Ascendere Associates LLC

Steve Castellano

January 27, 2010
steve@ascenderellc.com

McKesson Corporation (NYSE: MCK)
Sector: Healthcare
Industry: Healthcare Distributors
McKesson Corporation has a very strong fundamental profile, is securely situated in an industry that should show considerable longterm growth, and seems undervalued relative to its historical ROIC, growth prospects and to other Healthcare stocks. As such, it is
probably one of the best Healthcare Sector stocks to own at the current moment.
Conservative assumptions get us to about a 15.5-16x target multiple on NTM EPS of $4.67, or $75 -- which compares to a sell-side
range of $60-80 and average of $70. And it would not be a stretch to justify a target multiple of 19x using academically derived
WACC calculations. On a worst case basis -- one in which EPS could decline 25% next year to $3.66 and gradually resume for flat 5yr
growth on average, we still drive a fundamental fair value of $52, which is not far from the current stock price. In short, it seems that
the fundamentally calculated risk/reward for MCK is at an extremely compelling level.

LTM

FY+1

FY+2

LTM

5yr Avg

MCK
Stock Price

$59.52

EPS: $ 3.10

EPS:

$4.54

EPS:

$4.76

ROE:

Market Cap / Shares
($B)
$16.0 / 269

P/E:

19.2

P/E:

13.1

P/E:

P/B

2.4

P/CF

7.1

P/CF

6.5

P/CF

6.3

EBIT
Margin

1.7%

Beta

0.82

P/S:

0.1

P/S:

0.1

P/S:

0.1

Income
Margin

0.8%

EBITDA/
12.5 Capital

13.0%

ROE: 18.5%

EBITDA/
26.2% Capital 19.9%

Insider
Ownership0.2%
# of
Analysts

12

EBIT
Margin

1.4% Debt/Cap:

27.2%

Income
Margin

0.7%

Div Yld:

Description: McKesson Corporation is a
health care drug and supply distribution
company supply, and is a provider of
various healthcare technology solutions.
Roughly 97% of revenue and 82% of
operating profit is generated from its
distribution segment and the balance from
its healthcare IT business.

0.8%

McKesson Appears Compelling on a Standalone and Relative Value Basis
McKesson has a very strong fundamental profile in terms of ROIC momentum, various operating efficiency metrics and balance
sheet strength. In addition, McKesson and other drug distributors and pharmacy benefit managers will probably increasingly
play a major and positive role in managing health care costs. Furthermore, the long-term demand for drugs, especially generic
drugs, and other products will increase as the baby boomers age. If we experience a resurgent economy, its health care
technology business will likely contribute to higher earnings growth and multiple expansion.
Even after its impressive 75% run to a recent close of about $59, this stock still has room to appreciate. A market-driven
correction could occur, but for portfolio managers that have an opening in a portfolio, this is probably one of the best
Healthcare Sector stocks to own at the current moment. Our confidence in this stock idea is supported by relative valuation on a
ROIC-adjusted basis and recently reported results that show the story is on track, as well as its strong balance sheet and solid
cash flow
McKesson is currently trading at 11.7x NTM consensus EPS estimate of $4.67 versus a 5yr average of 16x and a high of 22.1x
reached in 2006. Based on an academically derived WACC of 7.5% and conservative assumptions on cash flow growth, the stock
deserves to trade at a multiple of more than 19x. Even assigning a more conservative WACC of 8.5% on 10-year compounded
sales growth of 2% and EPS growth of 5%, together with a the stock deserves to trade at a 15.5-16x multiple -- or about $75 in
one year.
As of the time of this report -- one day after the company's report of fiscal 3Q results, the stock is down 4.5%. This is probably
because EPS for the fiscal year ending in March will contain about $0.55 in positive non-recurring gains and guidance is up only
$0.05-$0.10 for the year. Perhaps implicit in the recent negative stock price action is that this represents poor earnings quality
and a possible stagnation in positive analyst revisions as we head into the next fiscal year. However, the key metrics for earnings
quality -- improving levels of ROIC, working capital management and cash flow growth -- overwhelmingly point to the overall
Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 1

quality of the company. We would also point out that McKesson has historically reported EPS and provided guidance that
includes nonrecurring items -- which provides some justification on valuation on a historical multiple basis.
A key quality that is probably not wholly embedded in the current valuation is McKesson's strong management and penchant for
deploying cash in a way that enhances value, whether through dividends, share repurchase or acquisitions. The company has
$3.4b cash and equivalents and about $2.5b in total debt. From McKesson's track record, it's a believable statement when CEO
John Hammergren states in the latest conference call transcribed by Seeking Alpha:
"...We’ve built a track record and if we choose to deploy any of our capital in acquisitions I
would hope to do so intelligently and in a way that creates more value than a share repurchase
would create for us.
So I think you’d find that we would look to the businesses that we’re in today and we bring
some knowledge. We bring some synergy. It’s unlikely that we will buy companies that our
shareholders could buy and we can’t add any value beyond what you could add to them to hold
them independently."
Typically, acquisitions obfuscate ROIC trends by setting a lower base upon which new cash flow growth can be measured
against. However, despite recent acquisitions (such as the McQueary Bros. Drug Company for $190m in April 2008 and
Oncology Therapeutics Network Corporation for $575m in October 2007 and Per-Se Technologies in November 2006 for $1.6b)
McKesson has a good track record of continuing to grow cash flow and ROIC over these periods. This is in part helped by the
occasional sale of noncore operations and, from an accounting ROIC point of view, making large repurchases of its stock. MCK
seems to manage its cash flows and balance sheet to drive growth in an economically value-added and accounting value-added
manner.
Valuation Summary
We have chosen 3 different scenarios in which to value McKesson. Numerous underlying factors can be summarized in the longterm earnings growth rates on a 8.5% WACC and 2% terminal growth rate -- 9.3%, 4.8% and essentially 0%.
These various scenarios justify multiples of 19.9x, 16.2x and 12.7x on consensus EPS for the fiscal year ended March. Assigning a
20% probability to flat-long-term growth ($52 near-term target), 70% to 4.8% long-term growth ($75 12-month target) and 10%
to 9.3% growth ($92 12-month target) gets us a price target of $72 -- which is close enough to the $75 price target scenario that
we truly believe in.
Applying a 7.5% WACC (CAPM derived) and 3% terminal growth rate (Fed's estimate for long-term inflation) -- both of which are
very much justifiable -- could drive these price targets $10-20 higher.
Furthermore, whether on multiples alone or multiples adjusted for ROIC and earnings growth, MCK shows significant relative
value. For example, MCK is trading at 6.3x on Enterprise Value to 2010E EBITDA versus 8.5x for a peer average and 12.7x
calendar 2010E EPS versus 15.1x for the group. Even just compared to just the other two major drug distributors, Cardinal
Health (15.2x 2010E PE) and Amerisource Bergen (13.7x), MCK is a bargain.
This relative valuation comparison is further bolstered when comparing ROIC on a loosely defined basis -- for example, the
pharmacy benefit manager Medco trades at 18.7x 2010E EPS with LTM EBITDA/Total Capital at 25.6%. Meanwhile, McKesson
trades at 12.7x EPS with LTM EBITDA/Total Capital at a higher 26.2% figure. Granted, MHS estimated earnings growth is several
times that of MCK, but the relatively high "ROIC" coupled with a low PE and positive earnings growth makes MCK seem severely
undervalued in comparison.
Risks
Ascendere Associates LLC makes no guarantee on the accuracy of the data, estimates, assumptions or forecasts in this report.
Investing in MCK or any equity entails a high degree of risk. This report is not a solicitation to buy or sale any securities.
Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 2

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 3

About Ascendere Associates LLC
J. Stephen Castellano – Steve founded Ascendere Associates LLC to provide custom equity research and financial consulting
services for institutional clients. Steve has been involved in equity research, strategic studies and financial writing since 1995,
and has more than 10 years of experience in equity research analysis. At PaineWebber, Warburg Dillon Read and Credit
Lyonnais Securities he developed fundamental equity valuation models and conducted in-depth research on the steel and
telecom services industries. At Boston Private Value Investors, he developed quantitative models for stock idea generation and
also provided general fundamental equity research coverage. Steve received a MBA from the F. W. Olin School of Business at
Babson College (2005) and a BA from Oberlin College (1993).
Steve’s career history is highlighted below:





