EQUITY RESEARCH–AMERICAS

Industry: Foods
November 11, 1996
FD2427

Michael J. Mauboussin 212/325-3108
Shelby Heard 212/325-4701

Packaged Food Industry
Rate of Return Analysis
November 1996

• Industry returns drift lower in
1995/1996.
• ROIC-to-cost-of-capital
spread explains valuation better than EPS or cash-flow
growth.
• Detailed analysis of capital
allocation shows disparate
results.
• Valuations appear full.

Packaged Food Industry Rate of Return Analysis

Contents
Introduction

3

Industry Summary

3

Capital Allocation

5

Empirical Evidence

6

Charts
A
B
C

ROIC-WACC Versus Enterprise Value/Invested Capital
Cash Flow Growth Versus Enterprise Value/Invested Capital
EPS Growth Versus Enterprise Value/Invested Capital

Tables
A
B
C

Prime Components of Pretax ROIC 1985–1995
ROIC Scorecard
Correlation of Three Financial Measures to Valuation

Company Tables
1-411 Campbell Soup Company
5-911 ConAgra, Inc.
10-14 CPC International
15-19 General Mills
20-24 H.J. Heinz & Company
25-28 Hershey Foods
29-31 Interstate Bakeries
32-36 Kellogg Company
37-41 McCormick & Company
42-44 The Morningstar Group
45-48 Nabisco
49-53 Quaker Oats
54-57 Ralcorp Holdings
58-62 Ralston Purina
63-67 Sara Lee Corporation
68-71 Tyson Foods
72-72 Packaged Foods Composite: Returns on Invested Capital (13 companies)
73-72 Packaged Foods Composite: Returns on Invested Capital (16 companies)
74-72 Packaged Foods Composite: Weighted Average Cost of Capital
75-72 Support Data
76-72 Packaged Food Industry Universe

2

8
9
10
4
4
6
11
16
22
28
34
40
45
49
55
61
65
70
76
81
87
93
98
100
102
103
104

Packaged Food Industry Rate of Return Analysis
Introduction
The purpose of this report is threefold. First, we
update the return on invested capital trends for the
industry, highlighting both the directional change
and the composition of the change. Second, we
provide extensive data on capital allocation for the
industry. Finally, we set forth further empirical evidence demonstrating that a value-based framework
is the best way to understand valuation—in direct
contrast to the rules of thumb used by most financial analysts.
Included for most of the companies in this report are
five tables: historical return on invested capital calculations, rate of return on incremental investment,
a history of capital allocation among strategic business units, a value-driver matrix highlighting the
expectation for free cash flow, and a discountedcash-flow model.
The following points summarize the key conclusions
from this report:
• The returns on invested capital (ROIC) for our
food industry composite are drifting slightly lower.
The data for the most recent period show a continuation of a multiyear trend: operating margins are
on a steady ascent, while invested capital turnover
(sales divided by invested capital) is declining. To
illustrate, composite EBITA margins were 10.8% in
1995, up 90 basis points from the 1990 level. However, invested capital turnover was 1.7 times in the
recent measurement period, down from 2.3 times
five years earlier. Further, every major efficiency
component of invested capital showed deterioration,
including inventories, receivables, overall working
capital, fixed assets and goodwill/other. This trend
is the basis for our contention that asset efficiency
will be central to improving ROICs, and hence relative valuations, for the sector.
• Management’s capital allocation results have
varied widely across the food industry. In this report, we consider capital allocation on two levels.
First, we calculate the cash-on-cash returns on incremental investment over time. Our research in this
area is unique in that we consider all disbursements
of value (whether in the form of investment, stock,
or restructuring charges) as “investment.” Second,
we analyze where the capital has flowed on a segment basis within each company. Our objective is to
determine whether or not capital is being allocated

to businesses with acceptable returns, versus ones
that offer the prospects of growth without commensurate returns.
• Understanding returns on invested capital is the
key to understanding industry valuation. While
most market participants—from both Main Street
and Wall Street—adhere to the notion that accrualaccounting figures determine value, our empirical
research shows that value-based yardsticks explain
valuation significantly better than more conventional metrics (i.e., earnings-per-share growth, cashflow growth). In turn, we believe analytical energy
can best be spent understanding the interrelation
among earnings growth, capital intensity, and
financing options, rather than focusing solely on
growth.
• Valuations appear extended in the group. This
contention is based on value estimates generated by
our discounted-cash-flow models. Our model derives value from three components: a free-cash-flow
growth rate, a discount rate, and an assumed period
of competitive advantage (i.e., during which returns
on investments are assumed to exceed the cost of
capital). Each company-specific model lays out the
assumptions that drive the valuation, and offers
sensitivities around our base case.
Industry Summary
The rate of return on invested capital for the 16
companies under our coverage was 12.9% in 1995,
down 40 basis points from the preceding year. This
modest deterioration is the result of worsening asset
utilization, a trend that has emerged over the past
decade. In 1995, net operating profit after tax
(NOPAT) grew at a 7.3% rate, while invested
capital rose at a 10.4% clip. We anticipate that the
1996 ROIC rate will advance from that of 1995,
based largely on our expectation that invested capital management will improve somewhat.
Table A shows the main components of pretax
ROIC for our composite from 1985-1995 in fiveyear increments. Our main point is that higher
operating margins—realized in spite of a massive
acceleration in marketing spending—have been
overshadowed by a marked drop in asset efficiency.
While a significant part of the asset efficiency is
attributable to acquisition-related goodwill, working
capital and net PP&E turns are trending down as
well.
3

Packaged Food Industry Rate of Return Analysis
Table A
Prime Components of Pretax ROIC 1985–1995
NOPBT margin
Invested capital turnover
Return on invested capital

1985

1990

1995

8.7%
2.9
25.1%

9.9%
2.3
23.3%

10.8%
1.7
18.8%

Source: Company published data, CS First Boston estimates.

We have asserted for some time that “Efficient
Consumer Response” (ECR) is a real industry-wide
opportunity to improve capital efficiency, and have
been frustrated with the slow pace of adopting
ECR’s central principles within the food industry. 1
We suspect the inhibiting factor in embracing ECR
is the potential short-term negative impact some
ECR steps would have on reported earnings per
share. As most executive compensation schemes are
linked to earnings, the interests of shareholders and
managers are not always aligned.
Table B
ROIC Scorecard
Company

Campbell Soup
ConAgra
CPC International
General Mills
H.J. Heinz
Hershey Foods
Interstate Bakeries
Kellogg
McCormick
Morningstar
Nabisco
Quaker Oats
Ralcorp Holdings
Ralston Purina
Sara Lee
Tyson Foods
Average

Recent
ROIC

3-Year ROIC
Trend

Value-Based
Grade

















ABBB
C
ABA
AB
C+
B+
B
B+
B+
B

17.8%
12.9
13.3
26.6
13.1
14.2
6.8
23.8
12.1
9.9
7.7
8.1
10.9
15.1
14.8
9.0
13.5%

Source: Company data, CS First Boston estimates.

Table B shows how the industry participants stack
up in a few critical areas, including current ROICs,
ROIC trends, and the level of commitment to valuebased tools. The highest-ranked companies include
Campbell Soup, Hershey Foods, Kellogg, and
General Mills.

1

See The Food Chain, April 4, 1996.

4

In recent months, a number of high-profile food
companies have embraced the value-based model.
Examples include Hershey Foods, McCormick, and
Sara Lee. We are very encouraged by these developments, and consider this shift fundamental to an
improving ROIC case for the sector. Following are
short summaries of how our Buy-rated stocks look
when viewed through the ROIC lens.
Kellogg

A central tenet of our long-term investment recommendation of K shares is that the company’s return
on invested capital is likely to materially improve
over the next five years. We estimate that K’s ROIC
will be about 22% in 1996, and that the ratio could
reach 30% by 2000. The key to this improvement is
a sustained rate of NOPAT growth ahead of invested capital growth. As a result, we anticipate that
the company’s surplus cash flows will remain robust for the foreseeable future and that the valuation
will improve lockstep with the higher returns.
General Mills

GIS, since it shed its high-capital-growth, lowreturn restaurant operations, has catapulted to have
the highest ROIC in the sector. Further, the company has indicated that capital needs in upcoming
years will be relatively modest. Accordingly, we
anticipate ongoing strong returns as well as generous surplus cash flows for General Mills.
Ralston Purina

Ralston’s multiyear restructuring has left a core of
businesses (pet food, batteries, soy protein isolates)
with attractive economics and growth prospects. In
particular, we are forecasting a sharp ROIC improvement in the battery segment as the business
evolves to higher-value-added products. In addition,
RAL management has been among the most astute
capital allocators in the industry, suggesting that
resources are unlikely to be squandered.
Sara Lee

We believe SLE has entered into a new phase,
where returns on invested capital promise to be
better balanced with long-term growth objectives.
We anticipate that the tangible results will include
an improving return on invested capital trend, a
sharp acceleration in surplus cash flow, and an upward revaluation of the shares. The main source of
leverage is the personal-products division, currently
the lowest ROIC operation within Sara Lee.

Packaged Food Industry Rate of Return Analysis
Quaker Oats

Despite an overt sponsorship of value-based management, Quaker has likely destroyed more shareholder value than any other food company in the
1990s through its Snapple acquisition (1994). The
huge purchase has set up an extraordinary dichotomy in returns: the core food and Gatorade franchises would score favorably versus its peers (high
teens), while Snapple has lost $150 million cumulatively on a $1.8 billion invested capital base. Our
constructive opinion hinges on the view that aggregate asset values are much higher than the current
share price, and that management will be compelled
to take meaningful steps to bring this value to the
surface.
McCormick

MCCRK was on an ROIC slide from 1991 through
1995, resulting in a depressed valuation and marked
share price underperformance. Over the past 12
months, however, the company has righted its
course by divesting low-return operations, reducing
capital spending, restructuring to further trim costs,
and engaging in an active share-repurchase program. We believe MCCRK is a classic ROIC inflection story, and see the typical benefits (i.e.,
improved cash flow and valuation) accruing to
shareholders.
Interstate Bakeries

IBC still appears to have poor returns, but the improvement in fiscal 1997 (change on the margin is
what really drives the model) should be sharp. Specifically, earnings for the company are expected to
double while invested capital will remain flat. While
we will never see IBC become a high-return business,
we believe the improvement over the next few years
will be sufficient to propel the shares on the upside.
Capital Allocation
In an industry that generates consistently high returns on capital and surplus cash (in a sourcesminus-uses sense), capital allocation must be a
prime focus of both managers and investors. Not
surprisingly, the goals of managers and the goals of
investors are not always synonymous—a notion
well documented by agency theory—largely because
the incentives of managers (agents) are not thoroughly consistent with shareholder wealth maximization, the objective of shareholders (owners).

Managers generally fall into two traps. First, they
pursue growth—including earnings growth, cashflow growth, and asset growth—without proper
consideration of returns. This is not too surprising,
as compensation programs are often driven by
growth measures, and bigger is almost always
considered better in corporate America. Second,
managers often commit common cognitive errors,
resulting in value destruction. Examples include an
irrational escalation in commitment to an initial, but
incorrect, course of action, and overconfidence.
Ideally, we like to see that managers are “rational”
and are subject to proper incentives. In this sense,
Berkshire Hathaway Chairman Warren Buffett is a
model: his wealth is directly tied to Berkshire’s
stock price (his salary is very modest), and his ability to act rationally is truly rare.
Our first test of capital allocation, analyzed company by company, is a detailed derivation of historical free cash flow.2 Such a breakdown allows the
investor to observe trends in sales growth and margins, as well as gain a clear sense of how capital has
been reinvested in the business (working capital versus capital expenditures versus acquisitions). Further, the structure is conducive to estimating rates of
return on incremental invested capital, a figure that
can be extremely important in understanding future
valuation trends and earnings power. 3 The benchmark to attain is the opportunity cost of capital,
which is roughly 10-11% for most of the food companies. As ROIC speaks to only part of the valuecreation equation—the magnitude of investment
opportunities is the other—we have included calculations of economic profit. Economic profit is the
spread between the ROIC and the cost of capital,
multiplied by the invested capital base.
Our second test of capital allocation involves seeing
where the incremental funds are flowing, based on
the segment breakdown data presented for each
2

Free cash flow here is not the typical sources-minus-uses
definition used on Wall Street. Rather it is the difference
between net operating profit after tax (NOPAT) and the investment in future growth (I).
3
Two points here. First, rate of return on incremental capital
is defined as
NOPATT2 -NOPATT1/∑Investment(T1-T0).
Second, it is practically impossible, as an outsider, to determine whether the returns on incremental capital or returns on
the “base” capital are driving NOPAT. Our simplifying assumption is that returns on the “base” business are stable.
5

Packaged Food Industry Rate of Return Analysis
company. The goal is to judge whether or not incremental capital is being allocated to high-return
areas. Here again, we attempt to distinguish between
the pursuit of growth for growth’s sake (in recent
years, General Mills’ investment in restaurants and
Sara Lee’s investments in personal products stand
out as examples) and value-creating spending.
One of the best discussions we have seen on the issue of capital allocation is in the book The Value
Imperative, written by the senior partners of
Marakon Associates.4 The authors lay out four key
principles of resource allocation:
• Zero-based resource allocation. The key notion
here is that managers consider only the amount of
capital required to create wealth, with the explicit
recognition that past capital allocation need not
have any bearing on current capital allocation. Most
companies allocate capital spending with a significant inertia bias—every division gets a little more
or less capital than last year, without thorough consideration of how much is rationally justified. Behavioral psychologists call this phenomenon
“anchoring and adjusting,” and cite it as a prime
source of suboptimal individual decision making.
• Fund strategies, not projects. Managers need to
consider their capital allocation in a strategy context
versus an accumulation of unattractive projects. Two
examples serve to illuminate this point. First, a company may have an attractive project within a division
that has a limited strategic life. Such an investment
may appear to be net-present-value positive but is
not likely to be a wise investment. Second, a company
may realize that it has to make a net-present-value
negative investment to maintain or enhance its longterm strategic position. This “cost of admission”
should be funded. To state the obvious, managers
have to be very careful, because a crafty strategic
planner can make virtually any project look good.
• Capital rationing. The culture of most organizations fosters a sense that capital is “scarce but free”
when in reality capital is accessible but costly. The
error lies in a company’s mindset: most chief financial officers set their capital expenditures to be
consistent with expected earnings and capitalization
considerations. Hence, managers naturally jockey

for the largest amount of capital possible within
these artificial constraints, generally to support
growth. What is overlooked is that all capital must
generate satisfactory returns, whether it is generated
internally (retained earnings) or externally (capital
raised).
• Zero tolerance for bad growth. Few new products or ventures deliver satisfactory returns. This
point does not suggest that companies should abandon new opportunities, rather is underscores that
managers should not continue to fund projects that
do not appear to be economically viable over the
long run. Very few businesses grow out of their
problems, and good money often chases bad money
for the wrong reasons.
Empirical Evidence
Here we provide further evidence that a value-based
model is better than traditional accounting measures
in understanding how the market prices assets. Our
analysis is straightforward: we performed linear
regressions on the food industry using, alternatively,
earnings-per-share growth, cash-flow growth, and
the ROIC-to-WACC spread as the independent
variable and enterprise value to invested capital (a
fancy proxy for price-to-book) as the dependent
variable. The estimates of long-term earnings and
cash-flow growth were taken from Value Line, a
source we assumed was a nonbiased proxy for the
consensus view.
Table C summarizes our findings. To our (mild)
surprise, anticipated cash-flow and earnings-pershare growth showed no correlation with valuation
(the r-squares were actually negative). At the same
time, the ROIC-to-WACC spread had a 77%
r-square, with a t-statistic of 7.1. Charts A-C show
the same data graphically. While our number of
observations is admittedly low, our experience
shows that the explanatory power of returns vastly
outstrips that of earnings or cash-flow growth in
industry after industry.
Table C
Correlation of Three Financial Measures to Valuation
Independent Variable

R-squared

ROIC to WACC spread
Cash flow growth
EPS growth
Source: Company published data, CS First Boston estimates, Value Line.

4

The Value Imperative, McTaggart, Kontes, Mankins, Free
Press, 1994, pps. 241-252.

6

77%
(1)
(6)

Packaged Food Industry Rate of Return Analysis
It is logical to ponder why valuation myths, such as
P/E to EPS growth rate, are perpetuated in the face
of such powerful evidence of their uselessness. The
answer, in our view, is that such metrics are used as
rules of thumb—formally called heuristics. Under
certain circumstances, these rules of thumb may
provide reasonable results; unfortunately, they are
unable to present consistent quality guidance in decision making. Not surprisingly, many leading investors, including the aforementioned Warren

Buffett, stress the importance of understanding the
economics of a business in an intelligent appraisal
of the company’s value.
N.B.: CS First Boston Corporation may have, within the last three years,
served as a manager or co-manager of a public offering of securities for or
makes a primary market in issues of any or all of the companies mentioned.

7

8

Intercept
X Variable 1

CPC

-2.0%

88.4%
78.2%
76.7%
51.4%
16

2.0
19.0

0.0%

1.0

Standard Error

y = 18.345x + 2.0561

-4.0%

0.2
2.7

2.0%

t Stat
12.7
7.1

ROIC - WACC

4.0%

P-value

6.0%

0.0
0.0

1.7
13.2

10.0%

Lower 95%

8.0%

14.0%

2.3
24.7

Upper 95%

12.0%

Lower 95.0%
1.7
13.2

16.0%

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1.5 AAAA
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2.0
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MCCRK
IBC OAT

CAG

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RAL
2.5
SLE

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3.5
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CPB

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4.0

Coefficients

Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations

GIS

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4.5

5.0
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Chart A
ROIC-WACC Versus Enterprise Value/Invested Capital

Packaged Food Industry Rate of Return Analysis

Enterprise value/invested capital

2.3
24.7

Upper 95.0%

9

Intercept
X Variable 1

OAT

1.0

24.7%
6.1%
-1.1%
106.9%
15

1.7
10.8

Standard Error

y = 11 41x + 1 7144

4.0%

1.1
11.8

t Stat

6.0%

1.6
0.9

P-value
0.1
0.4

Cash flow growth

8.0%

Lower 95%
-0.6
-14.6

10.0%

4.1
36.2

Upper 95%

12.0%

Lower 95.0%
-0.6
-14.6

14.0%

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MCCRK

SLE

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CPB

2.0%
y = 11.41x + 1.7144

Coefficients

Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations

GIS

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Chart B
Cash Flow Growth Versus Enterprise Value/Invested Capital

Packaged Food Industry Rate of Return Analysis

Enterpise value/invested capital

4.1
36.2

Upper 95.0%

10

Intercept
X Variable 1

SLE

CAG

OAT

4.0%

2.3
3.5

11.7%
1.4%
-6.2%
109.6%
15

Standard Error

y = 3 9093x + 2 31

y = 3.9093x + 2.31

1.0
2.0%

0.9
8.2

6.0%

t Stat
2.4
0.4

8.0%
EPS growth

P-value
0.0
0.7

10.0%

Lower 95%
0.3
-14.3

12.0%

4.4
21.2

Upper 95%

14.0%

Lower 95.0%
0.3
-14.3

16.0%

TYSNA
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MCCRK

Coefficients

Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations

CPC

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RAL

HNZ

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5.0 AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA
GIS

Chart C
EPS Growth Versus Enterprise Value/Invested Capital

Packaged Food Industry Rate of Return Analysis

Enterpise value/invested capital

4.4
21.2

Upper 95.0%

29.4
214.3
470.4
35.3
749.4
253.8
87.3
52.2
393.3

356.1
815.4
115.0
-

Invested capital calculation
Cash
Accounts receivable
Inventory
Other current assets
Current assets

Accounts payable
Accrued expenses
Income taxes payable
NIBCLs

Net working capital

Net P,P&E
Goodwill/other
Restructuring charges

11

1,286.4

127.3
4.6
10.1
132.7

Adjusted taxes calculation
Tax provision
Deferred taxes
Tax shield
Adjusted taxes

Invested capital

2,944.8
2,221.3
24.6%
504.6
0.0
4.2
223.0
132.7
90.3

1982

NOPAT calculation
Sales
Cost of goods sold
Gross margin
S,G&A
Other income
Goodwill amortization
NOPBT
Adjusted taxes
NOPAT

fiscal year ends July

1,350.9

889.2
118.4
-

343.4

255.8
100.3
52.5
408.6

32.9
237.3
456.5
25.3
751.9

141.0
16.9
18.1
142.2

3,292.4
2,444.2
25.8%
502.9
0.0
4.8
350.1
142.2
207.9

1983

1,595.3

970.9
129.0
-

495.4

277.0
135.5
45.9
458.3

36.6
278.9
602.5
35.8
953.8

141.2
21.0
12.2
132.4

3,657.4
2,700.8
26.2%
597.7
0.0
6.4
365.4
132.4
233.0

1984

1,663.0

1,027.5
148.9
-

486.6

274.6
156.6
50.0
481.2

39.9
279.8
623.1
24.9
967.7

135.9
36.1
14.8
114.5

3,988.7
2,950.2
26.0%
672.7
0.0
6.7
372.5
114.5
258.0

1985

Table 1
Campbell Soup Company: Returns on Invested Capital

1,745.9

1,168.1
130.2
-

447.6

321.7
165.8
49.6
537.2

43.8
299.0
610.5
31.5
984.8

164.0
45.0
13.1
132.1

4,378.7
3,173.5
27.5%
789.4
0.0
6.0
421.8
132.1
289.7

1986

Packaged Food Industry Rate of Return Analysis

1,977.7

1,349.0
171.5
-

457.2

374.8
174.7
43.4
592.9

44.9
338.9
623.6
42.7
1,050.1

170.6
48.9
8.4
130.1

4,490.4
3,180.5
29.2%
884.9
0.0
5.6
430.6
130.1
300.5

1987

2,664.8

1,508.9
590.4
-

565.5

446.7
236.9
41.7
725.3

48.7
486.9
664.7
90.5
1,290.8

147.0
18.7
7.9
136.2

4,868.9
3,392.8
30.3%
1,012.8
0.0
8.9
472.2
136.2
336.0

1988

2,737.8

1,540.6
576.6
70.1

550.5

508.2
422.3
30.1
960.6

56.7
538.0
816.0
100.4
1,511.1

175.6
(74.7)
21.2
271.5

5,672.1
4,001.6
29.5%
1,118.6
0.0
16.4
568.3
271.5
296.8

1989

2,927.9

1,717.7
511.0
170.6

528.6

525.2
524.2
46.4
1,095.8

62.1
624.5
819.8
118.0
1,624.4

212.6
5.4
35.7
242.9

6,205.8
4,258.2
31.4%
1,324.9
0.0
16.8
639.5
242.9
396.6

1990

2,994.1

1,790.4
640.1
170.6

393.0

482.4
445.7
67.7
995.8

62.0
527.4
706.7
92.7
1,388.8

265.9
24.5
34.3
275.7

6,204.1
4,095.5
34.0%
1,319.2
0.0
14.1
803.5
275.7
527.8

1991

3,265.9

1,965.8
689.0
170.6

440.5

497.8
413.1
95.1
1,006.0

62.6
577.1
717.9
88.9
1,446.5

308.8
31.0
32.9
310.7

6,263.2
3,963.1
36.7%
1,392.0
0.0
15.8
923.9
310.7
613.2

1992

3,890.5

2,264.4
886.9
237.7

501.5

510.0
562.4
108.7
1,181.1

65.9
646.3
804.2
166.2
1,682.6

316.6
1.4
28.0
343.2

6,586.2
4,027.8
38.8%
1,603.3
0.0
19.5
974.6
343.2
631.4

1993

3,949.7

2,401.0
914.0
293.8

340.9

473.0
641.0
117.0
1,231.0

66.9
578.0
786.0
141.0
1,571.9

333.0
66.0
24.3
291.3

6,690.0
3,978.0
40.5%
1,662.0
0.0
18.0
1,068.0
291.3
776.7

1994

5,254.0

2,584.0
2,050.0
338.0

282.0

556.0
623.0
120.0
1,299.0

53.0
631.0
755.0
142.0
1,581.0

343.8
40.0
41.8
345.6

7,278.0
4,264.0
41.4%
1,838.0
0.0
34.0
1,210.0
345.6
864.4

1995

5,606.0

2,681.0
2,333.0
338.0

254.0

568.0
679.0
117.0
1,364.0

34.0
618.0
739.0
227.0
1,618.0

389.0
39.0
49.4
399.4

7,678.0
4,363.0
43.2%
1,956.0
0.0
36.0
1,395.0
399.4
995.6

1996

17.3%
7.8%
22.4%
15.2%
-

6.3
6.8
25.6
3.6

15.0%
6.6%
16.3%
13.6%
15.8%
28.2

7.2
7.5
27.8
3.7

16.3%
7.3%
14.6%
15.0%
15.8%
12.3

6.1
6.1
28.3
3.8

6.4
6.3
26.8
3.9

14.4%
5.9%
13.9%
13.2%
15.8%
42.6

9.6%
2.3
21.8%
30.2%
15.2%
4.6%

7.2
7.6
26.2
3.3

11.3%
5.8%
9.9%
10.8%
16.1%
100.1

9.6%
2.5
24.2%
31.3%
16.6%
38.2%

7.2
7.4
33.6
3.7

11.8%
4.8%
9.8%
11.1%
17.0%
100.3

12.5%
6.2%
22.7%
11.1%
14.5%
79.0

7.3
6.9
8.2
3.2

9.7%
1.8
17.7%
28.8%
12.6%
5.2%

12

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%

WACC

1985

21.0%
ROIC

1991

1994

1993

1992

1990

1989

1988

1987

1986

1984

1983

12.2%
5.5%
10.6%
11.5%
11.0%
(13.9)

7.0
6.7
9.8
3.7

10.0%
2.1
20.8%
47.8%
10.8%
(53.7)%

12.4%
5.9%
12.7%
11.6%
14.0%
69.3

7.6
6.8
12.1
3.6

10.3%
2.1
21.8%
38.0%
13.5%
52.5%

1990

12.2%
5.7%
9.4%
11.5%
17.8%
185.9

8.8
8.3
9.7
3.5

13.0%
2.1
26.8%
34.3%
17.6%
198.0%

1991

11.9%
5.2%
9.5%
11.3%
19.6%
260.7

8.7
7.9
9.1
3.2

14.8%
1.9
28.3%
33.6%
18.8%
31.4%

1992

(50.0)

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

Chart 2
Campbell Soup Company: Economic Profit

1984

1983

Chart 1
Campbell Soup Company: ROIC vs. WACC

1995

Source: Company published data; Datastream; Annual Statistical Digest , Board of Governors of the Federal Reserve System; CS First Boston estimates.

