.

Westinghouse Air Brake Technologies (NYSE:WAB)

6. Company Overview
Wabtec is a U.S.-based multinational firm, headquartered in Wilmerding, PA. Wabtec is one of the
worlds largest equipment and services providers for the global rail industry. Wabtec has two main
business segments, freight and transit. The freight segment, which manufactures and services parts
for locomotives and freight car, composes 57% of sales, with 75% of freight sales in North America.
The firm holds 50% market share in North America for its primary breaking-related equipment. The
transit segment, which manufactures and services parts for passenger transit vehicles, such as
subways, composes 43% of sales, with 45% of those sales in North America. Wabtec is a relatively
large and stable firm and it seeks to grow internationally and through acquisitions.
7. DCF Valuation
We used a two stage FCFF discount model for WAB because it is a large firm in a relatively stable
industry. Wabtec has a higher growth rate recently due to a large backlog, which we assumed was
already factored into the reported financials, so the backlog was not valued separately. We believe
that growth will decline over time as the backlog depletes, since Wabtec does not have any large
sustainable competitive advantages. The calculated reinvestment rate is also abnormally high (101%)
using the LTM numbers due to a recent acquisition, so a number more in line with its historical
reinvestment rate over the last three years was used.

The two drivers for WAB are years in high growth and return on capital. We used 5 years of high
growth to reflect the $2.32 billion in sales backlog as well as growth from recent acquisitions, but we
do not expect these factors to create a sustained high return on capital. Thus, we cannot use 10 years
of high growth because the firm is large and mature and we cannot use 0 years of high growth
because of the backlog and acquisitions. The base case return on capital is the imputed one. The
bear case return on capital is based on the industry average and the bull case return on capital is
based on the top 10th percentile return on capital among comparable firms. We believe the imputed
return on capital during the high growth phase is most appropriate. Even in the most bullish of
scenarios in the sensitivity analysis, our estimated value is still below the current market price (as of
May 8, 2015).

8. Relative Valuation

Multiples Approach
27 firms were used in the comparable firm analysis. The chosen companies were primarily U.S.based firms in the railroad, railroad equipment, or road transportation of freight industry. Firms
were also screened by a minimum market cap of $100 million. A best subsets regression with
EV/EBITDA as the dependent variable and estimated 2-year revenue growth, debt/capital,
effective tax rate, and return on capital yielded the following model:

This regression fits an EV/EBITDA multiple of 11.43 for WAB, which yields a standardized
residual of 2.28 relative to its actual EV/EBITDA of 15.80 (CapIQ). In both residual plots, WAB is
in the top-right. The 11.43 EV/EBITDA multiple implies a stock price of $70.64.
9. Market Regression
The market regression equation for EV/EBITDA is:
EV/EBITDA = 19.09 + 9.59 (.0934) 5.00(.0499) 16.67(.3085) = 14.25
This implies a stock price of $88.78.

10. Final Analysis

Wabtec is a large, stable firm in a mature industry that has recently been growing through
acquisitions. Its high backlog will provide a short period of high growth, but the firm does not have
sustainable competitive advantages that should generate a high excess return in perpetuity. Even
relative to its market peers and according to the market regression, the firm is overvalued. Using all
of our methods, we generate an implied value less than the current price. Accordingly, we
recommend a sell on WAB.

Spark Networks (NYSE:LOV)

1. Company Overview
Spark Networks operates dating websites and mobile applications. Membership on the companys
online singles sites is free, and registered users can post personal profiles and use the search and
validation features. The company generates revenues from monthly subscription fees that allow paid
users to initiate communication with other members. Jewish Networks, primarily JDate.com, makes
up 38% of sales and Christian Networks, primarily ChristianMingle.com, makes up 58% of sales.
The remainder of sales is generated from smaller properties like BlackSingles.com.
Spark Networks satisfied the money losing criteria at the time of selection. However, the company achieved TTM
profitability based off recently reported quarterly financials.
2. DCF Valuation

Key Assumptions
Sales Growth Rate
Current Operating Margin
Target Operating Margin
Sales to Capital Ratio