Ascendere Associates LLC (2009-Present)
Boston Private Value Investors , Equity Research, Equity Research Analyst (2005-2009)
Pyramid Research, Contract Consultant, Telecom Services (2002-2003)
Credit Lyonnais Securities (USA), Equity Research, Telecom Services, Vice President (2000-2001)
Warburg Dillon Read, Equity Research, Telecom Services, Research Associate (1999-2000)
PaineWebber, Equity Research, Steel and Nonferrous Metals, Research Associate, Editor (1995-1999)

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 4

Summary of Various ROIC and Efficiency Ratios
McKesson Corporation
Healthcare
Healthcare Distributors
MCK
Operating Assets Components
Net PP&E
Goodwill
Other Intangibles
Other Long-term Assets
Net Working Capital (ex cash)
Cash (estimated requirement)
Total Operating Assets

FQ
836
3,560
846
1,452
512
321
7,527

FQ-1
814
3,549
860
1,432
694
264
7,613

FQ-2
796
3,528
1,357
915
1,175
210
7,981

FQ-3
788
3,484
892
1,766
1,140
117
8,187

FQ-4
777
3,524
925
1,813
1,267
112
8,418

LTM EBITDA
Average Operating Assets
Back of Envelope ROIC

2,245
7,945
28.3%

2,178
8,100
26.9%

2,085
8,184
25.5%

2,055
8,263
24.9%

1,889
8,087
23.4%

12/31/10
2,500
9,735
25.7%

9/30/10
2,495
9,550
26.1%

6/30/10
2,452
9,301
26.4%

3/31/10
2,402
9,081
26.4%

12/31/09
2,323
8,817
26.3%

9/30/2009
2,245
8,563
26.2%

6/30/2009
2,178
8,324
26.2%

LTM EBIT
Avg. Total Capital
EBIT / Total Cap

2,025
9,735
20.8%

2,022
9,550
21.2%

1,980
9,301
21.3%

1,950
9,081
21.5%

1,924
8,817
21.8%

1,848
8,563
21.6%

1,782
8,324
21.4%

1,694
8,152
20.8%

1,655
8,102
20.4%

1,522
8,177
18.6%

Earnings from Continuing Operations
Average Total Equity
Return on Equity

1,245
7,266
17.1%

1,246
7,085
17.6%

1,200
6,853
17.5%

1,164
6,638
17.5%

1,127
6,450
17.5%

850
6,339
13.4%

876
6,244
14.0%

823
6,214
13.2%

847
6,276
13.5%

1,068
6,320
16.9%

12/31/10
1,878
700
1,178
0%

9/30/10
1,883
702
1,182
3%

6/30/10
1,853
704
1,149
2%

3/31/10
1,834
707
1,127
1%

12/31/09
1,821
708
1,112
6%

9/30/2009
1,757
710
1,047
43%

6/30/2009
1,475
741
734
2%

3/31/2009 12/31/2008
1,403
1,584
685
641
719
943
-24%
-16%

9/30/2008
1,936
810
1,125
5%

1,878
9,397
19.9%
0%

1,883
9,425
19.9%
2%

1,853
9,455
19.4%
2%

1,834
9,493
19.0%
2%

1,821
9,514
18.6%
6%

1,757
9,538
17.6%
21%

1,475
9,732
14.5%
5%

NYSE:MCK
CROC Model
LTM EBITDA
Avg. Total Capital
EBITDA/Total Cap

NYSE:MCK
NOPLAT
Economic Charge
Economic Profit
Sequential growth
NOPLAT
Operating Capital
ROIC (NOPLAT / Operating Capital)
Sequential growth

FQ-5
779
3,505
921
1,851
1,127
118
8,301

FQ-6
775
3,345
1,318
1,379
1,078
136
8,031

FQ-7
747
3,353
878
1,703
1,553
143
8,377

3/31/2009 12/31/2008
2,085
2,085
8,152
8,102
25.6%
25.7%

1,403
9,864
13.7%
-11%

1,584
10,295
15.4%
-20%

FQ-8
714
3,055
763
1,713
811
251
7,307

9/30/2008
1,933
8,177
23.6%

1,936
10,584
19.3%
0%

Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 5

Competitor Overview

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 6

McKesson Corporation
NYSE:MCK

Ticker

Company
Name

Stock
Price

NYSE:MCK
NYSE:CAH
NYSE:ABC
NasdaqGS:HSIC
NasdaqGS:PDCO
NYSE:MHS
NasdaqGS:ESRX
NYSE:OCR

McKesson Corporation
$
Cardinal Health, Inc.
AmerisourceBergen Corporation
Henry Schein Inc.
Patterson Companies Inc.
MedcoHealth Solutions Inc.
Express Scripts Inc.
Omnicare Inc.

59.45
31.61
27.20
53.99
28.99
62.46
85.39
24.95

$

Mkt
Val
16,797
11,748
7,818
4,934
3,559
29,559
23,406
2,986

$

Total
Cash
3,215
1,585
1,009
321
170
2,068
5,145
324

$

Total
Debt
2,511
2,466
1,178
268
525
4,211
4,012
2,149

$

Other
62
(0)
-

Enterprise
Val
$
16,093
12,629
7,987
4,943
3,914
31,702
22,273
4,811

Calendar Year Comps
NYSE:MCK
Peer Average
Peer Min
Peer Max

>---------------------------Calendar Year---------------------------<
EV /
EV /
Rev EBITDA
EPS
EPS
PE
PE
2009E
2010E
2009E
2010E
2009E
2010E
0.1x
0.1x
0.1x
0.8x
1.2x
0.5x
0.9x
0.8x

EV /
Rev
2009E
0.1x
0.6x
0.1x
1.2x

6.3x
8.0x
7.5x
8.2x
9.6x
10.1x
9.3x
6.7x

4.68
2.08
1.99
3.46
1.91
3.35
4.68
2.65

13.3x
11.7x
15.5x
17.1x
16.6x
22.2x
24.8x
10.0x

12.7x
15.2x
13.7x
15.6x
15.2x
18.7x
18.2x
9.4x

EV /
EBITDA
EPS
EPS
2009E
2010E
2010E
6.3x $ 4.47 $ 4.68

PE
2009E

PE
2010E

13.3x

12.7x

16.8x
10.0x
24.8x

15.1x
9.4x
18.7x

8.5x
6.7x
10.1x

$
$
$
$
$
$
$
$

4.47
2.70
1.76
3.15
1.75
2.81
3.45
2.50

$
$
$
$
$
$
$
$

Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 7

Sensitivity Analysis

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 8

Sensitivity Analysis
McKesson Corporation
Healthcare
Healthcare Distributors
MCK

$

59.48

1/27/2010

>--------------------10-year Historical Range--------------------<
Low
Average
Median
High
Adjusted Present Value current
Adjusted Present Value +12 months

YTD Scenario +2 Consensus Scenario -2
$
84 $
68 $
52
$
92 $
75 $
59

Unlevered equity discount rate
Tax shield discount rate

9.2%
6.3%

9.2%
6.3%

9.2%
6.3%

Levered equity discount rate
After tax cost of debt
WACC

9.2%
4.8%
8.5%

9.2%
4.8%
8.5%

9.2%
4.8%
8.5%

Risk free rate
Market risk premium
Terminal growth rate

3.8%
7.8%
2.0%

3.8%
7.8%
2.0%

3.8%
7.8%
2.0%

0.82
0.71
0.70

0.82
0.71
0.70

0.82
0.71
0.70

2.8%
9.3%

2.4%
4.8%

2.0%
-0.6%

17.4%
19.8%
22.7%

17.4%
16.2%
18.5%

17.4%
12.6%
14.4%

Equity beta
Industry asset beta, company levered
Industry asset beta

Next 5yr Sales CAGR
Next 5yr EPS CAGR
ROIC FY2010E
ROIC FY2011E
ROIC FY2015E
Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 9

