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Greenwald Class Notes 5 - Liz Claiborne & Valuing Growth(2)

Greenwald Class Notes 5 - Liz Claiborne & Valuing Growth(2)

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Liz Claiborne Case Study & Valuationwww.csinvesting.wordpress.comstudying, teaching, investing Page 1
Hand out more information for
Sealed Air 
Valuation for Class on Feb.17, 2004.
Professor Greenwald 
reviews the
Claiborne Valuation 
. These applications of ourinvestment process are very important.Go here for 1999 10-K (Year End Jan. 01, 2000):Begin with a
search strategy
. How likely it is that this particular security will beundervalued. The first question you should ask when you find an investment through
your search strategy is, ―Why me God?‖
Why is this presented to me? Why are you thelucky one? Know the causes of the price decline.
LIZ CLAIBORNE 
VALUATION EXERCISE
Basic OverviewIn 1999, the price of
Liz Claiborne 
got as high as $44 per share and as low as $20 pershare during the time of the Russian Debt default and the demise of
Long-Term Capital Management.
There are 57 million outstanding shares
mkt. value of $2.4 billion, $116 mil of LT debtand no short term debt. The Enterprise value is $2.5 billion. This is not a smallcompany nor is it that obscure, but it is in the rag trade. An industry with a badreputation.
The fact that this industry has a bad reputation is a good sign.
That isreassuring.It is fairly widely held. Management and Directors hold about 20% of the stock which isenough to make it worthwhile to help the company be successful. Not so much that itwould be impossible to remove them if company is run poorly.Funds own 32% of the stock. One famous value investor owns the stock: GEICO9% Sales growth
could this be too fast or glamorous for me? But this company hashad a checkered sales growth record over its history. Look in Value Line and seeinconsistent growth.
Don’t forget in 1999
we are in the
Internet Mania 
--during the rapidgrowth bull market. 1% Dividend Yield. The stock has gone up 41.4% in the past year;we may have missed the boat on this.12.6 P/E which is below the market average. Market to book value is relatively low, butremember that
this is a company with a lot of off-balance sheet assets
its brands.The company is border-line cheap.
The female analysts on Wall Street won’t care about
this company.Good news: 5% of the stock is being bought back each year. You could tender 5% ofyour stock each year and have the same percentage ownership
your residualownership would remain unchanged. A dividend yield in a form that is capital gains. 1%dividend yield along with the 5% buy back of stock gives you a 6% yield.There are some attractive features; there are some unattractive features for this stock.Again, from a value perspective, y
ou won’t be shocked to find this stock
fully valued orunder valued. Imagine going through this process yourself.
 
Liz Claiborne Case Study & Valuationwww.csinvesting.wordpress.comstudying, teaching, investing Page 2
This is a company that may not have been thrown up by a screen, but it is a decentcompany that has been at a low price and it has been purchased by value managerswho are certainly holding on to it.Now you have thought about it, you might wish to pass, but we have told you to value it.
STEP 1:
Start with the asset value. What is there for the $2.4 billion market value ($42.30 @56.72 mil. outstanding shares)?
Balance Sheet (LIZ)
Jan-00Assets
($000’s)
 Current AssetsCash $37.9Mkt. Secs.Accts Rec. Trade 299Inventories 418.3Deferred income tax benefits 27.8Other current assets 75.6Total CA 858.6PP&E Net (add value ofBuildings & Land) 284Goodwill and Intangibles - Net 227.7Other Assets 41.3TOTAL ASSETS 1,411.6LiabilitiesCurrent LiabilitiesAccounts Payable 184.5Accrued Expenses 160Income Tax Payable 7.5Total CL 352LT Debt 116Other Non-Current Liabilities 15Deferred Income Taxes 23.1Commitments andContingenciesMinority Interest 3.1Put WarrantsStockholder's EquityCommon Stock 88,218,617Treasury Stock -31,498,577Net OS 56,720,040
 
Net Sales $2,806CGS 1,709Gross Profit 1,097SG&A 798
EBIT 300
Inv.& other inc. 2Taxes 109
Cap-ex 75
 
Liz Claiborne Case Study & Valuationwww.csinvesting.wordpress.comstudying, teaching, investing Page 3
Total Share Equity 902,169.No LIFO Adj. In their history a fair amount of write-offs on Inventory so they areconservative. The inventory number is probably good.They own buildings in the Meadowlands, NJ. So probably worth more than original cost.At a minimum at replacement cost. Probably worth $400 to $500 million. Maint. Capexnot very high since the industry is not capital intensive. There is some extra value in thereal estate so add back to EPV. Remember to add back assets that are not needed fortheir ongoing business.There are no formulas here. We treat the brands separately.
The value doesn’t necessarily reside on the balance sheet except there may be more
value in the real estate than stated on the books. $288 mil in PP&E is probably worth$400 million because of the Real Estate value? If it was crucial to your decision, thenfind out more about the industry and asset and/or hire an assessor for the buildings. Weknow that Real Estate value is greater than the book value historical cost basis.Equity value: $902,000 divided by 56.72 mil OS = $16 per share in book value. Themarket value is over 2.3x book value.Now analyze the
Brand Value
calling people up to assess the value of brands in therag trade. Investment in advertising and distribution. 20 to 40 cents per $1 of sales iswhat you are given.These estimates are not something you get from an accounting formula. You have toask someone in the rag/retail industry. These investments in developing brands, by nomeans, always work out. Failure rate is ½ to 1/3 of the time. For a successful brand like
Liz Claiborne 
it could cost as little as 20 cents per $1 of sustainable sales with a 50%success probability or 40 cents for the cost of developing a brand or as much as a $1.20.There are a large range of uncertainties. If these are old, tired brands, they need to bewritten down by 25%. These brands are worth about 60 cents per $1 of sales.40 cents to $1.20 cents investment for brands. These brands coupled with the supplierrelations are worth about 60 cents per $1 of sales.Revenues of $2.807 billion multiplied by .60 (remember 60 cents per $1 of sales) =$1.684 billion in estimated brand value
the reproduction value of the bands. We areestimating this off of what
Liz Claiborne 
was willing to pay. 10% is the cost of capital, soyou should be able to make $168 million per year ($1.68 bil. X 10%) without risk ofcompetitive entry. You have asset protection.
The brand is an asset NOT a competitive advantage.
Competitors would have to paythat amount to compete with you in that particular brand, but the higher cost to enter themarket does not equate to a competitive advantage.Old brands are worth less than new brands in the rag trade. You have to spend tosupport the brand. We are seeking the
reproduction value
for the brands.

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