WORKBOOK
SUMMER ANALYST PROGRAM – 2007
PRELIMINARY | SUBJECT TO FURTHER REVIEW AND EVALUATION
THESE MATERIALS MAY NOT BE USED OR RELIED UPON FOR ANY PURPOSE OTHER THAN AS SPECIFICALLY CONTEMPLATED BY A WRITTEN AGREEMENT WITH CREDIT SUISSE.
If you have any questions regarding materials in this book, or the valuation project in general, don’t hesitate to call us:
Anna Golynskaya Phil Kohn
Training Leader Training Leader
[email protected] [email protected] (212) 538-5442 (212) 538-0558
Table of Contents
1 Overview of Valuation Project 2 Sample Project3 Weekly Assignments and Resources
A Public Information Book (PIB) B Company Profile
C Equity Comps / M&A Comps
D DCF and WACC Analysis
Overview of Valuation Project
Welcome to Credit Suisse! In addition to meeting a ton of new people and having fun for the next 10 weeks, we figured it would be helpful for you to return to college your senior year having
learned something about what Investment Bankers do
Several analysts, associates, and Vice Presidents from across the division have worked hard to put the following materials together as your “one-stop shop” for banking how to’s
In addition to your group staffing assignments over the next two months, you will also be asked to complete a group valuation project to be submitted by Week 9 of your program. The submission will include the following:
A company profile
Equity comps and M&A comps
DCF valuation
Merger consequences analysis
At the end of the summer, August 2nd, your team will be asked to present, in a short session, your
analyses and conclusions to a team of bankers
This project will be completed gradually over the course of the summer and we will be holding 4 sessions (1 every week) to cover each of the topics or analysis we will be asking you to do
You will be required to turn in you work for the topic covered each week at the following weeks session (i.e., you will go over profiles in first session and turn them in at the second session)
Project Schedule and Key Dates
Date Session Details Next Steps
Session 1 June 29 10 am & 2 pm
Finding public information and creating a PIB Creating a company profile
Create Knight Ridder PIB Create Knight Ridder profile
Session 2 July 6
10 am & 2 pm
Equity Comps and Acquisition Comp Analysis Find Knight Ridder trading comparables Find important average trading stats For given comparable acquisitions, find key
multiples
Session 3 July 13
10 am & 2 pm
Discounted Cash Flow Create projected Knight Ridder income
statement
Determine WACC based on comps
Project free cash flows and discount at WACC
Session 4 July 27
10 am & 2 pm
Merger Consequences Evaluate transaction consequences including
EPS accretion/dilution, pro forma credit stats, pro forma ownership
Create premiums paid and synergies sensitivity tables
PRESENTATION August 6 Present final projects Good Luck!!
Note: Due to the fact that the deal was announced on 3/13/06, for all valuations, please use all public information available as of then (latest filing would be the 12/25/05 10-K) and stock prices and research as of 3/10/06.
Provides comprehensive supply chain management services in four business segments:
“Less-than-truckload” segment, carriers provide regional and inter-regional delivery throughout the United States
“Truckload” segment offers premium regional and national truckload services
“Logistics” segment provides dedicated fleet, cross-dock operations, supply chain management, contractual warehousing, domestic ocean freight forwarding and reverse logistics services
“Information Technology” segment provides support activities including corporate sales and various financial management functions
USF provide services to a wide variety of customers, with no single customer accounting for more than 3.3% of revenue
Management and Board of Directors Company Overview
USF Corporation – Company Profile
1/28/2005: USF Corporation reported fourth quarter and full
year 2004 results, missed Wall Street earnings
12/13/2004: Announced opening of two new terminals serving
the Southern Minnesota and Decatur, Alabama areas
11/2/2004: Richard P. DiStasio stepped down as CEO, Paul
Liska was named interim CEO
10/22/2004: Reported third quarter 2004 results, missed Wall
Street earnings
9/9/2004: USF Holland announced the opening of eight (8)
Northeast terminals, service city includes: Baltimore, MD Albany, NY, Allentown, PA, Harrisburg, PA, Philadelphia, PA, Wilkes Barre, PA, Syracuse, NY, and Richmond, VA
Recent News Ownership
Status: Public (Nasdaq: USFC) Headquarters: Chicago, IL Website: www.usfc.com Employees: 21,000
Name Position and Affiliation
Thomas E. Bergmann Interim CEO, CFO
Steven Caddy President and CEO, USF Holland Edward R. Fitzgerald President and CEO, USF Reddaway Douglas R. Waggoner President and CEO, USF Bestway Paul J. Liska Chairman of the Board Morley Koffman Director
Stephen W. Lilienthal Director Anthony J. Paoni Director Glenn R. Richter Director Neil A. Springer Director Michael L. Thompson Director
HOLDERS SHARES % OF TOTAL
Citigroup Inc. 2,595,871 9.9%
Fidelity Management & Research 2,410,515 9.2%
Dimensional Fd Advisors, Inc. 1,831,607 7.0%
Barclays Bank 1,567,377 6.0%
Allianz Dresdner Asset Mgmt. 1,234,140 4.7%