Cost of capital calculation
Cost of equity
Cost of debt
Debt/total capital
WACC
Return on avg. inv. cap.
Economic profit

Capital turnover analysis
Inventory turns
Operating wkg. cap. turns
Goodwill/other turns
Net P,P&E turns

9.3%
2.4
22.4%
30.7%
15.5%
36.9%

1996

1989

1985

10.0%
2.3
22.9%
36.2%
14.6%
10.3%

1988

1986

10.6%
2.4
25.9%
40.6%
15.4%
182.5%

1987

1986

1987

Return on invested capital calculation
NOPBT margin
7.6%
Capital turns
2.3
Pretax ROIC
17.3%
Tax
59.5%
Return on invested capital
7.0%
Return on incr. inv. cap.

1988

continued

1989

1985

1990

1984

1991

1983

1992

1982

1993

Table 1
Campbell Soup Company: Returns on Invested Capital

11.5%
4.6%
11.1%
10.8%
17.6%
246.2

8.2
7.0
7.4
2.9

14.8%
1.7
25.1%
35.2%
16.2%
2.9%

1993

1995

Packaged Food Industry Rate of Return Analysis

1996

1994

1995

16.6%
1.4
23.0%
28.6%
16.5%
6.7%

9.6
8.8
3.6
2.8

11.5%
4.7%
12.6%
10.6%
18.8%
374.8

1994

16.0%
1.7
27.0%
27.3%
19.7%
245.3%

8.5
7.5
7.3
2.8

12.0%
5.2%
9.0%
11.4%
19.8%
330.1

12.0%
4.6%
8.7%
11.4%
18.3%
379.2

10.4
9.7
3.3
2.9

18.2%
1.4
24.9%
28.6%
17.8%
37.3%

1996

13

* Includes cash outlays associated with restructuring.

Source: Company published data.

3.2%
14.0%
32.9%
-25.0%
71.8%
153.3%
24.4%

185

Free Cash Flow (FCF)

Value drivers 1990-1995
Sales
Operating Margin
Cash Tax Rate
Incremental Working Capital
Incremental Fixed Capital
Acquisitions
Other*

($9)
94
(12)
0
73

1985
3,988.7
366
115
7
$258

Change in net working capital
Fixed capital (net of depreciation)
Acquisitions (net of divestitures)
Other*
Investment in future growth

Sales
EBIT
Adjusted taxes
Amortization of goodwill
Net operating profit after taxes (NOPAT)

204

($39)
131
(6)
0
86

1986
4,378.7
416
132
6
$290

(346)

$108
61
472
41
682

1988
4,868.9
463
136
9
$336

(83)

($15)
68
136
191
380

1989
5,672.1
552
272
16
$297

1988

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1989

41%
43%
24%

29

($22)
169
20
201
368

1990
6,205.8
623
243
17
$397

427

($136)
123
113
0
100

1991
6,204.1
789
276
14
$527

1990

1991

1992

1993

427

$48
111
28
0
187

1992
6,263.2
908
311
16
$613

1994

1995

Definitions
NOPAT
I
FCF

Rolling 3 year rate of return on incremental investment

Rates of return on incremental investment
3 years
5 years
10 years

117

$10
191
(17)
0
184

1987
4,490.4
425
130
6
$300

Table 2
Campbell Soup Company: Rates of Return on Incremental Investment

Packaged Food Industry Rate of Return Analysis

762

($161)
142
(13)
23
(9)

1994
6,690.0
1,027
291
18
$754

1996

(461)

($59)
119
1,243
22
1,325

1995
7,278.0
1,176
346
34
$864

= EBIT - adjusted taxes + goodwill
= Chg w.c.+Cap ex (net) + Acq. (net)
= NOPAT - I

216

$61
106
252
15
435

1993
6,586.2
975
343
20
$651

743

($28)
126
106
0
204

1996
7,678.0
1,317
406
36
$947

Packaged Food Industry Rate of Return Analysis
Table 3
Campbell Soup Company: Value Driver Matrix
Sales growth
Units
Pricing/mix

Operating
margins

Working and fixed
capital needs (a)

Business risk

Other risk (b)

3-4%

36-38%

small

low

low

0%

0%

8-11%

small

low

low

$1,300

5-7%

2-3%

14-16%

small

low

low

Other USA

$365

3-4%

1-2%

12-14%

small

low

low

USA

$4,515

3-4%

2-3%

22-25%

small

low

low

Pepperidge Farm

$590

6-8%

1-2%

12-14%

small

low

low

Int'l biscuit/confectionary

$1,115

3-4%

1-2%

12-14%

small

medium

low

Biscuit & confectionary

$1,705

5-7%

1-2%

11-13%

small

medium

medium

International
Grocery

$1,458

6-8%

2-3%

9-11%

small

medium

medium

$7,678

4-5%

2-3%

18-20%

20-25%

low

low

15.9%

71.2%

($ in millions)

Sales base

Soup

$1,975

2-3%

Frozen/pickles

$875

Meal enhancement*

Campbell Soup
Company
5 yr avg
91-96

4.4%

Source: Company published data, CS First Boston estimates.
Note: (*) Includes V-8, Pace, Swanson, Prego.
(a) Working and fixed capital needs as a % of change in sales (net of non-cash charges).
(b) Other risks include volatility in raw materials, currency risk and reinvestment risk.

14

Beta = 1.05

15

FCF growth

9%
10%
11%
12%
13%

Sensitivity Analysis

Rate of return on incremental capital

Return on invested capital (avg)

Invested capital

Year

Shareholder value per share

Shares outstanding

Shareholder value

Debt

Cash

Corporate Value

PV of Residual Value

Residual Value

Cumulative PV of FCF

PV of FCF

Free Cash Flow

Investment in future

NOPAT

Cash
Shares outstanding

Debt
WACC

NOPAT growth
Invested capital growth
Implied ROR on incremental capital

2
6,316

10,030
9,079
9,710
100
2,689
7,121
235
$--.-1
5,960
18.2%

9,507
9,507
10,433
53
2,689
7,797
235
$--.--

5,606
17.8%

6%
69.06
78.42
88.91
100.67
113.85

$--.--

630

926

788

35.3%

19.3%

6,821

7%
65.83
75.19
85.68
97.44
110.62
93.82
107.00

8%
62.21
71.57
82.05

3

$--.--

235

8,248

2,689

100

10,837

8,994

12,126

1,843

567

765

505

1,270

1999E

9%
58.15
67.51
78.00
89.76
102.95

Invested capital growth

26.4%

18.6%

235

7,638

2,689

100

10,227

8,951

10,924

1,276

646

696

356

630

354

70

1,144

1998E

926

1,050

996

10%
53.6
62.96
73.45
85.21
98.4

27.6%

19.9%

7,367

4

$--.--

235

8,871

2,689

100

11,460

9,037

13,459

2,423

580

864

546

1,409

2000E

Invested capital growth
3-year
5-year 10-year
16.0%
11.9%
12.2%

926

1997E

1996A

53
235

2,689
10.5%

11%
8%
31%

Table 4
Campbell Soup Company: DCF Analysis

28.4%

20.4%

7,956

5

$--.--

235

9,507

2,689

100

12,096

9,080

14,940

3,016

593

975

589

1,564

2001E

29.2%

21.0%

8,593

6

$--.--

235

10,155

2,689

100

12,744

9,123

16,583

3,621

605

1,100

636

1,737

2002E

30.0%

21.6%

9,280

7

$--.--

235

10,817

2,689

100

13,406

9,167

18,407

4,239

618

1,240

687

1,928

2003E

30.8%

22.2%

10,022

8

$--.--

235

11,490

2,689

100

14,079

9,211

20,432

4,869

630

1,397

742

2,140

2004E

Return on incremental capital
3-year
5-year 10-year
30.0%
43.3%
27.8%

Packaged Food Industry Rate of Return Analysis

NOPAT growth

31.7%

22.8%

10,824

9

$--.--

235

12,176

2,689

100

14,765

9,255

22,680

5,510

642

1,573

802

2,375

2005E

33.5%
7.2%

6.7%

24.1%

12,625

11

$--.--

235

13,585

2,689

100

16,174

9,344

27,944

6,830

666

1,991

935

2,926

2007E

32.6%

23.4%

11,690

10

$--.--

235

12,875

2,689

100

15,464

9,299

25,175

6,164

654

1,770

866

2,636

2006E

9.4%
9.1%

10
15
20
18

FCF
6.7%
8.6%

CAP

Price

7.6%

34.4%

24.7%

13,635

12

$--.--

235

14,307

2,689

100

16,896

9,388

31,018

7,508

677

2,238

1,010

3,248

2008E

$89.10
$80.52

$55.74
$71.83

8.0%

35.4%

25.4%

14,726

13

$--.--

235

15,041

2,689

100

17,630

9,433

34,429

8,197

689

2,515

1,091

3,605

2009E

8.3%

36.4%

26.1%

15,904

14

$--.--

235

15,786

2,689

100

18,375

9,478

38,217

8,897

700

2,824

1,178

4,002

2010E

8.6%

37.4%

26.9%

17,177

15

$--.--

235

16,543

2,689

100

19,132

9,523

42,421

9,609

712

3,170

1,272

4,442

2011E

8.8%

38.4%

27.6%

18,551

16

$--.--

235

17,311

2,689

100

19,900

9,569

47,087

10,331

723

3,557

1,374

4,931

2012E

9.0%

39.5%

28.4%

20,035

17

$--.--

235

18,091

2,689

100

20,680

9,615

52,266

11,065

734

3,989

1,484

5,473

2013E

9.1%

40.6%

29.2%

21,638

9.3%

41.7%

30.0%

23,369

19

$--.--

$80.52
18

235

19,683

2,689

100

22,272

9,707

64,397

12,566

756

5,013

1,731

6,744

2015E

235

18,882

2,689

100

21,471

9,661

58,016

11,810

745

4,473

1,603

6,075

2014E

9.4%

42.9%

30.8%

25,238

20

$--.--

235

20,496

2,689

100

23,085

9,753

71,481

13,332

766

5,616

1,870

7,485

2016E

18.9
144.5
171.8
10.2
345.4

206.9
2.9
7.6
217.4

128.0

122.9
13.5
-

264.4

Invested capital calculation
Cash
Accounts receivable
Inventory
Other current assets
Current assets

Accounts payable
Accrued expenses
Income taxes payable
NIBCLs

Net working capital

Net P,P&E
Goodwill/other
Restructuring charges

Invested capital

16

19.3
1.5
12.4
30.3

1,705.2
1,501.3
12.0%
126.8
0.0
0.0
77.1
30.3
46.8

1982

Adjusted taxes calculation
Tax provision
Deferred taxes
Tax shield
Adjusted taxes

NOPAT calculation
Sales
Cost of goods sold
Gross margin
S,G&A
Other income
Goodwill amortization
NOPBT
Adjusted taxes
NOPAT

fiscal year ends May

473.6

253.2
27.1
-

193.3

369.0
5.2
6.0
380.2

23.1
213.3
311.0
26.2
573.5

29.3
3.8
12.4
37.8

2,308.9
1,970.1
14.7%
237.2
0.0
0.0
101.7
37.8
63.8

1983

633.9

331.2
47.9
-

254.8

514.1
7.7
15.1
536.9

33.0
330.3
404.8
23.6
791.7

24.5
4.1
14.4
34.9

3,301.5
2,837.1
14.1%
361.5
0.0
0.0
103.0
34.9
68.1

1984

Table 5
ConAgra, Inc.: Returns on Invested Capital

758.6

373.8
55.2
-

329.6

703.8
7.7
21.8
733.3

43.6
400.0
579.6
39.7
1,062.9

59.9
35.8
20.3
44.4

5,498.2
4,846.9
11.8%
457.3
0.0
0.0
193.9
44.4
149.5

1985

799.7

427.1
72.6
-

299.9

889.6
8.7
15.8
914.1

59.1
478.3
640.7
35.9
1,214.0

75.1
11.6
19.8
83.3

5,911.0
5,150.1
12.9%
540.7
0.0
0.0
220.2
83.3
137.0

1986

Packaged Food Industry Rate of Return Analysis

1,078.7

601.9
98.3
-

378.6

994.5
204.4
24.8
1,223.7

90.0
602.4
864.0
45.8
1,602.2

122.8
21.6
20.1
121.2

9,001.6
7,925.1
12.0%
754.9
0.0
0.0
321.5
121.2
200.3

1987

1,185.9

696.1
99.9
-

390.0

1,203.8
385.8
23.6
1,613.1

94.8
754.4
1,096.1
57.9
2,003.1

85.4
11.5
25.6
99.6

9,475.0
8,389.3
11.5%
788.6
0.0
15.0
312.0
99.6
212.4

1988

1,584.0

825.5
144.7
-

613.8

1,427.4
832.2
20.0
2,279.5

113.4
1,094.9
1,383.1
302.0
2,893.3

114.3
15.6
50.3
149.0

11,340.4
9,873.9
12.9%
1,022.0
0.0
20.6
465.1
149.0
316.1

1989

2,088.2

1,034.7
285.6
4.8

763.1

1,390.1
1,149.2
45.4
2,584.7

120.5
1,300.0
1,648.8
278.5
3,347.8

125.2
(5.2)
64.8
195.2

15,501.2
13,846.6
10.7%
1,151.3
0.0
31.2
534.5
195.2
339.3

1990

5,383.7

1,941.5
2,907.9
4.8

529.4

2,363.4
884.3
45.1
3,292.8

195.0
1,228.9
2,019.8
378.5
3,822.2

204.0
(149.6)
113.2
466.8

19,504.7
16,932.2
13.2%
1,782.9
0.0
56.0
845.6
466.8
378.8

1991

5,674.7

2,276.8
2,856.5
4.8

536.6

2,637.6
940.8
112.6
3,691.0

211.2
1,290.4
2,373.9
352.1
4,227.6

215.3
3.8
120.7
332.2

21,219.0
18,195.0
14.3%
2,136.3
0.0
81.1
968.8
332.2
636.7

1992

6,083.1

2,388.2
2,807.7
4.8

882.4

1,459.6
2,102.9
0.0
3,562.5

215.2
1,421.4
2,439.2
369.1
4,444.9

239.9
4.8
98.2
333.3

21,519.1
18,640.4
13.4%
2,014.3
0.0
90.8
955.2
333.3
621.9

1993

6,277.6

2,586.3
2,756.3
4.8

930.2

1,610.5
2,602.6
0.0
4,213.1

166.4
1,589.6
2,884.4
502.9
5,143.3

282.9
0.5
96.6
379.0

23,512.2
20,452.2
13.0%
2,091.0
0.0
73.6
1,042.6
379.0
663.6

1994

6,888.8

2,796.0
2,864.8
4.8

1,223.2

1,574.8
2,342.2
0.0
3,917.0

60.0
1,540.0
3,167.3
372.9
5,140.2

330.3
22.5
105.7
413.5

24,108.9
20,778.4
13.8%
2,229.2
0.0
71.4
1,172.7
413.5
759.2

1995

6,802.3

2,820.5
2,809.2
240.6

932.0

1,856.9
2,778.0
0.0
4,634.9

113.7
1,428.4
3,573.4
451.4
5,566.9

371.3
76.7
115.9
410.5

24,821.6
21,322.2
14.1%
2,278.1
0.0
68.7
1,290.0
410.5
879.5

1996

17.6%
8.1%
26.4%
15.1%
-

9.9
15.6
125.9
13.9

16.0%
6.5%
30.5%
13.1%
17.3%
15.4

7.4
14.9
85.1
9.1

15.8%
7.8%
29.1%
13.5%
12.3%
(6.4)

8.2
14.9
69.0
10.0

15.2%
6.9%
20.1%
13.5%
21.5%
55.2

9.5
19.9
99.6
14.7

10.4
19.1
91.6
15.0

12.2%
6.1%
17.5%
11.1%
21.3%
95.7

9.2
25.8
81.4
13.8

12.7%
5.4%
14.8%
11.6%
17.6%
46.5

13.3%
6.5%
26.1%
11.5%
18.8%
82.1

8.6
14.7
94.9
13.6

3.3%
8.0
26.3%
31.9%
17.9%
11.3%

17

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

WACC

1986

22.0%

1987

24.0%

ROIC

1990

1989

1988

1985

1984

1983

1994

1993

1992

1991

13.4%
6.2%
25.3%
11.6%
22.8%
156.1

8.2
10.8
78.4
13.7

4.1%
7.2
29.4%
32.0%
20.0%
26.0%

13.4%
6.5%
21.2%
11.9%
18.5%
120.3

9.4
9.9
54.3
15.0

3.4%
7.4
25.6%
36.5%
16.3%
4.6%

1990

(50.0)

0.0

50.0

100.0

150.0

200.0

9.7
22.0
6.7
10.0

4.3%
3.6
15.7%
55.2%
7.0%
1.2%

1991

13.1%
6.1%
31.2%
10.9%
10.1%
(28.5)

Chart 4
ConAgra, Inc.: Economic Profit

1983

Chart 3
ConAgra, Inc.: ROIC vs. WACC

1995

Source : Company published data; Datastream; Annual Statistical Digest , Board of Governors of the Federal Reserve System; CS First Boston estimates.

Cost of capital analysis
Cost of equity
Cost of debt
Debt/total capital
WACC
Return on avg. inv. cap.
Economic profit

Capital turnover analysis
Inventory turns
Operating wkg. cap. turns
Goodwill/other turns
Net P,P&E turns

3.6%
8.3
29.8%
37.7%
18.6%
22.7%

3.7%
7.4
27.5%
37.8%
17.1%
(30.6)%

1984

3.5%
7.2
25.6%
22.9%
19.7%
65.3%

1996

1989

1985

3.1%
5.2
16.2%
33.9%
10.7%
2.7%

1988

1986

4.4%
4.9
21.5%
37.2%
13.5%
8.1%

1987

1986

1987

1985

1988

continued

1989

1984

1990

1983

1992

13.2%
5.7%
29.5%
11.0%
11.5%
29.7

8.9
20.7
7.4
9.3

4.6%
3.7
17.1%
34.3%
11.2%
88.6%

1991

1982
Return on invested capital calculation
NOPBT margin
4.5%
Capital turns
6.4
Pretax ROIC
29.2%
Tax
39.3%
Return on invested capital
17.7%
Return on incr. inv. cap.

1992

Table 5
ConAgra, Inc.: Returns on Invested Capital

12.6%
5.1%
32.9%
10.1%
10.6%
25.7

8.8
9.0
7.7
9.0

4.4%
3.5
15.7%
34.9%
10.2%
(3.6)%

1993

1994

Packaged Food Industry Rate of Return Analysis

1995

4.9%
3.5
17.0%
35.3%
11.0%
15.6%

7.6
7.7
8.4
8.6

13.0%
5.1%
25.8%
10.9%
11.5%
39.9

1994

4.4%
3.7
16.6%
36.4%
10.6%
21.4%

8.2
8.2
8.5
9.1

13.0%
5.3%
29.5%
10.7%
10.7%
(0.4)

1996

1995

1993

11.2%
5.1%
21.3%
9.9%
12.8%
199.4

6.9
7.9
8.8
8.8

5.2%
3.6
19.0%
31.8%
12.9%
(139.1)%

1996

18

Source: Company published data.
* Includes cash outlays associated with restructuring.

Value drivers 1990-1996
Sales
Operating Margin
Cash Tax Rate
Incremental Working Capital
Incremental Fixed Capital
Acquisitions
Other*

Free Cash Flow (FCF)

Change in net working capital
Fixed capital (net of depreciation)
Acquisitions (net of divestitures)
Other *
Investment in future growth

Sales
EBIT
Adjusted taxes
Amortization of goodwill
Net operating profit after taxes (NOPAT)

4.9%
4.3%
41.8%
3.2%
21.5%
33.7%
0.0%

31

($30)
59
76
0
106

1986
$5,911
220
83
0
$137

(156)

$77
59
220
0
356

1987
$9,002
322
121
0
$200

65

$11
59
76
0
147

1988
$9,475
297
100
15
$212

(171)

$224
83
180
0
487

1989
$11,340
445
149
21
$316

75

$149
98
18
0
265

1990
$15,501
503
195
31
$339

1989

0%

5%

10%

15%

20%

25%

30%

1990

11%
14%
15%

(343)

($234)
186
770
0
722

1991
$19,505
790
467
56
$379

(36)

$7
121
544
0
672

1992
$21,219
888
332
81
$637

1991

1992

1993

1994

1995

63

$346
136
77
0
559

1993
$21,519
864
333
91
$622

Definitions
NOPAT
I
FCF

Rolling 3 year rate of return on incremental investment

Rates of return on incremental investment
3 years
5 years
10 years

Table 6
ConAgra, Inc.: Rates of Return on Incremental Investment

Packaged Food Industry Rate of Return Analysis

(13)

$293
195
261
0
749

1995
$24,109
1,101
436
71
$736

1996

681

($291)
330
78
0
117

1996
$24,817
1,217
487
69
$798

= EBIT - adjusted taxes + goodwill
= Chg w.c.+Cap ex (net) + Acq. (net)
= NOPAT - I

381

$48
174
61
0
283

1994
$23,512
969
379
74
$664

336
395
533
1,263

25
11
62
98

13.4%
3.8%
25.5%
15.5%

Identifiable assets
Agri-products
Trading & processing
Prepared foods
Total

Additions to PPE*
Agri-products
Trading & processing
Prepared foods
Total

Return on assets
Agri-products
Trading & processing
Prepared foods
Total
9.9%
2.9%
31.6%
14.9%

43
26
43
112

488
502
508
1,498

1986
48
15
160
223

19

9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
-

Agriproducts

9%

Trading &
processing

17%

Identifiable assets, 1995

Source: Company published data, CS First Boston estimates

* Includes businesses acquired

1985
45
15
136
196

Operating income
Agri-products
Trading & processing
Prepared foods
Total

Table 7
ConAgra, Inc.: Capital Allocation

Prepared
foods

74%

9.6%
6.3%
18.9%
13.1%

21
29
128
178

493
788
1,202
2,483

1987
47
49
227
324

Prepared foods

Trading & processing

Agri-products

9.4%
6.1%
13.7%
10.1%

11
90
95
196

541
1,141
1,363
3,044

1988
51
69
187
308

Packaged Food Industry Rate of Return Analysis

12.2%
4.1%
16.4%
9.9%

8
98
136
241

612
2,043
1,623
4,278

1989
75
85
266
425

14.0%
4.8%
14.8%
10.3%

10
56
284
349

570
2,142
2,092
4,804

1990
80
104
309
493

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

12.2%
5.0%
9.5%
8.8%

15
84
294
393

688
2,034
7,266
9,988

1993
84
102
691
878

Capital expenditures

12.4%
6.7%
9.5%
9.1%

17
35
328
380

633
1,953
7,173
9,759

1992
79
130
679
888

9.4%
4.6%
10.2%
8.9%

17
101
387
505

881
2,197
7,644
10,722

1994
83
100
776
959

198 198 198 198 198 199 199 199 199 199 199
5
6
7
8
9
0
1
2
3
4
5

15.1%
4.9%
9.5%
8.8%

14
94
1,052
1,160

568
2,088
6,364
9,021

1991
86
103
604
793

Agri-products

Trading & processing

Prepared foods

7.9%
8.6%
11.6%
10.8%

15
63
479
557

936
1,788
8,039
10,763

1995
74
155
935
1,163

$2,850
$1,935
$1,300
$2,210
$1,750
$3,150
$3,425

$24,820

Processed meats/cheese

Poultry

Frozen foods

Shelf stable

Diversified

Inputs

Ingredients

ConAgra

5-7%

6-8%

6-8%

6-8%

3-4%

3-5%

3-4%

2-3%

3.2%

20

(b) Other risks include volatility in raw materials, currency risk and reinvestment risk.

0-2%

0-2%

0-2%

0-2%

2-3%

0%

0-2%

0-2%

Sales growth
Units
Pricing
1-2%
0-2%

Note: (a) Working and fixed capital needs as a % of change in sales (net of non-cash charges).

Source: Company published data, CS First Boston estimates.

