CFA Investment Research Challenge Joe Corkin Mauricio Franco John - - PowerPoint PPT Presentation

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CFA Investment Research Challenge Joe Corkin Mauricio Franco John - - PowerPoint PPT Presentation

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CFA Investment Research Challenge Joe Corkin Mauricio Franco John Keeton Quyen Nguyen April 30, 2008 Executive Summary Market Price $24.86 Recommendation: BUY Target Price $37.00 52-Wk Range $16.76 - $56.64 Market

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CFA Investment Research Challenge

Joe Corkin Mauricio Franco John Keeton Quyen Nguyen April 30, 2008

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CFA-DFW/HSFA Student Research

Executive Summary

Recommendation: BUY

  • Market Price

$24.86

  • Target Price

$37.00

  • Conservative Approach
  • Economy
  • 52-Wk Range $16.76 - $56.64
  • Market Capitalization $1.27B
  • Product Mix
  • High Quality at Great Prices

Key Points

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CFA-DFW/HSFA Student Research

Business Description

  • Leading retailer of men’s dress apparel and tuxedo rentals
  • Designer, brand name & private label merchandise
  • Dry cleaning and corporate uniform businesses
  • Purchasing & distribution
  • 1,273 retail stores under four brand names
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CFA-DFW/HSFA Student Research

Revenue Breakdow n

2006 Sales by Brand MW 65% K&G 23% Moores 12% 2007 Sales by Brand MW 58% K&G 19% After Hours 9% Other 2% Moores 12%

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CFA-DFW/HSFA Student Research

Revenue Breakdow n

2007 Sales by Product

Men's Tailored Clothing 41% Men's Non- Tailored Clothing 34% Other 5% Tuxedo Rentals 15%

2006 Sales by Product

Men's Tailored Clothing 47% Men's Non- Tailored Clothing 37% Other 5% Tuxedo Rentals 6%

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CFA-DFW/HSFA Student Research

Industry Overview

  • Highly competitive
  • Low-growth industry
  • Correlated with economy
  • Shift to business casual

Industry Analysis Competitive Positioning

  • Strong brand
  • Product mix
  • Customer service
  • High quality/great price
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CFA-DFW/HSFA Student Research

Valuation

  • Multiples
  • Weighted Average
  • Grow th Adjustment

Model Comparables DCF

Average Intrinsic Value

Target Price

  • 5-YR Projections
  • FCF from Op. Assets
  • CAPM
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CFA-DFW/HSFA Student Research

Valuation: Comparables

The Men’s Wearhouse, Inc. MW Macy’s, Inc. M Kohl’s Corporation KSS Nordstrom, Inc. JWN J.C. Penney Company, Inc. JCP Jos A. Banks Clothiers, Inc. JOSB Company Ticker

EV/ EBITDA

EV/S P/B PEG

(5 yr Expected)

P/Sales

AVERAGE

P/E

TTM

P/E

$32.52

Multiples

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CFA-DFW/HSFA Student Research

Valuation: DCF

131 102 21 33 30 FCF 36 48 79 63 64

∆ in WC

141 133 158 115 85 CAPEX 433 397 361 290 240 EBITDA $2,657

5.7%

$2,514

6.6%

$2,358

8.2%

$2,179

2.7%

$2,122

0.5%

Revenues

Grow th

2012 2011 2010 2009 2008

In millions

  • Terminal Growth Rate 5.0%
  • Cost of Equity

10.3%

  • Cost of Debt

5.5%

  • PV Free Cash Flow

$1,818M

  • PV Debt Tax Shield

$35M

  • Off-Balance Sheet Liabilities $17M

INTRINSIC VALUE = $34.54

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CFA-DFW/HSFA Student Research

DCF Drivers

SA SAM E ST O ST ORE SA RE SALES G ES GROWT H T H

  • 12%
  • 8%
  • 4%

0% 4% 8% 12% 2000 2002 2004 2006 2008 2010 2012

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CFA-DFW/HSFA Student Research

DCF Drivers

EB EBITD ITDA M M ARGIN IN

8% 10% 12% 14% 16% 18% 2000 2002 2004 2006 2008 2010 2012

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CFA-DFW/HSFA Student Research