Top 5 Institutions 9,639,510 36.8% Other Institutions 15,892,218 60.7% Total Institutions 25,531,728 97.4% Insiders 473,040 1.8% Other 196,072 0.7% Total 26,200,840 100.0%
Stock Price Performance Financial Overview $25 $28 $31 $34 $37 $40 2/4/04 4/5/04 6/5/04 8/5/04 10/5/04 12/5/04 2/4/05 Sto ck Pri c e 0 500 1,000 1,500 2,000 Vo lu me i n Th ousands
USF Corp. Volume USF Corp. Stock Price
Stock Price (2/4/05) $32.44 % of 52-Week High 83.6% 52-Week High / Low $38.80 / $27.51 Diluted Shares 28.2 Equity Market Value 916.0
(+) Debt 250.1
(–) Cash & Equivalents 150.8 Enterprise Value $1,015.3 Enterprise Value to:
2004E Revenue $2,516.9 / 0.4x 2005E Revenue $2,658.8 / 0.4x 2004E EBITDA $169.2 / 6.0x 2005E EBITDA $253.7 / 4.0x EPS Estimates / P/E Ratio
2004E EPS $0.85 / 38.2x
USF Corporation
(Cont’d)
Market and Trading Data
($ in millions)
December 31,
2004A 2005E 2006E
Revenues $2,394.6 $2,516.9 $2,658.8 % Growth 4.5% 5.1% 5.6% EBIT $112.1 $130.0 $150.1 % Margin 4.7% 5.2% 5.6% EBITDA $169.2 $253.7 $273.1 % Margin 7.1% 10.1% 10.3%
Comparable Company Analysis
($ in millions)
SHARE % OF ENTERPRISE VALUE AS A LONG-TERM LTM
PRICE 52-WEEK EQUITY ENTERPRISE MULTIPLE OF SALES MULTIPLE OF EBITDA EPS OPERATING
COMPANY 02/04/05 HIGH VALUE VALUE 2004E 2005E 2004E 2005E 2004E 2005E GROWTH RATIO
Truck Load JB Hunt Transportation $45.00 97.7% $3,682 $3,697 1.3x 1.2x 8.2x 7.2x 17.5x 15.5x 15.8% 92.9% Swift Transportation(1) 22.61 99.4% 1,671 2,265 0.8x 0.7x 6.2x 5.9x 14.8x 12.6x 12.6% 93.6% Werner Enterprises(1) 20.94 90.1% 1,679 1,570 0.9x 0.9x 5.5x 4.9x 19.6x 16.1x 15.3% 91.6% Heartland Express(1) 20.93 90.2% 1,570 1,311 2.9x 2.6x 10.8x 9.7x 25.2x 22.0x 13.8% 79.6% Knight Transportation(1) 25.71 99.3% 1,460 1,434 3.5x 2.9x 11.9x 10.1x 29.4x 23.1x 16.6% 80.7% Covenant Transportation 20.86 97.8% 312 372 0.6x 0.6x 4.8x 4.1x 18.9x 15.8x 12.0% 94.0% Mean 1.7x 1.5x 7.9x 7.0x 20.9x 17.5x 14.4% 88.7% Median 1.1x 1.0x 7.2x 6.5x 19.3x 16.0x 14.6% 92.3%
Less Than Truckload
CNF Inc(1) $46.49 91.2% $2,457 $2,400 0.6x 0.6x 6.2x 5.3x 17.8x 14.3x 14.1% 92.3% Overnite Corp(1)
30.35 78.5% 850 925 0.6x 0.5x 5.3x 4.6x 13.2x 11.0x 15.5% 82.8% Arkansas Best Corp(1) 41.77 89.5% 1,069 1,000 0.6x 0.5x 4.9x 4.7x 13.0x 11.2x 12.5% 92.8% Old Dominion Freight(1) 35.60 97.5% 885 961 1.2x 0.9x 7.9x 6.6x 21.6x 16.9x 17.5% 91.4% SCS Transportation(1) 22.55 81.6% 354 470 0.5x 0.4x 5.2x 4.6x 17.8x 13.0x 15.0% 95.6% Yellow Roadway Corp(1) 56.31 97.8% 2,769 3,320 0.5x 0.5x 6.3x 5.0x 14.2x 10.9x 10.5% 94.6%
Mean 0.7x 0.6x 6.0x 5.2x 16.3x 12.9x 14.2% 91.6%
Median 0.6x 0.5x 5.8x 4.9x 16.0x 12.1x 14.5% 92.6%
Logistics
C.H. Robinson Worldwide $51.38 91.1% $4,435 $4,201 1.0x 0.9x 18.5x 16.1x 32.9x 28.4x 14.5% 94.9% UTi Worldwide Inc 71.88 98.5% 2,307 2,297 1.5x 1.1x 30.8x 13.0x 27.9x 21.6x 20.0% 94.0% Sirva Inc 9.40 36.2% 693 1,165 1.1x 1.0x 6.9x 5.2x 11.1x 7.4x 20.0% 94.6% EGL Inc 31.18 89.1% 1,461 1,475 0.5x 0.5x 19.1x 14.7x 27.7x 23.1x 17.4% 97.2% Landstar System Inc(1) 35.25 91.4% 1,083 1,113 0.6x 0.5x 8.3x 7.2x 29.0x 23.8x 17.0% 94.1% Pacer International 22.19 91.0% 837 1,007 2.6x 2.4x 11.2x 9.8x 16.2x 13.7x 14.6% 94.8% Forward Air Corp 43.33 91.7% 944 840 3.0x 2.6x 13.9x 11.5x 27.7x 23.1x 14.5% 81.1% Hub Group 56.46 96.6% 529 529 0.4x 0.4x 10.2x 8.9x 25.3x 22.6x 25.0% 96.6% Quality Distribution Inc 8.62 53.4% 164 436 0.7x 0.6x 6.6x 5.5x 12.3x 8.5x NA 93.9%
Mean 1.3x 1.1x 14.0x 10.2x 23.3x 19.1x 17.9% 93.5%
Median 1.0x 0.9x 11.2x 9.8x 27.7x 22.6x 17.2% 94.6%
USF Corp(1) $32.44 83.6% $916 $1,015 0.4x 0.4x 6.0x 4.0x 38.2x 13.1x 10.2% 97.3% P/E
Selected Precedent Transactions
($ in millions)
EQUITY ENTERPRISE
ENTERPRISE
VALUE/ TARGET
DATE TARGET TARGET DESCRIPTION ACQUIROR VALUE VALUE (1) EBITDA (2) UNIONIZED
Jul-03 Roadway Corporation (US)
LTL carrier providing freight services on major city-to-city routes in North America
Yellow Corporation $966 $1231 6.7x NA
Nov-01 Motor Cargo Industries Provides regional less-than truckload services in the western U.S.
Union Pacific Corp. 83 78 4.0 No
Nov-01 Arnold Industries Provides regional less-than-truckload services in northeastern states and also provides truckload and logistics services
Roadway Corp. 558 510 5.7 Yes
Aug-01 Arnold Industries (US) N/A Roadway Corporation 539 510 5.4 No
Aug-01 G.I. Trucking Company Provides regional less-than-truckload services in western and southwestern states
Investor Group (Estes) 40 40 5.0 No
Nov-00 American Freightways Corporation
Operates as a scheduled common and contract carrier transporting primarily less-than-truckload shipments of general commodities.
FedEx Corp. 934 1,196 6.3 No
Jun-99 Jevic Transportation Inc.
Provides regional and interregional transportation of general commodity freight
Yellow Corp. 158 197 5.9 No
Jun-98 Preston Trucking Provides les-than-truckload transportation of general commodity freight
Management Group NM NA NA Yes
Oct-97 Caliber System, Inc.
Provides transportation, logistics and related information services through its five subsidiaries
FedEx Corp. 2,489 2,681 10.3 No
Jul-95 Worldway Corp. Transporter of freight throughout United States; also provides truckload services and driver leasing services through its subsidiaries
Arkansas Best Corp. 82 153 9.0 Yes
Nov-92 Central Freight Lines Inc.