Sensitivity Analysis
McKesson Corporation
Healthcare
Healthcare Distributors
MCK

$

59.48

1/27/2010

>--------------------10-year Historical Range--------------------<
Low
Average
Median
High
Adjusted Present Value current
Adjusted Present Value +12 months

YTD Scenario +2 Consensus Scenario -2
$
84 $
68 $
52
$
92 $
75 $
59

Gross Margin FY2010E
Gross Margin FY2015E
Gross Margin Expansion

4.2%

5.3%

5.0%

7.7%

4.9%

5.27%
5.55%
0.27%

5.27%
5.35%
0.07%

5.27%
5.15%
-0.13%

SG&A + R&D Margin FY2010E
SG&A + R&D Margin FY2015E
SG&A Margin Expansion

3.0%

4.1%

3.5%

7.0%

3.2%

3.46%
3.26%
-0.20%

3.46%
3.46%
0.00%

3.46%
3.66%
0.20%

EBITDA Margin FY2010E
EBITDA Margin FY2015E
EBITDA Margin Expansion

0.9%

1.6%

1.7%

2.1%

2.1%

2.18%
2.65%
0.47%

2.18%
2.25%
0.07%

2.18%
1.85%
-0.33%

EBIT Margin FY2010E
EBIT Margin FY2015E
EBIT Margin Expansion

0.3%

1.2%

1.4%

1.7%

1.7%

1.81%
2.29%
0.47%

1.81%
1.89%
0.07%

1.81%
1.49%
-0.33%

Debt FY2010E
Debt FY2015E

991

1,652

1,496

2,511

2,511

2,290
599

2,290
599

2,290
599

Cash FY2010E
Cash FY2015E

262

1,309

1,040

3,215

3,215

3,720
9,662

3,720
8,020

3,720
6,415

Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 10

Sensitivity Analysis
McKesson Corporation
Healthcare
Healthcare Distributors
MCK

$

59.48

1/27/2010

>--------------------10-year Historical Range--------------------<
Low
Average
Median
High
Adjusted Present Value current
Adjusted Present Value +12 months
EPS FY2010E
EPS FY2011E
EPS FY2015E

(+1 FY)
(+2 FY)

Justified PE FY2010E
Justified PE FY2011E
Sales FY2010E
Sales FY2011E

2.56
2.88

(+1 FY)
(+2 FY)

(+1 FY)
(+2 FY)

Justified EV / Sales FY2010E
Justified EV / Sales FY2011E
EBITDA FY2010E
EBITDA FY2011E

1.88
2.25

(+1 FY)
(+2 FY)

(+1 FY)
(+2 FY)

Justified EV / EBITDA FY2010E
Justified EV / EBITDA FY2011E

(+1 FY)
(+2 FY)

2.22
2.55

4.47
4.68

YTD Scenario +2 Consensus Scenario -2
$
84 $
68 $
52
$
92 $
75 $
59
4.47
4.68

4.62
5.89
7.21

4.62
4.77
5.82

4.62
3.66
4.49

13.3
12.7

19.9
15.6

16.2
15.7

12.7
16.1

108,427
112,661

108,427
112,227

108,427
111,794

0.2
0.2

0.2
0.2

0.1
0.1

2,364
2,897

2,364
2,437

2,364
1,981

9.5
7.8

7.6
7.4

5.8
6.9

Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 11

WACC Assumptions

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 12

Peer Group Cost of Capital
McKesson CorporationCardinal Health, Inc.AmerisourceBergen Henry
Corporation
Schein Inc. Patterson Companies
MedcoHealth
Inc.
Solutions
Express
Inc. Scripts Inc. Omnicare Inc.
Company NYSE:MCK
NYSE:CAH
NYSE:ABC
NasdaqGS:HSIC NasdaqGS:PDCO NYSE:MHS
NasdaqGS:ESRX NYSE:OCR
Cost of Equity:
Beta S&P (5-yr monthly)
Industry average beta, levered

Average

0.82
0.70

0.81
0.72

0.75
0.70

0.72
0.66

0.81
0.70

0.45
0.70

0.89
0.71

0.45
0.93

3.6%
7.8%
9.1%

3.6%
7.8%
9.3%

3.6%
7.8%
9.1%

3.6%
7.8%
8.8%

3.6%
7.8%
9.1%

3.6%
7.8%
9.1%

3.6%
7.8%
9.1%

3.6%
7.8%
10.9%

7.9%

7.4%

5.4%

6.0%

4.6%

4.4%

5.6%

5.2%

37.5%
4.9%

37.5%
4.6%

37.5%
3.4%

37.5%
3.8%

37.5%
2.8%

37.5%
2.7%

37.5%
3.5%

37.5%
3.2%

37.5%

15.3%

21.1%

15.3%

5.4%

14.8%

14.1%

17.1%

72.0%

21.9%

0.75

0.72

0.68

0.70

0.74

0.42

0.80

0.31

0.64

16,465
2,511
18,976

11,682
2,466
14,148

7,724
1,178
8,902

4,968
268
5,236

3,559
525
4,084

29,955
4,211
34,166

23,406
4,012
27,418

2,986
2,149
5,135

86.8%
13.2%

82.6%
17.4%

86.8%
13.2%

94.9%
5.1%

87.1%
12.9%

87.7%
12.3%

85.4%
14.6%

58.1%
41.9%

83.7%
16.3%

Cost
Equity
9.1%
Debt
4.9%
Weighted Average Cost of Capital (WACC) =
8.5%

9.3%
4.6%
8.5%

9.1%
3.4%
8.3%

8.8%
3.8%
8.5%

9.1%
2.8%
8.3%

9.1%
2.7%
8.3%

9.1%
3.5%
8.3%

10.9%
3.2%
7.7%

9.3%
3.6%
8.3%

Current Risk Free Rate (US 10yr bond)
Equity Risk Premium
Cost of Equity
Cost of Debt:
Estimated Cost of Debt
Normalized Tax Rate
After Tax Cost of Debt
Capital Structure:
Debt to Equity Ratio
Unlevered Beta
Cost of Capital
Equity
Debt
Market Value of Total Capitalization
Weighting
Equity
Debt

0.71
0.73
3.6%
7.8%
9.3%
5.8%
3.6%

12,593
2,165
14,758

Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 13

$75 Stock Price Target Derived in Part by
Consensus Average Estimates

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 14

Consensus
FY2009
3/31/2009

FY2010
3/31/2010

FY2011
3/31/2011

FY2012
3/31/2012

FY2013
3/31/2013

FY2014
3/31/2014

FY2015
3/31/2015

FY2020
3/31/2020

-

-

-

-

-

-

-

-

106,632
0.00%

108,427
1.68%

112,227
3.50%

114,893
2.38%

117,191
2.00%

119,535
2.00%

121,926
2.00%

134,616
2.00%

Gross margin
SG&A margin

5.0%
3.46%

5.3%
3.46%

5.3%
3.46%

5.3%
3.46%

5.3%
3.46%

5.3%
3.46%

5.3%
3.46%

5.3%
3.46%

EBITDA
EBITDA margin

2,085
1.96%

2,364
2.18%

2,437
2.17%

2,589
2.25%

2,641
2.25%

2,694
2.25%

2,748
2.25%

3,034
2.25%

EBIT
EBIT margin

1,694
1.59%

1,966
1.81%

2,026
1.80%

2,168
1.89%

2,211
1.89%

2,255
1.89%

2,300
1.89%

2,540
1.89%

-

-

-

-

-

-

-

-

Income Statement
Acquired sales
Disposed Sales
Total sales
Total sales growth

Other recurring income
Nonrecurring income
Net interest expense

(113)

(92)

(59)

(33)

7

53

99

264

Tax rate
22.7%
Earnings from Continuing Operations
1,223

33.0%
1,256

34.0%
1,298

34.0%
1,409

34.0%
1,464

34.0%
1,524

34.0%
1,584

34.0%
1,850

Shares outstanding
EPS from Continuing Operations

279
4.38

272
4.62

272
4.77

272
5.18

272
5.38

272
5.60

272
5.82

272
6.80

Dividend per share
Dividends

0.48
(116)

0.48
(131)

0.48
(131)

0.48
(131)

0.48
(131)

0.48
(131)

