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 Capitalization $1.27B • Conservative Approach Key Points • Economy • Product Mix • High Quality at Great Prices 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 • CFA-DFW/HSFA Student Research
Revenue Breakdow n 2006 Sales by Brand 2007 Sales by Brand MW 65% MW K&G 58% 19% K&G 23% Moores 12% After Moores Other Hours 12% 2% 9% CFA-DFW/HSFA Student Research
Revenue Breakdow n 2006 Sales by Product 2007 Sales by Product Men's Non- Men's Tailored Tailored Men's Clothing Clothing Tailored Men's Non- 34% 47% Clothing Tailored 41% Clothing 37% Tuxedo Tuxedo Rentals Other Other Rentals 15% 5% 5% 6% CFA-DFW/HSFA Student Research
Industry Overview Industry Analysis Competitive Positioning • Highly competitive • Strong brand • Low-growth industry • Product mix • Correlated with economy • Customer service • Shift to business casual • High quality/great price CFA-DFW/HSFA Student Research
Valuation Model Comparables DCF • Multiples • 5-YR Projections Average Intrinsic • Weighted Average • FCF from Op. Assets Value • Grow th Adjustment • CAPM Target Price CFA-DFW/HSFA Student Research
Valuation: Comparables Ticker Company TTM P/E MW The Men’s Wearhouse, Inc. EV/ AVERAGE P/E EBITDA JOSB Jos A. Banks Clothiers, Inc. JCP J.C. Penney Company, Inc. $32.52 EV/S P/Sales JWN Nordstrom, Inc. KSS Kohl’s Corporation PEG P/B M Macy’s, Inc. (5 yr Expected) Multiples CFA-DFW/HSFA Student Research
Valuation: DCF In millions 2008 2009 2010 2011 2012 Revenues $2,122 $2,179 $2,358 $2,514 $2,657 Grow th 0.5% 2.7% 8.2% 6.6% 5.7% EBITDA 240 290 361 397 433 CAPEX 85 115 158 133 141 ∆ in WC 64 63 79 48 36 • Terminal Growth Rate 5.0% • PV Free Cash Flow $1,818M FCF 30 33 21 102 131 • Cost of Equity 10.3% • PV Debt Tax Shield $35M • Cost of Debt 5.5% • Off-Balance Sheet Liabilities $17M INTRINSIC VALUE = $34.54 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 CFA-DFW/HSFA Student Research
DCF Drivers EB EBITD ITDA M M ARGIN IN 18% 16% 14% 12% 10% 8% 2000 2002 2004 2006 2008 2010 2012 CFA-DFW/HSFA Student Research
DCF Sensitivity $49.00 $44.00 $39.00 $34.00 $29.00 $24.00 EBITDA Margin Capex WC Needs Beta Risk-Free Terminal Growth ±1% ±1% ±1% ±0.2 Rate Rate ±1% ±0.5% 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 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? CFA-DFW/HSFA Student Research
Index PRESENTATION VALUATION ANALYSIS RATIO ANALYSIS • Profitability • Executive Summary • DCF Model • Liquidity • Business Description – Projections Worksheet – • Operating Performance & Cash – Sales by Brand Revenues Flow s – Sales by Product Type • Industry Overview – Projections Worksheet – • Z M F Scores Capex & Margins • Valuation Model • Inventory Turnover vs JOSB – Multiples – Off-B/S Liabilities • Revenues per Store vs JOSB – DCF – Un-levered Beta • Revenue per Sq Ft vs JOSB – Drivers: Comp Sales – Beta Sensitivity HISTORY – Drivers: Margins – Interest Rate Sensitivity – Sensitivity • Comp Sales, Margins, and – Income Statement Multiple History • Investment Risks • Final Thought – Balance Sheet • Stock Repurchases – Free Cash Flow Graph • Dividend History WALL STREET & MANAGEMENT – Capex & Rev/Op Assets Graph • Charts GUIDANCE • Multiples – MW vs Apparel Retailers Index • Sales by Brand Forecast & Comp • Management Guidance - Sales History – MW historic price chart Comp Sales & EPS • Beta Comparisons for MW – Comp Sales vs Nonfarm • Wall Street EPS Projections Payrolls • Recession Scenarios vs UH Team OTHER • Operating vs. Capital Leases • Wall Street Analyst Ratings • JOSB Snapshot • Institutional & Mutual Fund • CFO Presentation Slides Holders – Market Share – Men’s Dress Apparel – Market Share – Men’s Suits – Men’s Dress Apparel U.S. Sales CFA-DFW/HSFA Student Research • Economic Stimulus Info
DCF Model CFA-DFW/HSFA Student Research
Projections Worksheet CFA-DFW/HSFA Student Research
Projections Worksheet CFA-DFW/HSFA Student Research
Off-B/S Liabilities CFA-DFW/HSFA Student Research
Unlevered Beta CFA-DFW/HSFA Student Research
Beta Sensitivity Beta Intrinsic Value 1.05 $43.50 1.15 $38.50 1.25 $34.50 1.35 $31.00 1.45 $28.50 1.55 $26.00 1.65 $24.00 1.75 $22.50 1.85 $21.00 CFA-DFW/HSFA Student Research
Interest Rate Sensitivity Risk-free Cost of Beta Market Risk Intrinsic Rate Equity Premium Value 3.0% 9.3% 1.25 5.0% $43.00 4.0% 10.3% 1.25 5.0% $34.50 5.0% 11.2% 1.25 5.0% $28.50 6.0% 12.1% 1.25 5.0% $24.50 7.0% 13.1% 1.25 5.0% $21.00 CFA-DFW/HSFA Student Research
Income Statement CFA-DFW/HSFA Student Research
Balance Sheet CFA-DFW/HSFA Student Research
Free Cash Flow s CFA-DFW/HSFA Student Research
Capex vs. Revenues/Op. Assets CFA-DFW/HSFA Student Research
Multiples CFA-DFW/HSFA Student Research
Sales by Brand Comparable Store Sales Grow th History: 2000 2001 2002 2003 2004 2005 2006 2007 MW 3.3% -10.2% -3.1% 7.9% 8.2% 6.2% 3.1% -0.4% K&G N/A N/A N/A -0.3% 3.9% 16.4% -1.8% -10.9% Moores 8.3% 4.2% -2.1% -5.1% 7.1% 2.7% 8.7% 1.5% Total 3.3% -10.2% -3.1% 6.1% 7.3% 8.4% 1.9% -2.5% 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 CFA-DFW/HSFA Student Research
Recession Scenarios 2008 2009 2010 2011 2012 Revenue Growth 0.5% 2.7% 8.2% 6.6% 5.7% EBITDA Margin 11.3% 13.3% 15.3% 15.8% 16.3% Base Case: Intrinsic Value = $34.50 2008 2009 2010 2011 2012 Revenue Growth -1.7% 2.0% 9.1% 6.6% 5.6% EBITDA Margin 7.9% 9.3% 12.2% 14.2% 16.3% Deeper Recession: Intrinsic Value = $30.00 2008 2009 2010 2011 2012 Revenue Growth 0.5% 2.7% 3.9% 5.7% 5.7% EBITDA Margin 11.3% 13.0% 13.0% 15.3% 16.0% Prolonged Recession: Intrinsic Value = $28.00 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 CFA-DFW/HSFA Student Research
Management Guidance Comparable Store Sales Growth EPS MW K&G Moores Q1 2008 Down 4-7% Down 11-13% Down 1-3% $0.18-0.20 Q2 2008 Down 1-7% Down 11-13% Up 1-3% N/A FY 2008 Down 1-7% Down 7-9% Flat $1.80-2.00 CFA-DFW/HSFA Student Research
Forecast Comparison Fiscal period Wall Street Mean U of H Annual Jan 2010 $2.47 $2.49 Annual Jan 2009 2.01 1.91 Quarterly Apr 2008 0.22 0.18 Quarterly Jul 2008 0.82 0.75 Quarterly Oct 2008 0.62 0.40 Quarterly Jan 2009 0.35 0.58 CFA-DFW/HSFA Student Research
Analyst Ratings 1 – Strong Buy 3 2 – Buy 1 3 – Hold 3 4 – Underperform 0 5 – Sell 0 Mean Recommendation: 2.0 Sell Strong Buy CFA-DFW/HSFA Student Research
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