Carrier of intrastate and foreign commerce within Texas, Arizona, and New Mexico
Roadway Services Inc. 102 148 6.8 No
Nov-92 Preston Trucking Provides less-than-truckload transportation of general commodity freight
Yellow Freight Systems 24 146 5.8 Yes
Jul-88 Viking Freight Inc. Provides regional carrier services in California and 9 other Western States
Roadway Services Inc. 135 172 7.8 No
Jun-88 Arkansas Best Corp. LTL and TL carriage, furniture manufacturing and tire retreading
Kelso & Co. 317 472 6.2 Yes
WACC Schedule
Industry Statistics
(in millions)
Total Mkt Debt / Tax Levering Unlevered Company Beta (1)
Debt Equity Mkt Equity Rate (2) Factor (3) Beta (4) Assumptions
Arkansas Best Corp 0.83 15 1,069 1.4% 40.1% 1.01 0.82 Target Marginal Tax Rate 38.0% Cnf Inc 0.89 714 2,457 29.1% 41.0% 1.17 0.76 Risk Free Rate (5) 4.330% Old Dominion Freight 0.62 81 885 9.2% 39.1% 1.06 0.59 Equity Risk Premium (6) 7.20% Overnite Corp 0.95 127 850 14.9% 40.0% 1.09 0.87 Size Premia ("Sp") (7) 1.59% Scs Transportation Inc 0.63 123 354 34.7% 37.6% 1.22 0.52
Yellow Roadway Corp 1.00 728 2,769 26.3% 39.1% 1.16 0.86
Mean 0.82 19.3% 39.5% 1.12 0.74 Median 0.86 20.6% 39.6% 1.12 0.79
Schedule A (Sensitivity of Capital Structure)
Weighted Average Cost of Capital (10) Debt / Debt / Average Levering Levered Cost of Pre-tax Cost of Debt
Capital Mkt Equity Unlev'd Beta Factor Beta (8) Equity (9) 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%
0.0% 0.0% 0.74 1.00 0.74 11% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 10.0% 11.1% 0.74 1.07 0.79 12% 10.7% 10.8% 10.9% 10.9% 11.0% 11.1% 20.0% 25.0% 0.74 1.16 0.85 12% 10.3% 10.4% 10.5% 10.6% 10.8% 10.9% 30.0% 42.9% 0.74 1.27 0.93 13% 9.8% 10.0% 10.1% 10.3% 10.5% 10.7% 40.0% 66.7% 0.74 1.41 1.04 13% 9.3% 9.5% 9.8% 10.0% 10.3% 10.5% 50.0% 100.0% 0.74 1.62 1.19 15% 8.8% 9.1% 9.4% 9.7% 10.0% 10.4%
Schedule B (Sensitivity of Unlevered Beta)
Weighted Average Cost of Capital (10) Debt / Debt / Levering Unlevered Pre-tax Cost of Debt
Capital Mkt Equity Factor Beta 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%
0.0% 0.0% 1.00 0.65 10.6% 10.6% 10.6% 10.6% 10.6% 10.6% 10.0% 11.1% 1.07 0.70 10.5% 10.5% 10.6% 10.7% 10.7% 10.8% 20.0% 25.0% 1.16 0.75 10.3% 10.5% 10.6% 10.7% 10.8% 11.0% 30.0% 42.9% 1.27 0.80 10.2% 10.4% 10.5% 10.7% 10.9% 11.1% 40.0% 66.7% 1.41 0.85 10.0% 10.2% 10.5% 10.7% 11.0% 11.2% 50.0% 100.0% 1.62 0.90 9.8% 10.1% 10.4% 10.7% 11.0% 11.3% (1) Barra US equity Book predictions (7) Cost of equity premia based on equity market capitalization.
(2) Based on marginal tax rate low-cap ($797mm - $1,167mm) = 1.59%. Amounts per 2004 Ibbotson. (3) Levering Factor: 1 + [ ( 1 - Tax Rate ) * ( Debt / Equity ratio ) ] (8) Levered Beta: (Beta * Levering Factor)
(4) Unlevered Beta: ( Beta / Levering Factor ) (9) Cost of Equity: Rf + B * ( Rm - Rf ) + Sp, or the risk-free rate plus the beta * the eq (5) Yield on Interpolated 20-Year US treasury Bonds which corresponds to Ibbotson's long-term equity (10) WACC: Rd = Return on Debt; Re = Return on Equity
Discounted Cash Flow Analysis
($ in millions)
2005E 2006E 2007E 2008E 2009E
EBITDA $250.7 $278.5 $307.2 $317.6 $328.2
Less: D&A (113.6) (121.6) (130.3) (134.2) (138.2)
EBIT $137.1 $156.9 $176.9 $183.4 $190.0
Less: Tax Effect (52.1) (59.6) (67.2) (69.7) (72.2)
Unlevered Net Income $85.0 $97.3 $109.7 $113.7 $117.8
Plus: D&A 113.6 121.6 130.3 134.2 138.2
Less: Capex (103.2) (110.5) (118.4) (122.0) (125.7)
Plus: Changes in WC (13.7) (7.2) (7.7) (3.2) (3.2)
Unlevered Free Cash Flow $81.7 $101.1 $113.9 $122.7 $127.1
Source: Wall Street research projections and Credit Suisse estimates.
($ in millions, except per share data)
Terminal Value EBITDA Multiple
Discount Rate 4.50x 5.00x 5.50x 6.00x
9.0% $417.5 $417.5 $417.5 $417.5 Present Value of Free Cash Flows
960.0 1,066.7 1,173.3 1,280.0 Present Value of Terminal Value
$1,377.5 $1,484.2 $1,590.9 $1,697.5 Enterprise Value
(99.3) (99.3) (99.3) (99.3) Less: Net Debt
$1,278.2 $1,384.9 $1,491.6 $1,598.2 Equity Value
$44.42 $47.92 $51.42 $54.92 Equity Value per Share
36.9% 47.7% 58.5% 69.3% Implied Premium / (Discount) to Current(1)
0.4% 1.2% 1.8% 2.4% Implied Perpetuity Growth Rate
10.0% $406.1 $406.1 $406.1 $406.1 Present Value of Free Cash Flows
917.1 1,019.1 1,121.0 1,222.9 Present Value of Terminal Value
$1,323.3 $1,425.2 $1,527.1 $1,629.0 Enterprise Value
(99.3) (99.3) (99.3) (99.3) Less: Net Debt
$1,224.0 $1,325.9 $1,427.8 $1,529.7 Equity Value
$42.64 $45.98 $49.33 $52.67 Equity Value per Share
31.4% 41.8% 52.1% 62.4% Implied Premium / (Discount) to Current(1)
Projections USF Corporation and Yellow Roadway projections based on Wall Street equity research; estimated marginal tax rate of 38%
Prospective acquiror net income based on Wall Street equity research
Financing 50% Stock – 50% Cash Consideration assumed; financed by 100% bank debt at 3-Months LIBOR plus 100 basis points
Purchase Price Range of $1,015 – $1,410 mm, corresponding to 4.0x – 5.6x 2005E EBITDA
FMV Adjustments Fair market value adjustment estimated at 12% of book value; depreciated over 20 years
Goodwill Goodwill not amortized
Timing Assumed to gain full 2005 earnings
Fees M&A Fees of 0.5% of transaction value
Financing fees of 2.5% of debt raised
Synergies None assumed; pre-tax synergies required to achieve acquiror break-even EPS inferred
Potential Merger Assumptions
Key AssumptionsMerger Consequences Analysis
Yellow Roadway Acquisition of USF Corporation($ in millions)
50% Cash / 50% Stock Consideration
Premium to Share Price – 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%
Price Per Share $32.44 $34.06 $35.68 $37.31 $38.93 $40.55 $42.17 $43.79 $45.42
Equity Value $918 $966 $1,014 $1,062 $1,111 $1,160 $1,210 $1,259 $1,309
Net Debt (1) 99 99 99 99 99 99 99 99 99
Enterprise Value 1,017 1,065 1,114 1,162 1,210 1,259 1,309 1,358 1,408
Enterprise Value / 2005E EBITDA 4.1x 4.2x 4.4x 4.6x 4.8x 5.0x 5.2x 5.4x 5.6x
Enterprise Value / 2006E EBITDA 3.7x 3.8x 4.0x 4.2x 4.3x 4.5x 4.7x 4.9x 5.1x
Equity Value / 2005E Net Income 13.3x 14.0x 14.7x 15.4x 16.1x 16.9x 17.6x 18.3x 19.0x
Equity Value / 2006E Net Income 11.4x 12.0x 12.6x 13.2x 13.8x 14.4x 15.0x 15.6x 16.2x
2005E Stand Alone Diluted EPS $5.25 $5.25 $5.25 $5.25 $5.25 $5.25 $5.25 $5.25 $5.25
2005E Pro Forma Diluted EPS 5.59 5.53 5.48 5.43 5.38 5.33 5.28 5.24 5.19
2005E Accretion / (Dilution)
Acc / (Dil) – $ $0.34 $0.28 $0.23 $0.18 $0.13 $0.08 $0.03 ($0.01) ($0.06)
Acc / (Dil) – % 6.4% 5.4% 4.4% 3.5% 2.6% 1.6% 0.7% (0.3%) (1.2%)
Pre-Tax Breakeven Synergies – – – – – – – $1.3 $6.1
Pro-Forma Debt / LTM EBITDA (2) 1.6x 1.7x 1.7x 1.7x 1.8x 1.8x 1.8x 1.9x 1.9x
Debt-to-Capitalization (at closing) 45.28% 45.36% 45.45% 45.53% 45.61% 45.69% 45.76% 45.83% 45.91%
% Shares issued as currency 14.2% 14.9% 15.5% 16.1% 16.7% 17.3% 17.9% 18.5% 19.1%
3. Weekly Assignments and
Resources
Summer Assignment – PIB
Assignment
Prior to the June 30th training session, please assemble a PIB on Knight Ridder
Make sure that your PIB has all the sections outlined on the next page
Insert numbered tabs between each section “blue sheets” between each item in the same tab, if multiple items exist. For example, put a blue sheet between each research report
Have the Copy Center make a double-sided bound copy of your PIB
Key Takeaways
After completing this section, you should be familiar with most of the tools that are available to access public information
Research reports are expensive!!! Purchase only those that are appropriate
Be prepared to answer questions like:
1. Where do I go to get the latest SEC filing?
Public Information Book Resources
1. General Public Information– S&P Stock Report
– Bloomberg Data
– Price/Volume
– Web Site Company Website
2. Prospectus
– Usually follows a major event (M&A, Equity offering, Debt offering)
3. Annual Report Company Website
4. Form 10-K
– Annual filing with the SEC, similar to an annual report 5. Form 10-Q
– Quarterly filing with the SEC
6. Proxy Statement
– Covers information about company shares and shareholders
7. Research Report – Include CS if available
– Look for longer, more recent research
CS Research & Analytics
8. News Run
– Back two – six months is standard Company Website 9. Ownership Run
3. Weekly Assignments and
Resources
Summer Assignment – Company Profile
Assignment
In the format shown on the sample pages, create a two page company profile for Knight Ridder Corporation
Make sure you include:
Company Overview
Market Statistics (download from FactSet)
Financial Overview
Stock Price Performance
Directors and Officers
Products
Current OwnershipHelpful Hint: The financial overview summary sheet in your Abacus shell (see Tab C) is a good
template from which to copy and paste market stats and financial overviews
Key Takeaways
At the end of this section, you should be able to answer the following: 1. What are Knight Ridder Corporation’s primary business segments?
2. How has Knight Ridder Corporation performed in the last year with respect to:
– Earnings?
– Stock price?
– Any relationship between the two?
Agenda
Creating a general two page company profile
Keys to a Successful Acquisition Ideas Presentation
Know Your Audience Use a Systematic Approach
Remember the Formula: Strategic Fit + Availability = A Good Idea
Demonstrate Industry Knowledge
Revisit “Old” Ideas Selectively
Stimulate Discussion and Ask Questions
Summarize Conclusions and Develop Follow-up Plan
A successful acquisition ideas presentation delivers a focused set of ideas with a point of view and a rationale.
Considerations in Determining Fit
Client specified Size Industry Technology Geographic scope (international vs. domestic) Product synergies Markets Customers Distribution Manufacturing Operating synergies Corporate cost savings
S,G & A cost savings
Other
Strategic
Organic growth prospects of target Management talent Technology or other proprietary assets General Leverage Accretion / dilution Market perception Financial
Parent is a LBO sponsor
Filed equity offering with large secondary component
Previous failed attempt to sell (“busted auction”) or spin-off (“busted IPO”)
Takeover speculation
Undervalued, depressed or declining stock price
Shareholder activism
Potential odd man out in rapidly consolidating industry or segment
Changes in senior management or aging senior management with no obvious successor
Dramatic revisions in corporate strategy
Need to expand internationally or to retrench
Need for capital
Failure or inability to grow new products organically
Parent reorganizing or realigning businesses, possibly in preparation for a sale
Division with no logical strategic fit with the parent (“corporate orphan”)
Division underperforming or less profitable than core business
Insiders control a meaningful percent of the stock and have no evident need for liquidity
Family-owned with the next generation preparing or prepared to assume leadership
Majority owned by another company that has obvious reason to hold onto the business
Strong and consistent stock performance
The current parent is the most obvious best owner for the business
The current parent has identified the business as a core business and/or the equity market is in favor of current parent owning the business
Consider the target’s defensive posture vis-a-vis a hostile offer, but remember … the valuation/rationale must be even more compelling to justify an unsolicited approach
Note: It is also important to review the valuation multiples of the publicly-traded Parent Company which owns the “target” subsidiary. If sale proceeds (after tax) imply lower valuation multiples (EBITDA, EBITA and Net Income) than those at which the parent stock is selling, the transaction would be dilutive to overall value and thus would probably be a non-starter as a sale candidate today
Signals of Availability / Lack Thereof
Acquisition Screening – Information Sources
SIC code lists Equity analyst research
“Competition” sections of prospectuses and 10-Ks of comparable companies
Research reports relating to the Client and its core industry group competitors
Value Line for Client and its competitors
S&P Tear Sheets (with word search)
OneSource (U.S. Public, U.S. Private, and U.K. Public SIC Code Summary Analyses)
Industry trade association lists
Trade publications
WorldScope database (Global Buyers List)
FactSet “comp builder”
Creating a General Company Profile
Business Description
The Boeing Company is an aerospace firm. The Company operates in principal areas that include commercial airplanes, military aircraft, missile systems, space and communications and customer and commercial financing.
Business Segments
The Commercial Airplanes segment is involved in development, production and marketing of commercial jet aircraft and providing related support services, principally to the commercial airline industry worldwide.
The Military Aircraft and Missile Systems segment is involved in the research, development, production, modification and support of military aircraft including fighter, transport and attack aircraft, as well as helicopters and missiles.
The Space and Communications segment is involved in the research, development, production, modification and support of space systems, missile defense systems, satellites and satellite launching vehicles, rocket engines and information and battle management systems.
The Customer and Commercial Financing segment is primarily engaged in the financing of commercial and private aircraft and commercial equipment.
Competitors
The Company competes with Lockheed Martin, Raytheon, BAE Systems, Northrop Grumman, Matra BAe Dynamics Alenia and The European Aeronautics Defense & Space Corporation.