0.48
(131)

0.48
(131)

1,711
(195)
(620)

2,316
(356)
(350)

986
(368)
(340)

1,819
(384)
(340)

1,885
(400)
(555)

1,945
(416)
(555)

2,010
(433)
(555)

2,316
(528)
(131)

896

1,611

278

1,094

931

974

1,022

1,658

Free Cash Flow to the Firm
EBIAT
Depreciation
Capital investment
Working capital investment

1,310
391
(195)
97

1,317
398
(356)
663

1,337
412
(368)
(723)

1,431
421
(384)
(12)

1,459
430
(400)
(9)

1,489
438
(416)
(17)

1,518
447
(433)
(21)

1,676
494
(528)
(28)

Free cash flow

1,603

2,022

658

1,456

1,480

1,494

1,511

1,614

Economic Profit
Operating Capital
8,271
WACC (rough estimate)
7.5%
Capital Charge
617
NOPAT (adjusted for leases, R&D)1,310
Economic Profit
693
EP as % of Operating Capital
8.4%

7,566
8.6%
647
1,317
670
8.9%

8,245
8.6%
710
1,337
627
7.6%

8,220
8.7%
713
1,431
718
8.7%

8,199
8.8%
721
1,459
738
9.0%

8,194
8.9%
731
1,489
758
9.2%

8,201
9.0%
741
1,518
777
9.5%

8,400
9.0%
759
1,676
917
10.9%

Adjusted Present Value
Unlevered equity discount rate
8.7%
8.7%
8.7%
Tax shield discount rate
6.0%
6.0%
6.0%
Terminal growth rate
1.5%
2.0%
2.5%
Current Value
70
73
76
+12 Months Value
77
80
84
Source: Ascendere Associates LLC models and Capital IQ, Inc. data

9.2%
6.3%
1.5%
66
72

9.2%
6.3%
2.0%
68
75

9.2%
6.3%
2.5%
71
78

9.7%
6.5%
1.5%
62
68

Cash Flow Statement
Cash from Operations
Cash from Investing
Cash from Financing
Change in Cash

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 15

Consensus
FY2009
3/31/2009
Balance Sheet
Cash
Accounts Receivable
Inventory
Other Current Assets
Total Current Assets
Gross PP&E
Net PP&E
Other Fixed Assets
Total Fixed Assets
Total Assets

FY2010
3/31/2010

FY2011
3/31/2011

FY2012
3/31/2012

FY2013
3/31/2013

FY2014
3/31/2014

FY2015
3/31/2015

FY2020
3/31/2020

2,109
6,741
8,527
1,294
18,671

3,720
7,838
8,598
279
20,435

3,998
8,157
8,948
290
21,394

5,093
8,189
8,983
291
22,556

6,023
8,270
9,072
294
23,661

6,998
8,394
9,208
299
24,898

8,020
8,540
9,368
304
26,233

15,888
9,406
10,318
335
35,947

1,723
796
5,800
6,596

2,079
754
5,800
6,554

2,447
711
5,800
6,511

2,831
674
5,800
6,474

3,231
644
5,800
6,444

3,647
622
5,800
6,422

4,080
608
5,800
6,408

6,522
676
5,800
6,476

25,267

26,989

27,904

29,030

30,105

31,320

32,641

42,424

Accounts Payable
Other NIB Current Liabilities
Total NIB Current Liabilities

11739
3648
15387

12688
3515
16203

12655
3506
16161

12699
3518
16217

12828
3554
16382

13021
3607
16628

13249
3670
16919

14593
4043
18636

Total Debt
Capital Leases
Minority Interest
Shareholder Equity
Total Capital

2,509
6,193
8,702

2,290
7,318
9,608

2,081
8,485
10,566

1,871
9,764
11,635

1,447
11,098
12,545

1,023
12,491
13,514

599
13,944
14,543

599
22,011
22,610

Other Non Current Liabilities
Total Liabilities and SE

1,178
25,267

1,178
26,989

1,178
27,904

1,178
29,030

1,178
30,105

1,178
31,320

1,178
32,641

1,178
42,424

Working Capital
Current Assets Less Cash
Current Liabilities Less Debt
Net Working Capital
NWC as a % of Sales
Working Capital Turnover

16,562
15,387
1175
1.1%
90.8

16,715
16,203
512
0.5%
128.5

17,395
16,161
1235
1.1%
128.5

17,464
16,217
1247
1.1%
92.6

17,637
16,382
1255
1.1%
93.7

17,900
16,628
1272
1.1%
94.6

18,213
16,919
1293
1.1%
95.1

20,059
18,636
1423
1.1%
95.5

Cash Cycle
Days Inventory in Stock
Days Sales Outstanding
Days Payables Outstanding
Cash Cycle

31
23
42
12

30
25
43
12

30
26
43
13

30
26
43
14

30
26
42
13

29
25
42
13

29
25
41
13

29
25
41
13

Operating Efficiency
NI / Sales
Sales / Operating Assets

1.1%
1289%

1.2%
1433%

1.2%
1361%

1.2%
1398%

1.2%
1429%

1.3%
1459%

1.3%
1487%

1.4%
1603%

Operating Assets / Equity
Operating ROE

1.3
19.7%

1.0
17.2%

1.0
15.3%

0.8
14.4%

0.7
13.2%

0.7
12.2%

0.6
11.4%

0.4
8.4%

16.7
41%
29%

21.9
36%
26%

34.8
28%
22%

67.7
22%
18%

NMF
16%
14%

NMF
10%
9%

NMF
6%
6%

NMF
3%
3%

1.1%
422.0%
4.1
19.7%

1.2%
415.0%
4.2
20.3%

1.2%
408.9%
3.8
17.7%

1.2%
403.6%
3.4
16.6%

1.2%
396.4%
3.0
15.0%

1.3%
389.2%
2.8
13.7%

1.3%
381.3%
2.6
12.7%

1.4%
325.3%
2.0
9.1%

Accounting Efficiency
(EBITDA - Capex) / Net Interest
Debt/Equity
Debt/Total Capital
NI / Sales
Sales / Assets
Assets / Equity
ROE

ROA
ROI (Earnings / TotalCap)
ROIC (RetainEarn / TotalCap)
ROIC (Noplat / Operating Assets)
EBIT / Capital
EBITDA / Capital
Book value per share
$

4.8%
14.1%
12.7%
15.8%
19.5%
24.0%
22 $

4.8%
13.7%
12.3%
17.4%
21.5%
25.8%
27 $

4.7%
12.9%
11.6%
16.2%
20.1%
24.2%
31 $

5.0%
12.7%
11.5%
17.4%
19.5%
23.3%
36 $

5.0%
12.1%
11.0%
17.8%
18.3%
21.8%
41 $

5.0%
11.7%
10.7%
18.2%
17.3%
20.7%
46 $

5.0%
11.3%
10.4%
18.5%
16.4%
19.6%
51 $

4.5%
8.5%
7.9%
20.0%
11.7%
13.9%
81

Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 16

Consensus

Stock price
Shares outstanding

59.48
268.0

Market value

15,940

Cash
Non operating assets
Debt market value
Preferred stock market value
Minority interest
Other non operating liabilities

(3,215)
2,511
-

Enterprise Value

15,236

Unlevered Cost of Equity
Pretax Cost of Debt
Terminal growth rate
Current WACC*

274.5

9.2%
6.25%
2.0%
8.5%

Discount unlevered free cash flows at the unlevered cost of equity to determine value of the unlevered firm
Period
Adjusted Present Value

FY2010

FY2009

Total Sales
EBIT
Tax rate
Cash income taxes
EBIAT
Depreciation
Capital Spending, recurring
Working Capital Investment

3
FY2013

4
FY2014

5
FY2015

6
FY2016

7
FY2017

8
FY2018

9
FY2019

10
FY2020

108,427
1,966

112,227
2,026

114,893
2,168

117,191
2,211

119,535
2,255

121,926
2,300

124,364
2,347

126,851
2,393

129,389
2,441

131,976
2,490

134,616
2,540

23%
384

33%
649

34%
689

34%
737

34%
752

34%
767

34%
782

34%
798

34%
814

34%
830

34%
847

34%
864

1,310

1,317

1,337

1,431

1,459

1,489

1,518

1,549

1,580

1,611

1,643

1,676

398
(356)
663

1,603

412
(368)
(723)