DCF Sensitivity

$24.00 $29.00 $34.00 $39.00 $44.00 $49.00

EBITDA Margin ±1% Capex ±1% WC Needs ±1% Beta ±0.2 Risk-Free Rate ±1% Terminal Growth Rate ±0.5%

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CFA-DFW/HSFA Student Research

Investment Risk

  • Economic conditions

Economic conditions

  • Failed expansion strategies

Failed expansion strategies

  • Continued demand changes

Continued demand changes

  • Disruptions in supply

Disruptions in supply

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CFA-DFW/HSFA Student Research

Final Thoughts

Why buy Men’s Wearhouse Why buy Men’s Wearhouse in the n the current economic environment? current economic environment?

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CFA-DFW/HSFA Student Research

Index

PRESENTATION

  • Executive Summary
  • Business Description

– Sales by Brand – Sales by Product Type

  • Industry Overview
  • Valuation Model

– Multiples – DCF – Drivers: Comp Sales – Drivers: Margins – Sensitivity

  • Investment Risks
  • Final Thought

VALUATION ANALYSIS

  • DCF Model

– Projections Worksheet – Revenues – Projections Worksheet – Capex & Margins – Off-B/S Liabilities – Un-levered Beta – Beta Sensitivity – Interest Rate Sensitivity – Income Statement – Balance Sheet – Free Cash Flow Graph – Capex & Rev/Op Assets Graph

  • Multiples
  • Sales by Brand Forecast & Comp

Sales History

  • Beta Comparisons for MW
  • Recession Scenarios
  • Operating vs. Capital Leases

WALL STREET & MANAGEMENT GUIDANCE

  • Management Guidance -

Comp Sales & EPS

  • Wall Street EPS Projections

vs UH Team

  • Wall Street Analyst Ratings
  • Institutional & Mutual Fund

Holders RATIO ANALYSIS

  • Profitability
  • Liquidity
  • Operating Performance & Cash

Flow s

  • Z M F Scores
  • Inventory Turnover vs JOSB
  • Revenues per Store vs JOSB
  • Revenue per Sq Ft vs JOSB

HISTORY

  • Comp Sales, Margins, and

Multiple History

  • Stock Repurchases
  • Dividend History
  • Charts

– MW vs Apparel Retailers Index – MW historic price chart – Comp Sales vs Nonfarm Payrolls OTHER

  • JOSB Snapshot
  • CFO Presentation Slides

– Market Share – Men’s Dress Apparel – Market Share – Men’s Suits – Men’s Dress Apparel U.S. Sales

  • Economic Stimulus Info
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CFA-DFW/HSFA Student Research

DCF Model

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CFA-DFW/HSFA Student Research

Projections Worksheet

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CFA-DFW/HSFA Student Research

Projections Worksheet

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CFA-DFW/HSFA Student Research

Off-B/S Liabilities

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CFA-DFW/HSFA Student Research

Unlevered Beta

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CFA-DFW/HSFA Student Research

Beta Sensitivity

$24.00 1.65 $22.50 1.75 $21.00 1.85 $26.00 1.55 $28.50 1.45 $31.00 1.35 $34.50 1.25 $38.50 1.15 $43.50 1.05 Intrinsic Value Beta

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CFA-DFW/HSFA Student Research

Interest Rate Sensitivity

$21.00 5.0% 1.25 13.1% 7.0% $24.50 5.0% 1.25 12.1% 6.0% $28.50 5.0% 1.25 11.2% 5.0% $34.50 5.0% 1.25 10.3% 4.0% $43.00 5.0% 1.25 9.3% 3.0% Intrinsic Value Market Risk Premium Beta Cost of Equity Risk-free Rate

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CFA-DFW/HSFA Student Research

Income Statement

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CFA-DFW/HSFA Student Research

Balance Sheet

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CFA-DFW/HSFA Student Research

Free Cash Flow s

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CFA-DFW/HSFA Student Research

Capex vs. Revenues/Op. Assets

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CFA-DFW/HSFA Student Research

Multiples

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CFA-DFW/HSFA Student Research