Company Overview
Business section of 10K / Annual Report
finance.yahoo.com business profile
Research reports
Company Web site
VentureSource (private companies)
Your PIB can be a great resource (See Tab A)
10K / Annual Report
Research reports
Company Web site
PIB
10K / Annual Report
Research reports
finance.yahoo.com business profile
Company Web site
Creating a General Company Profile
Financial Overview Therapeutic Focus – 2003 CNS $5.4 BN Diabetes/ Metabolic $2.1 BN Osteoporosis $1.0 BN Sexual Dysfunction $0.2 BN Oncology $1.0 BN Antibiotics $0.7 BN Cardiology $0.5 BN You can find the historical information from company filings
The projections will come from research
Highlight product mix or any particular asset that might be of interest to your Audience
Company Web site
Research reports
10K / Annual report
($ in millions)
December 31,
2004A 2005E 2006E
Revenues $2,394.6 $2,516.9 $2,658.8
% Growth 4.5% 5.1% 5.6%
EBIT $112.1 $130.0 $150.1
% Margin 4.7% 5.2% 5.6%
EBITDA $169.2 $253.7 $273.1
Note: Currently there is no similar pie graph in USF profile but it is a possibility for your Knight Ridder profile (or other profiles you will be expected to do in your respective groups).
Creating a General Company Profile
Market and Trading Data
This should come from your equity comp shell (See Tab C)
Keep in mind, you may update this profile often (e.g. latest stock price or estimates) so keeping your comps flexible is key
Stock Price (2/4/05) $32.44 % of 52-Week High 83.6% 52-Week High / Low $38.80 / $27.51 Diluted Shares 28.2 Equity Market Value 916.0
(+) Debt 250.1
(–) Cash & Equivalents 150.8 Enterprise Value $1,015.3 Enterprise Value to:
2004E Revenue $2,516.9 / 0.4x 2005E Revenue $2,658.8 / 0.4x 2004E EBITDA $169.2 / 6.0x 2005E EBITDA $253.7 / 4.0x EPS Estimates / P/E Ratio
2004E EPS $0.85 / 38.2x 2005E EPS $2.48 / 13.1x
Creating a General Company Profile
Stock Price Performance
ActiveGraph made from Excel and FactSet
Keep in mind, you may update this often
Plot either standalone or against peer group. If showing peer group, use the companies in your equity comps (see Tab C) but exclude the company you
$25 $28 $31 $34 $37 $40 2/4/04 4/5/04 6/5/04 8/5/04 10/5/04 12/5/04 2/4/05 S tock Pr ic e 0 500 1,000 1,500 2,000 Volume in Th ous a n ds
Creating a General Company Profile
Ownership
Recent News
ShareWorld
Proxy (for insider ownership)
FactSet
Company news releases
Factiva
Equity research
1/28/2005: USF Corporation reported fourth quarter and full
year 2004 results, missed Wall Street earnings
12/13/2004: Announced opening of two new terminals serving
the Southern Minnesota and Decatur, Alabama areas
11/2/2004: Richard P. DiStasio stepped down as CEO, Paul
Liska was named interim CEO
10/22/2004: Reported third quarter 2004 results, missed Wall
Street earnings
9/9/2004: USF Holland announced the opening of eight (8)
Northeast terminals, service city includes: Baltimore, MD Albany, NY, Allentown, PA, Harrisburg, PA, Philadelphia, PA, Wilkes Barre, PA, Syracuse, NY, and Richmond, VA
HOLDERS SHARES % OF TOTAL
Citigroup Inc. 2,595,871 9.9%
Fidelity Management & Research 2,410,515 9.2%
Dimensional Fd Advisors, Inc. 1,831,607 7.0%
Barclays Bank 1,567,377 6.0%
Allianz Dresdner Asset Mgmt. 1,234,140 4.7%
Top 5 Institutions 9,639,510 36.8% Other Institutions 15,892,218 60.7% Total Institutions 25,531,728 97.4% Insiders 473,040 1.8% Other 196,072 0.7% Total 26,200,840 100.0%
Creating a General Company Profile
Management and Board
Proxy
finance.yahoo.com
Company Web site
Sometimes you will see profiles with a brief biography of the directors and officers
Name Position and Affiliation
Thomas E. Bergmann Interim CEO, CFO
Steven Caddy President and CEO, USF Holland Edward R. Fitzgerald President and CEO, USF Reddaway Douglas R. Waggoner President and CEO, USF Bestway Paul J. Liska Chairman of the Board
Morley Koffman Director Stephen W. Lilienthal Director Anthony J. Paoni Director Glenn R. Richter Director Neil A. Springer Director Michael L. Thompson Director
3. Weekly Assignments and
Resources
Summer Assignment – Equity Comps
For your assignment, you are to submit an Equity Comp output page for Knight Ridder AS OF THE DATE OF THE ACQUISITION (3/10/06)
You must first find comparable companies. For this project, you need only Knight Ridder Corporation and three comparable companies
IncludeMcClatchy Company
and New York Times Co as comps and find one comp on your own Input ABACUS shells for these comps using FactSet, the companies’ financials and Wall Street research to find the following multiples:
2006E and 2007EV/revenue
2006E and 2007E EV/EBITDA
2006E and 2007E EV/EBIT
2006E and 2007E P/E
2006E and 2007E EBITDA margins When necessary, make sure to calendarize the financials
Make sure to check your output and see if something looks abnormal
Summer Assignment – Equity Comps (Cont’d)
Helpful Hint #1: If you’ve inserted your data properly into the input pages, ABACUS will generate
a formatted and linked output page for you: Go to ABACUS / New Summary Sheet / Forward Multiple Analysis
Helpful Hint #2: The output page converts all currencies to US$. If you are using a foreign
company, make sure you input the proper exchange rate in the appropriate section of the shell
Key Takeaways
At the end of this section, you should be able to answer the following:
1. On what basis did you choose your one other comparable?
2. In retrospect, are they “good” comps? Why or why not?
3. How is Knight Ridder trading relative to its peer group?
4. Can you explain its relative valuation? Why does it trade at a premium or discount to its peers? Think of its relative earnings, margins, market share, size, etc.Agenda
What are Equity Comps and Why Do We Do Them?
Finding Comparable Companies
Collecting the Data
Using the Compco Model
Common Pitfalls
Interpreting the Results
What Are Equity Comps and Why Do We Do Them?
A big part of an investment banker’s job is to value companies
More than anything else, clients want to know what their companies are worth – especially relative to their peers One way to value companies is to infer (or compare) their value based on the public trading values of other companies with similar characteristics
Because not all companies are the same size or have the same capital structure, we need to establish universal metrics that can apply to all companies within a group
These metrics almost always take the form of a ratio or “multiple”, where the numerator is a measure of trading value (Enterprise Value; Market Value) and the denominator is anoperating statistic (EBITDA, Net Income)
The most common metrics are Enterprise Value / EBITDA and Market Value / Net Income (or P/E) The calculation and interpretation of these metrics is a Comparable Company Analysis, or Compco Analysis
Helpful Hint: The right terminology for this analysis is the Comparable Company Analysis, but
since bankers like to complicate matters, this analysis is referred to differently by each group. Don’t get confused if you’re asked to do equity comps, compcos, comps, and a comparable company analysis all in one night: They all mean the same thing!
OK, So What Are Enterprise and Equity Value?