421
(384)
(12)

430
(400)
(9)

438
(416)
(17)

447
(433)
(21)

456
(450)
(24)

465
(469)
(25)

474
(488)
(26)

484
(507)
(27)

494
(528)
(28)

2,022

658

1,456

1,480

1,494

1,511

1,531

1,551

1,572

1,593

2,022

658

1,456

1,480

1,494

1,511

1,531

1,551

1,572

1,593

1,614
22,831
24,445

-

602

1,221

1,136

1,050

973

902

837

777

721

10,127

2
FY2012

3
FY2013

4
FY2014

Present value of future cash flows
Value of unlevered firm

2
FY2012

106,632
1,694

391
(195)
97

Free cash flow to the entity
Residual value of free cash flows
Free cash flow plus residual value

1
FY2011

18,345

Discount interest tax shields at cost of debt to determine value of interest tax shields
FY2010

FY2009
Total Debt
Cash interest expense as % of Debt
Cash interest expense
Interest tax shield
Residual value of interest tax shields
Interest tax shields plus residual value

$

Cost of debt
Present value of future cash flows
Value of interest tax shields

350

Cost of Potential Bankruptcy
Probability of bankruptcy
Negative impact to PV
Unlevered firm value

4.0%
100.0%
18,345

Expected bankruptcy costs

2,290 $
6.3%
150
49

2,081 $
6.3%
137
46

1,871 $
6.3%
123
42

1,447 $
6.3%
104
35

1,023 $
6.3%
77
26

5
FY2015
599 $
6.3%
51
17

6
FY2016
599 $
6.3%
37
13

7
FY2017

8
FY2018

599 $
6.3%
37
13

599 $
6.3%
37
13

9
FY2019
599 $
6.3%
37
13

10
FY2020

49

46

42

35

26

17

13

13

13

13

599
6.3%
37
13
305
318

6.3%
-

6.3%
44

6.3%
37

6.3%
29

6.3%
21

6.3%
13

6.3%
9

6.3%
8

6.3%
8

6.3%
7

6.3%
174

(734)

Valuation
Value of unlelvered firm
Value of interest tax shields
Expected bankruptcy costs

18,345
350
(734)

Enterprise value

17,961

Cash
Other non-operating assets
Debt
Preferred
Minority Interest
Other non operating liabilities

3,215
(2,511)
-

Value of equity

18,665

Shares outstanding
Value per share

2,509 $
6.3%
157

1
FY2011

274.5
67.99

Current Value
Terminal Growth
Equity
1.5%
2.0%
2.5% Tax shield
Current ValueConsensus0.0871276506826462
8.7%
$
70.11 $
72.94 $
76.23
6.0%
Current ValueConsensus0.0921276506826462
9.2%
$
65.63 $
67.99 $
70.72
6.3%
Current ValueConsensus0.0971276506826462
9.7%
$
61.70 $
63.69 $
65.97
6.5%

Value 12+ months

274.5

Terminal Growth
Equity
1.5%
2.0%
2.5% Tax shield
Value 12+ monthsConsensus0.0871276506826462
8.7%
$
76.90 $
79.97 $
83.55
6.0%
Value 12+ monthsConsensus0.0921276506826462
9.2%
$
72.35 $
74.92 $
77.89
6.3%
Value 12+ monthsConsensus0.0971276506826462
9.7%
$
68.34 $
70.53 $
73.02
6.5%

Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 17

Assumptions Required for a Target of $92
(Above the $80 Consensus High Target)

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 18

Scenario +2
FY2009
3/31/2009

FY2010
3/31/2010

FY2011
3/31/2011

FY2012
3/31/2012

FY2013
3/31/2013

FY2014
3/31/2014

FY2015
3/31/2015

FY2020
3/31/2020

-

-

-

-

-

-

-

-

106,632
0.0%

108,427
1.7%

112,661
3.9%

115,788
2.8%

118,567
2.4%

121,412
2.4%

124,326
2.4%

139,979
2.4%

5.0%
3.5%

5.3%
3.5%

5.5%
3.3%

5.5%
3.3%

5.5%
3.3%

5.5%
3.3%

5.5%
3.3%

5.5%
3.3%

EBITDA
EBITDA margin

2,085
2.0%

2,364
2.2%

2,897
2.6%

3,072
2.7%

3,146
2.7%

3,222
2.7%

3,299
2.7%

3,714
2.7%

EBIT
EBIT margin

1,694
1.6%

1,966
1.8%

2,484
2.2%

2,648
2.3%

2,711
2.3%

2,776
2.3%

2,843
2.3%

3,201
2.3%

-

-

-

-

-

-

-

-

Income Statement
Acquired sales
Disposed Sales
Total sales
Total sales growth
Gross margin
SG&A margin

Other recurring income
Nonrecurring income
Net interest expense

(113)

(92)

(57)

(24)

22

75

129

335

Tax rate
22.7%
Earnings from Continuing Operations
1,223

33.0%
1,256

34.0%
1,602

34.0%
1,732

34.0%
1,804

34.0%
1,882

34.0%
1,961

34.0%
2,334

Shares outstanding
EPS from Continuing Operations

279
4.38

272
4.62

272
5.89

272
6.37

272
6.63

272
6.92

272
7.21

272
8.58

Dividend per share
Dividends

0.48
(116)

0.48
(131)

0.48
(131)

0.48
(131)

0.48
(131)

0.48
(131)

0.48
(131)

0.48
(131)

1,711
(195)
(620)

2,316
(356)
(350)

1,253
(370)
(340)

2,139
(387)
(340)

2,225
(405)
(555)

2,304
(423)
(555)

2,390
(441)
(555)

2,812
(549)
(131)

896

1,611

544

1,412

1,266

1,327

1,394

2,132

Free Cash Flow to the Firm
EBIAT
Depreciation
Capital investment
Working capital investment

1,310
391
(195)
97

1,317
398
(356)
663

1,639
413
(370)
(762)

1,748
425
(387)
(17)

1,790
435
(405)
(14)

1,832
445
(423)
(23)

1,876
456
(441)
(27)

2,113
513
(549)
(36)

Free cash flow

1,603

2,022

921

1,768

1,805

1,832

1,863

2,042

8499
9.0%
768
2113
1344
15.8%

Cash Flow Statement
Cash from Operations
Cash from Investing
Cash from Financing
Change in Cash

Economic Profit
Operating Capital
WACC (rough estimate)
Capital Charge
NOPAT (adjusted for leases, R&D)
Economic Profit
EP as % of Operating Capital

8271
7.5%
617
1310
693
8.4%

7566
8.6%
647
1317
670
8.9%

8284
8.6%
714
1639
926
11.2%

8264
8.7%
717
1748
1031
12.5%

8248
8.8%
726
1790
1064
12.9%

8249
8.9%
736
1832
1097
13.3%

8262
9.0%
747
1876
1130
13.7%

Adjusted Present Value
Unlevered equity discount rate
Tax shield discount rate
Terminal growth rate
Current Value
+12 Months Value

8.7%
6.0%
1.5%
87
94

8.7%
6.0%
2.0%
91
98

8.7%
6.0%
2.5%
95
103

9.2%
6.3%
1.5%
81
89

9.2%
6.3%
2.0%
84
92

9.2%
6.3%
2.5%
88
96

9.7%
6.5%
1.5%
77
84

Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 19

Scenario +2
FY2009
3/31/2009
Balance Sheet
Cash
Accounts Receivable
Inventory
Other Current Assets
Total Current Assets
Gross PP&E
Net PP&E
Other Fixed Assets
Total Fixed Assets
Total Assets

