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Students Grilled on Their Presentations and Review of Course

Students Grilled on Their Presentations and Review of Course

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Published by John Aldridge Chew

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Published by: John Aldridge Chew on Sep 22, 2011
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Lecture 7: Students Grilled on Their Investment PresentationsCsinvesting.wordpress.com studying/teaching/investing Page 1
Class #9 November 16, 2005
(SB)
from XXXX
Capital
is here to ask you questions about your presentations.Your assignment is to read the
 book (The ―Little Book‖) for next class.
The exam will be a test of your valuation skills.The one thing about the final is that I generally keep them so when someone asks me about you; I can see the results of your exam.
STUDENT PRESENTATIONS
Student Presentation on Timberland (TBL):
Students:
A $2 billion Mkt. Cap Company manufacturing and selling active wear and footwear. 7.7 EV/EBIT and 59%ROIC.
(GI):
Did you use EBITA minus MCX for your proxy for EBIT?
Student:
Yes, we see it as cheap for a number of reasons: Negative sentiment. Miscues in product rollouts.We believe there is a 25% upside today and 50% in two years. On a net basis for 24% and if you hold it more than twoyears you have a 50% return.
Take the current multiple ….
 They have no debt and strong cash flow. They have profitable investment opportunities. They are growing. Every dollarthey put back into the business, they earn 40% on capital.The management team is solid. They are fully vested. They have announced a stock buy-back. How many sharesoutstanding? $68 million. Shareholder-friendly management. Corporate responsibility is good. Human rights are one of their concerns.
 
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)
GI:
One of the points that always come out is do you subtract (all) cash? The answer is no; you subtract
―excess‖
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:
Wolverine.
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.
GI:
How about on an absolute basis? How do you justify that?
Students:
This is a great company over a long period of time.
GI:
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?
Student:
Timberland is growing abroad so we do not see repatriation as an issue. We also discounted back two years inour valuation.
Analyst:
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.
Student:
 
Timberland 
messed up on apparel in the US so earnings for 2006 are depressed (temporarily we believe). EBITmargin of 2005 is 11%.
Analyst:
Did you break out their licensing revenue from other revenue? Licensing revenue is very high margin revenue.
Student:
No, but it is very small.
 
Lecture 7: Students Grilled on Their Investment PresentationsCsinvesting.wordpress.com studying/teaching/investing Page 3
Analyst:
Companies will tell you if you ask them to break out their license revenue. You can always assume the licenses.Revenue is an 80% margin business.
Footlocker, Inc. (FL).
There are three main reasons to buy FL as it sits at $20 with our price target of $26 which is a 35% upside.Three (3) main reasons to buy FL:Increase in operating margins. The management is shutting down over-size big store concepts in early 2000 andimproving their operating margins. 15% average over the last 4 years and mgt. stated a target of 10% with it currently at7.4%. Op. margins.Domestic growth is uncontested in Footwear for teens. Growth in mall space across the US. They have Strong portfolio of business with different footlocker products and Chance with an 11% EBIT margin.Valuation:Average store size 300 square feet, Year-by-year growth in sq. footage. CAGR is 2.5% over the last five years. Sales perSq. Ft. are $529.
GI:
They have been closing some of their stores and that will stop, so using net square footage number may bemisleading. So I would look inside that number to see what was the growth of the smaller stores ex-the closing of the big-store concept.What you said is that they are closing the big store concept while their square footage is growing 2.5% per year. Look atgrowth with just the small store concept.
Break out the concepts!

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