Enterprise Value is the total dollar value of a business, represented by the sum of all of the ownership interests in the business
Note: Enterprise Value is sometimes referred to as Adjusted Market Value, Firm Value or (in early-stage biotech) Technology Value In broad terms, there are two types of ownership interests in a business – Debt and Equity
The public market value of a business’ equity is referred to as its equity value, market value or market capitalization We calculate a business’ Enterprise Value by summing the public market values of its debt and equity
Caveat: Because the trading value of debt securities is less volatile than equity securities, we typically use the book value of debt rather than the market value to save time Enterprise Value is an important measure because it makes companies with different capital structures more comparable
OK, So What Are Enterprise and Equity Value?
Enterprise Value = Value of All Business’ Assets = Equity Value + Net Debt(1)
Equity Value = Value of the Shareholders’ Equity = Current Stock Price x Shares Outstanding(2)
(1) Net Debt equals long-term debt + short-term debt + “out of the money” convertible debt + minority interest + preferred stock + capitalized leases – cash and cash equivalents.
(2) The proper way to calculate Equity Value is to use the diluted number of shares outstanding, which includes all “in the money” and exercisable stock options.
Enterprise Value
Net Debt
Equity Value
Enterprise ValueAssets
Liabilities and
Shareholders’ Equity
Fair Enough, But Help Me With This EBITDA Thing
EBITDA is an accounting measure of how much cash flow a business generates from itsoperations
EBITDA excludes interest, taxes and depreciation and amortization because these items vary from company to company – for reasons which generally do not impact value – making them harder to compare on a consistent basis
Interest is a function of capital structure
Taxes are a function of incorporation and tax structure
Depreciation is a function of depreciation policy / asset lives
Amortization is a function of how acquisitive a company has been EBITDA = Earnings before Interest, Taxes, Depreciation and Amortization We place emphasis on Enterprise Value / EBITDA because this metric excludes most variables which do not affect value (or can be easily changed) making companies more comparable for valuation purposes
Let’s Recap
The absolute value of a business is expressed by its Enterprise and Equity Value
Enterprise Value is the total value of all ownership interests in a business
Equity Value is the value of the equity in a business The relative value of a business is expressed by a “multiple” of its absolute value to its operating results
“GE is trading at 22x its 2006E projected EBITDA” – Translation: The ratio of GE’s Enterprise Value to its forecasted 2006E EBITDA is 22
“Walmart’s 2006E P/E multiple is 18x” – Translation: The ratio of Walmart’s equity value to its forecasted 2006 net income is 18 Enterprise Value / EBITDA is an important metric because it eliminates non-value impacting variables which otherwise make companies less comparable
Enterprise Value / Sales
Enterprise Value / EBITDA
Enterprise Value / EBIT
Industry Specific Metrics (EV / Fiber Miles)
Equity Value / Net Income Price / Earnings
Equity Value / Tangible Book Value Other Industry Specific Metrics
Finding Comparable Companies
Sources to check to initially select comparables:
Your colleagues (before you start, make sure someone hasn’t done it already!)
Associates and Officers – most of the time they will pick them for you
Proxy Statements
Equity research reports and analysts
SIC code searches – FactSet, OneSource, Library
S&P Tearsheets Value Line Industry Products Distribution Channels Markets Size
Growth Profile (Sales, EBITDA, Earnings)
Margins (Gross Profit, EBIT, Net Income)
Leverage
Operational Financial
Look for companies with characteristics similar to those of the business being valued:
Note: This rule
does not apply to your summer valuation project – sorry guys! Seasonality Cyclicality Strategy Customers
Collecting The Data – What Do I Need?
Most recent financial statements – LTM financials
10-K, 20-F or Annual Report (available 90 days after end of period)
10-Q quarterly or interim report (available 45 days after end of period)
Earnings Releases (typically available 2-3 weeks after the end of the quarter)– Don’t miss these – they are the most updated information available
– Often have complete income statements and balance sheets
Other Press Releases EPS Forecasts – Be Consistent!
First Call
I/B/E/S Operating Projections
CS Equity Research
Equity Research from other firm
I/B/E/S Stock Price Information
Research analysts submit their EPS estimates to publicly available centralized databases (First Call, I/B/E/S)
The mean or “consensus” estimate
FactSet (First Call, I/B/E/S) on your PC
First Call website (InfoCentral)
Detailed First Call reports (6th Floor)
Why Do I Need It and Where Do I Get It?
10-K / Annual Report
LTM Income Statement Information
Options/Convertible Data
10-Q / Quarterly Report
LTM Income Statement Information
Balance Sheet Information
Basic Shares Outstanding
8-Ks / Report of a Material Event
Pro Forma Information for Acquisitions or Other Transactions
Earnings Announcements
Why Do I Need It?
Thomson Research (from InfoCentral – IBD Internal website)
FactSet on your PC
OneSource on your PC
SEC Edgar Archives (www.sec.gov)
Disclosure workstations (in library)
Sedar.com (for Canadian companies)
Documents Library on EMA 28 at x5-4000 (use library as a last resort – they will always take longer to pull docs than you will)
Where Do I Get It?
10-Ks, 10-Qs, 8-Ks
EPS Forecasts
To calculate equity and enterprise value FactSet on your PC
Investment Banking Workstation on your PC
Bloomberg terminals
Why Do I Need It and Where Do I Get It?
Research analysts project what a Company’s income statement will look like in the future
We use these models to calculate projected EBITDA
The research report you select is VERY important and will influence your valuation multiples
You should always select a research report which has an EPS forecast close to the consensus
Why Do I Need It?
CS Research & Analytics
Call CS Research Analyst for updated model
Research Bank Web (Info Central) – for non-CS research
Multex.com – for non-CS research
Research Bank workstations (older reports)
Library request at x5-4000 (for older or hard to find research reports)
Where Do I Get It?
Operating Projections
Stock Price Information
To calculate equity and enterprise value FactSet on your PC
Investment Banking Workstation on your PC
Bloomberg terminals
Other Information
My Associate Happy and Get a Big Bonus)
Keep a Record
Print out hardcopies of all source documents (10-Ks, 10-Qs, EPS Projections, Analyst Reports) Leave a Trail / Be Organized
Highlight data and tab pages used from source documents and use folders for each company
Use “Comments” function in Excel to footnote items that need explanation (i.e., approximations, assumptions, calculations and unusual items) Be Complete
Supply your Associate with all source documents, a printout of the equity comps and an electronic copy for all companies to be checked Be Efficient
Work sequentially through companies, so that your Associate can start checking while you continue working Be a Thinker
Check your results. If something looks wrong, it probably is1. General Company Information / User
The ticker identifies the company you are creating a comp file for and is used by Factset to select data to download
The financial statement dates identify which historical and projected years you are
generating multiples for. These dates drive the model’s column headings
Note: The dates do not drive which data FactSet downloads; FactSet defaults to the most recently available data It is important to fill out the user information so that other people using your model can call you with questions
General Company Information
User Information
Primary Company Ticker CHRW
Last Fiscal Year Ended 12/31/04
Latest Balance Sheet as of 3/31/05
Source of Latest Balance Sheet 10-Q
LTM Earnings as of 3/31/05
Source of LTM Earnings 10-Q
First Projected Calendar Year End: 12/31/05
Calendarization Factor 0.0%
Research
Research Source Morgan Stanley
Analyst James Valentine
Date of Research 5/01/05
Recommendation
Target Price –
Analysis Prepared by kjackso3
Preparer Phone Number 62714
Analysis Checked by T_Bushey
Convertible Debt Schedules
In general, Equity Value = Current Stock Price x Basic Shares Outstanding
However, most companies have securities which represent contingent shares – meaning they are not shares today, but can become shares if certain conditions are met – and as a result, we need to make adjustments to basic shares outstanding
The most common of these securities are options / warrants
Options are a price right or option granted to management to purchase their company’s stock at a pre-specified or strike price
Management profits if the market price of the stock exceeds the strike price when they exercise the options. Hence, Management is only likely to exercise his/her options under these circumstances Options are reported in the 10-K. Companies typically disclose the number of options that are outstanding and exercisable
Exercisable options are vested and can be used to purchase shares today. Exercisable options, NOT outstanding, are relevant for equity comp purposesScenario:
197.3 million basic shares outstanding8.2 million exercisable options with a weighted average strike price of $14.02
Current stock price is $17.74.