FY2010
3/31/2010

FY2011
3/31/2011

FY2012
3/31/2012

FY2013
3/31/2013

FY2014
3/31/2014

FY2015
3/31/2015

FY2020
3/31/2020

2,109
6,741
8,527
1,294
18,671

3,720
7,838
8,598
279
20,435

4,264
8,189
8,982
291
21,726

5,676
8,253
9,053
294
23,275

6,941
8,368
9,179
298
24,786

8,268
8,526
9,352
303
26,450

9,662
8,708
9,553
310
28,233

19,689
9,781
10,729
348
40,547

1,723
796
5,800
6,596

2,079
754
5,800
6,554

2,448
711
5,800
6,511

2,836
673
5,800
6,473

3,240
643
5,800
6,443

3,663
621
5,800
6,421

4,104
606
5,800
6,406

6,624
677
5,800
6,477

25,267

26,989

28,237

29,749

31,229

32,871

34,640

47,025

Accounts Payable
Other NIB Current Liabilities
Total NIB Current Liabilities

11739
3648
15387

12688
3515
16203

Total Debt
Capital Leases
Minority Interest
Shareholder Equity
Total Capital

2,509
6,193
8,702

2,290
7,318
9,608

2,081
8,790
10,870

1,871
10,391
12,262

1,447
12,065
13,512

1,023
13,816
14,839

599
15,647
16,246

599
25,910
26,509

1,178
25,267

1,178
26,989

1,178
28,237

1,178
29,749

1,178
31,229

1,178
32,871

1,178
34,640

1,178
47,025

Other Non Current Liabilities
Total Liabilities and SE
Working Capital
Current Assets Less Cash
Current Liabilities Less Debt
Net Working Capital
NWC as a % of Sales
Working Capital Turnover

16562
15387
1175
1.1%
90.8

16715
16203
512
0.5%
128.5

12677
3512
16189

17462
16189
1274
1.1%
126.2

12771
3538
16309

17600
16309
1291
1.1%
90.3

12951
3588
16539

17844
16539
1305
1.1%
91.4

13198
3656
16854

18182
16854
1328
1.1%
92.2

13481
3735
17216

18571
17216
1355
1.1%
92.7

15142
4195
19337

20859
19337
1521
1.1%
93.1

Cash Cycle
Days Inventory in Stock
Days Sales Outstanding
Days Payables Outstanding
Cash Cycle

31
23
42
12

30
25
43
12

30
26
43
13

30
26
42
14

30
26
42
13

29
25
42
13

29
25
41
13

29
25
41
13

Operating Efficiency
NI / Sales
Sales / Operating Assets

1.1%
1289%

1.2%
1433%

1.4%
1360%

1.5%
1401%

1.5%
1437%

1.6%
1472%

1.6%
1505%

1.7%
1647%

Operating Assets / Equity
Operating ROE

1.3
19.7%

1.0
17.2%

0.9
18.2%

0.8
16.7%

0.7
15.0%

0.6
13.6%

0.5
12.5%

0.3
9.0%

16.7
41%
29%

21.9
36%
26%

44.5
27%
21%

111.5
21%
17%

NMF
15%
13%

NMF
10%
9%

NMF
6%
5%

NMF
2%
2%

1.1%
422.0%
4.1
19.7%

1.2%
415.0%
4.2
20.3%

1.4%
408.0%
3.8
21.9%

1.5%
399.4%
3.3
19.7%

1.5%
388.9%
2.9
17.4%

1.6%
378.8%
2.7
15.6%

1.6%
368.3%
2.4
14.2%

1.7%
306.3%
1.9
9.8%

Accounting Efficiency
(EBITDA - Capex) / Net Interest
Debt/Equity
Debt/Total Capital
NI / Sales
Sales / Assets
Assets / Equity
ROE

ROA
ROI (Earnings / TotalCap)
ROIC (RetainEarn / TotalCap)
ROIC (Noplat / Operating Assets)
EBIT / Capital
EBITDA / Capital
Book value per share
$

4.8%
14.1%
12.7%
15.8%
19.5%
24.0%
22 $

4.8%
13.7%
12.3%
17.4%
21.5%
25.8%
27 $

5.8%
15.6%
14.4%
19.8%
24.3%
28.3%
32 $

6.0%
15.0%
13.8%
21.1%
22.9%
26.6%
38 $

5.9%
14.0%
13.0%
21.7%
21.0%
24.4%
44 $

5.9%
13.3%
12.4%
22.2%
19.6%
22.7%
51 $

5.8%
12.6%
11.8%
22.7%
18.3%
21.2%
58 $

5.1%
9.2%
8.7%
24.9%
12.6%
14.6%
95

Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 20

Scenario +2

Stock price
Shares outstanding

59.48
268.0

Market value

15,940

Cash
Non operating assets
Debt market value
Preferred stock market value
Minority interest
Other non operating liabilities

(3,215)
2,511
-

Enterprise Value

15,236

Unlevered Cost of Equity
Pretax Cost of Debt
Terminal growth rate
Current WACC*

274.5

9.2%
6.25%
2.0%
8.5%

Discount unlevered free cash flows at the unlevered cost of equity to determine value of the unlevered firm
Period
Adjusted Present Value

FY2010

FY2009

Total Sales
EBIT

106,632
1,694

Tax rate
Cash income taxes
EBIAT
Depreciation
Capital Spending, recurring
Working Capital Investment

108,427
1,966

115,788
2,648

3
FY2013

118,567
2,711

4
FY2014

121,412
2,776

5
FY2015

124,326
2,843

6
FY2016

7
FY2017

8
FY2018

9
FY2019

10
FY2020

127,310
2,911

130,366
2,981

133,494
3,053

136,698
3,126

139,979
3,201

23%
384

33%
649

34%
845

34%
900

34%
922

34%
944

34%
967

34%
990

34%
1,014

34%
1,038

34%
1,063

34%
1,088

1,317

1,639

1,748

1,790

1,832

1,876

1,921

1,968

2,015

2,063

2,113

398
(356)
663

1,603

413
(370)
(762)

425
(387)
(17)

435
(405)
(14)

445
(423)
(23)

456
(441)
(27)

467
(461)
(30)

478
(482)
(32)

489
(503)
(33)

501
(525)
(35)

513
(549)
(36)

2,022

921

1,768

1,805

1,832

1,863

1,897

1,932

1,968

2,004

2,022

921

1,768

1,805

1,832

1,863

1,897

1,932

1,968

2,004

2,042
28,873
30,914

-

844

1,482

1,386

1,288

1,199

1,118

1,042

972

907

12,806

2
FY2012

3
FY2013

4
FY2014

5
FY2015

6
FY2016

7
FY2017

Present value of future cash flows
Value of unlevered firm

112,661
2,484

2
FY2012

1,310
391
(195)
97

Free cash flow to the entity
Residual value of free cash flows
Free cash flow plus residual value

1
FY2011

23,045

Discount interest tax shields at cost of debt to determine value of interest tax shields
FY2010

FY2009
Total Debt
Cash interest expense as % of Debt
Cash interest expense
Interest tax shield
Residual value of interest tax shields
Interest tax shields plus residual value

$

Cost of debt
Present value of future cash flows
Value of interest tax shields

350

Cost of Potential Bankruptcy
Probability of bankruptcy
Negative impact to PV
Unlevered firm value

4.0%
100.0%
23,045

Expected bankruptcy costs

599 $
6.3%
51
17

599 $
6.3%
37
13

8
FY2018

599 $
6.3%
37
13

599 $
6.3%
37
13

9
FY2019
599 $
6.3%
37
13

10
FY2020

2,290 $
6.3%
150
49

2,081 $
6.3%
137
46

1,871 $
6.3%
123
42

1,447 $
6.3%
104
35

1,023 $
6.3%
77
26

49

46

42

35

26

17

13

13

13

13

599
6.3%
37
13
305
318

6.3%
-

6.3%
44

6.3%
37

6.3%
29

6.3%
21

6.3%
13

6.3%
9

6.3%
8

6.3%
8

6.3%
7

6.3%
174

(922)

Valuation
Value of unlelvered firm
Value of interest tax shields
Expected bankruptcy costs

23,045
350
(922)

Enterprise value

22,473

Cash
Other non-operating assets
Debt
Preferred
Minority Interest
Other non operating liabilities