5 yr avg
91-96

Sales base
$8,200

(in $ millions)
Red meats

Table 8
ConAgra, Inc.: Value Driver Matrix

Packaged Food Industry Rate of Return Analysis

4.4%

6-7%

6-7%

4-5%

10-12%

15-17%

9-11%

3-6%

6-7%

Operating
margins
1-3%

25-30%

small

small

small

small

small

small

small

Working and fixed
capital needs (a)
small

low

low

low

low

low

low

low

low

low

low

medium

low

Other risk (b)
medium

Beta = 1.00

medium

low

Business risk
medium

21

FCF growth

9%

Invested capital growth

2
7,175

100
3,900
4,769
245
$--.-1
6,952
12.7%

100
3,900
5,701
245
$--.--

6,802
12.9%

40.09
45.13
50.68
56.77
63.47

8%
9%
10%
11%

3%

$--.--

8,569

9,501

9,438

38.2%

48.8%

61.08

54.39

48.29

42.74

37.7

4%

58.46

51.76

40.12
45.66

35.07

5%

55.57

48.87

42.78

37.23

32.18

6%

Invested capital growth

14.0%

7,534

3

$--.--

245

5,684

3,900

100

9,484

7,729

10,287

1,754

503

670

359

1,029

1999E

13.4%

245

5,251

3,900

100

9,051

7,800

8,705
7,914

8,797

1,251

596

721

222

944

1998E

52.4

45.7

39.6

34.06

29.01

7%

25.8%

14.5%

7,910

4

$--.--

245

6,122

3,900

100

9,922

7,659

11,213

2,263

508

744

377

1,121

2000E

3-year
5-year
10-year
5.2%
24.3%
25.4%

8,797

655

720

705

655

150

175

705

870

880

705

1997E

1996A

100
245

3,900
10.0%

5%
31%

7%

Sensitivity Analysis

Rate of return on incremental capital

Return on invested capital (avg)

Invested capital

Year

Shareholder value per share

Shares outstanding

Shareholder value

Debt

Cash

Corporate Value

PV of Residual Value

Residual Value

Cumulative PV of FCF

PV of FCF

Free Cash Flow

Investment in future

NOPAT

Year 0 is normalized

Cash
Shares outstanding

Debt
WACC

Invested capital growth
Implied ROR on incremental capital

NOPAT growth

Table 9
ConAgra, Inc.: DCF Analysis

26.8%

15.1%

8,306

5

$--.--

245

6,566

3,900

100

10,366

7,590

12,222

2,776

513

826

396

1,222

2001E

27.8%

15.6%

8,721

6

$--.--

245

7,014

3,900

100

10,814

7,521

13,322

3,293

518

917

415

1,332

2002E

28.9%

16.2%

9,157

7

$--.--

245

7,467

3,900

100

11,267

7,453

14,521

3,815

521

1,016

436

1,452

2003E

30.0%

16.9%

9,615

8

$--.--

245

7,925

3,900

100

11,725

7,385

15,828

4,339

525

1,125

458

1,583

2004E

3-year
5-year
10-year
8.2%
8.5%
10.4%

Return on incremental capital

Packaged Food Industry Rate of Return Analysis

NOPAT growth

31.1%

17.5%

10,096

9

$--.--

245

8,385

3,900

100

12,185

7,318

17,253

4,867

528

1,244

481

1,725

2005E

FCF

33.5%
7.2%

6.9%

18.9%

11,130

11

$--.--

245

9,316

3,900

100

13,116

7,186

20,498

5,930

533

1,519

530

2,049

2007E

8.5%
8.0%

6.9%
8.0%

32.3%

18.2%

10,600

10

$--.--

245

8,849

3,900

100

12,649

7,252

18,806

5,398

530

1,375

505

1,880

2006E

20
15

10
15

CAP

Price

7.5%

34.8%

19.6%

11,687

12

$--.--

245

9,785

3,900

100

13,585

7,121

22,343

6,465

535

1,677

557

2,234

2008E

$55.40
$45.66

$36.06
$45.66

7.7%

36.1%

20.3%

12,271

13

$--.--

245

10,257

3,900

100

14,057

7,056

24,354

7,001

536

1,851

584

2,435

2009E

7.9%

37.5%

21.1%

12,885

14

$--.--

245

10,730

3,900

100

14,530

6,992

26,546

7,538

537

2,040

614

2,654

2010E

8.0%

38.9%

21.9%

13,529

8.2%

40.4%

22.7%

14,206

16

$--.--

$45.66
15

245

11,682

3,900

100

15,482

6,866

31,539

8,616

539

2,477

676

3,153

2012E

245

11,206

3,900

100

15,006

6,929

28,935

8,077

538

2,249

644

2,893

2011E

8.3%

42.0%

23.6%

14,916

17

$--.--

245

12,159

3,900

100

15,959

6,804

34,378

9,156

540

2,727

710

3,437

2013E

8.4%

43.6%

24.5%

15,662

18

$--.--

245

12,637

3,900

100

16,437

6,742

37,471

9,695

540

3,001

746

3,746

2014E

8.5%

45.2%

25.4%

16,445

19

$--.--

245

13,116

3,900

100

16,916

6,681

40,844

10,235

540

3,300

783

4,084

2015E

8.5%

46.9%

26.4%

17,267

20

$--.--

245

13,595

3,900

100

17,395

6,620

44,520

10,775

540

3,629

822

4,451

2016E

504.8
1,207.7
73.9
-

1,786.4

Net working capital

Net P,P&E
Goodwill/other
Restructuring charges

Invested capital

22

166.3
234.7
98.8
499.8

40.9
416.7
534.5
12.5
1,004.6

Invested capital calculation
Cash
Accounts receivable
Inventory
Other current assets
Current assets

Accounts payable
Accrued expenses
Income taxes payable
NIBCLs

148.8
18.6
30.5
160.7

4,091.5
2,879.0
29.6%
772.0
7.5
1.1
449.1
160.7
288.4

1982

Adjusted taxes calculation
Tax provision
Deferred taxes
Tax shield
Adjusted taxes

NOPAT calculation
Sales
Cost of goods sold
Gross margin
S,G&A
Other income
Goodwill amortization
NOPBT
Adjusted taxes
NOPAT

calendar year

1,900.9

1,183.7
152.9
55.4

508.9

159.4
257.2
91.4
508.0

40.1
441.9
524.0
10.9
1,016.9

87.9
(22.8)
25.9
136.6

4,010.9
2,874.5
28.3%
760.4
15.5
1.4
392.9
136.6
256.3

1983

2,103.1

1,382.3
146.4
55.4

519.0

158.3
254.3
100.1
512.7

43.7
460.7
515.2
12.1
1,031.7

138.2
20.9
25.1
142.4

4,373.3
3,203.7
26.7%
797.8
12.0
4.2
388.0
142.4
245.6

1984

Table 10
CPC International: Returns on Invested Capital

2,403.2

1,632.8
161.3
55.4

553.7

202.8
276.9
85.1
564.8

42.1
484.4
577.3
14.7
1,118.5

95.7
22.9
24.6
97.4

4,209.9
3,028.9
28.1%
831.4
8.9
4.3
362.8
97.4
265.4

1985

1986

2,839.8

1,991.6
251.8
55.4

541.0

248.3
376.0
108.8
733.1

45.5
578.3
624.8
25.5
1,274.1

156.9
74.7
23.5
105.7

4,548.8
3,168.6
30.3%
960.4
12.2
4.3
436.3
105.7
330.6

Packaged Food Industry Rate of Return Analysis

2,283.5

1,638.0
240.2
55.4

349.9

219.0
417.7
172.0
808.7

49.0
537.4
536.8
35.4
1,158.6

211.0
(17.6)
37.1
265.7

4,903.0
3,287.2
33.0%
1,147.6
22.2
8.5
498.9
265.7
233.3

1987

2,506.8

1,687.9
330.5
55.4

433.0

199.6
415.6
173.8
789.0

47.0
570.9
572.6
31.5
1,222.0

197.7
(4.4)
25.5
227.6

4,700.0
2,932.3
37.6%
1,216.1
9.6
14.3
575.5
227.6
347.9

1988

2,792.1

1,738.7
469.1
55.4

528.9

246.3
423.8
171.9
842.0

51.0
671.5
614.5
33.9
1,370.9

222.7
28.0
32.7
227.4

5,103.1
3,178.0
37.7%
1,292.2
9.8
13.4
656.1
227.4
428.7

1989

3,596.3

1,898.0
877.9
55.4

765.0

282.5
518.9
158.4
959.8

57.9
839.0
780.8
47.1
1,724.8

255.3
1.3
41.0
295.0

5,781.1
3,580.5
38.1%
1,466.1
11.8
17.9
764.2
295.0
469.2

1990

3,346.2

1,881.4
767.4
55.4

642.0

291.5
512.3
190.7
994.5

61.9
774.8
743.8
56.0
1,636.5

277.4
(25.0)
39.6
342.0

6,189.1
3,804.0
38.5%
1,596.0
9.1
20.9
819.1
342.0
477.1

1991

3,856.2

2,110.8
938.5
55.4

751.5

381.4
680.1
147.3
1,208.8

66.0
927.1
886.9
80.3
1,960.3

297.8
(4.5)
37.7
340.0

6,599.0
3,992.8
39.5%
1,768.0
10.9
23.9
873.0
340.0
533.0

1992

3,739.0

2,120.7
898.3
55.4

664.6

352.9
711.3
144.2
1,208.4

67.4
899.7
830.2
75.7
1,873.0

316.1
(8.5)
34.2
358.8

6,738.0
4,043.2
40.0%
1,825.1
13.6
24.3
907.6
358.8
548.8

1993

4,183.7

2,281.0
1,107.0
55.4

740.3

443.0
847.0
134.0
1,424.0

74.3
1,093.0
907.0
90.0
2,164.3

332.5
(42.0)
41.0
415.5

7,425.4
4,496.0
39.5%
2,001.0
11.0
29.0
968.4
415.5
552.9

1994

5,678.7

2,898.0
1,934.0
55.4

791.3

747.0
915.0
5.0
1,667.0

84.3
1,293.0
1,011.0
70.0
2,458.3

360.0
60.0
46.7
346.7

8,432.0
5,064.0
39.9%
2,320.0
17.0
37.0
1,102.0
346.7
755.3

1995

16.1%
6.0%
15.0%
14.6%
-

7.7
5.2
55.4
3.4

14.7%
7.1%
19.4%
13.3%
13.9%
11.8

7.7
5.0
26.2
3.4

15.6%
7.0%
22.8%
13.6%
12.3%
(27.3)

8.5
5.3
29.9
3.2

8.9%
2.1
18.4%
36.7%
11.7%
(5.3)%

9.6%
1.6
15.4%
24.2%
11.6%
14.9%

7.3
4.8
18.1
2.3

12.1%
4.9%
31.9%
9.8%
12.6%
73.5

8.6%
1.8
15.1%
26.8%
11.0%
6.6%

7.3
4.9
26.1
2.6

13.4%
6.0%
23.1%
11.7%
11.8%
1.9

12.8%
6.4%
22.0%
11.4%
9.1%
(58.3)

9.1
5.7
20.4
3.0

10.2%
2.1
21.8%
53.2%
10.2%
17.5%

1987

12.8%
6.1%
19.2%
11.5%
14.5%
71.8

8.2
5.0
14.2
2.8

12.2%
1.9
23.0%
39.5%
13.9%
51.4%

1988

23

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

WACC

ROIC

1991

1994

1993

1992

1990

1989

1988

1987

1986

1985

1984

1983

12.4%
5.6%
17.7%
11.2%
16.2%
131.4

8.3
4.9
10.9
2.9

12.9%
1.8
23.5%
34.7%
15.4%
28.3%

1989

12.7%
5.8%
20.1%
11.4%
14.7%
106.5

7.4
4.3
6.6
3.0

13.2%
1.6
21.2%
38.6%
13.0%
5.0%

1990

(100.0)

(50.0)

0.0

50.0

100.0

150.0

200.0

250.0

300.0

Chart 6
CPC International: Economic Profit

1984

1983

Chart 5
CPC International: ROIC vs. WACC

1995

Source: Company published data; Datastream; Annual Statistical Digest , Board of Governors of the Federal Reserve System; CS First Boston estimates.

Cost of capital analysis
Cost of equity
Cost of debt
Debt/total capital
WACC
Return on avg. inv. cap.
Economic profit

Capital turnover analysis
Inventory turns
Operating wkg. cap. turns
Goodwill/other turns
Net P,P&E turns

9.8%
2.1
20.7%
34.8%
13.5%
(28.0)%

1986

1985

1985

1986

Return on invested capital calculation
NOPBT margin
11.0%
Capital turns
2.3
Pretax ROIC
25.1%
Tax
35.8%
Return on invested capital
16.1%
55.4
Return on incr. inv. cap.

1987

continued

1988

1984

1989

1983

12.1%
5.3%
16.8%
11.0%
13.7%
95.8

8.3
5.0
8.1
3.3

13.2%
1.8
24.5%
41.8%
14.3%
(3.2)%

1991

1991

1982

12.2%
5.1%
15.9%
11.1%
14.8%
133.4

7.4
4.6
7.0
3.1

13.2%
1.7
22.6%
38.9%
13.8%
11.0%

1992

1993

Table 10
CPC International: Returns on Invested Capital

1994

Packaged Food Industry Rate of Return Analysis

1994

13.0%
1.8
23.1%
42.9%
13.2%
0.9%

8.2
4.8
6.7
3.3

12.1%
5.3%
16.6%
11.0%
14.0%
118.0

1993

13.5%
1.8
24.3%
39.5%
14.7%
(13.4)%

8.1
4.9
7.5
3.2

11.6%
4.4%
15.1%
10.5%
14.5%
148.4

1995

1992

1990

11.6%
4.3%
21.4%
10.0%
15.3%
261.2

8.3
5.4
4.4
2.9

13.1%
1.5
19.4%
31.5%
13.3%
13.5%

1995

24

Source: Company published data.
* Includes cash outlays associated with restructuring.

7.8%
12.6%
40.3%
9.9%
20.3%
77.4%
5.1%

(62)

Free Cash Flow (FCF)

Value drivers 1990-1995
Sales
Operating Margin
Cash Tax Rate
Incremental Working Capital
Incremental Fixed Capital
Acquisitions
Other*

$35
269
7
8
318

1985
$4,210
350
97
4
$257

Change in net working capital
Fixed Capital (net of depreciation)
Acquisitions (net of divestitures)
Other*
Investment in future growth

Sales
EBIT
Adjusted taxes
Amortization of goodwill
Net operating profit after taxes (NOPAT)

(0)

($13)
184
147
0
319

1986
$4,549
420
106
4
$318

53

$83
39
162
0
285

1988
$4,700
552
228
14
$338

183

$96
(12)
152
0
236

1989
$5,103
633
227
13
$419

-60%

-50%

-40%

-30%

-20%

-10%1988

0%

10%

20%

30%

1989

21%
18%
29%

(159)

$236
25
356
0
617

1990
$5,781
735
295
18
$457

587

($123)
30
(26)
0
(119)

1991
$6,189
789
342
21
$468

1990

1991

1992

1993

140

$110
52
221
0
382

1992
$6,599
838
340
24
$522

1994

Definitions
NOPAT
I
FCF

Rolling 3 year rate of return on incremental investment

Rates of return on incremental investment
3 years
5 years
10 years

1,222

($191)
29
(849)
0
(1,011)

1987
$4,903
468
266
9
$211

Table 11
CPC International: Rates of Return on Incremental Investment

Packaged Food Industry Rate of Return Analysis

(30)

$76
133
283
76
568

1994
$7,425
924
415
29
$537

1995

(716)

$51
198
1,146
59
1,454

1995
$8,432
1,048
347
37
$738

= EBIT - adjusted taxes + goodwill
= Chg w.c.+Cap ex (net) + Acq. (net)
= NOPAT - I

449

($87)
100
73
0
86

1993
$6,738
870
359
24
$535

20.9%
2.7%
11.9%

154
270
424

1,496
3,016

1,521

1985
318
40
358

18.1%
5.1%
11.8%

163
198
361

1,904
1,746
3,650

1986
344
88
432

25

-

1,000

2,000

3,000

4,000

5,000

6,000

Consum er
foods

67%

Baking

16%

Assets, 1995

Source: Company published data, CS First Boston estimates

Return on assets
Consumer foods
Baking
Corn refining
Total

Capital expenditures
Consumer foods
Baking
Corn refining
Total

Assets
Consumer foods
Baking
Corn refining
Total

Operating income
Consumer foods
Baking
Corn refining
Total

Table 12
CPC International: Capital Allocation

Corn
refining

17%

18.0%
8.5%
15.0%

226
78
304

2,219
1,042
3,261

1987
400
89
488

Corn refining

Baking

1989
495
148
643

18.6%
14.2%
17.4%

143
73
215

2,661
1,043
3,704

Consum er foods

19.6%
10.7%
16.8%

166
60
226

2,282
1,060
3,342

1988
447
114
561

Packaged Food Industry Rate of Return Analysis

16.4%
17.5%
16.6%

182
80
262

3,472
1,018
4,490

1990
568
178
746

0%

20%

40%

60%

80%

100%

17.7%
16.7%
17.4%

248
138
386

3,997
1,063
5,060

1993
706
177
883

Capital expenditures

16.2%
17.4%
16.4%

240
71
311

4,173
999
5,172

1992
675
174
849

16.3%
17.4%
16.6%

248
129
377

4,516
1,152
5,668

1994
738
201
939

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

18.3%
15.6%
17.7%

211
66
277

3,494
1,016
4,510

1991
640
158
798

Consumer foods

Baking

Corn refining

16.2%
3.3%
16.7%
14.2%

253
34
183
470

5,043
1,215
1,244
7,502

1995
817
40
208
1,065

$3,438
$1,023
$364
$816
$358
$59

European Foods

L.A. Foods

Asia

N.A. Corn Refining

L.A. Corn Refining

Asia Corn Refining

+4-6%

10%+

8-10%

1-2%

15-20%

10-15%

6-8%

1-2%

7.8%

+1-2%

0%

0%

1-2%

0%

0-5%

2-4%

1-2%

Sales growth
Units
Pricing
1-2%
1-2%

26

(b) Other risks include volatility in raw materials, currency risk and reinvestment risk.

Note: (a) Working and fixed capital needs as a % of change in sales (net of non-cash charges).

Source: Company published data, CS First Boston estimates.

$8,432

$675

Baking

CPC
International
5 yr avg
90-95

Sales base
$1,699

(in $ millions)
Best Foods

Table 13
CPC International: Value Driver Matrix

Packaged Food Industry Rate of Return Analysis

12.9%

13-14%

----

14-15%

18-20%

17-19%

16-17%

10-12%

6-7%

Operating
margins
14-15%

35.3%

10-15%

medium

small

small

small

small

small

small

Working and fixed
capital needs (a)
small

medium

medium

medium

medium

medium

medium

low

low

medium

medium

medium

medium

medium

medium

low

low

Other risk (b)
low

Beta = 0.90

Business risk
low

27

FCF growth

4,235
146
$--.-1
6,276
12.3%

5,404
146
$--.--

5,679
13.3%

86.84
98.79
112.11

6,515

2,723

2,723

10%
11%
12%

2

100

100

8%
9%

$--.--

6,858

8,027

8,074

33.6%

11.1%

Invested capital growth
5%
6%
7%
61.92
56.82
51.13
71.53
66.44
60.75
77.16
82.26
71.47
94.21
89.11
83.43
107.54 102.44
96.75

13.1%

6,905

3

$--.--

146

5,023

2,723

100

7,646

6,690

8,881

956

368

489

391

879

1998E

12.5%

146

4,649

2,723

100

7,272

6,684

7,402
6,735

7,627

588

465

561

238

800

1997E

65.14
77.09
90.42

8%
44.80
54.42

22.5%

13.6%

7,320

4

$--.--

146

5,408

2,723

100

8,031

6,696

9,769

1,335

379

553

414

967

1999E

3-year
5-year
10-year
5.9%
7.9%
7.0%

Invested capital growth

7,627

123

135

400

123

598

355

400

733

755

400

1996E

1995A

146

6%
24%
2,723
9.9%
100

10%

4%
66.49
76.11

Sensitivity Analysis

Rate of return on incremental capital

Return on invested capital (avg)

Invested capital

Year

Shareholder value per share

Shares outstanding

Shareholder value

Debt

Cash

Corporate Value

PV of Residual Value

Residual Value

Cumulative PV of FCF

PV of FCF

Free Cash Flow

Investment in future

NOPAT

Year 0 is normalized

Shares outstanding

Invested capital growth
Implied ROR on incremental capital
Debt
WACC
Cash

NOPAT growth

Table 14
CPC International: DCF Analysis

23.3%

14.1%

7,759

5

$--.--

146

5,804

2,723

100

8,427

6,702

10,746

1,725

390

625

439

1,064

2000E

24.2%

14.6%

8,225

6

$--.--

146

6,210

2,723

100

8,833

6,708

11,821

2,125

400

705

466

1,171

2001E

25.1%

15.2%

8,718

7

$--.--

146

6,626

2,723

100

9,249

6,714

13,003

2,535

410

794

493

1,288

2002E

26.1%

15.8%

9,241

8

$--.--

146

7,052

2,723

100

9,675

6,720

14,303

2,955

420

893

523

1,416

2003E

3-year
5-year
10-year
3.1%
9.7%
14.9%

Return on incremental capital

Packaged Food Industry Rate of Return Analysis

NOPAT growth

27.1%

16.4%

9,796

9

$--.--

146

7,486

2,723

100

10,109

6,726

15,733

3,384

429

1,004

554

1,558

2004E

FCF

29.2%
11.0%

10.9%

17.6%

11,006

11

$--.--

146

8,383

2,723

100

11,006

6,738

19,037

4,268

447

1,262

623

1,885

2006E

10.9%
11.2%
11.3%
11.3%

28.1%

17.0%

10,383

10

$--.--

146

7,930

2,723

100

10,553

6,732

17,307

3,822

438

1,126

588

1,714

2005E

10
15
20
17

CAP

Price

11.1%

30.3%

18.3%

11,667

12

$--.--

146

8,844

2,723

100

11,467

6,744

20,941

4,723

455

1,413

660

2,074

2007E

$54.31
$70.37
$87.69
$77.16

11.2%

31.4%

19.0%

12,367

13

$--.--

146

9,314

2,723

100

11,937

6,750

23,035

5,187

463

1,581

700

2,281

2008E

11.2%

32.6%

19.7%

13,109

14

$--.--

146

9,791

2,723

100

12,414

6,756

25,339

5,658

471

1,767

742

2,509

2009E

11.2%

33.8%

20.4%

13,895

15

$--.--

146

10,275

2,723

100

12,898

6,762

27,873

6,137

479

1,974

787

2,760

2010E

11.3%

35.1%

21.2%

14,729

16

$--.--

146

10,768

2,723

100

13,391

6,768

30,660

6,623

486

2,202

834

3,036

2011E

11.3%

36.4%

22.0%

15,613

11.3%

37.8%

22.8%

16,549

18

$--.--

$77.16
17

146

11,773

2,723

100

14,396

6,780

37,098

7,616

500

2,737

937

3,674

2013E

146

11,267

2,723

100

13,890

6,774

33,726

7,116

493

2,456

884

3,340

2012E

11.3%

39.2%

23.7%

17,542

19

$--.--

146

12,286

2,723

100

14,909

6,786

40,808

8,123

507

3,048

993

4,041

2014E

11.3%

40.7%

24.6%

18,595

20

$--.--

146

12,805

2,723

100

15,428

6,792

44,889

8,636

513

3,393

1,053

4,445

2015E

1,892.0

Invested capital

28

1,054.1
198.0
-

639.9

Net working capital

Net P,P&E
Goodwill/other
Restructuring charges

333.1
217.1
68.9
619.1

33.4
408.6
660.6
156.4
1,259.0

Invested capital calculation
Cash
Accounts receivable
Inventory
Other current assets
Current assets

Accounts payable
Accrued expenses
Income taxes payable
NIBCLs

181.2
7.8
34.5
207.9

5,312.1
3,081.6
42.0%
1,748.7
0.0
6.2
488.0
207.9
280.1

1982

Adjusted taxes calculation
Tax provision
Deferred taxes
Tax shield
Adjusted taxes

NOPAT calculation
Sales
Cost of goods sold
Gross margin
S,G&A
Other income
Goodwill amortization
NOPBT
Adjusted taxes
NOPAT

fiscal year ends May

2,037.3

1,197.5
187.3
-

652.5

410.1
215.0
78.0
703.1

55.5
468.3
632.8
199.0
1,355.6

164.6
42.5
27.0
149.1

5,550.8
3,123.3
43.7%
1,959.1
0.0
5.2
473.6
149.1
324.5

1983

1,921.2

1,229.4
146.0
-

545.8

477.8
282.0
74.3
834.1

56.0
550.6
661.7
111.6
1,379.9

165.3
(12.0)
28.2
205.5

5,600.8
3,165.9
43.5%
1,982.5
0.0
4.1
456.5
205.5
251.0

1984

Table 15
General Mills: Returns on Invested Capital

1,682.0

956.0
50.8
30.5

644.7

360.8
255.8
1.4
618.0

42.9
284.5
377.7
557.6
1,262.7

80.5
(46.7)
27.7
154.9

4,285.2
2,474.8
42.2%
1,478.5
0.0
2.8
334.7
154.9
179.8

1985

1,224.7

1,084.9
196.9
30.5

(87.6)

382.4
267.7
97.5
747.6

45.9
220.0
350.9
43.2
660.0

140.1
19.9
17.8
138.0

4,586.6
2,563.9
44.1%
1,658.8
0.0
1.8
365.7
138.0
227.7

1986

Packaged Food Industry Rate of Return Analysis

1,248.1

1,249.5
56.4
30.5

(88.3)

434.0
276.0
116.4
826.4

51.9
236.7
388.6
60.9
738.1

211.2
16.0
12.5
207.7

5,189.3
2,834.0
45.4%
1,888.1
0.0
3.0
470.2
207.7
262.5

1987

1,688.8

1,376.4
115.8
30.5

166.1

460.8
283.7
75.3
819.8

14.6
230.0
423.5
317.8
985.9

177.4
30.2
14.3
161.5

5,178.8
2,847.8
45.0%
1,850.5
0.0
2.7
483.2
161.5
321.7

1988

1,701.3

1,588.1
146.0
30.5

(63.3)

436.8
322.1
145.7
904.6

10.6
254.6
370.1
206.0
841.3

202.2
(31.2)
10.5
243.9

5,620.6
3,114.8
44.6%
1,960.8
0.0
3.5
548.5
243.9
304.7

1989

2,149.9

1,934.5
264.4
30.5

(79.5)

518.2
342.7
128.7
989.6

0.7
258.7
394.4
256.3
910.1

239.0
20.8
12.3
230.5

6,448.3
3,485.1
46.0%
2,318.1
0.0
4.0
649.1
230.5
418.6

1990

2,574.2

2,241.3
340.1
30.5

(37.7)

578.7
382.1
159.2
1,120.0

39.8
306.3
493.6
242.6
1,082.3

301.4
3.2
23.2
321.4

7,153.2
3,722.1
48.0%
2,604.4
0.0
5.0
831.7
321.4
510.3

1991

2,924.6

2,648.6
380.7
30.5

(135.2)

632.5
409.4
127.9
1,169.8

0.5
291.9
487.2
255.0
1,034.6

338.9
(12.5)
22.1
373.5

7,777.8
4,123.2
47.0%
2,751.9
0.0
5.4
908.1
373.5
534.6

1992

3,206.8

2,859.6
413.4
30.5

(96.7)

617.0
398.2
139.7
1,154.9

81.3
287.4
439.0
250.5
1,058.2

347.6
36.9
28.0
338.7

8,134.6
4,297.6
47.2%
2,919.4
0.0
3.4
921.0
338.7
582.3

1993

3,560.8

3,092.6
592.1
30.5

(154.4)

650.4
454.9
178.3
1,283.6

0.2
309.7
488.3
331.0
1,129.2

283.6
(42.7)
37.7
364.0

8,516.9
4,458.2
47.7%
3,059.3
0.0
4.0
1,003.4
364.0
639.4

1994

2,244.4

1,456.6
790.0
115.2

(117.4)

494.0
411.5
108.8
1,014.3

13.0
277.3
372.0
234.6
896.9

217.2
83.4
38.5
172.3

5,026.7
2,023.0
59.8%
2,314.7
0.0
5.0
694.0
172.3
521.7

1995

2,222.3

1,312.4
775.0
115.2

19.7

590.7
259.9
124.3
974.9

20.6
337.8
395.5
240.7
994.6

279.4
46.6
38.5
271.3

5,416.0
2,241.0
58.6%
2,317.8
0.0
5.0
862.2
271.3
590.9

1996

17.3%
8.1%
14.9%
15.9%
-

8.0
7.2
26.8
5.0

15.0%
6.9%
15.2%
13.8%
16.5%
53.8

8.8
8.0
29.6
4.6

16.0%
6.8%
22.9%
13.9%
12.7%
(23.5)

8.5
7.6
38.4
4.6

8.2%
2.9
23.8%
45.0%
13.1%
63.3%

13.8%
6.0%
25.0%
11.9%
10.0%
(33.7)

11.3
14.2
84.4
4.5

7.8%
2.5
19.9%
46.3%
10.7%
29.7%

9.1%
4.2
37.7%
44.2%
21.0%
148.9%

13.4
27.1
92.0
4.2

13.1%
6.6%
8.4%
12.6%
21.2%
106.8

8.0%
3.7
29.9%
37.7%
18.6%
(10.5)%

13.1
24.3
23.3
4.2

12.6%
5.1%
12.0%
11.7%
15.7%
58.1

13.2%
6.3%
16.1%
12.1%
21.9%
144.4

12.2
26.9
44.7
3.8

9.3%
3.1
28.6%
33.4%
19.0%
13.4%

29

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%

21.0%

23.0%

WACC

1989

25.0%

ROIC

1993

27.0%

1995

1994

1992

1991

1990

1988

1987

1986

1985

1984

1983

1989

13.2%
6.0%
11.7%
12.3%
21.7%
181.2

16.3
47.8
24.4
3.3

10.1%
3.0
30.2%
35.5%
19.5%
25.4%

1990

(50.0)

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

Chart 8
General Mills: Economic Profit

12.8%
5.8%
10.9%
12.1%
18.0%
99.9

15.2
29.9
38.5
3.5

9.8%
3.3
32.2%
44.5%
17.9%
(136.2)%

1984

1983

Chart 7
General Mills: ROIC vs. WACC

1996

Source: Company published data; Datastream; Annual Statistical Digest , Board of Governors of the Federal Reserve System; CS First Boston estimates.
Note : Results prior to 1994 reflect inclusion of restaurant operations.