Translation:
8.2 million options are “in the money,” meaning they are exercisable at alower price than the current market price. This means the owner of these options has the right to buy stock from the Company at $14.02 and could sell it in today’s market at $17.74. If the owner of the options did this, he would pay the Company $14.02 for each share, sell it in the market for $17.74 and pocket the $3.72 spread.
Treasury
Method Calculations:
The treasury stock method assumes the above transaction occurs and that the Company uses the $14.02 they receive to repurchase shares in the market at $17.74, thus:
Basic Shares Outstanding 197.3
Plus: Shares Issued to Options Holder 8.2
205.5
Less: Shares Repurchased with Proceeds (6.5)
Diluted Shares Outstanding 199.0
Using the Treasury Stock Method
What About Convertible Debt and Preferred?
Investment Bankers have created hybrid securities which pay interest like straight debt, but become common stock if certain conditions are met
Convertible Debt
Convertible Preferred
Other Equity-Linked Securities Convertible securities are NOT evaluated using the Treasury Stock Method
Most important thing to remember: Convertible Securities are treated as either debt or equity for valuation purposes – NOT both
What About Convertible Debt and Preferred?
Example: A company has a convertible preferred security with a face value of $1,114 million that pays a dividend of 6.5% and has a conversion price of $18.00
Income Statement Effect
None
Equity Value Effect
None
Net Debt Effect
Should include full amount of convertibles ($1,114)
Income Statement Effect
Debt: Interest backed out
Preferred: Dividend backed out ($1,114 x 6.5% = $72.4)
Equity Value Effect
Additional shares outstanding from conversion (add $1,114/$18 = 61.9 to shares outstanding)
Net Debt Effect
Debt does NOT include face value of converted debt/preferred
Options and Convertible Debt Schedules
Treasury Method Fully Diluted Share Calculation($ in millions, except per share data)
CLASS SHS. OUT. PRICE
A 1,129.5 74.36
B 0.0 0.00
C 0.0 0.00
D 0.0 0.00
E 0.0 0.00
Total Primary Shares Outstanding 1,129.5 74.36
New Shares Issued 0.0
Converted Debt shares (Schedule A) 0.0
Converted Preferred Shares (Schedule B) 0.0
Converted Options/Warrants (Schedule C) 59.6
Shares Buy-Back from Options/Warrants exercise proceeds (48.5)
Fully Diluted Shares Outstanding 1,140.6
Schedule A - Convertible Debt
ANNUAL BOOK TRADING # SHARES IMPLIED DEBT SHARES MATURITY INTEREST VALUE VALUE CONV INTO CONV PR CONVTD ISSUED
Debt Series 1 1/00/00 0.00% 0.0 0.0 0.0 0.00 0.0 0.0
Schedule B - Convertible Preferred
ANNUAL BOOK TRADING # SHARES IMPLIED PREF SHARES MATURITY INTEREST VALUE VALUE CONV INTO CONV PR CONVTD ISSUED
Preferred Series 1 1/00/00 0.00% 0.0 0.0 0.00 0.0 0.0
3. Debt & Preferred Schedule
Debt can be listed on the balance sheet under a variety of names
Notes
Commercial Paper (CP)
Current Portion of LT debt
Credit Facility
Revolver
Loans The ABACUS model allows you to calculate the net debt based on book or market values
If the Company issued additional debt or convertible securities since its latest filing, input these securities in adjustment rows (additional equity securities would increase shares outstanding and book equity)
For Credit Stats identify Seniority of the outstanding debt
1 = Senior Debt
2 = Sub. DebtDebt & Preferred Schedule
($ in millions)
DESCRIPTION VALUE
NAME RATE SENIORITY BOOK MARKET
Long-Term 0.0% Sen 4,503.6 4,503.6
Long-Term 0.0% Sen 0.0 0.0
Long-Term 0.0% Sub 0.0 0.0
Long-Term 0.0% Sub 0.0 0.0
Long-Term 0.0% Sen 0.0 0.0
LT Debt Adj 0.0% Sen 0.0 0.0
Total Long-Term Debt 4,503.6 4,503.6 Out-of-the-Money Convertible Sub 0.0 0.0 Short-Term 0.0% Sen 807.1 807.1
Short-Term 0.0% Sub 0.0 0.0
ST Debt Adj 0.0% Sen 0.0 0.0
Total Short-Term Debt 807.1 807.1 Capital Leases 0.0% Sub 0.0 0.0 Capital Leases 0.0% Sub 0.0 0.0
Cap. L. Adj. 0.0% Sub 0.0 0.0
Total Capital Leases 0.0 0.0
Other 0.0% Sen 0.0 0.0
Other Adj. 0.0% Sen 0.0 0.0
Total Other Debt 0.0 0.0
Out-of-the-Money Convertible Preferred 0.0 0.0
Preferred 0.0% 0.0 0.0
Preferred 0.0% 0.0 0.0
Pref. Adj. 0.0% 0.0 0.0
Total Preferred 0.0 0.0
Total Debt & Preferred 5,310.7 5,310.7
Total Senior Debt 5,310.7 5,310.7 Total Subordinated Debt 0.0 0.0 Total Convertible Debt (assumes no conversion 0.0 0.0 Total Convertible Preferred (assumes no conve 0.0 0.0
4. Historical / LTM Income Statement
Step 1
FactSet downloads the historicals automatically. Check downloaded FactSet information and make changes as required
Fill in Last Fiscal Year column exactly as shown on financial statement (we’ll get to adjustments later)
You will find all the line items on the income statement, except Depreciation & Amortization, which are on typically the cashflow statement
If the latest fiscal year end is the most recent quarter, you can ignore the other two columns
Step 2
Fill in the most current quarter and prior corresponding quarter to get to LTM
Make sure you use cumulative amounts (i.e. if the fiscal year end is 12/31 and you are looking at 9/30 10-Q, use “nine months ended” data)
Step 3
Great, But What’s LTM?
LTM = Last Twelve Months Companies report financial results on a quarterly basis (every 3 months)
LTM represents the sum of the last four quarters’ results
LTM is important because it shows what the company’s reported performance has been over the last year (though not necessarily a calendar year)
Unusual and Non-Recurring Items
Companies often report one-time gains or extraordinary charges in accordance with GAAP. As financial analysts, we do not view these charges as related to operations and thus
exclude them.