3,215
(2,511)
-

Value of equity

23,177

Shares outstanding
Value per share

2,509 $
6.3%
157

1
FY2011

274.5
84.43

Current Value
Terminal Growth
Equity
1.5%
2.0%
2.5% Tax shield
Current ValueScenario
8.7%
+20.0871276506826462
$
87.10 $
90.65 $
94.79
6.0%
Current ValueScenario
9.2%
+20.0921276506826462
$
81.46 $
84.43 $
87.85
6.3%
Current ValueScenario
9.7%
+20.0971276506826462
$
76.51 $
79.02 $
81.88
6.5%

Value 12+ months

274.5

Terminal Growth
Equity
1.5%
2.0%
2.5% Tax shield
Value 12+ monthsScenario
8.7%
$ +20.0871276506826462
94.45 $
98.31 $ 102.80
6.0%
Value 12+ monthsScenario
9.2%
$ +20.0921276506826462
88.71 $
91.95 $
95.69
6.3%
Value 12+ monthsScenario
9.7%
$ +20.0971276506826462
83.67 $
86.42 $
89.55
6.5%

Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 21

Consensus Quarterly Estimates
and Implied Estimates

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 22

Days in Period
Period Date
Period

9/30/10
+4Q

6/30/10
+3Q

3/31/10
+2Q

Dep
12/31/09
+1Q

CY2004

12/31/10
+5Q

92
9/30/2009
Last QTR

91
6/30/2009
QTR-1

28,614
1,551
937
97
634
116
517
319
320

28,160
1,506
922
95
604
115
489
299
298

27,593
1,503
903
93
620
114
489
299
299

27,016
1,505
884
91
643
113
530
327
327

27,725
1,516
907
94
629
114
515
321
318

107,141

27,130
1,335
888
91
560
113
447
253
301

26,657
1,303
844
91
570
111
459
263
288

8
4
7
7
5
-

9
4
7
7
5
-

9
5
7
7
5
-

14
6
13
13
9
-

14
6
13
13
9
9/30/2009
2.1%
4.9%
3.3%
0.3%
2.1%
0.4%
1.6%
0.9%
1.1%

6/30/2009
-0.2%
4.9%
3.2%
0.3%
2.1%
0.4%
1.7%
1.0%
1.1%

Average Consensus Estimates
Revenue
Gross Profit
SG&A
R&D
EBITDA
Depreciation
EBIT (or EBT)
Income (recurring earnings)
Income (reported)

90
92
3/31/2009 12/31/2008
QTR-2
QTR -3

92
9/30/2008
QTR -4

91
6/30/2008
QTR -5

27,130
1,343
904
87
551
112
439
264
(20)

26,574
1,302
921
87
493
112
381
222
327

26,704
1,268
897
87
477
106
371
224
235

o
26,231
1,451
640
87
564
100
464
279
307

26,494
1,207
901
71
399
93
306
188
201

24,450
1,181
827
71
443
89
354
221
247

3/31/2009 12/31/2008
0.0%
2.4%
5.6%
5.0%
2.3%
3.3%
0.3%
0.3%
2.2%
2.0%
0.2%
0.4%
1.9%
1.6%
1.1%
1.0%
1.1%
-0.1%

9/30/2008
8.7%
4.9%
3.5%
0.3%
1.9%
0.4%
1.4%
0.8%
1.2%

8.9%
4.7%
3.4%
0.3%
1.8%
0.4%
1.4%
0.8%
0.9%

8.5%
5.5%
2.4%
0.3%
2.2%
0.4%
1.8%
1.1%
1.2%

14.6%
4.6%
3.4%
0.3%
1.5%
0.4%
1.2%
0.7%
0.8%

9.2%
4.8%
3.4%
0.3%
1.8%
0.4%
1.4%
0.9%
1.0%

26,224
1,470
603
91
564
61
503
291
281

91
92
3/31/2008 12/31/2007
QTR -6
QTR -7

92
9/30/2007
QTR -8

# of Consensus Estimates
Revenue
Gross Profit
SG&A
EBITDA
Depreciation
EBIT (or EBT)
Income (recurring earnings)
Income (reported)
NOPLAT
EP
Free Cash Flow

Margins
Revenue growth
Gross margin
SG&A margin
R&D margin
EBITDA margin
Depreciation margin
EBIT margin (or EBT)
Income (recurring earnings)
Income (reported)

12/31/10
3.2%
5.4%
3.3%
0.3%
2.2%
0.4%
1.8%
1.1%
1.1%

9/30/10
3.8%
5.3%
3.3%
0.3%
2.1%
0.4%
1.7%
1.1%
1.1%

6/30/10
3.5%
5.4%
3.3%
0.3%
2.2%
0.4%
1.8%
1.1%
1.1%

3/31/10
3.0%
5.6%
3.3%
0.3%
2.4%
0.4%
2.0%
1.2%
1.2%

12/31/09
2.2%
5.5%
3.3%
0.3%
2.3%
0.4%
1.9%
1.2%
1.1%

Trend
1
1
2
(2)
(2)
2
(2)
(2)
3

Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 23

Economic Profit Model
(Consensus Estimates)

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 24

ECONOMIC PROFIT MODEL

McKesson Corporation
NYSE:MCK
8.5%
Economic Profit Model
Adjusted Working Capital
Net PP&E
Other fixed assets
Operating Capital (McKinsey)

12/31/10
1,117
652
7,627
9,397

9/30/10
1,109
689
7,627
9,425

6/30/10
1,098
730
7,627
9,455

3/31/10
1,089
777
7,627
9,493

12/31/09
1,081
806
7,627
9,514

9/30/2009
1,075
836
7,627
9,538

6/30/2009
1,254
814
7,664
9,732

Cost of Debt
Cost of Equity
WACC*
Economic Charge

7.6%
11.6%
7.4%
700

7.6%
11.6%
7.4%
702

7.6%
11.6%
7.4%
704

7.6%
11.6%
7.4%
707

7.6%
11.6%
7.4%
708

7.6%
11.6%
7.4%
710

7.6%
7.6%
7.6%
741

7.4%
11.4%
6.9%
685

EBIT
Interest on Operating Leases
R&D Expenditure
R&D Amortization
Goodwill Amortization
Adjustment for Provisions and Extraordinary Items
Adjusted EBITA

2,025
29
376
(255)
253
(300)
2,128

2,022
30
373
(244)
253
(300)
2,135

1,980
30
369
(233)
253
(300)
2,100

1,950
31
367
(222)
253
(300)
2,079

1,924
32
367
(212)
253
(300)
2,064

1,848
34
360
(203)
253
(300)
1,992

1,782
36
356
(194)
258
(528)
1,710

Operating tax rate
Taxes on EBITA
Increase in deferred taxes (smoothed)
NOPLAT

11.8%
(251)
1,878

11.8%
(252)
1,883

11.8%
(248)
1,853

11.8%
(245)
1,834

11.8%
(243)
1,821

11.8%
(235)
1,757

13.7%
(235)
1,475

12/31/10
1,878
700
1,178
0%

9/30/10
1,883
702
1,182
3%

6/30/10
1,853
704
1,149
2%

3/31/10
1,834
707
1,127
1%

12/31/09
1,821
708
1,112
6%

9/30/2009
1,757
710
1,047
43%

6/30/2009
1,475
741
734
2%

1,878
9,397
19.9%
0%

1,883
9,425
19.9%
2%

1,853
9,455
19.4%
2%

1,834
9,493
19.0%
2%

1,821
9,514
18.6%
6%

1,757
9,538
17.6%
21%

1,475
9,732
14.5%
5%

3/31/10
1,452
7,501
1,499

12/31/09
1,452
7,566

9/30/2009
1,452
7,627

6/30/2009
1,432
7,664

NYSE:MCK
NOPLAT
Economic Charge
Economic Profit
Sequential growth
NOPLAT
Operating Capital
ROIC (NOPLAT / Operating Capital)
Sequential growth

(300)