Cost of capital analysis
Cost of equity
Cost of debt
Debt/total capital
WACC
Return on avg. inv. cap.
Economic profit

Capital turnover analysis
Inventory turns
Operating wkg. cap. turns
Goodwill/other turns
Net P,P&E turns

8.5%
2.7
23.2%
31.5%
15.9%
30.6%

1988

1985

1987

1986

1986

1987

1985

1988

continued

1989

1984

12.6%
5.5%
9.7%
11.9%
21.6%
229.6

14.5
32.3
21.0
3.2

11.6%
2.8
32.3%
38.6%
19.8%
21.6%

1991

1990

1983

1992

12.7%
5.2%
9.7%
12.0%
19.4%
205.7

16.0
53.1
20.4
2.9

11.7%
2.7
31.1%
41.1%
18.3%
6.9%

1992

1982
Return on invested capital calculation
NOPBT margin
9.2%
Capital turns
2.8
Pretax ROIC
25.8%
Tax
42.6%
Return on invested capital
14.8%
Return on incr. inv. cap.
-

1993

Table 15
General Mills: Returns on Invested Capital

12.1%
4.5%
13.5%
11.1%
19.0%
241.8

18.5
74.4
19.7
2.8

11.3%
2.5
28.7%
36.8%
18.2%
16.9%

1993

1995

Packaged Food Industry Rate of Return Analysis

1996

1994

1991

1995

13.8%
2.2
30.9%
24.8%
23.2%
8.9%

13.5
32.4
6.4
3.5

12.1%
4.4%
16.4%
10.8%
18.0%
207.1

1994

11.8%
2.4
28.2%
36.3%
18.0%
16.1%

17.4
57.7
14.4
2.8

12.5%
5.4%
18.4%
11.2%
18.9%
260.5

11.0%
4.9%
15.0%
10.1%
26.5%
365.5

13.7
38.0
7.0
4.1

15.9%
2.4
38.8%
31.5%
26.6%
(312.8)%

1996

1,036

Free Cash Flow

30

Note : Results prior to 1994 include restaurant operations.

Source: Company published data.
* Includes cash outlays associated with restructuring.

-5.4%
12.0%
36.6%
-5.7%
-61.9%
-1.6%
-4.8%

($557)
134
(385)
0
(809)

Change in net working capital
Fixed capital (net of depreciation)
Acquisitions (net of divestitures)
Other*
Investment in future growth

Value drivers 1991-1996
Sales
Operating Margin
Cash Tax Rate
Incremental Working Capital
Incremental Fixed Capital
Acquisitions
Other*

1986
$4,587
364
138
2
$228

Sales
EBIT
Adjusted taxes
Amortization of goodwill
Net operating profit after taxes (NOPAT)

150

($1)
200
(87)
0
113

1987
$5,189
467
208
3
$262

(207)

$254
261
13
0
528

1988
$5,179
481
162
3
$322

835

($229)
285
(586)
0
(530)

1989
$5,621
545
244
4
$305

115

($16)
352
(32)
0
304

1990
$6,448
645
231
4
$419

-50%

1989

0%

50%

100%

150%

200%

1990

-11%
7%
48%

160

$42
331
(23)
0
350

1991
$7,153
827
321
5
$510

234

($98)
445
(47)
0
300

1992
$7,778
903
374
5
$535

1991

1992

1993

1994

150

$39
347
56
57
499

1993
$8,135
985
339
3
$649

Definitions
NOPAT
I
FCF

1995

Rolling 3 year rate of return on incremental investment

Rates of return on incremental investment
3 years
5 years
10 years

Table 16
General Mills: Rates of Return on Incremental Investment

Packaged Food Industry Rate of Return Analysis

633

$37
(35)
(140)
27
(111)

1995
$5,027
689
172
5
$522

1996

467

$137
(53)
40
0
124

1996
$5,416
858
271
5
$592

= EBIT - adjusted taxes + goodwill
= Chg w.c.+Cap ex (net) + Acq. (net)
= NOPAT - I

292

($58)
39
141
0
122

1994
$8,517
774
364
4
$414

126
50
28
204

Capital expenditures
Consumer foods
Restaurants
Specialty retailing & other
Total

31

153
146
30
329

1,393
683
204
2,280

1987
325
81
26
432

23.3%
11.9%
12.9%
18.9%

-

500

Restaurants

280
275
555

70%

80%

90%

100%

0%

10%

20%

30%

40%

25.1%
10.6%
19.5%

322
302
624

2,865
1,785
4,650

1993
719
189
908

Capital expenditures

25.2%
11.0%
20.0%

398
298
695

2,739
1,566
4,305

1992
689
173
862

22.4%
9.5%
17.3%

211
349
560

3,150
2,049
5,198

1994
706
194
900

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

22.8%
10.7%
18.4%

50%

1,000

1991
566
152
718

2,479
1,423
3,902

Restaurants

22.6%
13.0%
19.1%

300
241
540

2,101
1,189
3,290

1990
476
154
630

1,500

25.7%
13.2%
21.3%

257
185
442

1,572
862
2,434

1989
403
114
518

60%

20.5%
9.4%
16.6%

221
190
411

1,735
937
2,672

1988
355
88
443

Consumer foods

39%

Identifiable Assets, 1994

Consumer
foods

61%

18.1%
12.7%
6.9%
15.4%

155
74
17
245

1,298
556
232
2,085

1986
235
71
16
322

2,000

2,500

3,000

3,500

Source: Company published data, CS First Boston estimates

11.3%
6.8%
-11.1%
7.3%

1,639
690
333
2,663

Identifiable assets
Consumer foods
Restaurants
Specialty retailing & other
Total

Return on identifiable assets
Consumer foods
Restaurants
Specialty retailing & other
Total

1985
186
47
(37)
196

Operating income
Consumer foods
Restaurants
Specialty retailing & other
Total

Table 17
General Mills: Capital Allocation

Packaged Food Industry Rate of Return Analysis

Consumer foods

Restaurants

Specialty retailing &
other

350
505
325
1,255

Helper/Potato/Side Dishes

Snacks

Yogurt

International/Other

3-4%

8-10%

5-6%

5-6%

3-4%

1-2%

3-4%

Units
3-4%

3.1%

32

(b) Other risks include volatility in raw materials, currency risk and reinvestment risk.

1-2%

0-1%

0-1%

0-1%

2-3%

0-1%

2-3%

Sales growth
Pricing/Mix
0%

Note: (a) Working and fixed capital needs as a % of change in sales (net of non-cash charges).

Source: Company published data, CS First Boston estimates.

5 yr avg

$5,415

320

Flour (Baking & retail)

General Mills

450

Sales base
$2,210

Desserts

(in $ millions)
Big G

Table 18
General Mills: Value Driver Matrix

Packaged Food Industry Rate of Return Analysis

14.7%

15-18%

11-13%

11-13%

12-14%

12-14%

9-10%

12-14%

Operating
margins
20-23%

24.7%

35-40%

small

small

small

small

small

small

Working and fixed
capital needs (a)
small

low
Beta=1.00

low

low

low

low

low

low

Business risk
low

low

low

low

low

low

low

low

Other risk (b)
low

33

FCF growth

3,543
159
$--.-1
2,162
26.3%

4,496
159
$--.--

2,222
26.6%

62.53
69.39
77.07

1,999

1,622

1,622

9%
10%
11%

2

0

0

7%
8%

$--.--

5,165

6,119

5,866

-36.5%

-139.9%

61.56
68.42
76.11

3%
49.94
55.43
67.35
75.03

4%
48.87
54.35
60.48
59.28
66.15
73.83

5%
47.67
53.15

Invested capital growth

35.3%

2,079

3

$--.--

159

4,721

1,622

0

6,344

4,642

6,393

1,702

465

640

80

720

1999E

31.8%

159

4,353

1,622

0

5,975

4,738

5,110
4,593

5,247

1,237

665

823

(163)

661

1998E

5,247

572

636

872

572

(61)

(281)

872

576

591

872

1997E

1996A

0
159

9%
4%
167%
1,622
11.3%

2%
50.91
56.39

Sensitivity Analysis

Rate of return on incremental capital

Return on invested capital (avg)

Invested capital

Year

Shareholder value per share

Shares outstanding

Shareholder value

Debt

Cash

Corporate Value

PV of Residual Value

Residual Value

Cumulative PV of FCF

PV of FCF

Free Cash Flow

Investment in future

NOPAT

Year 0 is normalized

Cash
Shares outstanding

NOPAT growth
Invested capital growth
Implied ROR on incremental capital
Debt
WACC

Table 19
General Mills: DCF Analysis

57.94
64.8
72.48

6%
46.32
51.81

81.1%

37.0%

2,162

4

$--.--

159

5,085

1,622

0

6,707

4,548

6,969

2,160

458

702

83

785

2000E

85.0%

38.8%

2,248

5

$--.--

159

5,443

1,622

0

7,066

4,455

7,596

2,611

451

769

86

855

2001E

89.0%

40.7%

2,338

6

$--.--

159

5,797

1,622

0

7,419

4,365

8,280

3,055

444

842

90

932

2002E

Packaged Food Industry Rate of Return Analysis

NOPAT growth

93.3%

42.6%

2,432

7

$--.--

159

6,146

1,622

0

7,768

4,276

9,025

3,492

437

923

94

1,016

2003E

97.8%

44.7%

2,529

8

$--.--

159

6,489

1,622

0

8,111

4,189

9,837

3,922

430

1,011

97

1,108

2004E

102.5%

46.8%

2,630

9

$--.--

159

6,827

1,622

0

8,450

4,104

10,722

4,346

423

1,106

101

1,207

2005E

112.6%
3.9%

3.3%

51.4%

2,845

11

$--.--

159

7,488

1,622

0

9,111

3,939

12,739

5,172

410

1,325

109

1,435

107.4%

49.1%

2,735

10

$--.--

159

7,160

1,622

0

8,783

4,020

11,687

4,762

417

1,211

105

1,316

2007E

10
15
20
18

2006E

FCF
3.3%
5.3%
6.3%
6.0%

CAP

Price

4.3%

118.0%

53.9%

2,958

12

$--.--

159

7,811

1,622

0

9,434

3,859

13,886

5,575

403

1,450

114

1,564

2008E

$44.92
$54.89
$64.06
$60.48

4.7%

123.7%

56.5%

3,077

13

$--.--

159

8,129

1,622

0

9,751

3,780

15,136

5,971

396

1,586

118

1,704

2009E

5.0%

129.6%

59.2%

3,200

14

$--.--

159

8,442

1,622

0

10,064

3,703

16,498

6,361

389

1,735

123

1,858

2010E

5.3%

135.9%

62.0%

3,328

15

$--.--

159

8,749

1,622

0

10,372

3,628

17,983

6,743

383

1,897

128

2,025

2011E

5.6%

142.4%

65.0%

3,461

16

$--.--

159

9,052

1,622

0

10,674

3,554

19,601

7,119

376

2,074

133

2,207

2012E

5.8%

149.2%

68.2%

3,599

17

$--.--

159

9,349

1,622

0

10,971

3,482

21,365

7,489

370

2,268

138

2,406

2013E

3,743

6.0%

156.4%

71.4%

6.1%

163.9%

74.9%

3,893

19

$--.--

$60.48
18

159

9,928

1,622

0

11,551

3,342

25,384

8,209

357

2,709

150

2,859

2015E

159

9,641

1,622

0

11,264

3,411

23,288

7,852

363

2,479

144

2,623

2014E

6.3%

171.8%

78.5%

4,049

20

$--.--

159

10,211

1,622

0

11,833

3,274

27,669

8,559

350

2,960

156

3,116

2016E

34

1,537.3

647.4
266.1
-

Net P,P&E
Goodwill/other
Restructuring charges

Invested capital

623.9

Net working capital

36.9
358.3
703.8
46.1
1,145.2

Invested capital calculation
Cash
Accounts receivable
Inventory
Other current assets
Current assets

296.9
197.9
26.6
521.3

106.1
2.8
27.1
130.4

Adjusted taxes calculation
Tax provision
Deferred taxes
Tax shield
Adjusted taxes

Accounts payable
Accrued expenses
Income taxes payable
NIBCLs

3,688.5
2,384.2
35.4%
942.1
0.0
5.2
367.4
130.4
237.0

1982

NOPAT calculation
Sales
Cost of goods sold
Gross margin
S,G&A
Other income
Goodwill amortization
NOPBT
Adjusted taxes
NOPAT

fiscal year
y ends April
p

1,447.5

670.4
282.4
-

494.7

242.3
215.3
51.6
509.2

37.4
297.0
625.3
44.2
1,003.9

136.1
11.8
23.2
147.5

3,738.4
2,355.8
37.0%
986.2
0.0
5.5
402.0
147.5
254.5

1983

1,479.5

726.7
265.7
-

487.2

287.3
232.8
72.3
592.3

39.5
294.5
700.2
45.2
1,079.5

164.7
39.4
21.4
146.7

3,953.8
2,446.2
38.1%
1,053.4
0.0
5.7
459.8
146.7
313.1

1984

1,599.0

759.7
268.6
-

570.7

282.1
238.8
47.8
568.8

40.5
333.5
708.4
57.2
1,139.5

179.3
35.4
24.3
168.2

4,047.9
2,475.5
38.8%
1,081.0
0.0
5.9
497.4
168.2
329.2

1985

Table 20
H.J. Heinz & Company: Returns on Invested Capital

1,806.1

923.5
299.0
-

583.6

324.2
257.4
88.6
670.2

44.2
427.8
717.9
64.0
1,253.8

198.0
42.3
26.7
182.3

4,366.2
2,622.2
39.9%
1,192.8
0.0
5.9
557.0
182.3
374.7

1986

Packaged Food Industry Rate of Return Analysis

2,102.1

1,036.8
470.6
-

594.8

333.4
317.3
93.1
743.8

46.4
446.3
746.9
99.0
1,338.5

226.1
30.6
5.0
200.4

4,639.5
2,779.8
40.1%
1,266.7
0.0
10.7
603.6
200.4
403.2

1987

2,585.9

1,253.9
686.7
-

645.3

397.1
361.2
60.4
818.7

52.4
491.9
797.1
122.5
1,464.0

236.6
20.0
13.0
229.5

5,244.2
3,174.2
39.5%
1,382.1
0.0
13.9
701.9
229.5
472.4

1988

2,974.8

1,366.0
860.6
-

748.2

407.1
385.7
54.3
847.1

57.8
507.5
902.7
127.3
1,595.3

284.7
19.2
16.8
282.3

5,800.9
3,550.2
38.8%
1,447.1
0.0
22.2
825.7
282.3
543.4

1989

3,408.6

1,567.8
906.0
-

934.9

460.0
365.3
73.2
898.6

60.9
640.8
993.6
138.2
1,833.5

307.0
28.2
29.4
308.2

6,085.7
3,726.6
38.8%
1,437.2
0.0
27.5
949.4
308.2
641.2

1990

3,767.9

1,722.7
1,092.9
-

952.3

515.5
339.1
65.4
920.0

66.5
678.1
967.9
159.9
1,872.3

335.0
35.2
39.0
338.9

6,647.1
4,063.4
38.9%
1,546.6
0.0
28.8
1,065.9
338.9
727.0

1991

4,604.7

1,912.1
1,739.5
-

953.1

512.9
468.9
138.2
1,119.9

65.8
830.8
1,034.9
141.5
2,073.0

346.1
(9.2)
33.6
388.8

6,581.9
4,102.8
37.7%
1,594.0
0.0
41.5
926.6
388.8
537.7

1992

5,406.0

2,162.2
2,035.7
-

1,208.1

533.8
669.5
58.6
1,262.0

71.0
978.9
1,185.4
234.7
2,470.1

263.1
16.3
44.5
291.3

7,103.4
4,530.6
36.2%
1,711.9
0.0
49.0
909.9
291.3
618.6

1993

5,056.6

2,167.7
1,921.9
-

967.0

575.3
546.9
130.5
1,252.7

70.5
812.5
1,145.7
190.9
2,219.6

319.4
53.5
42.7
308.7

7,046.7
4,381.7
37.8%
1,723.7
0.0
59.8
1,001.1
308.7
692.4

1994

6,631.2

2,534.4
2,889.8
-

1,207.0

720.7
689.8
79.2
1,489.8

80.8
1,030.8
1,374.6
210.6
2,696.8

347.0
99.9
66.1
313.2

8,086.8
5,119.6
36.7%
1,811.4
0.0
77.0
1,232.8
313.2
919.7

1995

6,847.8

2,616.8
3,010.2
-

1,220.8

870.3
762.6
175.7
1,808.6

91.1
1,207.9
1,494.0
236.5
3,029.4

364.3
(28.6)
88.4
481.4

9,112.3
5,775.4
36.6%
2,049.3
0.0
89.2
1,376.8
481.4
895.4

1996

16.8%
7.8%
22.3%
14.8%
-

5.2
4.8
13.9
5.7

14.8%
6.5%
15.7%
13.5%
17.1%
53.4

6.0
5.5
13.2
5.6

15.0%
7.3%
15.5%
13.8%
21.4%
111.2

5.6
5.6
14.9
5.4

14.3%
6.9%
12.7%
13.4%
21.4%
123.0

5.7
5.3
15.1
5.3

12.3%
2.5
31.1%
33.8%
20.6%
13.5%

13.0%
2.2
28.7%
33.2%
19.2%
9.6%

6.2
5.4
9.9
4.5

11.3%
5.7%
14.1%
10.5%
20.6%
197.1

12.8%
2.4
30.8%
32.7%
20.7%
22.0%

6.1
5.3
14.6
4.7

11.6%
5.0%
9.2%
11.0%
22.0%
187.9

12.4%
6.1%
12.9%
11.6%
20.2%
200.2

6.6
5.9
7.6
4.2

13.4%
2.0
27.1%
32.7%
18.3%
14.3%

35

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

WACC

ROIC

1989

1994

1993

1992

1991

1990

1988

1987

1986

1985

1984

1983

12.3%
6.2%
13.1%
11.5%
19.5%
223.2

6.4
5.8
6.7
4.2

14.2%
1.9
27.8%
34.2%
18.3%
18.2%

12.6%
6.0%
13.5%
11.7%
20.1%
267.6

6.1
5.2
6.7
3.9

15.6%
1.8
27.9%
32.5%
18.8%
22.6%

1990

12.0%
5.7%
11.4%
11.3%
20.3%
320.9

6.9
5.9
6.1
3.9

16.0%
1.8
28.3%
31.8%
19.3%
23.9%

1991

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

1983

1992

11.9%
5.4%
17.2%
10.8%
12.8%
86.5

6.4
4.9
3.8
3.4

14.1%
1.4
20.1%
42.0%
11.7%
(22.6)%

Chart 10
H.J. Heinz & Company: Economic Profit

1984

Chart 9
H.J. Heinz & Company: ROIC vs. WACC

1995

Source: Company published data; Datastream; Annual Statistical Digest , Board of Governors of the Federal Reserve System; CS First Boston estimates.

Cost of capital analysis
Cost of equity
Cost of debt
Debt/total capital
WACC
Return on avg. inv. cap.
Economic profit

Capital turnover analysis
Inventory turns
Operating wkg. cap. turns
Goodwill/other turns
Net P,P&E turns

11.6%
2.7
31.1%
31.9%
21.2%
182.8%

1996

1989

1985

10.8%
2.6
27.8%
36.7%
17.6%
(19.5)%

1988

1986

1987

1987

1986

1988

continued

1989

1985

1990

1984

1991

1983

1992

1982
Return on invested capital calculation
NOPBT margin
10.0%
Capital turns
2.4
Pretax ROIC
23.9%
Tax
35.5%
Return on invested capital
15.4%
Return on incr. inv. cap.

1993

Table 20
H.J. Heinz & Company: Returns on Invested Capital

11.4%
4.7%
21.5%
9.9%
12.4%
121.1

6.0
4.4
3.5
3.3

12.8%
1.3
16.8%
32.0%
11.4%
10.1%

1993

1995

Packaged Food Industry Rate of Return Analysis

1996

1994

1995

15.2%
1.2
18.6%
25.4%
13.9%
14.4%

5.9
4.8
2.8
3.2

11.7%
5.1%
16.4%
10.6%
15.7%
300.5

1994

14.2%
1.4
19.8%
30.8%
13.7%
(21.1)%

6.2
5.1
3.7
3.3

11.6%
5.0%
20.5%
10.3%
13.2%
154.9

8.2%
0.6%
20.8%
6.7%
13.3%
447.2

6.1
5.0
3.0
3.5

15.1%
1.3
20.1%
35.0%
13.1%
(11.2)%

1996

36

Source: Company published data.
* Includes cash outlays associated with restructuring.

6.5%
14.3%
33.3%
11.6%
34.2%
69.6%
11.5%

244

Free Cash Flow (FCF)

Value drivers 1990-1996
Sales
Operating Margin
Cash Tax Rate
Incremental Working Capital
Incremental Fixed Capital
Acquisitions
Other*

$13
118
0
0
131

1986
$4,366
551
182
6
$375

Change in net working capital
Fixed Capital (net of depreciation)
Acquisitions (net of divestitures)
Other*
Investment in Future Growth

Sales
EBIT
Adjusted taxes
Amortization of goodwill
Net operating profit after taxes (NOPAT)

312

$11
80
0
0
91

1987
$4,639
593
200
11
$403

148

$103
197
95
0
395

1989
$5,801
804
282
22
$543

190

$187
215
50
0
451

1990
$6,086
922
308
28
$641

-5%1989

0%

5%

10%

15%

20%

25%

30%

35%

1990

4%
6%
12%

445

$17
178
87
0
282

1991
$6,647
1,037
339
29
$727

56

$1
161
230
90
482

1992
$6,582
885
389
42
$538

1991

1992

1993

1994

(244)

$255
245
368
192
1,060

1993
$7,103
1,059
291
49
$817

1995

Definitions
NOPAT
I
FCF

Rolling 3 year rate of return on incremental investment

Rates of return on incremental investment
3 years
5 years
10 years

34

$51
119
269
0
438

1988
$5,244
688
230
14
$472

Table 21
H.J. Heinz & Company: Rates of Return on Incremental Investment

Packaged Food Industry Rate of Return Analysis

(550)

$240
104
1,126
0
1,470

1995
$8,087
1,156
313
77
$920

1996

728

$14
80
74
0
168

1996
$9,112
1,288
481
89
$895

= EBIT - adjusted taxes + goodwill
= Chg w.c.+Cap ex (net) + Acq. (net)
= NOPAT - I

1,028

($241)
75
(170)
0
(336)

1994
$7,047
941
309
60
$692

21.2%
28.2%
15.3%
15.7%
19.9%

21.5%
28.1%
14.6%
13.2%
19.4%

115
19
64
9
206

1,725
150
775
188
2,837

1986
371
42
113
25
551

37

5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
-

Domestic

56%

Canada

3%
Europe

27%

Other

14%

18.8%
20.5%
14.7%
17.7%
17.6%

102
13
58
11
185

1,981
187
1,001
196
3,364

1987
373
38
147
35
593

Identifiable assets, 1996

Source: Company published data, CS First Boston estim ates

Return on assets
Domestic
Canada
Europe
Other
Total

98
16
33
12
159

1,591
147
556
179
2,474

Identifiable assets
Domestic
Canada
Europe
Other
Total

Capital expenditures
Domestic
Canada
Europe
Other
Total

1985
337
41
85
28
491

Operating income
Domestic
Canada
Europe
Other
Total

Table 22
H.J. Heinz & Company: Capital Allocation

Other

Europe

Canada

Domestic

21.2%
15.4%
16.2%
18.6%
19.1%

115
15
93
15
238

2,001
203
1,134
267
3,605

1988
423
31
184
50
688

Packaged Food Industry Rate of Return Analysis

19.7%
19.8%
20.5%
22.3%
20.1%

166
12
128
17
323

2,380
235
1,115
273
4,002

1989
468
47
229
61
803

21.8%
21.4%
18.0%
20.3%
20.5%

202
33
99
22
355

2,605
257
1,335
291
4,487

1990
567
55
241
59
922

0%

20%

40%

60%

80%

100%

13.3%
21.0%
20.1%
13.0%
15.4%

267
25
102
37
431

3,930
367
1,772
752
6,821

1993
523
77
356
98
1,053

Capital expenditures

20.8%
10.9%
16.3%
19.3%
18.7%

227
20
63
22
331

3,361
384
1,835
352
5,932

1992
698
42
299
68
1,107

12.4%
15.9%
21.0%
13.0%
14.8%

155
13
66
42
275

3,657
336
1,551
837
6,381

1994
454
53
325
109
941

Domestic

Canada

Europe

Other

13.7%
16.8%
14.3%
14.2%
14.0%

188
14
72
67
342

4,812
349
1,979
1,106
8,247

1995
657
59
283
157
1,156

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

20.4%
19.9%
22.2%
21.0%
21.0%

199
20
111
15
345

2,655
293
1,668
320
4,935

1991
542
58
370
67
1,037

15.4%
20.6%
14.7%
12.2%
14.9%

186
10
65
33
294

4,802
298
2,290
1,234
8,624

1996
740
61
336
150
1,288

$975
$1,000
$820
$270
$1,060
$1,085
$1,075

Weight Watchers

Ore-Ida

Starkist

Bakery/other

U.K.

