Lecture 7: Students Grilled on Their Investment PresentationsCsinvesting.wordpress.com studying/teaching/investing Page 2
Risks: Not getting the fashion trends right. Risk is mostly in the US business.Calculating Enterprise Value (EV): Timberland has no debt and $100 million in cash.Calculating Excess Cash for Enterprise Value (EV)
One of the points that always come out is do you subtract (all) cash? The answer is no; you subtract
cash(cash that is not needed to run their business on a yearly basis). You have to decide whether any of that cash is needed.
Negative working capital businesses (like McDonald’s Restaurants where customers pay cash or credit card while
payables are 30//60/90 days) usually have the total amount of excess cash on the balance sheet excepting, of course, forpetty cash in the registers.Remember that retailers need to keep cash in their registers all the time, so do not subtract the full amount of cash on thebalance sheet.Competitors:
They have a loyal following of customers
construction workers.The multiples and the margins
we took them down from where they have been. There peer group is trading at 11xEV/EBIT. This is trading at 10 x EV/EBIT. 50% return if you hold it for two years and you get 10x EV/EBIT on an exitor sale.
How about on an absolute basis? How do you justify that?
This is a great company over a long period of time.
Did you factor in how much room they have to expand
grow their store base? How much more expansion do theyhave?10x pre-tax (EV/EBIT)? Usually I would take off 40% for taxes so you would have a 6% return (10% - 4%). If the tax
rate is lower due to overseas operations, sometimes they can’t repatriat
e the money. Ask why that tax rate is lower or if that tax rate is sustainable?
Timberland is growing abroad so we do not see repatriation as an issue. We also discounted back two years inour valuation.
How does the business break out between domestic and international operations regarding operation margins?What are international competitors doing? Since you say their international division is growing 20% to 22% overseas.How much of their business comes from the work boot area versus their entire sales because you said their strong marginsare due to their strong customer loyalty in foot wear.
messed up on apparel in the US so earnings for 2006 are depressed (temporarily we believe). EBITmargin of 2005 is 11%.
Did you break out their licensing revenue from other revenue? Licensing revenue is very high margin revenue.
No, but it is very small.