Sales by Brand

1.5% 8.7% 2.7% 7.1%

  • 5.1%
  • 2.1%

4.2% 8.3% Moores

  • 2.5%

1.9% 8.4% 7.3% 6.1%

  • 3.1%
  • 10.2%

3.3% Total K&G MW

  • 10.9%
  • 1.8%

16.4% 3.9%

  • 0.3%

N/A N/A N/A

  • 0.4%

3.1% 6.2% 8.2% 7.9%

  • 3.1%
  • 10.2%

3.3% 2007 2006 2005 2004 2003 2002 2001 2000

Comparable Store Sales Grow th History:

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CFA-DFW/HSFA Student Research

Beta Comparison

  • Our Method: Linear regression of 3 years of weekly

returns for MW and the S&P 500 = 1.25

  • Other Sources:

– ValueLine: 1.10 – Standard & Poor’s: 1.55 – Yahoo! Finance: 2.40 – Reuters: 1.66

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CFA-DFW/HSFA Student Research

Recession Scenarios

Base Case: Intrinsic Value = $34.50

16.3% 15.8% 15.3% 13.3% 11.3% EBITDA Margin 5.7% 6.6% 8.2% 2.7% 0.5% Revenue Growth 2012 2011 2010 2009 2008

Deeper Recession: Intrinsic Value = $30.00

16.3% 14.2% 12.2% 9.3% 7.9% EBITDA Margin 5.6% 6.6% 9.1% 2.0%

  • 1.7%

Revenue Growth 2012 2011 2010 2009 2008 16.0% 15.3% 13.0% 13.0% 11.3% EBITDA Margin 5.7% 5.7% 3.9% 2.7% 0.5% Revenue Growth 2012 2011 2010 2009 2008

Prolonged Recession: Intrinsic Value = $28.00

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CFA-DFW/HSFA Student Research

Operating vs Capitalizing Leases

Operating lease expense in current year = 150.00 $ Operating Lease Commitments (From footnote to financials) Year Commitment ! Year 1 is next year, …. 1 147.50 $ 1-3 246.00 $ 4-5 163.30 $ 6 and beyond 201.90 $ Pre-tax Cost of Debt = 5.50% . From the current financial statements, enter the following Reported Operating Income (EBIT) = 229.00 $ Reported Debt = 110.00 $ Reported Interest Expenses = 5.00 $ Number of years embedded in yr 6 estimate = 1 ! I use the average lease expense over the first five years to estimate the number of years of expenses in yr 6 Converting Operating Leases into debt Year Commitment Present Value 1 147.50 $ 139.81 $ 1-3 246.00 $ 221.02 $ 4-5 163.30 $ 131.82 $ 6 and beyond 201.90 $ 146.43 $ ! Commitment beyond year 6 converted into an annuity for ten years Debt Value of leases = 639.08 $ Restated Financials Debt with Operating leases reclassified as debt = 749.08 $

Full Operating lease adjustment Reported Operating income = $229.00 + Current year's operating lease expense = $150.00

  • Depreciation on leased asset =

$106.51 Adjusted Operating Income $272.49 Adjusted EBITDA $459.00 Adjusted Intrinsic value

74.43 $

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CFA-DFW/HSFA Student Research

Management Guidance

Comparable Store Sales Growth Flat Up 1-3% Down 1-3% Moores $1.80-2.00 N/A $0.18-0.20 EPS Down 7-9% Down 1-7% FY 2008 Down 11-13% Down 1-7% Q2 2008 Down 11-13% Down 4-7% Q1 2008 K&G MW

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CFA-DFW/HSFA Student Research

Forecast Comparison

0.58 0.35 Jan 2009 Quarterly 0.40 0.62 Oct 2008 Quarterly 0.75 0.82 Jul 2008 Quarterly 0.18 0.22 Apr 2008 Quarterly 1.91 2.01 Jan 2009 Annual $2.49 $2.47 Jan 2010 Annual

U of H Wall Street Mean Fiscal period

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CFA-DFW/HSFA Student Research

Analyst Ratings 1 – Strong Buy 3 2 – Buy 1 3 – Hold 3 4 – Underperform 5 – Sell Mean Recommendation: 2.0 Sell Strong Buy

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CFA-DFW/HSFA Student Research

Institutional & Mutual Fund Holders

Institutional Holders

PrimeCap Management Co. 5.98% Vanguard Group Inc. 5.66% Maverick Capital Ltd. (HF) 5.51% Barclays Global Investors UK 5.47% Fidelity 5.23%