Asia Pacific

Europe

+3-4%

3-5%

5-10%

1-3%

3-5%

2-4%

3-5%

0%

1-3%

6.5%

1-2%

3-4%

3-4%

0-2%

1-2%

0-2%

0%

0-2%

0%

Sales growth
Units
Pricing/mix
1-2%
0-2%

38

(b) Other risks include volatility in raw materials, currency risk and reinvestment risk.

Note: (a) Working and fixed capital needs as a % of change in sales (net of depreciation).

Source: Company published data, CS First Boston estimates.

$9,110

$1,095

Heinz Pet

H.J.
Heinz
5 yr avg
91-96

Sales base
$1,730

($ in millions)
Heinz USA

Table 23
H.J. Heinz & Company: Value Driver Matrix

Packaged Food Industry Rate of Return Analysis

14%

16-18%

17-19%

11-13%

11-13%

10-12%

8-10%

14-16%

12-15%

14-16%

Operating
margins
24-26%

45.8%

30-35%

small

small

small

small

medium

medium

medium

medium

Working and fixed
capital needs (a)
small

low

low

low

low

low

medium

low

low

low

medium

medium

low

medium

medium

medium

low

low

low

Other risk (b)
low

Beta = 0.90

Business risk
low

39

FCF growth

7%
8%
9%
10%
11%

Sensitivity Analysis

Rate of return on incremental capital

Return on invested capital (avg)

Invested capital

Year

Shareholder value per share

Shares outstanding

Shareholder value

Debt

Cash

Corporate Value

PV of Residual Value

Residual Value

Cumulative PV of FCF

PV of FCF

Free Cash Flow

Investment in future

NOPAT

Year 0 is normalized

Implied ROR on incremental capital
Debt
WACC
Cash
Shares outstanding

NOPAT growth
Invested capital growth

$--.-2
7,672

927
434
492
448
448
9,366
8,523
8,971
100
3,583
5,489
390
$--.-1
7,282
13.1%

895
587
308
308
308
9,051
9,051
9,359
100
3,583
5,877
390
$--.--

6,848
13.1%

30.97
35.02
39.52
44.55
50.15

2%

1998E

1997E

1996A

23.1%

16.6%

Invested capital growth
3%
4%
5%
29.34
27.53
25.51
33.39
31.57
29.55
36.08
37.89
34.06
42.92
41.11
39.09
48.52
46.71
44.69

13.9%

7,978

3

$--.--

390

6,352

3,583

100

9,834

8,293

11,005

1,542

589

782

307

1,089

1999E

13.8%

13.4%

390

5,830

3,583

100

9,313

8,360

10,096

953

504

609

390

999

12.7%

23.26
27.30
31.81
36.84
42.44

6%

31.9%

14.6%

8,298

4

$--.--

390

6,879

3,583

100

10,362

8,225

11,996

2,136

595

868

319

1,187

2000E

15.3%

Invested capital growth
3-year
5-year
10-year

34%
3,583
9.9%
100
390

9%
4%

Table 24
H.J. Heinz & Company: DCF Analysis

33.5%

15.3%

8,629

5

$--.--

390

7,412

3,583

100

10,895

8,158

13,075

2,736

600

962

332

1,293

2001E

35.1%

16.0%

8,975

6

$--.--

390

7,951

3,583

100

11,433

8,092

14,252

3,341

605

1,065

345

1,410

2002E

40.3%

36.8%

16.8%

9,334

7

$--.--

390

8,493

3,583

100

11,976

8,026

15,535

3,950

609

1,178

359

1,537

2003E

15.0%

38.5%

17.6%

9,707

8

$--.--

390

9,040

3,583

100

12,523

7,961

16,933

4,562

612

1,302

373

1,675

2004E

17.2%

Return on incremental capital
3-year
5-year
10-year

Packaged Food Industry Rate of Return Analysis

NOPAT growth

40.4%

18.4%

10,095

9

$--.--

390

9,591

3,583

100

13,073

7,897

18,457

5,177

615

1,438

388

1,826

2005E

44.4%
17.1%

17.8%

20.3%

10,919

11

$--.--

390

10,700

3,583

100

14,183

7,769

21,928

6,414

620

1,749

420

2,169

2007E

42.3%

19.3%

10,499

10

$--.--

390

10,144

3,583

100

13,627

7,832

20,118

5,794

618

1,586

404

1,990

2006E

15.2%
13.8%
14.6%

10
15
20
17

FCF
17.8%

CAP

Price

16.5%

46.5%

21.2%

11,356

12

$--.--

390

11,259

3,583

100

14,741

7,706

23,902

7,035

621

1,928

437

2,365

2008E

$33.19
$40.42
$36.08

$26.01

16.0%

48.7%

22.3%

11,810

13

$--.--

390

11,819

3,583

100

15,301

7,643

26,053

7,658

623

2,123

454

2,577

2009E

15.6%

51.1%

23.3%

12,282

14

$--.--

390

12,381

3,583

100

15,863

7,581

28,398

8,282

624

2,337

472

2,809

2010E

15.2%

53.5%

24.4%

12,774

15

$--.--

390

12,944

3,583

100

16,426

7,519

30,954

8,907

625

2,571

491

3,062

2011E

14.9%

56.1%

25.6%

13,285

16

$--.--

390

13,507

3,583

100

16,990

7,458

33,740

9,532

625

2,827

511

3,338

2012E

14.6%

58.8%

26.8%

13,816

14.3%

61.6%

28.1%

14,369

18

$--.--

$36.08
17

390

14,636

3,583

100

18,119

7,338

40,086

10,781

625

3,413

553

3,966

2014E

390

14,072

3,583

100

17,554

7,398

36,776

10,157

625

3,107

531

3,638

2013E

14.1%

64.6%

29.5%

14,943

19

$--.--

390

15,201

3,583

100

18,684

7,278

43,694

11,406

624

3,748

575

4,322

2015E

13.8%

67.7%

30.9%

15,541

20

$--.--

390

15,766

3,583

100

19,248

7,219

47,626

12,029

624

4,114

598

4,711

2016E

15.7
65.1
178.6
13.4
272.8
45.3
65.3
11.4
122.0

150.8
539.9
52.6
-

743.3

Invested capital calculation
Cash
Accounts receivable
Inventory
Other current assets
Current assets

Accounts payable
Accrued expenses
Income taxes payable
NIBCLs

Net working capital

Net P,P&E
Goodwill/other
Restructuring charges

Invested capital

40

77.4
12.1
3.6
68.9

1,565.7
1,084.7
30.7%
301.6
0.0
1.7
181.1
68.9
112.2

1982

Adjusted taxes calculation
Tax provision
Deferred taxes
Tax shield
Adjusted taxes

NOPAT calculation
Sales
Cost of goods sold
Gross margin
S,G&A
Other income
Goodwill amortization
NOPBT
Adjusted taxes
NOPAT

calendar year
y

761.4

575.1
51.3
-

135.0

67.1
68.3
10.3
145.7

17.1
56.5
194.7
12.4
280.6

89.2
12.2
7.3
84.3

1,706.1
1,168.1
31.5%
332.8
0.0
1.8
207.0
84.3
122.7

1983

1984

841.6

642.6
79.3
-

119.7

96.4
85.6
14.2
196.2

18.5
81.0
186.0
30.5
315.9

102.1
12.2
4.8
94.7

1,848.5
1,269.8
31.3%
355.8
0.0
2.7
225.5
94.7
130.9

Table 25
Hershey Foods: Returns on Invested Capital

904.0

701.8
66.2
-

136.0

87.8
88.6
9.3
185.7

20.0
76.6
192.7
32.4
321.7

112.3
24.5
5.5
93.3

1,996.2
1,355.8
32.1%
395.5
0.0
2.7
247.5
93.3
154.3

1985

1986

1,116.1

793.3
149.0
-

173.8

103.0
93.8
17.0
213.7

21.7
77.4
237.5
50.9
387.5

128.1
26.1
4.5
106.5

2,169.6
1,453.4
33.0%
445.5
0.0
3.0
273.6
106.5
167.1

Packaged Food Industry Rate of Return Analysis

1,341.1

863.0
261.6
-

216.5

130.4
121.5
16.4
268.3

15.0
121.5
285.4
63.0
484.9

121.2
4.9
9.4
125.7

2,433.8
1,612.1
33.8%
527.6
0.0
6.6
300.7
125.7
174.9

1987

1,387.5

736.0
371.3
-

280.2

128.8
144.3
17.4
290.5

21.7
166.8
308.8
73.5
570.7

91.6
1.3
11.4
101.7

2,168.0
1,326.5
38.8%
575.5
0.0
8.2
274.3
101.7
172.6

1988

1,475.4

829.9
373.4
-

272.1

102.2
142.9
22.1
267.2

24.2
121.9
309.8
83.3
539.3

118.9
9.1
7.8
117.5

2,421.0
1,455.6
39.9%
655.0
0.0
11.2
321.5
117.5
204.0

1989

1,714.6

952.1
417.6
-

344.9

127.6
170.2
19.1
316.9

26.6
143.0
379.1
113.1
661.8

145.6
12.9
9.3
142.1

2,715.6
1,588.4
41.5%
776.7
0.0
12.2
362.7
142.1
220.7

1990

1,883.6

1,145.7
421.7
-

316.2

137.9
226.3
22.0
386.2

29.0
159.8
436.9
76.6
702.4

143.9
17.5
10.2
136.6

2,899.2
1,694.4
41.6%
814.5
0.0
12.7
403.0
136.6
266.4

1991

2,120.2

1,296.0
257.9
-

566.3

127.2
240.8
5.7
373.7

24.1
173.6
457.2
285.0
940.0

158.4
31.5
10.4
137.3

3,219.8
1,833.4
43.1%
958.2
0.0
12.7
440.9
137.3
303.6

1992

2,360.1

1,460.9
473.4
-

425.7

125.7
302.0
35.6
463.3

16.0
295.0
453.4
124.6
889.0

213.6
30.1
10.3
193.8

3,488.2
1,995.5
42.8%
1,035.5
0.0
12.9
470.2
193.8
276.4

1993

2,402.1

1,468.4
453.6
2.9

477.2

115.4
347.3
8.7
471.5

26.7
331.7
445.7
144.6
948.7

174.8
0.2
14.4
189.0

3,606.3
2,097.6
41.8%
1,034.1
0.0
14.2
488.8
189.0
299.8

1994

2,409.0

1,436.0
472.3
29.1

471.6

127.1
308.1
15.5
450.7

32.3
326.0
397.6
166.4
922.3

185.8
20.2
17.1
182.6

3,690.7
2,126.3
42.4%
1,053.8
0.0
14.8
525.4
182.6
342.8

1995

15.8%
6.0%
15.4%
14.3%
-

41

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

WACC

1986

22.0%

1987

24.0%

1989

1988

1985

1984

1983

Chart 11
Hershey Foods: ROIC vs. WACC

Cost of capital analysis
Cost of equity
Cost of debt
Debt/total capital
WACC
Return on avg. inv. cap.
Economic profit

8.8
9.3
33.3
3.0

14.6%
7.1%
11.9%
13.7%
16.3%
19.5

ROIC

1990

8.8
7.9
29.8
2.9

1991

Capital turnover analysis
Inventory turns
Operating wkg. cap. turns
Goodwill/other turns
Net P,P&E turns
9.9
10.8
23.3
2.9

15.4%
7.0%
9.8%
14.6%
16.3%
14.1

1993

12.6%
1.9
24.5%
38.9%
15.0%
6.1%

9.1
10.2
14.6
2.7

11.9%
4.9%
9.0%
11.3%
16.5%
53.3

12.4%
2.2
27.4%
37.7%
17.1%
37.5%

10.4
11.0
30.1
2.8

13.2%
6.0%
6.9%
12.7%
17.7%
43.4

12.6%
6.1%
10.9%
11.9%
12.6%
9.9

7.0
6.3
5.8
2.9

12.7%
1.6
19.8%
37.1%
12.4%
(5.1)%

12.2%
5.6%
6.8%
11.8%
14.3%
35.6

7.8
7.3
6.5
2.9

13.3%
1.6
21.8%
36.6%
13.8%
35.8%

1989

12.5%
5.8%
8.1%
12.0%
13.8%
29.5

7.2
6.9
6.5
2.9

13.4%
1.6
21.2%
39.2%
12.9%
7.0%

1990

(50.0)

0.0

50.0

100.0

150.0

200.0

Chart 12
Hershey Foods: Economic Profit

12.6%
6.4%
13.3%
11.8%
14.2%
30.3

8.5
8.8
9.3
2.8

12.4%
1.8
22.4%
41.8%
13.0%
3.5%

1983

12.2%
2.2
26.8%
42.0%
15.6%
10.2%

1994

1988

1984

12.1%
2.2
27.2%
40.7%
16.1%
58.2%

1996

1987

1985

1986

1986

1985

1987

Return on invested capital calculation
NOPBT margin
11.6%
Capital turns
2.1
Pretax ROIC
24.4%
Tax
38.1%
Return on invested capital
15.1%
Return on incr. inv. cap.

1988
1995

1992

continued

1989

1984

11.9%
5.3%
8.4%
11.3%
14.8%
62.2

6.6
6.3
6.9
2.5

13.9%
1.5
21.4%
33.9%
14.1%
27.1%

1991

1991

1983

1992

12.0%
5.1%
11.3%
11.2%
15.2%
79.0

7.0
6.4
12.5
2.5

13.7%
1.5
20.8%
31.1%
14.3%
15.7%

1993

1982

1994

Table 25
Hershey Foods: Returns on Invested Capital
1994

13.6%
1.5
20.4%
38.7%
12.5%
55.8%

8.1
5.4
8.0
2.5

11.9%
5.3%
10.3%
11.2%
12.6%
32.5

1993

13.5%
1.5
19.9%
41.2%
11.7%
(11.3)%

7.7
5.6
7.4
2.4

11.4%
4.4%
10.7%
10.6%
12.3%
38.2

1995

Packaged Food Industry Rate of Return Analysis

1996

1992

1990

11.0%
4.4%
13.3%
10.2%
14.3%
98.5

9.3
6.2
7.8
2.6

14.2%
1.5
21.8%
34.8%
14.2%
617.8%

1995

42

Source: Company published data.
* Includes cash outlays associated with restructuring.

6.3%
13.3%
37.6%
20.5%
60.1%
22.5%
3.4%

78

Free Cash Flow (FCF)

Value drivers 1990-1995
Sales
Operating Margin
Cash Tax Rate
Incremental Working Capital
Incremental Fixed Capital
Acquisitions
Other*

$16
65
(6)
0
76

1985
$1,996
245
93
3
$154

Change in net working capital
Fixed Capital (net of depreciation)
Acquisitions (net of divestitures)
Other*
Investment in future growth

Sales
EBIT
Adjusted taxes
Amortization of goodwill
Net operating profit after taxes (NOPAT)

(66)

$38
80
115
0
233

1986
$2,170
271
106
3
$167

(58)

$43
44
147
0
233

1987
$2,434
294
126
7
$175

141

$64
58
(90)
0
32

1988
$2,168
266
102
8
$173

105

($8)
107
0
0
99

1989
$2,421
310
118
11
$204

1988

0%

5%

10%

15%

20%

25%

1989

7%
12%
11%

(43)

$73
113
78
0
264

1990
$2,716
351
142
12
$221

97

($29)
154
44
0
169

1991
$2,899
390
137
13
$266

1990

1991

1992

1993

(290)

$250
165
179
0
594

1992
$3,220
428
137
13
$303

Definitions
NOPAT
I
FCF

1994

Rolling 3 year rate of return on incremental investment

Rates of return on incremental investment
3 years
5 years
10 years

Table 26
Hershey Foods: Rates of Return on Incremental Investment

Packaged Food Industry Rate of Return Analysis

211

$52
22
0
15
89

1994
$3,606
475
189
14
$300

1995

297

($6)
22
13
17
46

1995
$3,691
511
183
15
$343

= EBIT - adjusted taxes + goodwill
= Chg w.c.+Cap ex (net) + Acq. (net)
= NOPAT - I

400

($141)
112
(95)
0
(124)

1993
$3,488
457
194
13
$276

-

Identifiable assets
Domestic
Foreign
Total

43

-

500

1,000

1,500

2,000

2,500

Source: Company published data, CS First Boston estimates

Return on identifiable assets
Domestic
Foreign
Total

-

-

-

1986

1985

Operating income
Domestic
Foreign
Total

Table 27
Hershey Foods: Capital Allocation

Domestic

83%

18.2%
3.1%
15.9%

1,312
232
1,544

1987
239
7
246

17.0%
3.6%
15.1%

1,506
259
1,765

1988
257
9
266

19.6%
1.4%
17.1%

1,561
253
1,814

1989
307
4
310

Foreign

17%

Identifiable assets. 1995

Packaged Food Industry Rate of Return Analysis

18.9%
2.4%
16.9%

1,820
258
2,079

1990
344
6
351

Foreign

Domestic

19.0%
2.6%
16.7%

2,003
338
2,342

1991
382
9
390

17.8%
2.8%
16.0%

2,353
320
2,673

1992
419
9
428

19.6%
1.9%
16.0%

2,282
573
2,855

1993
447
11
457

19.1%
-14.1%
12.7%

2,338
553
2,891

1994
447
(78)
368

21.4%
2.4%
18.0%

2,336
495
2,831

1995
499
12
511

3-5%

5-10%

$380

$3,690

3-4%

1-2%

6.3%

1-2%

0%

1-2%

1-2%

Sales growth
Units
Pricing/Mix
3-4%
1-2%

$410

$200

Sales base
$2,700

25-30%
84.0%

13.4%

44

medium

medium

small

Working and fixed
capital needs (a)
small

13-15%

4-6%

9-11%

6-9%

Operating
margins
15-17%

Source: Company published data, CS First Boston estimates.
Note: (a) Working and fixed capital needs as a % of change in sales (net of depreciation charges).
(b) Other risks include volatility in raw materials, currency risk and reinvestment risk.

Hershey
Foods
5 yr avg
90-95

Hershey Pasta
Group
Hershey
International

(in $ millions)
Hershey Chocolate
N.A.
Hershey Grocery

Table 28
Hershey Foods: Value Driver Matrix

Packaged Food Industry Rate of Return Analysis

low

medium

medium

low

low

medium

medium

low

Other risk (b)
low

Beta = 1.00

Business risk
low

6.4
46.1
17.3
2.7
72.5
26.7
35.5
0.3
62.5

10.0
111.5
4.7
-

126.1

Invested capital calculation
Cash
Accounts receivable
Inventory
Other current assets
Current assets

Accounts payable
Accrued expenses
Income taxes payable
NIBCLs

Net working capital

Net P,P&E
Goodwill/other
Restructuring charges

Invested capital

45

4.9
0.0
2.7
7.6

668.3
383.5
42.6%
267.2
0.0
0.0
17.6
7.6
10.0

1982

Adjusted taxes calculation
Tax provision
Deferred taxes
Tax shield
Adjusted taxes

NOPAT calculation
Sales
Cost of goods sold
Gross margin
S,G&A
Other income
Goodwill amortization
NOPBT
Adjusted taxes
NOPAT

fiscal year ends May

130.0

117.3
4.3
-

8.4

22.9
35.0
0.2
58.0

6.2
42.2
16.5
1.5
66.4

1.1
0.0
2.5
3.5

666.4
383.3
42.5%
276.0
0.0
0.0
7.2
3.5
3.6

1983

131.9

104.7
3.0
-

24.2

24.2
54.4
0.0
78.6

4.0
43.8
16.7
38.3
102.8

0.0
0.3
2.6
2.2

685.6
392.0
42.8%
288.7
0.1
0.0
5.1
2.2
2.8

1984

Table 29
Interstate Bakeries: Returns on Invested Capital

113.8

102.7
2.4
-

8.8

25.2
34.3
2.0
61.5

7.0
45.8
16.0
1.4
70.2

3.6
(1.8)
1.6
7.0

703.6
393.0
44.1%
300.6
0.0
0.0
10.0
7.0
2.9

1985

129.8

108.5
5.3
-

16.0

25.9
34.2
1.8
62.0

7.1
51.2
15.1
4.6
77.9

0.3
0.9
1.4
0.8

708.8
384.8
45.7%
309.0
0.1
0.3
15.4
0.8
14.6

1986

Packaged Food Industry Rate of Return Analysis

142.1

117.5
10.7
-

13.9

26.1
34.9
4.6
65.6

7.5
52.3
17.8
1.9
79.5

5.2
2.7
1.9
4.3

749.3
402.3
46.3%
326.3
0.1
1.7
22.5
4.3
18.2

1987

530.7

228.9
306.9
-

(5.0)

42.2
66.7
0.0
108.9

8.6
68.1
22.9
4.2
103.8

(5.8)
14.2
12.9
(7.1)

855.0
449.6
47.4%
387.1
0.0
10.0
28.4
(7.1)
35.4

1988

498.7

221.4
296.4
-

(19.0)

44.0
74.1
0.0
118.1

5.7
68.4
21.8
3.2
99.1

(1.8)
(1.8)
21.1
21.1

1,079.3
564.5
47.7%
480.7
0.0
11.5
45.6
21.1
24.4

1989

480.6

212.9
283.8
-

(16.1)

45.5
67.1
0.0
112.7

9.4
63.0
21.0
3.2
96.6

1.9
1.6
20.7
21.0

1,104.6
573.5
48.1%
482.2
0.0
11.6
60.5
21.0
39.5

1990

458.8

215.8
274.7
-

(31.7)

45.0
81.0
0.0
126.0

1.1
67.4
22.2
3.6
94.3

6.3
2.6
19.7
23.4

1,106.7
562.3
49.2%
482.6
0.0
9.9
71.7
23.4
48.3

1991

451.0

214.6
256.4
-

(20.0)

45.4
68.5
8.7
122.6

2.2
73.0
22.9
4.5
102.6

18.6
(0.7)
9.5
28.8

1,145.9
582.2
49.2%
490.1
0.0
7.2
80.8
28.8
52.0

1992

477.8

220.4
247.6
-

9.8

41.9
62.5
4.5
108.9

4.6
71.3
22.3
20.5
118.7

23.2
17.5
6.6
12.3

1,165.6
590.0
49.4%
504.2
0.0
7.2
78.5
12.3
66.2

1993

468.8

215.4
244.4
-

8.9

47.8
58.2
0.0
106.0

5.0
71.7
21.0
17.1
114.9

20.2
(4.9)
5.6
30.7

1,142.7
581.2
49.1%
505.2
0.0
7.2
63.5
30.7
32.8

1994

490.3

223.0
255.1
-

12.2

49.0
59.1
0.0
108.1

3.7
75.2
24.2
17.2
120.3

19.0
(1.8)
6.7
27.6

1,222.8
630.9
48.4%
534.6
0.0
6.0
63.3
27.6
35.7

1995

1,150.8

817.4
350.8
-

(17.4)

135.4
200.2
0.0
335.7

0.0
179.5
67.3
71.5
318.3

29.6
23.2
10.8
17.3

2,878.2
1,453.2
49.5%
1,336.7
0.0
7.5
95.8
17.3
78.5

1996

15.0%
7.0%
78.3%
8.8%
2.8%
(7.6)

15.4%
8.7%
77.1%
10.3%
2.1%
(10.6)

41.2
18.9
226.7
6.5

14.3%
7.2%
47.3%
10.9%
2.4%
(10.5)

43.9
19.2
294.5
6.9

42.1
17.0
70.2
6.4

11.5%
7.1%
39.5%
9.8%
13.4%
4.9

47.1
17.6
132.7
6.5

11.7%
6.4%
38.3%
9.7%
12.0%
2.8

12.5%
7.1%
0.0%
12.5%
10.5%
(6.6)

37.3
17.5
2.8
3.7

46

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

ROIC

1986

16.0%
WACC

1990

1994

1993

1992

1991

1989

1988

1987

1985

1984

1983

12.4%
7.4%
0.0%
12.4%
4.7%
(39.4)

49.5
23.4
3.6
4.9

4.2%
2.2
9.1%
46.3%
4.9%
34.3%

12.4%
7.8%
0.0%
12.4%
8.1%
(21.4)

52.6
28.7
3.9
5.2

5.5%
2.3
12.6%
34.7%
8.2%
(83.2)%

1990

12.1%
7.3%
80.8%
8.2%
10.3%
9.7

49.9
24.8
4.0
5.1

6.5%
2.4
15.6%
32.6%
10.5%
(40.4)%

1991

(40.0)

(30.0)

(20.0)

(10.0)

0.0

10.0

20.0

30.0

Chart 14
Interstate Bakeries: Economic Profit

1983

Chart 13
Interstate Bakeries: ROIC vs. WACC

1995

Source: Company published data; Datastream; Annual Statistical Digest , Board of Governors of the Federal Reserve System; CS First Boston estimates.