Typical “non-operating” charges include gains/losses on sale of assets, inventory write-downs and restructuring charges
It is important to remember that not all unusual or non-recurring items will be broken out on the financial statements. This is the result of:
Accountants will not always allow companies to break-out certain charges on the financial statements because they are not unusual in the strictest sense
Some companies may not want to highlight that they “made their numbers” as a result of an extraordinary gain Charges or gains not broken out in the financials can always be found in the MD&A – that’s why you need to read it!
6. Projected and Calendarized Income Statement
Projected income statement data comes from the research report you have selected This data generates your projected EBITDA
It is important to make sure your projected data is presented on the same basis as your historical data
A Note On Calendarizing Estimates
Some companies do not have December 31 fiscal year ends. As a result, the earnings of these companies are not comparable to the earnings of companies with a December 31 year end. Therefore:
EPS estimates must be adjusted to a December year end to make companies with different fiscal year ends comparable on a P/E basis
First Call and I/B/E/S generally download a CYEPS (Calendar Year EPS) This is intuitively clear when considering two companies – one with a fiscal year ending September 30, 2005 and the other with a fiscal year ending December 31, 2005
The 2005 earnings estimates associated with the “September” company have a higher degree of certainty than the “December” company and thus should receive a higher multiple than an identical “December” company Our objective is to eliminate this artificial valuation differential by “calendarizing” the estimates
If you choose not to calendarize it, please set calendarization date equal to last fiscal year end
Helpful Hint: In the top right corner of your ABACUS shell, you have the option to calendarize
Calendarizing EPS Estimates
Example #1: “Fiscal year ends September 30” What does this mean?
It means that 9 months (or ¾) of the Company’s fiscal 2004 results (Jan. 2004 – Sept. 2004) are included in the 2004 calendar year with the remaining 3 months (or ¼) of the calendar year estimated in the fiscal 2005 results.
Illustration:
FACTOR
2004A 2005E 2006E 75.0% 2004A 2005E
Sales $1,000 $1,010 $1,020 $1,002.5 $1,012.5
EBITDA 150 200 250 162.5 212.5
EPS 1.00 1.10 1.20 1.03 1.13
ENDED DEC. 31, FISCAL YEAR ENDED SEPT. 30,
CALENDAR YEAR
25% 75%
The Sanity Check
How to avoid the dreaded, “This doesn’t look right” response
Take 5 minutes to look at the output when you’re done – the team will wait
Look for outliers in the data
Comparable companies usually have comparable multiples– If 9 out of 10 companies in your equity comps are trading between 8x and 10x EBITDA, and one is trading at 20x, you might have a problem
– Possible explanations: 1. You’ve made a mistake, 2. This isn’t a good comp, or 3. There is something unusual about this company
– In the unlikely event of Case 3, be sure you can explain the situation
Likewise, the relationship between Enterprise Value / EBITDA and P/E should be roughly the same across companies– Not always true, but be prepared to explain why it’s not
Check your multiples against research to be sure you’re in the right ballpark
If the business is showing momentum and estimated annual operating statistics are improving over current year figures, your consecutive multiples should be declining (e.g., 16.5x 2005E P/E
Great Equity Comp Mysteries
What do I do with Minority Interests?
Include with total capital for Enterprise Value calculation, exclude from debt for credit statistics
Include with net income if it appears to be a “normal” part of business What do I do with Equity Earnings when I am calculating Net Income?
Include if it is a “normal” part of the business How do I know if a company has “done something” recently?
“Something’s not right”
Common “light bulbs” – dramatic change in stock price or shares outstanding, jump in sales or margins
Look in News Runs, SDC, Documents Library What if a company has done something recently?
Pro forma the event, e.g., for equity or debt offerings, use the prospectus
Make sure your forecasts (EPS and operating) reflect the event What do I do with all those weird “extraordinary” charges?
Is it really extraordinary?
Most common are Environmental Charges, Restructuring, Gain/Losses on Sales, Changes in Accounting
Get rid of it – don’t forget tax effects
Don’t forget to adjust historical EPS Can I trust FactSet (FDS) codes?
In general, no (exception is security prices) Do I do anything different with options in an M&A situation?
Assume all in-the-money options are exercisable (change of control provisions)What do I do if a company has had a stock split?
Look in the Stock Guide, footnotes to financial statements, Bloomberg
Make sure historical and forecast EPS reflect the split
Example:
BEFORE
SPLIT
AFTER SPLIT:
CORRECT
AFTER SPLIT:
INCORRECT
Stock
Price
$100 $50 $50
EPS $10.00
$5.00
$10.00
P/E 10x
10x
5x
2:1 Stock Split
Definitions
Equity Value (also referred to as Market Value)
The market value of a company’s equity: (Number of fully diluted shares x current stock price) - option/warrant proceeds
Number of fully diluted shares = “What the market thinks is outstanding”= Primary shares + “in the money” exercisable options/warrants + shares from the conversion of “in the money” convertible debt/convertible preferred stock
What to do with option/warrant proceeds – Subtract from market value Enterprise Value (also referred to as Adjusted Market Value, or AMV)
The market value of the total enterprise
Market value of equity + net debt
Net Debt =Long-term debt (including current portion) + short-term debt + “out of the money” convertible debt + minority interest + capitalized leases – (cash + equivalents)
Interpreting the Results – A Few General Themes
A larger business is viewed as less risky than a smaller business. However, smallerentrepreneurial companies may get a premium valuation if they are growing quickly
Higher projected earnings growth implies faster stock appreciation potential and will positively impact valuation
Higher leverage implies less financial flexibility and will negatively impact valuation
Higher profitability margins imply better expense controls and better ability to stay price competitive and will positively impact valuation
The higher the economic cyclicality or seasonality of earnings, the riskier the stock
Dividend payments positively impact valuation. Dividends are usually paid by mature
companies that need further incentives for investors. High growth companies do not need a dividend to get a high valuation
Higher trading multiples (e.g., price/earnings ratio) make the stock less attractive than a similar company with lower statistics
Your Enterprise Value Is Not Correct
You forgot Minority Interest
Should be included in total capital for enterprise value calculation
Is not included in total capital when calculating credit stats You missed a debt instrument on the balance sheet
You missed a cash equivalent on the balance sheet
The Company may have done a debt offering after the balance sheet date
You can find out in the “subsequent events” section of the 10-K or 10-Q, from a company news run or Bloomberg
Make sure that you check what the proceeds were used for – if they were used to pay down other debt, then you should not change anythingYour Equity Value Is Not Correct
The Company has done a stock split The Company has issued or repurchased shares after the 10-K or 10-Q date
The Company has additional classes of common stock outstanding
You forgot to include the stock options
Your LTM Data Is Incorrect
You forgot to pro forma for all the charges – make sure to thoroughly read the MD&A and financial notes
You forgot to use cumulative quarterly data (i.e. “three months ended” 9/30 vs. “nine months ended” 9/30)
You forgot to adjust your income statement for acquisitions/divestitures
You forgot to check for press releases and are not using the most up-to-date data
Your Projected Data Is Incorrect
Your research report is outdated – make sure that the research report you are using has EPS estimates in line with I/B/E/S or First Call
You did not calendarize
You did calendarize but used the wrong ratios
Your research report had a mistake you did not catch