3.00%
6.20%
15.00%
3.30

Cost of Equity
Cost of Debt
Initial Cost of Capital
Terminal Cost of Capital

7.85%
1.66%
7.66%
6.65%

Rationale
The FCFF model implies 25% upside from LOVs stock price as of May 8, 2015. Spark Networks
reports direct marketing expenses per segment; this expense represents a higher percentage of sales
for the Christian Networks segment since the company was previously investing heavily to establish
ChristianMingle.com in the online dating space. As a result, Jewish Networks make up 59% of TTM
revenues less direct marketing expenses, while Christian Networks constitute 35%. The current
operating margins are depressed due to the prior management teams undisciplined execution of
ChristianMingle growth and inadequate investment in the highly profitable JDate platform. Activist
fund Osmium Partners has successfully replaced the Board and management team, with the new
CEO taking the helm in January 2015. The 15% target operating margin is conservative relative to
peers; IAC/InterActives Match segment, which also operates dating sites, runs at a 27% operating
margin.
3. Relative Valuation

Multiples Approach
31 companies were used in the comparable company analysis. The firms selected were primarily
consumer-facing Internet stocks with similar user acquisition economics, business model features, or
network effects. The multiple that produced the highest R-squared was the EV/Sales metric. The
median EV/Sales multiple implies a stock price of $3.76 (18% upside), and the average multiple
implies a price of $5.76 (81% upside).

Regression Approach
The regression that produced the highest R-squared with statistically significant independent
variables follows:

EV/Sales = -0.49 + 6.76 NTM Revenue Growth + 13.77 NTM EBITDA Margin
Regression Statistics
Multiple R
0.798364432
R Square
0.637385767
Adjusted R Square
0.61148475
Standard Error
1.493200254
Observations
31
ANOVA

df
Regression
Residual
Total

2
28
30

SS
109.7366393
62.430116
172.1667553

MS
F
Significance F
54.86831965 24.60852308
6.7956E-07
2.229647

Coefficients Standard Error

t Stat
P-value
Intercept
-0.489961815
0.472388514 -1.037200949 0.308516993
NTM Revenue Growth 6.755052545
1.493269804 4.523665133 0.000101872
NTM EBITDA Margin
13.76813792
2.260812894
6.08990596 1.43736E-06

Lower 95%
Upper 95% Lower 95.0% Upper 95.0%
-1.45760582 0.477682191 -1.45760582 0.477682191
3.696228015 9.813877076 3.696228015 9.813877076
9.13707264 18.3992032 9.13707264 18.3992032

Based off LOVs estimated NTM revenue growth of -3.47% and estimated NTM EBITDA margin
of 16.95%, the regression equation yields an EV/Sales multiple of 1.61. This implies a stock price of
$4.32 and upside of 36%.
4. Market Regression
The market regression equation for EV/Sales is:
EV/Sales = 1.17 + 1.40 g + 6.35 Operating Margin + 5.26 DFR - 0.10 Tax rate
Based off a g of -4.72%, operating margin of 10.70%, DFR of 0%, and a tax rate of 25%, the
EV/Sales is 1.76. This estimate implies a stock price of $4.67 and 47% upside.
5. Final Analysis

Current Price
DCF Model
Median EV/Sales
Average EV/Sales
Comps EV/Sales Regression
Market EV/Sales Regression

Price
Estimate
3.18
3.96
3.76
5.76
4.32
4.67

Implied
ROI
25%
18%
81%
36%
47%

Spark Networks represents a compelling turnaround story with strong core franchises in the form of
JDate and ChristianMingle. Having translated the qualitative story into the valuation, the stock
appears undervalued by the market based off the various valuation methodologies used. As a result,
I recommend a buy on LOV.