Cost of capital analysis
Cost of equity
Cost of debt
Debt/total capital
WACC
Return on avg. inv. cap.
Economic profit

16.8%
9.3%
84.2%
10.5%
-

40.3
18.6
156.4
5.7

38.6
18.2
143.7
6.0

3.3%
1.6
5.3%
(24.9)%
6.7%
4.4%

1984

Capital turnover analysis
Inventory turns
Operating wkg. cap. turns
Goodwill/other turns
Net P,P&E turns

3.0%
5.3
15.8%
19.1%
12.8%
29.4%

2.2%
5.5
11.9%
5.3%
11.2%
72.5%

1985

1.4%
6.2
8.7%
70.4%
2.6%
(0.8)%

1996

1989

1986

0.7%
5.2
3.8%
44.4%
2.1%
(43.6)%

1988

1987

1.1%
5.1
5.5%
49.4%
2.8%
(165.0)%

1987

1986

1988

1985

1989

continued

1990

1984

1992

12.1%
6.9%
36.9%
10.2%
11.4%
5.7

50.0
22.7
4.5
5.3

7.1%
2.5
17.9%
35.6%
11.5%
(47.4)%

1992

1983

1991

1982
Return on invested capital calculation
NOPBT margin
2.6%
Capital turns
5.3
Pretax ROIC
13.9%
Tax
43.3%
Return on invested capital
7.9%
Return on incr. inv. cap.

1993

Table 29
Interstate Bakeries: Returns on Invested Capital
1993

11.5%
6.3%
35.4%
9.7%
14.3%
21.4

52.2
22.5
4.7
5.3

6.7%
2.4
16.4%
15.7%
13.9%
53.0%

1995

Packaged Food Industry Rate of Return Analysis

1996

1994

1995

5.2%
2.5
12.9%
43.6%
7.3%
13.8%

50.5
24.3
4.8
5.5

12.0%
6.5%
42.5%
9.7%
7.4%
(10.6)

1994

5.6%
2.4
13.5%
48.4%
7.0%
369.1%

54.4
25.4
4.7
5.3

11.9%
6.9%
45.4%
9.6%
6.9%
(12.9)

11.7%
10.6%
24.1%
11.4%
9.6%
(15.3)

42.8
25.8
8.2
3.5

3.3%
2.5
8.3%
18.0%
6.8%
6.5%

1996

47

Source: Company published data.
* Includes cash outlays associated with restructuring.

21.1%
4.7%
34.3%
-0.1%
0.5%
0.0%
0.0%

(4)

Free Cash Flow (FCF)

Value drivers 1990-1996
Sales
Operating Margin
Cash Tax Rate
Incremental Working Capital
Incremental Fixed Capital
Acquisitions
Other*

$7
11
0
0
18

1986
$709
15
1
0
$14

Change in net working capital
Fixed Capital (net of depreciation)
Acquisitions (net of divestitures)
Other*
Investment in future growth

Sales
EBIT
Adjusted taxes
Amortization of goodwill
Net operating profit after taxes (NOPAT)

4

($2)
16
0
0
14

1987
$749
21
4
2
$18

38

($14)
(4)
0
0
(18)

1989
$1,079
29
21
12
$20

41

$3
(4)
0
0
(1)

1990
$1,105
49
21
12
$40

-350%

-300%

-250%

-200%

-150%

-100%

-50%1989

0%

50%

1990

28%
81%
13%

66

($16)
(2)
0
0
(18)

1991
$1,107
62
23
10
$48

41

$12
(1)
0
0
11

1992
$1,146
74
29
7
$52

1991

1992

1993

1994

1995

27

($1)
7
0
0
6

1994
$1,143
56
31
7
$33

32

$3
0
0
0
3

1995
$1,223
57
28
6
$36

= EBIT - adjusted taxes + goodwill
= Chg w.c.+Cap ex (net) + Acq. (net)
= NOPAT - I

1996

30

$30
6
0
0
36

1993
$1,166
71
12
7
$66

Definitions
NOPAT
I
FCF

Rolling 3 year rate of return on incremental investment

Rates of return on incremental investment
3 years
5 years
10 years

(421)

($19)
8
467
0
456

1988
$855
18
(7)
10
$35

Table 30
Interstate Bakeries Corporation: Rates of Return on Incremental Investment

Packaged Food Industry Rate of Return Analysis

108

($30)
0
0
0
(30)

1996
$2,878
88
17
8
$79

48

FCF growth

300
809
37
$--.-1

300
556
37
$--.--

51.96
56.57
61.59

6%
7%
8%
9%

10%

1,410

59.76

54.73

1%
42.04
45.91
50.13
57.76

48.12
52.73

2%
40.04
43.90

55.57

45.94
50.54

3%
37.85
41.72

53.18

43.55
48.13

4%
35.46
39.33

97.7%

1298.1% 1043.8%

1,176

4

$--.--

37

1,140

300

0

1,440

1,040

1,523

13.0%

1,165

3

$--.--

37

1,063

300

0

1,363

1,059

400

96

141

12

152

2000E

12.2%

11.3%

1,153

37

986

300

0

1,286

1,079

1,305

304

97

129

12

141

1999E

Invested capital growth

9.6%

0

0

1,152

1,109

856

6.8%

2

1,010

786

1,151

$--.--

1,111

786

207

107

129

100

110

71

1

100

2

8

130

1998E

71

111

79

Invested capital growth
3-year
5-year
10-year
2.8%
0.4%
15.5%

71

1997E

1996A

0
37

8%
1%
153%
300
10.0%

0%
43.87
47.74

Sensitivity Analysis

Rate of return on incremental capital

Return on invested capital (avg)

Invested capital

Year

Shareholder value per share

Shares outstanding

Shareholder value

Debt

Cash

Corporate Value

PV of Residual Value

Residual Value

Cumulative PV of FCF

PV of FCF

Free Cash Flow

Investment in future

NOPAT

Year 0 is normalized

Cash
Shares outstanding

NOPAT growth
Invested capital growth
Implied ROR on incremental capital
Debt
WACC

Table 31
Interstate Bakeries Corporation: DCF Analysis

104.5%

13.9%

1,188

5

$--.--

37

1,216

300

0

1,516

1,021

1,645

495

95

153

12

164

2001E

111.8%

14.9%

1,200

6

$--.--

37

1,291

300

0

1,591

1,003

1,776

588

94

166

12

178

2002E

119.5%

15.9%

1,212

7

$--.--

37

1,365

300

0

1,665

985

1,918

680

92

180

12

192

2003E

127.8%

17.0%

1,224

8

$--.--

37

1,438

300

0

1,738

967

2,072

771

91

195

12

207

2004E

Return on incremental capital
3-year
5-year
10-year
-197.0%
51.0%
8.7%

Packaged Food Industry Rate of Return Analysis

NOPAT growth

136.6%

18.2%

1,236

9

$--.--

37

1,510

300

0

1,810

949

2,237

861

90

211

12

224

2005E

156.2%
12.1%

12.5%

20.8%

1,261

11

$--.--

37

1,652

300

0

1,952

915

2,610

1,036

87

248

12

261

146.1%

19.4%

1,249

10

$--.--

37

1,581

300

0

1,881

932

2,416

949

88

229

12

241

2007E

10
15
20
14

2006E

FCF
12.5%
11.1%
10.4%
11.3%

CAP

Price

11.8%

167.1%

22.2%

1,274

12

$--.--

37

1,721

300

0

2,021

899

2,818

1,122

86

269

13

282

2008E

$42.71
$50.13
$60.45
$50.13

11.5%

178.7%

23.8%

1,287

13

$--.--

37

1,789

300

0

2,089

882

3,044

1,207

84

291

13

304

2009E

11.3%

191.0%

25.4%

1,300

11.1%

204.3%

27.2%

1,313

15

$--.--

$50.13
14

37

1,922

300

0

2,222

851

3,550

1,372

82

342

13

355

2011E

37

1,856

300

0

2,156

866

3,287

1,290

83

316

13

329

2010E

10.9%

218.4%

29.1%

1,326

16

$--.--

37

1,988

300

0

2,288

835

3,834

1,452

81

370

13

383

2012E

10.8%

233.6%

31.1%

1,339

17

$--.--

37

2,052

300

0

2,352

820

4,141

1,532

79

401

13

414

2013E

10.6%

249.8%

33.2%

1,352

18

$--.--

37

2,115

300

0

2,415

805

4,472

1,610

78

434

13

447

2014E

10.5%

267.1%

35.5%

1,366

19

$--.--

37

2,177

300

0

2,477

791

4,830

1,687

77

469

14

483

2015E

10.4%

285.6%

38.0%

1,380

20

$--.--

37

2,238

300

0

2,538

776

5,217

1,762

76

508

14

521

2016E

23.8
140.7
227.7
35.9
428.1
99.1
120.1
81.9
301.1

127.0
682.2
51.1
-

860.3

Invested capital calculation
Cash
Accounts receivable
Inventory
Other current assets
Current assets

Accounts payable
Accrued expenses
Income taxes payable
NIBCLs

Net working capital

Net P,P&E
Goodwill/other
Restructuring charges

Invested capital

49

183.1
27.1
3.3
159.3

2,367.1
1,442.2
39.1%
529.2
0.0
0.0
395.7
159.3
236.4

1982

Adjusted taxes calculation
Tax provision
Deferred taxes
Tax shield
Adjusted taxes

NOPAT calculation
Sales
Cost of goods sold
Gross margin
S,G&A
Other income
Goodwill amortization
NOPBT
Adjusted taxes
NOPAT

calendar year

901.7

743.2
60.9
-

97.6

116.8
138.9
85.0
340.7

24.0
157.1
216.8
40.4
438.3

201.3
18.5
(13.6)
169.2

2,381.1
1,412.3
40.7%
554.4
0.0
0.0
414.4
169.2
245.2

1983

1984

1,060.6

856.0
59.6
-

145.0

127.4
144.7
51.4
323.5

25.9
182.5
221.1
39.0
468.5

225.6
41.4
(5.9)
178.3

2,602.4
1,488.4
42.8%
650.8
0.0
0.0
463.2
178.3
284.9

Table 32
Kellogg Company: Returns on Invested Capital

1,217.8

1,035.9
72.1
-

109.8

189.7
190.4
29.4
409.5

29.0
203.9
245.9
40.5
519.3

246.3
51.7
14.3
208.9

2,930.1
1,605.0
45.2%
766.7
0.0
0.0
558.4
208.9
349.5

1985

Packaged Food Industry Rate of Return Analysis

1,368.3

1,281.1
73.5
-

13.7

262.8
215.8
72.2
550.8

33.0
217.5
265.4
48.6
564.5

267.7
25.0
28.0
270.7

3,340.7
1,744.6
47.8%
948.7
0.0
0.0
647.4
270.7
376.7

1986

1,890.7

1,738.8
140.2
-

11.7

311.9
276.6
113.5
702.0

38.0
275.1
310.9
89.7
713.7

269.8
37.5
9.7
242.0

3,793.0
1,939.3
48.9%
1,162.5
0.0
0.0
691.2
242.0
449.2

1987

2,413.6

2,131.9
102.8
-

178.9

365.3
299.8
78.2
743.3

44.0
404.6
362.2
111.4
922.2

294.3
35.8
7.4
265.9

4,348.8
2,233.4
48.6%
1,321.3
0.0
0.0
794.1
265.9
528.2

1988

2,798.1

2,406.3
78.0
-

313.8

250.9
306.0
2.1
559.0

47.0
355.2
394.0
76.6
872.8

244.9
(3.4)
24.9
273.2

4,651.7
2,413.8
48.1%
1,505.4
0.0
0.0
732.5
273.2
459.3

1989

2,973.9

2,595.4
112.6
-

265.9

247.1
376.2
103.7
727.0

52.0
430.2
359.7
151.0
992.9

311.9
58.2
27.1
280.8

5,181.4
2,676.6
48.3%
1,618.8
0.0
0.0
886.0
280.8
605.2

1990

2,930.5

2,646.5
106.3
-

177.7

289.8
455.8
129.7
875.3

58.0
420.0
401.1
173.9
1,053.0

378.2
(1.2)
32.5
411.9

5,786.6
2,828.7
51.1%
1,930.0
0.0
0.0
1,027.9
411.9
616.0

1991

3,095.9

2,662.7
115.7
-

317.5

313.8
441.2
104.1
859.1

66.3
519.1
416.4
174.8
1,176.6

387.6
32.8
(2.9)
351.9

6,190.6
2,987.7
51.7%
2,140.1
0.0
0.0
1,062.8
351.9
710.9

1992

3,375.6

2,768.4
223.6
-

383.6

308.8
451.7
65.9
826.4

63.0
536.8
403.1
207.1
1,210.0

353.4
(15.0)
13.2
381.6

6,295.4
2,989.0
52.5%
2,237.5
0.0
0.0
1,068.9
381.6
687.3

1993

3,357.5

2,892.8
141.0
-

323.7

334.5
503.0
72.0
909.5

66.0
564.5
396.3
206.4
1,233.2

424.6
15.3
17.3
426.6

6,562.0
2,950.7
55.0%
2,448.7
0.0
0.0
1,162.6
426.6
736.0

1994

3,234.7

2,784.8
201.0
47.5

201.4

370.8
640.5
64.2
1,075.5

70.0
590.1
376.7
240.1
1,276.9

456.2
(8.2)
23.8
488.2

7,003.7
3,177.7
54.6%
2,566.7
0.0
0.0
1,259.3
488.2
771.1

1995

16.1%
5.8%
1%
16.0%
-

10.4
8.8
46.3
3.5

14.7%
6.8%
1.5%
14.6%
27.8%
116.4

11.0
9.3
39.1
3.2

15.6%
6.6%
22.1%
13.6%
29.0%
151.6

11.8
9.4
43.7
3.0

17.8%
2.5
43.7%
38.5%
26.9%
25.0%

19.4%
2.4
47.3%
41.8%
27.5%
18.1%

12.6
15.2
45.5
2.6

12.1%
4.6%
5.8%
11.7%
29.1%
225.7

19.1%
2.4
45.9%
37.4%
28.7%
41.1%

11.9
11.3
40.6
2.8

13.4%
5.5%
9.3%
12.7%
30.7%
205.3

12.8%
6.3%
6.3%
12.4%
27.6%
247.6

12.2
13.8
27.1
2.2

18.2%
2.0
36.6%
35.0%
23.8%
13.9%

50

8.0%

13.0%

18.0%

23.0%

28.0%

WACC

1986

33.0%

ROIC

1988

1993

1992

1991

1990

1989

1987

1985

1984

1983

12.8%
5.9%
8.3%
12.3%
24.5%
264.6

12.0
10.8
42.3
2.0

18.3%
1.8
32.9%
33.5%
21.9%
15.1%

12.4%
5.5%
9.3%
11.8%
17.6%
152.4

11.8
9.3
59.6
1.9

15.7%
1.7
26.2%
37.3%
16.4%
(17.9)%

1989

12.7%
5.6%
6.9%
12.3%
21.0%
251.6

14.4
9.5
46.0
2.0

17.1%
1.7
29.8%
31.7%
20.4%
83.0%

1990

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

Chart 16
Kellogg Company: Economic Profit

1983

Chart 15
Kellogg Company: ROIC vs. WACC

1994

Source: Company published data; Datastream; Annual Statistical Digest , Board of Governors of the Federal Reserve System; CS First Boston estimates.

Cost of capital analysis
Cost of equity
Cost of debt
Debt/total capital
WACC
Return on avg. inv. cap.
Economic profit

Capital turnover analysis
Inventory turns
Operating wkg. cap. turns
Goodwill/other turns
Net P,P&E turns

17.4%
2.6
46.0%
40.8%
27.2%
21.2%

1995

1988

1984

16.7%
2.8
46.0%
40.2%
27.5%
-

1987

1985

1986

1986

1985

1987

Return on invested capital calculation
NOPBT margin
Capital turns
Pretax ROIC
Tax
Return on invested capital
Return on incr. inv. cap.

1988

continued

1989

1984

1990

1983

12.1%
5.2%
2.9%
11.9%
20.9%
264.0

14.4
10.9
54.4
2.2

17.8%
2.0
35.1%
40.1%
21.0%
(24.9)%

1991

1991

1982

1992

Table 32
Kellogg Company: Returns on Invested Capital

12.2%
4.9%
3.2%
12.0%
23.6%
349.4

14.9
10.0
53.5
2.3

17.2%
2.0
34.3%
33.1%
23.0%
57.4%

1992

1994

Packaged Food Industry Rate of Return Analysis

1995

1993

1994

17.7%
2.0
34.6%
36.7%
21.9%
(269.5)%

16.6
10.5
46.5
2.3

11.9%
5.2%
6.8%
11.4%
21.9%
350.7

1993

17.0%
1.9
31.7%
35.7%
20.4%
(8.4)%

15.6
10.0
28.2
2.3

11.6%
4.3%
6.5%
11.2%
21.2%
326.3

11.3%
4.2%
5.0%
10.9%
23.4%
410.3

18.6
11.8
34.8
2.5

18.0%
2.2
38.9%
38.8%
23.8%
(28.6)%

1995

51

Source: Company published data.
* Includes cash outlays associated with restructuring.

Value drivers 1990-1995
Sales
Operating Margin
Cash Tax Rate
Incremental Working Capital
Incremental Fixed Capital
Acquisitions
Other*
6.2%
17.5%
36.2%
40.2%
-16.8%
2.2%
19.4%

215

($35)
170
0
0
135

Change in net working capital
Capital Expenditures (net of depreciation)
Acquisitions (net of divestitures)
Other*
Investment in Future Growth (I)

Free Cash Flow (FCF)

1985
$2,930
558
209
$350

Sales
EBIT
Adjusted taxes
Net operating profit after taxes (NOPAT)

236

($96)
237
0
0
140

1986
$3,341
647
271
$377

8

$167
353
0
0
520

1988
$4,349
794
266
$528

(2)

$135
326
0
0
461

1989
$4,652
733
273
$459

50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
1988
1989

18%
44%
21%

551

($48)
102
0
0
54

1990
$5,181
886
281
$605

619

($88)
86
0
0
(3)

1991
$5,787
1,028
412
$616

1990

1991

1992

1993

463

$140
223
(115)
0
248

1992
$6,191
1,063
352
$711

Definitions
NOPAT
I
FCF

1994

Rolling 3 year rate of return on incremental investment

Rates of return on incremental investment
3 years
5 years
10 years

96

($2)
355
0
0
353

1987
$3,793
691
242
$449

Table 33
Kellogg Company: Rates of Return on Incremental Investment

Packaged Food Industry Rate of Return Analysis

793

($60)
98
(95)
0
(57)

1994
$6,562
1,163
427
$736

1995

= EBIT - adjusted taxes + goodwill
= Chg w.c.+Cap ex (net) + Acq. (net)
= NOPAT - I

551

$66
166
(96)
0
136

1993
$6,295
1,069
382
$687

797

($122)
57
0
40
(25)

1995
$7,004
1,259
488
$771

1,188
366
172
1,726

19.7%
10.6%
4.6%
16.3%

Identifiable assets
USA/Canada
Europe
Other areas
Total

Return on identifiable assets
USA/Canada
Europe
Other areas
Total

52

-

500

1,000

1,500

2,000

2,500

Source: Company published data, CS First Boston estimates

1985
234
39
8
281

Operating income
USA/Canada
Europe
Other areas
Total

Table 34
Kellogg Company: Capital Allocation

52%

20.1%
9.8%
6.6%
14.6%

1,743
893
663
3,298

1988
350
87
44
480

Europe

29%

Identifiable assets, 1995

18.3%
9.6%
6.3%
14.8%

1,691
734
256
2,681

1987
310
70
16
396

USA/Canada

18.3%
11.7%
3.1%
15.3%

1,411
453
220
2,084

1986
259
53
7
319

Packaged Food Industry Rate of Return Analysis

Other areas

19%

17.2%
10.7%
9.1%
13.9%

1,818
902
670
3,390

1989
313
97
61
470

19.9%
11.2%
10.9%
15.4%

1,953
1,167
806
3,926

1991
388
130
88
606

Other areas

Europe

USA/Canada

17.2%
9.6%
9.5%
13.4%

1,890
1,130
729
3,749

1990
325
108
69
503

21.2%
12.7%
11.6%
17.0%

2,137
1,114
764
4,015

1992
452
142
89
683

18.8%
13.3%
11.3%
16.1%

2,402
1,049
786
4,237

1993
452
140
89
681

31.5%
22.2%
18.3%
26.0%

2,252
1,258
958
4,467

1994
709
279
175
1,163

33.4%
26.0%
18.9%
28.5%

2,297
1,275
843
4,415

1995
768
332
159
1,259

8-10%

$390

5-7%

8-10%

$355

$7,004

4-5%

4-5%

6.2%

1-2%

0%

0%

2-3%

1-2%

Sales growth
Units
Pricing/Mix
2-3%
1-2%

$1,829

$1,230

Sales base
$3,200

20-35%
42.8%

17.5%

53

medium

medium

small

small

Working and fixed
capital needs (a)
small

17-19%

12-14%

21-23%

17-19%

23-25%

Operating
margins
16-18%

Source: Company published data, CS First Boston estimates.
Note: (a) Working and fixed capital needs as a % of change in sales (net of non-cash charges).
(b) Other risks include volatility in raw materials, currency risk and reinvestment risk.

Kellogg
Company
5 yr avg
90-95

R-T-E Cereal
Europe
R-T-E Cereal
Latin America
R-T-E Cereal
Asia

(in $ millions)
R-T-E Cereal
U.S.A
Convenience Foods

Table 35
Kellogg Company: Value Driver Matrix

Packaged Food Industry Rate of Return Analysis

low

medium

medium

medium

low

low

medium

medium

medium

low

Other risk (b)
low

Beta = 1.00

Business risk
low

54

FCF growth

9%
10%
11%
12%
13%

Sensitivity Analysis

Rate of return on incremental capital

Return on invested capital (avg)

Invested capital

Year

Shareholder value per share

Shares outstanding

Shareholder value

Debt

Cash

Corporate Value

PV of Residual Value

Residual Value

Cumulative PV of FCF

PV of FCF

Free Cash Flow

Investment in future

NOPAT

Year 0 is normalized

Debt
WACC
Cash
Shares outstanding

NOPAT growth
Invested capital growth
Implied ROR on incremental capital

571

2
3,269

200
995
5,711
212
$--.-1
3,156
22.1%

400
995
7,010
212
$--.--

3,235
23.8%

1%
65.84
72.57
80.10
88.54
97.99

$--.--

6,506

7,605

7,441

592

79.2%

-140.4%

2%
64.75
71.48
79.01
87.45
96.90
86.23
95.68

3%
63.53
70.26
77.79

4%
62.18
68.90
76.44
84.87
94.33

Invested capital growth

27.3%

3,368

3

$--.--

212

7,118

995

200

7,913

6,043

8,260

1,870

25.4%

212

6,525

995

200

7,320

6,042

6,436
5,799

7,023
7,023

1,279

597

5%
60.66
67.38
74.92
83.36
92.81

101.7%

29.4%

3,469

4

$--.--

212

7,716

995

200

8,511

6,044

9,168

2,467

109.6%

31.7%

3,573

5

$--.--

212

8,319

995

200

9,114

6,045

10,177

3,069

602

1,013

118.1%

34.2%

3,680

6

$--.--

212

8,927

995

200

9,722

6,046

11,296

3,676

606

1,133

107

127.3%

36.9%

3,790

7

$--.--

212

9,539

995

200

10,334

6,047

12,539

4,287

611

1,266

110

137.2%

39.7%

3,904

8

$--.--

212

10,155

995

200

10,950

6,048

13,918

4,901

615

1,414

114

147.8%

42.8%

4,021

9

$--.--

212

10,774

995

200

11,569

6,049

15,449

5,520

618

1,579

117

1,696

171.7%
11.7%

11.7%

49.7%

4,266

11

$--.--

212

12,023

995

200

12,818

6,052

19,035

6,766

625

1,966

124

2,090

2006E

159.3%

46.1%

4,142

10

$--.--

212

11,397

995

200

12,192

6,051

17,148

6,141

622

1,762

121

1,883

708

2004E

708

906

104

1,528

2003E

582

809

101

1,377

2002E

582

704

98

1,240

2001E

785

113

1,117

582

2000E

(79)

1,007

1999E

189

907

1998E

2005E

817

707

1997E

1996E

771

10
15
11.6%
11.6%

FCF
11.7%
11.6%

CAP

1995A

Return on incremental capital
3-year
5-year
10-year
30.6%
25.4%
18.4%
20
18

Invested capital growth
3-year
5-year
10-year
4.6%
6.8%
12.2%

995
11.0%
200
212

11%
3%
153%

Table 36
Kellogg Company: DCF Analysis

Packaged Food Industry Rate of Return Analysis

NOPAT growth

Price

11.7%

185.0%

53.6%

4,394

12

$--.--

212

12,652

995

200

13,447

6,053

21,129

7,394

628

2,192

128

2,320

2007E

$83.89
$77.79

$53.81
$68.71

11.7%

199.4%

57.7%

4,526

13

$--.--

212

13,284

995

200

14,079

6,054

23,453

8,025

631

2,443

132

2,575

2008E

11.7%

214.9%

62.2%

4,662

14

$--.--

212

13,918

995

200

14,713

6,055

26,032

8,658

633

2,722

136

2,858

2009E

11.6%

231.6%

67.1%

4,801

15

$--.--

212

14,555

995

200

15,350

6,056

28,896

9,294

636

3,033

140

3,173

2010E

11.6%

249.6%

72.3%

4,945

16

$--.--

212

15,194

995

200

15,989

6,057

32,075

9,932

638

3,378

144

3,522

2011E

11.6%

268.9%

77.9%

5,094

17

$--.--

212

15,835

995

200

16,630

6,058

35,603

10,571

640

3,761

148

3,909

2012E

5,247

11.6%

289.8%

83.9%

11.6%

312.3%

90.4%

5,404

19

$--.--

$77.79
18

212

17,123

995

200

17,918

6,061

43,866

11,857

644

4,659

157

4,816

2014E

212

16,478

995

200

17,273

6,060

39,519

11,213

642

4,186

153

4,339

2013E

11.6%

336.6%

97.5%

5,566

20

$--.--

212

17,769

995

200

18,564

6,062

48,691

12,502

645

5,184

162

5,346

2015E

4.9
74.7
149.1
9.8
238.5
47.1
63.1
11.0
121.2

117.3
113.7
18.3
-

249.3

Invested capital calculation
Cash
Accounts receivable
Inventory
Other current assets
Current assets