3/31/2009 12/31/2008
1,735
1,700
796
788
7,333
7,807
9,864
10,295

9/30/2008
1,824
777
7,983
10,584

6/30/2008
1,673
779
8,032
10,483

5.6%
6.4%
6.2%
641

5.7%
7.9%
7.7%
810

5.6%
8.1%
7.8%
818

5.6%
7.5%
7.3%
723

7.9%
8.1%
8.1%
826

8.1%
8.7%
8.6%
775

1,694
37
351
(184)
258
(517)
1,638

1,655
28
347
(175)
220
(491)
1,584

1,522
28
331
(167)
215
6
1,936

1,495
28
316
(158)
207
1,887

1,466
27
300
(149)
203
30
1,877

1,385
35
284
(141)
233
7
1,803

1,397
33
269
(134)
216
47
1,828

14.3%
(235)
1,403

0.0%
1,584

0.0%
1,936

0.0%
1,887

-3.5%
66
1,943

1.5%
(27)
1,776

1.5%
(27)
1,801

3/31/2009 12/31/2008
1,403
1,584
685
641
719
943
-24%
-16%

9/30/2008
1,936
810
1,125
5%

1,887
818
1,069
-12%

1,943
723
1,220
28%

1,776
826
950
-7%

1,801
775
1,026
16%

1,584
10,295
15.4%
-20%

1,936
10,584
19.3%
0%

1,887
10,483
19.3%
-6%

1,943
9,886
20.6%
3%

1,776
10,187
19.9%
-9%

1,801
9,008
21.9%
-1%

3/31/2009 12/31/2008
915
1,766
7,333
7,807

9/30/2008
1,813
7,983

6/30/2008
1,851
8,032

3/31/2008 12/31/2007
1,379
1,703
7,498
7,363

9/30/2007
1,713
6,977

1,403
9,864
13.7%
-11%

3/31/2008 12/31/2007
1,612
2,076
775
747
7,498
7,363
9,886
10,187

9/30/2007
1,317
714
6,977
9,008

ECONOMIC PROFIT MODEL, SUPPORTING CALCULATIONS
12/31/10
1,452
7,321

9/30/10
1,452
7,380

6/30/10
1,452
7,439

Total Current Assets
less Cash and Short Term Equivalents
plus Estimated Cash Required for WC
Adjusted Current Assets

21,106
(3,729)
585
17,962

20,859
(3,621)
581
17,819

20,606
(3,529)
575
17,653

20,359
(3,428)
570
17,502

20,125
(3,318)
566
17,374

19,930
(3,215)
563
17,278

19,062
(2,644)
560
16,978

18,671
(2,109)
560
17,122

18,372
(1,175)
560
17,757

17,538
(1,123)
557
16,972

17,931
(1,187)
546
17,290

17,786
(1,362)
534
16,958

18,684
(1,436)
523
17,771

18,789
(2,518)
506
16,777

Total Current Liabilities
less Current Portion of Cap. Leases
less Current Portion of LT Debt
Short-term Borrowings
Finance Div. Debt Current
Short-term Finance Div. Loans and Leases
Adjusted Current Liabilities

16,420
217
16,203

16,420
217
16,203

16,420
217
16,203

16,420
217
16,203

16,420
217
16,203

16,420
217
16,203

15,941
217
15,724

15,606
219
15,387

16,057
16,057

15,148
15,148

15,617
15,617

15,348
2
15,346

15,847
152
15,695

15,612
152
15,460

Adjusted Net Working Capital

1,759

1,616

1,450

1,299

1,171

1,075

1,254

1,735

1,700

1,824

1,673

1,612

2,076

1,317

Capitalized R&D, Beginning Balance
R&D Expenditure
Annual Amortization (10yr life)
Capitalized R&D, Ending Balance

1,055
376
(255)
1,176

1,099
373
(244)
1,228

1,144
369
(233)
1,280

1,191
367
(222)
1,335

1,240
367
(212)
1,394

1,290
360
(203)
1,447

1,343
356
(194)
1,505

1,032
351
(184)
1,199

1,076
347
(175)
1,248

1,120
331
(167)
1,284

1,164
316
(158)
1,321

861
300
(149)
1,011

896
284
(141)
1,039

931
269
(134)
1,066

Other Long-term Assets
Total Other Fixed Assets

$

Total Current Assets less Cash & ST Invest
Current Liabilities less Interest Bearing Debt
Cash Shortfall -- Required for Working Capital
Cash -- 3-month Cushion
Total Cash Required for Working Capital
Excess Cash (above WC Requirements)

17,377
16,203
585
585

17,238
16,203
581
581

17,077
16,203
575
575

16,931
16,203
570
570

16,808
16,203
566
566

3,144

3,040

2,954

2,858

2,751

-

16,715
16,203
563
563

16,418
15,724
560
560

16,562
15,387
560
560

17,197
16,057
560
560

16,415
15,148
557
557

16,744
15,617
546
546

16,424
15,346
534
534

17,248
15,695
523
523

16,271
15,460
506
506

2,652

2,084

1,549

615

566

641

828

913

2,012

Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 25

Charts and Other

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 26

McKesson Corporation Price

59.52
NTM EPS $ 4.68
NTM PE
12.7
R/R
0.5 to 1

MCK
Healthcare
Healthcare Distributors

Price / Earnings (NTM) vs. Stock Price
35.0

$80

$70

30.0

$60

25.0
$50

P
/
E

20.0
$40
15.0
$30
10.0

P
r
i
c
e

$20

5.0

$10

Max up to ten years
01/26/00
Max PE
Average PE
Min PE

to
30.3
17.1
8.0

Average

Three years
01/27/10
11/15/00
11/19/08

01/31/07
Max PE
Average PE
Min PE

+1 St. Dev.

01/27/10
11/15/00
11/19/08

01/28/09
Max PE
Average PE
Min PE

J-10

J-09

O-09

J-09

A-09

J-08

O-08

J-08

A-08

J-07

Stock Price

One year
to
30.3
17.1
8.0

O-07

J-07

A-07

J-06

-1 St. Dev.

O-06

J-06

A-06

J-05

O-05

J-05

A-05

J-04

O-04

J-04

A-04

J-03

P/E

O-03

J-03

A-03

J-02

O-02

J-02

A-02

J-01

O-01

J-01

A-01

J-00

O-00

J-00

$-

A-00

0.0

One year historically implied target range
to
14.2
11.7
8.3

01/27/10
10/14/09
04/08/09

NTM
EPS
Max EPS $ 5.03
Average EPS $ 4.68
Min EPS $ 4.45

Target
$
$
71
$
55
$
37

59.52
20%
-8%
-38%

Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 27

MCK

## 12/31/2004 12/31/2005 12/31/2006 12/31/2007 12/31/2008

1/27/2010

Last 5 years

TEV / NTM Total Revenue

Average
High
Low
Close

0.2x
0.2x
0.1x
0.1x

0.2x
0.2x
0.1x
0.2x

0.2x
0.2x
0.1x
0.1x

0.2x
0.2x
0.1x
0.2x

0.1x
0.2x
0.1x
0.1x

0.1x
0.2x
0.1x
0.1x

0.1x
0.2x
0.1x
0.1x

TEV / NTM EBITDA

Average
High
Low
Close

7.1x
8.5x
5.4x
6.8x

8.0x
9.6x
6.5x
9.5x

9.1x
10.6x
7.4x
7.9x

9.1x
9.9x
8.1x
9.3x

7.1x
9.7x
3.8x
5.0x

5.7x
6.9x
4.4x
6.4x

7.8x
10.6x
3.8x
6.4x

TEV / NTM EBIT

Average
High
Low
Close

8.4x
9.4x
7.0x
9.3x

10.3x
11.6x
9.0x
11.4x

10.7x
12.1x
9.2x
9.9x

10.9x
12.1x
9.9x
11.5x

9.0x
11.9x
4.8x
6.7x

7.3x
8.8x
5.7x
8.0x

9.6x
12.1x
4.8x
8.0x

Price / NTM EPS

Average
High
Low
Close

13.5x
16.3x
11.1x
14.6x

18.1x
21.5x
14.2x
21.1x

19.0x
22.1x
16.4x
17.3x

18.2x
19.7x
16.1x
18.7x

13.5x
19.4x
7.2x
9.8x

11.7x
14.3x
8.3x
13.4x

16.0x
22.1x
7.2x
13.4x

Source: Ascendere Associates LLC models and Capital IQ, Inc. data

Steve Castellano
steve@ascenderellc.com

Ascendere Associates LLC
Page 28

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