Monster Beverage Corporation (NYSE: MNST)

1. Company Overview
Monster Beverage Company is a public soft drink, natural juices, and energy drink company
headquartered in Corona, California and makes up approximately 35% of the energy drink market.
The company began in the 1930s under the Hansen Natural Sodas name. In 1988 the company
declared bankruptcy and was acquired by the California CoPackers Corporation, and thus the
company was rebranded as Hansen Natural Corporation. On January 5, 2012, the firm changed its
name once again to Monster Beverage Corporation. The company currently has little to no presence
oversees and looks to expand internationally. On August 14, 2014 Coca Cola announced that it
would acquire a 16.7% stake in Monster Beverage Corporation for $2.15 billion.
Monster Beverage Corporation satisfies the high growth criteria given its stock price has more than doubled over the
past year and has seen its EPS increase by over 40% over the past year.
2. DCF Valuation
For our DCF model, the key inputs driving share price and Enterprise Value are projected growth
rates and return on capital. For this reason, the narrative behind Monster and its potential as a high
growth company in the near future are of the most importance. Monster has announced a desire to
expand oversees, and can be expected to follow behind competitor Red Bull. Red Bull, a private
company, has recently expanded to Asia. The recent merger with Coca Cola hands the distribution
of Monster products over to Coca Cola. Thus, we assume that Monster will both increase the size of
the market for energy drinks, especially the market that exists for US based corporations. We can
also assume that Monsters foothold in the industry will increase dramatically with its recent
partnership with Coca Cola. We believe that Monster is positioned to make another strong leap over
this next year and sustain a competitive advantage.

We assume that Monster Beverage Corporation will experience a high growth period for 7 years,
through 2018. Expansion to Asia offers tremendous upside for the global soft drinks industry as a
whole. Soft drink consumption in Asia has growth from 18% 10 years ago to 30% today. Also,
Asias per capita consumption is still only half of the international average, pointing to even stronger
future potential. We see Monster experiencing growth rates above 30% through 2018, at which
point Monster will have established a global presence and continue growing at a lesser pace till about
2021, thus having stable cash flows by 2022. The FCFF model used implies a share price of $149.48
and a16% upside from MNSTs stock price as of May 9, 2015.

3. Relative Valuation

Multiples Approach
18 corporations were used in our comparable company analysis. Firms were selected to match
Monster Beverage Corporation as closely as possible. The companies used in the valuation were
public companies, specifically in the Soft Drinks industry, located either in the United States,
Canada, European developed markets, or Asia developed markets. When comparing multiples, the
EV/EBITDA metric produced a high R-squared. The median EV/EBITDA multiple of the comp
set implies a stock price of $65.11, and the average multiple implies a price of $103.02. It is
important to note that Monsters EV/EBITDA is the second largest in the comp set and also that
Red Bull, their largest competitor, is not public and was not included in the comp set. MNST
currently trades at $128.47.

Regression Approach
A best subsets regression with EV/EBITDA showed that it would be best to control for estimated
annual revenue growth. The regression that produced the highest R-squared, solving for
EV/EBITDA, with statistically significant independent variables follows:
EV/EBITDA = 4.52 + 2.204 Est. Revenue Growth - 2

Based off of MNSTs estimated annual revenue growth of 15.7%, the regression equation results in
an EV/EBITDA multiple of 37.1228. This implies a stock price of $184.58, showing upside of 44%.
4. Market Regression

The market regression equation for EV/EBITDA is:

EV/EBITDA = 19.09 + 9.59 g - 5.00 DFR - 16.67 Tax Rate
Based off a g of 15.7% (received from Cap IQ), DFR of 0%, and a tax rate of 35.2%, the
EV/EBITDA is 14.73. This estimate implies a stock price of $74.54 and significant downside.
5. Final Analysis
Price
Estimate

Implied
ROI

Current Price

128.47

DCF Model

149.48

16%

Median EV/EBITDA

65.11

-49%

Average EV/EBITDA

103.02

-20%

Comps EV/EBITDA Regression

184.58

44%

Market EV/EBITDA Regression

74.54

-42%

Monster Beverage Corporation presents an interesting case in regards to a recommendation. Having

translated the current narrative into the DCF, MNST appears to be a buy and appears to be
undervalued by the market. The same can be said when taking a regression analysis using
EV/EBITDA and controlling for revenue growth.
However, as mentioned before the comp set used does not take into consideration Red Bull, a major
competitor, and also has MNST having the second largest EV/EBITDA ratio. The Median and
Average for EV/EBITDA in the comp set says that MNST is actually overvalued, as does the
market regression.
However, all three of these valuation methodologies ignore what we find as a compelling story
driving the DCF. Moreover, our comps regression implies that Monster Beverage Corporation is
cheap. As a result, we recommend a buy on MNST.