Accounts payable
Accrued expenses
Income taxes payable
NIBCLs

Net working capital

Net P,P&E
Goodwill/other
Restructuring charges

Invested capital

55

22.8
0.0
5.7
28.5

717.7
449.7
37.3%
207.9
0.0
4.0
64.0
28.5
35.5

1982

Adjusted taxes calculation
Tax provision
Deferred taxes
Tax shield
Adjusted taxes

NOPAT calculation
Sales
Cost of goods sold
Gross margin
S,G&A
Other income
Goodwill amortization
NOPBT
Adjusted taxes
NOPAT

fiscal year
y ends November

254.7

128.5
19.1
-

107.0

38.0
69.2
14.2
121.4

3.1
74.9
138.9
11.5
228.4

25.7
0.0
5.0
30.8

743.2
464.3
37.5%
212.2
0.0
4.9
71.6
30.8
40.8

1983

321.8

140.0
60.8
-

121.0

57.1
80.5
10.6
148.1

4.1
90.4
160.9
13.7
269.1

24.8
0.0
6.0
30.8

788.4
503.0
36.2%
220.2
0.0
3.9
69.1
30.8
38.2

1984

Table 37
McCormick & Company: Returns on Invested Capital

366.4

181.7
61.9
-

122.8

59.0
85.3
12.5
156.8

2.6
95.1
168.3
13.5
279.6

18.1
0.0
9.0
27.2

873.0
564.6
35.3%
247.9
0.0
6.3
66.9
27.2
39.7

1985

1986

376.2

177.4
56.5
-

142.3

81.9
89.0
11.6
182.4

4.4
109.6
187.8
22.8
324.7

21.5
0.0
8.8
30.3

975.7
637.4
34.7%
271.4
0.0
5.0
71.9
30.3
41.7

Packaged Food Industry Rate of Return Analysis

433.9

198.5
63.9
-

171.5

85.3
98.9
11.5
195.7

7.4
113.4
218.8
27.6
367.2

18.3
4.8
11.7
25.3

1,078.5
710.2
34.1%
305.2
0.0
8.1
71.2
25.3
45.9

1987

499.5

228.4
117.5
-

153.6

72.4
152.3
8.6
233.3

11.3
124.5
220.8
30.2
386.8

22.8
4.0
11.5
30.2

1,183.9
793.8
33.0%
311.8
0.0
2.6
80.8
30.2
50.6

1988

579.9

330.1
86.6
-

163.3

75.8
139.5
9.7
225.0

12.5
118.3
217.7
39.7
388.2

29.5
14.4
12.5
27.7

1,246.1
805.9
35.3%
338.2
0.0
2.9
104.9
27.7
77.2

1989

649.6

354.0
162.3
-

133.4

96.0
160.0
19.4
275.5

5.3
144.3
238.8
20.5
408.9

38.6
(2.6)
11.1
52.3

1,323.0
838.2
36.6%
357.7
0.0
3.3
130.4
52.3
78.1

1990

719.4

378.5
177.7
-

163.2

95.0
176.4
10.6
282.0

6.0
149.7
268.6
20.8
445.2

42.8
8.4
10.4
44.9

1,427.9
886.5
37.9%
395.8
0.0
3.4
149.0
44.9
104.1

1991

792.3

418.5
202.7
-

171.0

108.5
170.8
17.8
297.1

1.8
158.0
282.2
26.1
468.1

53.0
(3.4)
11.7
68.1

1,471.4
887.4
39.7%
416.8
0.0
3.8
171.0
68.1
102.9

1992

959.3

465.6
261.7
-

232.0

113.9
177.4
16.9
308.2

12.8
175.1
321.3
31.0
540.2

60.5
(25.8)
11.8
98.2

1,556.6
953.4
38.7%
422.7
0.0
3.8
184.3
98.2
86.1

1993

1,132.9

504.6
344.0
13.4

270.9

128.2
244.2
14.3
386.8

15.6
208.8
374.5
58.8
657.7

57.9
2.3
14.7
70.3

1,694.8
1,066.6
37.1%
429.5
0.0
5.7
204.3
70.3
134.1

1994

1,231.5

524.8
372.2
13.4

321.2

136.7
201.9
11.0
349.6

12.5
224.0
383.2
51.1
670.7

53.7
15.7
19.5
57.5

1,858.7
1,211.5
34.8%
446.1
0.0
6.0
207.0
57.5
149.5

1995

17.0%
6.4%
19.0%
15.0%
-

4.8
4.1
39.3
6.3

15.7%
7.1%
16.8%
14.2%
16.2%
5.0

5.3
4.2
38.8
5.8

16.2%
7.1%
26.0%
13.8%
13.3%
(1.5)

4.9
4.1
13.0
5.6

8.8%
2.4
21.5%
44.6%
11.9%
(3.8)%

7.4%
2.6
19.1%
42.1%
11.1%
20.0%

5.2
4.5
17.3
5.5

12.7%
5.1%
25.7%
10.7%
11.2%
1.8

7.7%
2.4
18.3%
40.6%
10.8%
3.3%

5.2
4.3
14.1
4.8

14.9%
6.2%
25.9%
12.7%
11.5%
(4.0)

13.7%
6.6%
40.5%
10.8%
11.3%
2.2

4.9
4.4
16.9
5.4

6.6%
2.5
16.4%
35.5%
10.6%
7.3%

13.4%
6.2%
30.4%
11.2%
10.8%
(1.8)

5.4
4.3
10.1
5.2

6.8%
2.4
16.2%
37.4%
10.1%
7.2%

1988

56

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

WACC

1989

17.0%

ROIC

1992

1994

1993

1991

1990

1988

1987

1986

1985

1984

1983

13.2%
5.8%
17.4%
11.9%
14.3%
12.9

5.7
4.8
14.4
3.8

8.4%
2.1
18.1%
26.4%
13.3%
33.1%

1989

13.6%
6.1%
20.1%
12.1%
12.7%
3.7

5.5
4.6
8.2
3.7

9.9%
2.0
20.1%
40.1%
12.0%
1.3%

1990

13.3%
5.6%
14.4%
12.2%
15.2%
21.0

5.3
4.4
8.0
3.8

10.4%
2.0
20.7%
30.1%
14.5%
37.3%

1991

(15.0)

(10.0)

(5.0)

0.0

5.0

10.0

15.0

20.0

25.0

Chart 18
McCormick & Company: Economic Profit

1984

1983

Chart 17
McCormick & Company: ROIC vs. WACC

1995

Source: Company published data; Datastream; Annual Statistical Digest , Board of Governors of the Federal Reserve System; CS First Boston estimates.

Cost of capital analysis
Cost of equity
Cost of debt
Debt/total capital
WACC
Return on avg. inv. cap.
Economic profit

Capital turnover analysis
Inventory turns
Operating wkg. cap. turns
Goodwill/other turns
Net P,P&E turns

9.6%
2.9
28.1%
43.0%
16.0%
98.3%

1987

1985

1986

1986

1985

1987

Return on invested capital calculation
NOPBT margin
8.9%
Capital turns
2.9
Pretax ROIC
25.7%
Tax
44.5%
Return on invested capital
14.2%
Return on incr. inv. cap.

1988

continued

1989

1984

1990

1983

1991

1982

1992

Table 37
McCormick & Company: Returns on Invested Capital

12.8%
5.3%
13.0%
11.9%
13.6%
13.3

5.2
4.4
7.3
3.5

11.6%
1.9
21.6%
39.8%
13.0%
(1.7)%

1992

1994

Packaged Food Industry Rate of Return Analysis

1995

1993

1994

12.1%
1.5
18.0%
34.4%
11.8%
27.6%

4.5
3.7
4.9
3.4

12.8%
5.5%
27.6%
10.8%
12.8%
21.1

1993

11.8%
1.6
19.2%
53.3%
9.0%
(10.0)%

4.8
4.1
5.9
3.3

12.5%
4.5%
18.5%
11.0%
9.8%
(10.1)

12.7%
4.5%
25.1%
10.7%
12.6%
23.5

4.9
4.0
5.0
3.5

11.1%
1.5
16.8%
27.8%
12.1%
15.7%

1995

57

Source: Company published data.
* Includes cash outlays associated with restructuring.

Value drivers 1990-1995
Sales
Operating Margin
Cash Tax Rate
Incremental Working Capital
Incremental Fixed Capital
Acquisitions
Other*

Free Cash Flow (FCF)

Change in net working capital
Fixed Capital (net of depreciation)
Acquisitions (net of divestitures)
Other*
Investment in future growth (I)

Sales
EBIT
Adjusted taxes
Amortization of goodwill
Net operating profit after taxes (NOPAT)

7.0%
11.0%
38.3%
29.5%
34.3%
41.2%
6.1%

(41)

$2
46
0
0
47

1985
$873
61
27
6
$40

(82)

$20
67
0
0
87

1986
$976
67
30
5
$42

(16)

($18)
23
14
0
19

1988
$1,184
95
30
3
$67

(36)

$10
21
8
0
39

1989
$1,246
102
28
3
$77

1988

0%

10%

20%

30%

40%

50%

60%

1989

11%
14%
14%

(9)

($30)
24
18
0
12

1990
$1,323
127
52
3
$78

(60)

$30
34
0
0
64

1991
$1,428
146
45
3
$104

1990

1991

1992

1993

(89)

1994

$8
42
44
0
93

1992
$1,471
167
68
4
$103

Definitions
NOPAT
I
FCF

Rolling 3 year rate of return on incremental investment

Rates of return on incremental investment
3 years
5 years
10 years

(81)

$29
53
6
0
89

1987
$1,078
63
25
8
$46

Table 38
McCormick & Company: Rates of Return on Incremental Investment

Packaged Food Industry Rate of Return Analysis

(180)

$39
31
83
33
185

1994
$1,695
199
70
6
$134

1995

= EBIT - adjusted taxes + goodwill
= Chg w.c.+Cap ex (net) + Acq. (net)
= NOPAT - I

(163)

$61
30
76
0
166

1993
$1,557
182
98
4
$88

(69)

$50
24
0
0
75

1995
$1,859
201
58
6
$150

462
85
35
582

5.8%
0.4%
1.9%
4.8%

Assets
North America/Unite
Europe
Other countries
Total

Return on assets
North America/Unite
Europe
Other countries
Total
5.6%
3.0%
-2.7%
4.7%

504
88
36
629

1986
28
3
(1)
30

58

-

200

400

600

800

1,000

1,200

1,400

North
America/U
nited
States

83%

Source: Company published data, CS First Boston estimates

1985
27
0
1
28

Operating income
North America/Unite
Europe
Other countries
Total

Table 39
McCormick & Company: Capital Allocation

Europe

14%
3%

Other
countries

5.6%
1.6%
-0.9%
4.7%

622
104
44
770

1988
35
2
(0)
36

Assets, 1995

4.7%
2.3%
2.3%
4.3%

575
102
41
718

1987
27
2
1
31

Packaged Food Industry Rate of Return Analysis

7.1%
6.0%
15.8%
7.3%

781
125
41
947

1990
55
7
6
69

Other countries

Europe

1991
64
3
14
81

7.4%
2.3%
29.4%
7.8%

874
111
47
1,032

North America/United States

17.7%
-2.6%
20.0%
15.7%

735
91
39
865

1989
130
(2)
8
136

9.3%
2.1%
7.0%
8.4%

986
126
18
1,131

1992
91
3
1
95

8.1%
4.1%
3.9%
7.6%

1,158
136
20
1,313

1993
93
6
1
100

7.8%
2.9%
-4.2%
6.8%

1,324
203
42
1,569

1994
103
6
(2)
107

6.4%
4.5%
4.6%
6.0%

1,332
224
58
1,614

1995
85
10
3
98

$690
$410
$165
$35

Industrial/Foodservice

International

Packaging

Gilroy

4-6%

4-6%

4-6%

6-8%

6-8%

2-3%

Units

5.0%

2-3%

0-2%

1-3%

2-4%

0-2%

2-3%

Sales growth
Pricing/Mix

59

(b) Other risks include volatility in raw materials, currency risk and reinvestment risk.

Note: (a) Working and fixed capital needs as a % of change in sales (net of non-cash charges).

Source: Company published data, CS First Boston estimates.

$1,860

$560

Consumer Products

McCormick &
Company
5-yr avg
90-95

Sales base

($ in millions)

Table 40
McCormick & Company: Value Driver Matrix

Packaged Food Industry Rate of Return Analysis

11.0%

11-14%

8-10%

11-13%

5-7%

11-13%

14-16%

Operating
margins

69.9%

40-45%

small

medium

medium

medium

medium

Working and fixed
capital needs (a)

low

low

low

low

low

low

medium

low

medium

medium

medium

medium

Other risk (b)

Beta = 1.10

Business risk

60

FCF growth

$--.-1
1,259
7.9%

$--.--

1,232
12.1%

28.18
30.63
33.30

1,273

79

79

11%
12%
13%

2

638

1,188

9%
10%

$--.--

447

447

141.3%

55.6%

Invested capital growth
1%
2%
3%
22.90
21.84
20.68
24.96
23.90
22.74
26.15
27.21
24.99
29.67
28.61
27.44
32.34
31.28
30.11

10.4%

1,298

3

$--.--

79

898

447

150

1,195

967

1,298

228

81

108

25

134

1998E

9.0%

79

759

447

150

1,056

935

909

1,106

150

870

1,450

150

959

1,450

147

82

100

14

114

1997E

23.71
26.16
28.84

4%
19.40
21.46

57.8%

11.3%

1,324

4

$--.--

79

986

447

150

1,283

973

1,440

311

83

123

26

148

1999E

Invested capital growth
3-year
5-year
10-year
15.8%
13.6%
13.5%

1,485

65

72

35

65

27

115

35

99

150

35

1996E

1995A

11%
2%
81%
447
10.3%
150
79

0%
23.87
25.93

Sensitivity Analysis

Rate of return on incremental capital

Return on invested capital (avg)

Invested capital

Year

Shareholder value per share

Shares outstanding

Shareholder value

Debt

Cash

Corporate Value

PV of Residual Value

Residual Value

Cumulative PV of FCF

PV of FCF

Free Cash Flow

Investment in future

NOPAT

Year 0 is normalized

NOPAT growth
Invested capital growth
Implied ROR on incremental capital
Debt
WACC
Cash
Shares outstanding

Table 41
McCormick & Company: DCF Analysis

.

62.9%

12.3%

1,351

5

$--.--

79

1,077

447

150

1,374

979

1,599

395

85

138

26

165

2000E

68.5%

13.4%

1,378

6

$--.--

79

1,170

447

150

1,467

985

1,775

482

87

156

27

183

2001E

74.5%

14.6%

1,405

7

$--.--

79

1,264

447

150

1,561

991

1,970

570

88

176

28

203

2002E

81.1%

15.9%

1,433

8

$--.--

79

1,361

447

150

1,658

997

2,186

660

90

197

28

225

2003E

Return on incremental capital
3-year
5-year
10-year
9.3%
12.3%
12.7%

Packaged Food Industry Rate of Return Analysis

NOPAT growth

88.2%

17.3%

1,462

9

$--.--

79

1,458

447

150

1,755

1,004

2,427

752

92

222

29

250

2004E

104.5%
20.8%

21.7%

20.5%

1,521

11

$--.--

79

1,659

447

150

1,956

1,016

2,990

940

95

278

30

308

96.0%

18.8%

1,491

10

$--.--

79

1,558

447

150

1,855

1,010

2,694

845

93

248

29

278

2006E

10
15
20
15

2005E

FCF
21.7%
18.3%
16.6%
18.3%

CAP

Price

20.0%

113.7%

22.3%

1,551

12

$--.--

79

1,761

447

150

2,058

1,023

3,319

1,036

96

312

30

342

2007E

$19.62
$26.15
$33.09
$26.15

19.4%

123.7%

24.2%

1,582

13

$--.--

79

1,865

447

150

2,162

1,029

3,684

1,133

97

349

31

380

2008E

18.8%

134.6%

26.4%

1,614

14

$--.--

79

1,970

447

150

2,267

1,035

4,089

1,232

99

390

32

422

2009E

1,646

18.3%

146.5%

28.7%

17.9%

159.5%

31.2%

1,679

16

$--.--

$26.15
15

79

2,184

447

150

2,481

1,048

5,039

1,433

101

487

33

519

2011E

79

2,077

447

150

2,374

1,042

4,539

1,332

100

436

32

468

2010E

17.5%

173.5%

34.0%

1,713

17

$--.--

79

2,293

447

150

2,590

1,055

5,593

1,535

102

543

34

577

2012E

17.2%

188.8%

37.0%

1,747

18

$--.--

79

2,404

447

150

2,701

1,062

6,208

1,639

104

606

34

640

2013E

16.9%

205.5%

40.3%

1,782

19

$--.--

79

2,515

447

150

2,812

1,068

6,891

1,744

105

675

35

710

2014E

16.6%

223.6%

43.8%

1,818

20

$--.--

79

2,627

447

150

2,924

1,075

7,649

1,849

106

753

36

789

2015E

3.5
35.4
16.6
5.5
61.1
23.5
17.2
0.0
40.7

20.4
48.8
106.1
-

175.2

Invested capital calculation
Cash
Accounts receivable
Inventory
Other current assets
Current assets

Accounts payable
Accrued expenses
Income taxes payable
NIBCLs

Net working capital

Net P,P&E
Goodwill/other
Restructuring charges

Invested capital

61

1.4
0.0
6.5
7.8

319.7
361.3
-13.0%
99.1
159.7
4.8
23.8
7.8
16.0

1991

Adjusted taxes calculation
Tax provision
Deferred taxes
Tax shield
Adjusted taxes

NOPAT calculation
Sales
Cost of goods sold
Gross margin
S,G&A
Other income
Goodwill amortization
NOPBT
Adjusted taxes
NOPAT

Calendar year

156.1

46.0
90.7
-

19.3

20.2
11.3
0.0
31.6

3.5
30.6
10.8
6.0
50.9

0.0
0.0
3.5
3.6

351.3
309.8
11.8%
82.0
59.3
5.0
23.9
3.6
20.3

1992

Table 42
The Morningstar Group: Returns on Invested Capital

146.6

56.2
99.2
-

(8.8)

24.4
48.8
0.6
73.9

3.3
36.6
15.1
10.0
65.1

1.9
0.0
2.4
4.3

396.7
303.0
23.6%
84.9
0.0
4.2
13.0
4.3
8.7

1993

Packaged Food Industry Rate of Return Analysis

128.7

46.6
70.4
-

11.6

17.3
16.3
3.0
36.6

2.2
30.5
10.5
5.1
48.2

5.5
0.0
1.7
7.2

292.3
222.5
23.9%
51.8
0.0
2.8
20.9
7.2
13.7

1994

122.5

50.3
61.9
-

10.3

21.5
14.4
1.5
37.4

3.0
28.0
11.1
5.5
47.7

6.1
(3.1)
1.5
10.6

304.7
232.9
23.6%
51.4
0.0
2.3
22.7
10.6
12.1

1995

-

Cost of capital analysis
Cost of equity
Cost of debt
Debt/total capital
W ACC
Return on avg. inv. cap.
Econom ic profit
11.9%
6.7%
39.5%
9.8%
12.3%
4.0

32.6
16.6
3.9
7.6

6.8%
2.3
15.3%
15.0%
13.0%
(22.4)%

1992

11.0%
5.9%
55.5%
8.2%
5.7%
(3.7)

26.2
14.5
4.0
7.1

3.3%
2.7
8.9%
33.3%
5.9%
123.2%

1993

continued

62

4 .0 %

5 .0 %

6 .0 %

7 .0 %

8 .0 %

9 .0 %

1 0 .0 %

1 1 .0 %

1 2 .0 %

1 3 .0 %

1992

1993

W AC C

R O IC

1994

Chart 19
The Morningstar Group: ROIC vs. WACC

Federal Reserve System ; CS First Boston estim ates.

1995

1994

10.6%
6.1%
26.8%
9.4%
9.6%
0.3

27.4
17.2
4.9
6.1

7.5%
2.5
18.6%
46.8%
9.9%
25.8%

1995

(4 .0 )

(3 .0 )

(2 .0 )

(1 .0 )

0 .0

1 .0

2 .0

3 .0

4 .0

5 .0

1992

1993

1994

Chart 20
The Morningstar Group: Economic Profit

11.5%
6.8%
37.9%
9.7%
9.9%
0.3

27.7
12.3
4.2
6.3

7.2%
2.3
16.2%
34.5%
10.6%
(27.9)%

Source: Com pany published data; Datastream ; Annual Statistical Digest, Board of Governors of the

19.2
11.2
3.0
6.6

7.5%
1.8
13.6%
32.9%
9.1%
9.1%

1991

Capital turnover analysis
Inventory turns
Operating wkg. cap. turns
Goodwill/other turns
Net P,P&E turns

Return on invested capital calculation
NOPBT m argin
Capital turns
Pretax ROIC
Tax
Return on invested capital
Return on incr. inv. cap.

Table 42
The Morningstar Group: Returns on Invested Capital

Packaged Food Industry Rate of Return Analysis

1995

63

Value drivers: 1992-1995
Sales
Operating Income
Incremental Working Capital
Incremental Fixed Capital
Acquisitions
Other*

Free Cash Flow (FCF)

Change in net working capital
Fixed Capital (net of depreciation)
Acquisitions (net of divestitures)
Other*
Investment in future growth

Sales
EBIT
Adjusted taxes
Amortization of goodwill
Net operating profit after taxes (NOPAT)

-4.6%
4.9%
-98.9%
-13.0%
68.6%
-16.8%

30

($1)
(3)
(9)
3
(10)

1992
351.3
19
3.6
5.0
$20

(49)

$28
0
30
0
58

1993
396.7
9
4.3
4.2
$9

11

($1)
6
(3)
0
1

1995
304.7
20
11
2
$12

Rates of return on incremental investment
3 years

35

$20
3
(50)
5
(22)

1994
292.3
18
7.2
2.8
$14

Table 43
The Morningstar Group: Rates of Return on Incremental Investment

Packaged Food Industry Rate of Return Analysis

-30%

Definitions
NOPAT
= EBIT - adjusted taxes + goodwill
I
= Chg w.c.+Cap ex (net) + Acq. (net)
FCF
= NOPAT - I

64

FCF growth

22.30
25.47
28.95
32.77

5%
6%
7%
8%
9%

275

265
13.4%

1998E

26.1%

125.6%

27.41
31.23

20.76
23.92

4%
17.88

25.71
29.54

19.06
22.23

5%
16.19

23.85
27.67

17.20
20.36

6%
14.32

Invested capital growth

14.2%

289

3

$--.--

15

197

175

0

372

314

414

58

20

26

14

40

13.8%

15

185

175

123

175

175

0

360

9.9%

0

0

2

262

136

322

387

1

246

126

$--.--

270

126

38

23

$--.--

16

11

$--.--

16

11

27

87

17

11

10

15

9

1

15

26

12

(39)

1996E

1995A
37

1999E

21.79
25.62

15.15
18.31

7%
12.27

20.3%

14.4%

303

4

$--.--

15

209

175

0

384

307

443

78

20

28

14

43

2000E

20.7%

14.7%

318

5

$--.--

15

221

175

0

396

299

474

97

19

31

15

46

2001E

21.1%

15.0%

334

6

$--.--

15

233

175

0

408

292

507

116

19

33

16

49

2002E

21.5%

15.3%

351

7

$--.--

15

245

175

0

420

285

543

135

19

36

17

52

2003E

21.9%

15.6%

369

8

$--.--

15

256

175

0

431

278

581

153

18

38

18

56

2004E

22.3%

15.9%

387

9

$--.--

15

268

175

0

443

272

622

171

18

41

18

60

23.2%
14.6%

15.3%

16.5%

427

11

$--.--

15

290

175

0

465

259

712

206

18

48

20

69

2006E

12.7%

22.8%

16.2%

406

10

$--.--

15

279

175

0

454

265

665

189

18

45

19

64

2005E

15

9.6%
0

1997E

15
20

15%
175

15

10
12.7%
11.4%

FCF
15.3%

CAP

7%
5%

3%
19.42

Sensitivity Analysis

Rate of return on incremental capital

Return on invested capital (avg)

Invested capital

Year

Shareholder value per share

Shares outstanding

Shareholder value

Debt

Cash

Corporate Value

PV of Residual Value

Residual Value

Cumulative PV of FCF

PV of FCF

Free Cash Flow

Investment in future

NOPAT

Year 0 is normalized

Shares outstanding

WACC
Cash

Implied ROR on incremental capital
Debt

NOPAT growth
Invested capital growth

Table 44
The Morningstar Group: DCF Analysis

Packaged Food Industry Rate of Return Analysis

NOPAT growth

Price

14.0%

23.6%

16.8%

448

12

$--.--

15

301

175

0

476

252

761

224

17

52

21

73

2007E

$22.23

$22.23
$25.62

$18.60

13.5%

24.1%

17.1%

470

13

$--.--

15

312

175

0

487

246

815

241

17

56

22

79

2008E

13.1%

24.5%

17.4%

494

14

$--.--

15

323

175

0

498

240

872

257

17

60

24

84

2009E

519

12.7%

25.0%

17.8%

12.4%

25.5%

18.1%

544

16

$--.--

$22.23
15

15

344

175

0

519

229

998

290

16

70

26

96

2011E

15

333

175

0

508

235

933

274

16

65

25

90

2010E

12.1%

26.0%

18.4%

572

17

$--.--

15

354

175

0

529

223

1,068

306

16

76

27

103

2012E

11.9%

26.5%

18.8%

600

18

$--.--

15

364

175

0

539

218

1,143

321

16

82

29

110

2013E

11.6%

27.0%

19.1%

630

19

$--.--

15

374

175

0

549

213

1,223

337

15

88

30

118

2014E

11.4%

27.5%

19.5%

662

20

$--.--

15

384

175

0

559

208

1,308

352

15

95

32

126

2015E

112.0
313.0
700.0
43.0
1,168.0
1,282.0
0.0
43.0
1,325.0

(157.0)
2,537.0
7,466.0
-

9,846.0

Invested capital calculation
Cash
Accounts receivable
Inventory
Other current assets
Adjusted current assets

Accounts payable
Accrued expenses
Income taxes payable
NIBCLs

Net working capital

Net P,P&E
Goodwill/other
Restructuring charges

Invested capital

65

51.0
(80.0)
3.8
134.8

7,025.0
3,848.0
45.2%
2,463.0
0.0
218.0
932.0
134.8
797.2

1993

Adjusted taxes calculation
Tax provision
Deferred taxes
Tax shield
Adjusted taxes

NOPAT calculation
Sales
Cost of goods sold
Gross margin
S,G&A
Other income
Goodwill amortization
NOPBT
Adjusted taxes
NOPAT

calendar year

Table 45
Nabisco: Returns on Invested Capital

10,538.0

2,873.0
7,514.0
-

151.0

1,217.0
0.0
48.0
1,265.0

245.0
346.0
783.0
42.0
1,416.0

224.0
82.0
2.7
144.7

7,699.0
4,295.0
44.2%
2,517.0
0.0
225.0
1,112.0
144.7
967.3

1994

10,715.0

3,132.0
7,547.0
-

36.0

511.0
882.0
131.0
1,524.0

121.0
523.0
865.0
51.0
1,560.0

222.0
46.0
132.6
308.6

8,294.0
4,776.0
42.4%
2,616.0
0.0
227.0
1,129.0
308.6
820.4

1995

Packaged Food Industry Rate of Return Analysis

11.4%
4.9%
40.0%
8.8%
16.2%
364.1

C o st o f cap ital an alysis
C os t of equity
C os t of debt
D ebt/total c apital
W ACC
R eturn on av g. inv . c ap.
E c onom ic profit

275.3

66

6 .0 %

8 .0 %

1 0 .0 %

1 2 .0 %

1 4 .0 %

1 6 .0 %

1 8 .0 %

1 99 3

W ACC

R O IC

Chart 21
Nabisco: ROIC vs. WACC

B o s to n e s tim a te s .