Mutual Fund Holders

Franklin Strategic Small-Mid Cap Growth 4.80% Vanguard Horizon Fund Opportunity Portfolio 4.60%

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CFA-DFW/HSFA Student Research

Ratio Analysis – Profitability

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CFA-DFW/HSFA Student Research

Ratio Analysis - Liquidity

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CFA-DFW/HSFA Student Research

Ratio Analysis – Oper. Performance & Cash Flow

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CFA-DFW/HSFA Student Research

Ratio Analysis – Z M F Scores

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CFA-DFW/HSFA Student Research

Inventory Turnover

1.0 1.4 1.8 2.2 2.6 3.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

COGS/Inventory MW JOSB

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CFA-DFW/HSFA Student Research

Revenues per Store

$1.0 $1.2 $1.4 $1.6 $1.8 $2.0 $2.2 $2.4 $2.6 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Revenues per Store (in millions)

MW JOSB

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CFA-DFW/HSFA Student Research

Revenues per Sq. Ft.

$250 $260 $270 $280 $290 $300 $310 $320 $330 2001 2002 2003 2004 2005 2006 2007

Revenues per SQ FT

MW JOSB

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CFA-DFW/HSFA Student Research

Comp Store Sales & Margins

35.1% 31.4% 30.5% 31.1% 30.7% 29.7% 29.6% 28.0% SG&A Margin P/E EBIT Margins Comp Store Sales Growth 16.3 12.8 15.1 9.4 11.3 13.1 15.3 8.4 10.8% 11.9% 9.6% 7.6% 5.9% 5.4% 5.7% 10.6%

  • 2.5%

1.9% 8.4% 7.3% 6.1%

  • 3.1%
  • 10.2%

3.3% 2007 2006 2005 2004 2003 2002 2001 2000

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CFA-DFW/HSFA Student Research

Stock Repurchase

2004 2005 2006 2007 Authorized purchase (millions) $50 $40 $100 $90 Total costs (millions) $90.3 $40.3 $106.1 Shares repurchased (thousands) 3,200 1,134 2,985 Average price per share $28.21 $35.53 $35.54 Total Authorized ~ $280M Total Repurchased ~ $236M Remaining Available ~ $44M

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CFA-DFW/HSFA Student Research

Dividend History

2006 2007 1st quarter $0.05 1st quarter $0.05 2nd quarter $0.05 2nd quarter $0.06 3rd quarter $0.05 3rd quarter $0.06 4th quarter $0.05 4th quarter $0.06 (8.5% Dividend Payout) 2008 1st quarter $0.07 (1.2% Dividend Yield)

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CFA-DFW/HSFA Student Research

MW vs DJ US Apparel Retailers Index

Source: BigCharts.com

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CFA-DFW/HSFA Student Research

Stock Chart

Source: BigCharts.com

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CFA-DFW/HSFA Student Research

Correlation w ith Non-farm Payroll

Source: CFO Presentation

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CFA-DFW/HSFA Student Research

JOSB

  • Market Cap:

$441M

  • 52-Wk Range:

$18.81 - $46.16

  • 2007

– Sales: $604M – EBITDA Margin: 16.8% – TTM P/E 8.9

  • Beta

– Linear regression of 3 years of weekly returns for JOSB and the S&P 500 = 2.05 – ValueLine: 1.60 – Standard & Poor’s: 1.48 – Yahoo! Finance: 2.62 – Reuters: 1.56

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CFA-DFW/HSFA Student Research

Market Share Total Dress Apparel

Source: CFO Presentation

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CFA-DFW/HSFA Student Research

Market Share – Men’s Suits

Source: CFO Presentation

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CFA-DFW/HSFA Student Research

Men’s Dress Apparel U.S. Sales

Source: CFO Presentation

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CFA-DFW/HSFA Student Research

Economic Stimulus

  • 2001 Tax Rebate

– According to Congressional Budget Office, rebate checks increased total consumption by 0.8% in the quarter issued and 0.6% in the subsequent quarter. – In 2001, $38 billion in rebate checks were distributed (about 0.4% of GDP)

  • 2008 stimulus package is $168 billion.