1 99 4

D ig e s t, B o a rd o f G o v e rn o rs o f th e F e d e ra l R e s e rv e S y s te m ; C S F irs t

S ourc e: C o m p a n y p u b lis h e d d a ta ; D a ta s tre a m ; A n n u a l S ta tis tic a l

(9,048.8)

9.8
(87.5)
1.0
1.5

10.0
(26.1)
0.9
1.5

C ap ital tu rn o ver an alysis
Inv entory turns
O perating w k g. c ap. turns
G oodw ill/other turns
N et P ,P & E turns

F ree c as h flow

14.4%
0.7
10.6%
13.0%
9.2%
24.6%

11.9%
5.6%
41.9%
9.3%
9.5%
22.0

1994

R etu rn o n in vested cap ital calcu latio n
N O P B T m argin
13.3%
C apital turns
0.7
P retax R O IC
9.5%
T ax
14.5%
R eturn on inv es ted c apital
8.1%
R eturn on inc r. inv . c ap.
8.1%

continued

1993

Table 45
Nabisco: Returns on Invested Capital

1 99 5

643.4

11.3%
4.4%
34.0%
9.0%
7.7%
(131.6)

9.6
9.5
1.1
1.5

13.6%
0.8
10.5%
27.3%
7.7%
(83.0)%

1995

Packaged Food Industry Rate of Return Analysis

(1 5 0 . 0 )

(1 0 0 . 0 )

(5 0 .0 )

0 .0

5 0 .0

1 0 0 .0

1 5 0 .0

2 0 0 .0

2 5 0 .0

3 0 0 .0

3 5 0 .0

4 0 0 .0

1 99 3

Chart 22
Nabisco: Economic Profit

1 99 4

1 99 5

67

7.3%
10.8%
27.8%
51.9%
39.6%

(50)

Free Cash Flow (FCF)

Value drivers: 1992-1995
Sales
Operating Income
Incremental Working Capital
Incremental Fixed Capital
Acquisitions

$180
133
385
0
698

1992
$6,707
698
262
212
$649

Change in net working capital
Fixed Capital (net of depreciation)
Acquisitions (net of divestitures)
Other*
Investment in future growth

Sales
EBIT
Adjusted taxes
Amortization of goodwill
Net operating profit after taxes (NOPAT)

888

$60
185
(335)
0
(90)

1993
$7,025
714
135
218
$797

Table 46
Nabisco: Rates of Return on Incremental Investment

318

$104
269
129
0
502

1995
$8,294
902
309
227
$820

Rates of return on incremental investment
3 years

183

$97
237
449
0
783

1994
$7,699
886
145
225
$966

Packaged Food Industry Rate of Return Analysis

12%

Definitions
NOPAT
I
FCF

= EBIT - adjusted taxes + goodwill
= Chg w.c.+Cap ex (net) + Acq. (net)
= NOPAT - I

Packaged Food Industry Rate of Return Analysis
Table 47
Nabisco: Value Driver Matrix
Sales growth
Units
Pricing/mix

OCC
margins

Working and fixed
capital needs (a)

Business risk

Other risk (b)

$3,573

4-6%

1-2%

16-20%

small

low

low

Specialty

$571

3-5%

1-2%

25-29%

small

low

low

Planters

$525

0%

1-2%

8-11%

small

low

medium

Lifesavers

$522

4-5%

0%

8-10%

small

low

low

Fleischmanns/Parkay

$397

0%

1-2%

7-9%

small

low

low

Food Service

$432

5-7%

1-2%

22-26%

small

low

low

Canada

$607

2-3%

2-3%

8-10%

small

low

low

International

$1,667

20-30%

0%

11-13%

medium

medium

medium

$8,294

5-8%

1-2%

14-17%

small

small

small

($ in millions)

Sales base

Nabisco Biscuit

Nabisco
Source: Company published data, CS First Boston estimates.

Note: (a) Working and fixed capital needs as a % of change in sales (net of non-cash charges).
(b) Other risks include volatility in raw materials, currency risk and reinvestment risk.

68

69

FCF growth

4,726
4,946
267
$--.-1

4,726
4,067
267
$--.--

37.39
42.43
47.92
53.92
60.47

8%
9%

10%
11%

3%

9.9%
21.4%

21.1%

12,260

4%

50.53
57.08

39.04
44.53

34.00

3

$--.--

267

5,935

4,726

100

10,561

9,139

12,107

9.5%

11,676

267

5,547

4,726

100

10,173

9,208

11,107

1,422

458

606

46.83
53.37

35.33
40.83

30.3

5%

42.79
49.33

31.29
36.79

26.25

6%

Invested capital growth

9.0%

100

100

11,218

9,572

8,693

7.7%

2

9,132

8,347

10,715

$--.--

10,030

8,347

525
965

440
440

346
346

633

584

38.37
44.91

26.87
32.37

21.84

7%

18.3%

10.3%

12,873

4

$--.--

267

6,336

4,726

100

10,962

9,070

13,197

1,892

470

684

613

19.0%

10.7%

13,517

5

$--.--

267

6,750

4,726

100

11,376

9,001

14,384

2,374

482

770

644

19.8%

11.1%

14,192

6

$--.--

267

7,175

4,726

100

11,801

8,933

15,679

2,867

493

865

676

1,541

2002E

20.5%

11.5%

14,902

7

$--.--

267

7,611

4,726

100

12,237

8,866

17,090

3,371

503

970

710

1,680

2003E

21.3%

12.0%

15,647

8

$--.--

267

8,057

4,726

100

12,683

8,799

18,628

3,884

513

1,086

745

1,831

2004E

22.1%

12.4%

16,430

9

$--.--

267

8,512

4,726

100

13,138

8,733

20,305

4,405

522

1,213

782

1,996

FCF

23.8%
14.3%

14.6%

13.4%

18,114

11

$--.--

267

9,449

4,726

100

14,075

8,601

24,124

5,473

538

1,509

863

2,371

2006E

13.6%

14.6%
13.5%
12.7%

23.0%

12.9%

17,251

10

$--.--

267

8,976

4,726

100

13,602

8,667

22,132

4,936

530

1,354

821

2,175

483

2001E

346

458

1,414

503

2000E

474

1,297

2005E

1999E

986

820

1,190

1996E

1995A

1998E

14

9.8%
100
267

1,092

10
15
20

1997E

CAP

9%
5%
21%
4,726

7%

Sensitivity Analysis

Rate of return on incremental capital

Return on invested capital (avg)

Invested capital

Year

Shareholder value per share

Shares outstanding

Shareholder value

Debt

Cash

Corporate Value

PV of Residual Value

Residual Value

Cumulative PV of FCF

PV of FCF

Free Cash Flow

Investment in future

NOPAT

Year 0 is normalized

WACC
Cash
Shares outstanding

Invested capital growth
Implied ROR on incremental capital
Debt

NOPAT growth

Table 48
Nabisco: DCF Analysis

Packaged Food Industry Rate of Return Analysis

NOPAT growth

Price

14.1%

24.7%

13.9%

19,019

12

$--.--

267

9,929

4,726

100

14,555

8,537

26,295

6,018

545

1,679

906

2,584

2007E

$40.83

$33.59
$42.70
$52.33

13.8%

25.7%

14.5%

19,970

13

$--.--

267

10,416

4,726

100

15,042

8,472

28,661

6,570

552

1,866

951

2,817

2008E

13.6%

26.7%

15.0%

20,969

13.5%

27.7%

15.6%

22,017

15

$--.--

$40.83
14

267

11,410

4,726

100

16,036

8,345

34,053

7,691

563

2,298

1,048

3,347

2010E

267

10,910

4,726

100

15,536

8,408

31,241

7,128

558

2,072

999

3,071

2009E

13.3%

28.7%

16.2%

23,118

16

$--.--

267

11,915

4,726

100

16,541

8,282

37,117

8,259

568

2,547

1,101

3,648

2011E

13.1%

29.8%

16.8%

24,274

17

$--.--

267

12,426

4,726

100

17,052

8,219

40,458

8,832

573

2,821

1,156

3,976

2012E

13.0%

31.0%

17.4%

25,488

18

$--.--

267

12,941

4,726

100

17,567

8,157

44,099

9,410

577

3,121

1,214

4,334

2013E

12.9%

32.1%

18.1%

26,762

19

$--.--

267

13,460

4,726

100

18,086

8,096

48,068

9,991

581

3,450

1,274

4,724

2014E

12.7%

33.4%

18.8%

28,100

20

$--.--

267

13,984

4,726

100

18,610

8,035

52,394

10,575

585

3,812

1,338

5,150

2015E

11.4
353.1
344.6
45.8
754.9
147.4
142.9
19.7
310.0

444.9
618.4
93.4
-

Invested capital calculation
Cash
Accounts receivable
Inventory
Other current assets
Current assets

Accounts payable
Accrued expenses
Income taxes payable
NIBCLs

Net working capital

Net P,P&E
Goodwill/other
Restructuring charges

70

1,156.7

89.6
16.8
21.1
93.9

Adjusted taxes calculation
Tax provision
Deferred taxes
Tax shield
Adjusted taxes

Invested capital

252.3
93.9
158.4

2,576.2
1,634.4
36.6%
689.5
0.0

1982

NOPAT calculation
Sales
Cost of goods sold
Gross margin
S,G&A
Other income
Goodwill amortization
NOPBT
Adjusted taxes
NOPAT

fiscal year
y ends June*

1,154.4

616.3
86.0
-

452.1

140.0
150.9
18.4
309.3

26.0
361.3
286.1
88.0
761.4

100.6
22.2
19.3
97.7

2,611.3
1,576.3
39.6%
758.7
0.0
2.8
279.1
97.7
181.4

1983

Table 49
Quaker Oats: Returns on Invested Capital

1,343.1

730.6
110.3
-

502.2

196.1
197.0
11.9
405.0

33.4
484.9
356.6
32.3
907.2

121.4
60.3
27.6
88.7

3,344.1
2,073.1
38.0%
952.9
0.0
4.2
322.3
88.7
233.6

1984

1,343.9

693.4
136.0
-

514.5

179.1
214.7
50.0
443.8

33.5
505.1
374.5
45.2
958.3

130.3
13.3
22.9
139.9

3,348.0
2,019.1
39.7%
995.8
0.0
6.1
339.2
139.9
199.3

1985

1986

1,475.1

771.8
179.8
-

523.5

204.3
237.7
42.4
484.4

34.5
536.9
413.5
23.0
1,007.9

135.0
29.9
13.7
118.8

3,453.9
1,975.9
42.8%
1,136.3
0.0
4.8
346.5
118.8
227.7

Packaged Food Industry Rate of Return Analysis

2,214.4

982.0
471.5
-

760.9

278.9
382.0
59.1
720.0

44.2
752.9
486.4
197.4
1,480.9

172.7
60.0
15.6
128.3

4,420.6
2,436.6
44.9%
1,534.2
0.0
13.0
462.8
128.3
334.5

1987

2,181.2

922.5
539.6
-

719.1

262.2
363.3
41.5
667.0

45.1
555.0
413.8
372.2
1,386.1

118.1
(38.7)
10.2
167.0

4,508.0
2,397.0
46.8%
1,697.8
0.0
15.2
428.4
167.0
261.4

1988

2,434.0

959.6
646.4
-

828.0

333.8
350.1
8.0
691.9

23.7
594.4
479.1
422.7
1,519.9

90.2
80.0
16.9
27.1

4,879.4
2,655.3
45.6%
1,779.0
0.0
18.2
463.3
27.1
436.2

1989

2,563.1

1,154.1
690.7
-

718.3

354.0
372.7
36.3
763.0

18.3
629.9
473.9
359.2
1,481.3

153.5
19.3
38.9
173.1

5,030.6
2,685.9
46.6%
1,844.1
0.0
22.2
522.8
173.1
349.7

1990

2,202.7

1,232.7
525.3
-

444.7

350.9
417.4
45.1
813.4

30.2
691.1
422.3
114.5
1,258.1

175.7
39.0
33.0
169.7

5,491.2
2,839.7
48.3%
2,121.2
0.0
22.4
552.7
169.7
383.0

1991

2,064.8

1,273.3
510.4
-

281.1

420.2
465.8
49.7
935.7

55.8
575.3
435.3
150.4
1,216.8

173.9
(17.8)
25.6
217.4

5,576.4
2,817.7
49.5%
2,213.0
0.0
23.6
569.3
217.4
351.9

1992

1,904.7

1,228.2
520.1
20.7

135.7

391.6
502.9
33.7
928.2

57.3
478.9
354.0
173.7
1,063.9

180.8
20.8
20.9
180.9

5,730.6
2,858.4
50.1%
2,279.4
0.0
26.3
619.1
180.9
438.2

1993

2,011.5

1,214.2
575.5
51.4

170.4

406.3
555.5
40.6
1,002.4

59.6
509.4
385.5
218.3
1,172.8

190.9
(7.3)
34.1
232.3

5,955.0
2,926.2
50.9%
2,425.6
0.0
33.9
637.1
232.3
404.8

1994

3,595.2

1,113.4
2,396.9
70.4

14.5

423.8
660.1
180.1
1,264.0

63.7
546.8
406.0
262.0
1,278.5

119.5
10.1
42.1
151.5

6,365.2
3,381.5
46.9%
2,603.2
0.0
63.8
444.3
151.5
292.8

1995

17.1%
8.6%
30.9%
14.5%
-

7.5
4.7
27.6
4.2

14.6%
7.1%
25.2%
12.7%
15.7%
34.3

9.1
5.1
30.4
4.2

8.4
4.6
19.2
4.5

11.5%
5.1%
16.3%
10.4%
16.2%
80.7

8.9
4.8
24.6
4.8

14.1%
6.0%
13.8%
13.0%
14.8%
24.7

9.4
5.2
30.3
4.6

15.5%
7.0%
24.4%
13.4%
18.7%
66.1

10.0%
2.3
23.5%
34.3%
15.4%
21.7%

10.1%
2.5
25.2%
41.2%
14.8%
(4294.2)%

9.6%
2.5
24.0%
27.5%
17.4%
27.7%

11.3%
6.6%
20.7%
10.3%
18.1%
144.7

9.1
4.6
9.4
4.5

10.5%
2.0
20.9%
27.7%
15.1%
14.4%

1987

12.4%
6.3%
15.3%
11.4%
11.9%
10.1

10.9
6.4
8.4
4.9

9.5%
2.1
19.6%
39.0%
12.0%
220.1%

1988

71

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%

21.0%

WAC C

1988

23.0%

RO IC

1991

1994

1993

1992

1990

1989

1987

1986

1985

1984

1983

12.2%
5.8%
15.5%
11.2%
18.9%
176.9

10.2
6.6
7.5
5.1

9.5%
2.0
19.0%
5.9%
17.9%
69.1%

1989

0.0

50.0

100.0

150.0

200.0

250.0

1983

12.2%
6.0%
23.6%
10.7%
14.0%
81.4

10.6
6.7
7.3
4.4

10.4%
2.0
20.4%
33.1%
13.6%
(66.9)%

1990

Chart 24
Quaker Oats: Economic Profit

1984

Chart 23
Quaker Oats: ROIC vs. WACC

1995

Source: Company published data; Datastream; Annual Statistical Digest , Board of Governors of the Federal Reserve System; CS First Boston estimates.
* Starting in 1996, the fiscal year will end in December.

Cost of capital analysis
Cost of equity
Cost of debt
Debt/total capital
WACC
Return on avg. inv. cap.
Economic profit

Capital turnover analysis
Inventory turns
Operating wkg. cap. turns
Goodwill/other turns
Net P,P&E turns

10.7%
2.3
24.2%
35.0%
15.7%
(1001.7)%

1986

1985

1985

1986

1984

1987

Return on invested capital calculation
NOPBT margin
9.8%
Capital turns
2.2
Pretax ROIC
21.8%
Tax
37.2%
Return on invested capital
13.7%
Return on incr. inv. cap.

1988

continued

1989

1983

1990

1982

12.0%
5.5%
14.7%
11.1%
16.1%
119.5

13.0
7.2
10.5
4.5

10.1%
2.5
25.1%
30.7%
17.4%
(9.2)%

1991

1992

Table 49
Quaker Oats: Returns on Invested Capital
1992

11.8%
5.2%
16.2%
10.7%
16.5%
123.2

12.8
9.4
10.9
4.4

10.2%
2.7
27.6%
38.2%
17.0%
22.5%

1994

Packaged Food Industry Rate of Return Analysis

1995

1993

1991

1994

10.7%
3.0
31.7%
36.5%
20.1%
(31.2)%

15.4
12.2
10.3
4.9

11.8%
5.4%
17.7%
10.7%
20.7%
195.6

1993

10.8%
3.0
32.5%
29.2%
23.0%
(53.9)%

16.2
13.0
11.0
4.7

11.2%
4.5%
12.9%
10.3%
22.1%
233.7

11.4%
4.4%
27.4%
9.5%
10.4%
27.8

15.7
12.0
2.7
5.7

7.0%
1.8
12.4%
34.1%
8.1%
(7.1)%

1995

182

Free Cash Flow (FCF)

72

Source: Company published data.
* Includes cash outlays associated with restructuring.

4.8%
9.3%
35.4%
-61.0%
35.9%
51.7%
10.5%

$12
37
(33)
0
17

Change in net working capital
Capital Expenditures (net of depreciation)
Acquisitions (net of divestitures)
Other*
Investment in future growth

Value drivers 1990-1995
Sales
Operating Margin
Cash Tax Rate
Incremental Working Capital
Incremental Fixed Capital
Acquisitions
Other*

1985
$3,348
333
140
6.1
$199

Sales
EBIT
Adjusted taxes
Goodwill Amortization
Net operating profit after taxes (NOPAT)

166

$9
69
(16)
0
62

1986
$3,454
342
119
4.8
$228

244

($42)
63
(18)
14
18

1988
$4,508
413
167
15.2
$261

(9)

$109
155
86
95
445

1989
$4,879
445
27
18.2
$436

-300%

-250%

-200%

-150%

-100%

-50%1988

0%

50%

1989

-279%
17%
10%

336

($110)
135
(12)
0
14

1990
$5,031
501
173
22.2
$350

571

($274)
85.3
0.0
0.0
(188)

1991
$5,491
530
170
22.4
$383

1990

1991

1992

1993

488

($164)
44.1
(16.5)
0.0
(136)

1992
$5,576
546
217
23.6
$352

1994

Definitions
NOPAT
I
FCF

Rolling 3 year rate of return on incremental investment

Rates of return on incremental investment
3 years
5 years
10 years

(479)

$237
83
482
11
814

1987
$4,421
450
128
13.0
$334

Table 50
Quaker Oats: Rates of Return on Incremental Investment

Packaged Food Industry Rate of Return Analysis

181

$35
37.8
96.0
55.6
224

1994
$5,955
603
232
33.9
$405

1995

(338)

($156)
135.2
623.1
57.5
660

1995
$6,365
410
151
63.8
$322

= EBIT - adjusted taxes + goodwill
= Chg w.c.+Cap ex (net) + Acq. (net)
= NOPAT - I

508

($145)
41.7
(1.2)
27.6
(77)

1993
$5,731
586
181
26.3
$431

(288)

421

$371
50.0
0.0

StubE
$2,725
175
64
22.0
$133

889
407
384
130
1,810

52
19
13
22
107

24.6%
13.8%
11.2%
10.7%
18.3%

Identifiable Assets
US & Canadian Grocery
International Grocery Pro
Fisher Price
Specialty retailing
Total

Capital expenditures
US & Canadian Grocery
International Grocery Pro
Fisher Price
Specialty retailing
Total

Return on assets
US & Canadian Grocery
International Grocery Pro
Fisher Price
Specialty retailing
Total
22.8%
13.9%
10.3%
9.7%
17.2%

92
17
17
20
147

1,005
423
437
160
2,025

1986
229
59
45
16
349

73

4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
-

US &
Canadian
Grocery
Products

86%

International
Grocery
Products

14%

Identifiable assets, 1995

Source: Company published data, CS First Boston estimates

1985
218
56
43
14
331

Operating income
US & Canadian Grocery
International Grocery Pro
Fisher Price
Specialty retailing
Total

Table 51
Quaker Oats: Capital Allocation

15.5%
16.6%
13.5%
15.4%

138
26
18
182

2,179
536
534
3,250

1987
338
89
72
499

1991
411
97
508

198 8

198 9

199 0

199 1

199 2

199 3

199 4

1995

US & Canadian
Grocery Products
198 7

Fisher Price

Specialty retailing

9.3%
3.0%
8.4%

202
74
276

4,163
664
4,827

1995
386
20
405

0%
198 6

22.4%
10.3%
18.9%

124
51
175

2,185
859
3,043

1994
488
88
577

International Grocery
Products

198 5

21.4%
15.0%
19.6%

107
65
172

2,016
800
2,816

1993
432
120
552

Capital expenditures

18.4%
10.5%
16.0%

111
66
176

2,139
901
3,040

1992
393
95
488

20%

40%

60%

100%

17.6%
14.2%
16.8%

167
74
241

2,330
686
3,016

International Grocery
Products

12.9%
20.1%
14.6%

215
61
276

2,565
761
3,326

1990
331
153
484

80%

15.7%
21.7%
142.3%
39.0%

181
42
50
272

2,149
504
569
3,222

1989
337
109
810
1,256

US & Canadian Grocery
Products

15.2%
14.9%
17.1%
15.5%

144
26
38
207

1,952
471
552
2,975

1988
297
70
95
461

Packaged Food Industry Rate of Return Analysis

$564
$354
$633
$274
$371
$333
$200
$560
$903
$289
$433

Snapple (domestic)

Gatorade/Snapple (int'l)

R-T-E Cereals

Wholesome snacks

Hot Cereals

Golden Grain

Canada

Food service

Other

Europe

Latin America/Asia food

20%+

2-3%

0-1%

4-6%

0-1%

2-3%

3-4%

6-8%

2-3%

15%

5%

0%

2-3%

1-2%

1-2%

1-2%

1-2%

0%

1-2%

0%

0%

0%

Sales growth
Units
Pricing/Mix
5-7%
0%

4-6%

6-8%

9-11%

5-8%

5-7%

10-12%

27-30%

18-20%

13-15%

6-8%

0%

Operating
margins
13-15%

74

Quaker
Oats
$5,954
6-8%
0-2%
10-13%
5 yr avg
(90-95)
4.8%
9.0%
Source: The Quaker Oats Company, CS First Boston estimates.
Note: (a) Working and fixed capital needs as a % of change in sales (net of non-cash charges).
(b) Other risks include volatility in raw materials, currency risk and reinvestment risk.

Sales base
$1,040

($ in millions)
Gatorade (domestic)

Table 52
Quaker Oats: Value Driver Matrix

Packaged Food Industry Rate of Return Analysis

-14.6%

10-15%

medium

medium

small

small

small

small

small

small

small

medium

medium

Working and fixed
capital needs (a)
medium

low

high

Beta = 1.15

medium

low

low

low

low

low

low

low

medium

high

Business risk
medium

low

high

medium

low

low

low

low

low

low

low

low

medium

Other risk (b)
low

75

FCF growth

135
$--.-1

135
$--.--

35.82
39.56
43.64
48.08
52.92

13%
14%

1%

40.30
45.13

28.04
31.78
35.86

5%

42.9%

60.3% -582.9%

3,929

4

$--.--

135

2,326

1,400

0

3,726

11.5%

3,814

3

$--.--

135

2,066

1,400

0

3,466

2,842

4,237

884

222

330

114

445

1999E

10.6%

9.6%

3,703

135

1,816

1,400

0

3,216

2,804

3,783

662

212

286

111

397

1998E

Invested capital growth
2%
3%
4%
34.12
32.27
30.25
37.86
36.01
33.99
40.09
41.94
38.06
46.38
44.53
42.5
51.22
49.36
47.34

7.8%

1,210

1,742

3,711

1,400

1,400

8.1%

2

0

0

3,595

$--.--

2,610

3,142

3,378
2,766

2,715
2,457

2,789

450

296

362

(7)

355

1997E

Invested capital growth
3-year
5-year
10-year
19.8%
6.8%
10.2%

2,789

154

170

353

154

115

(60)

353

285

293

353

1996E

1995A

0
135

1,400
10.5%

12%
3%
64%

10%
11%
12%

Sensitivity Analysis

Rate of return on incremental capital

Return on invested capital (avg)

Invested capital

Year

Shareholder value per share

Shares outstanding

Shareholder value

Debt

Cash

Corporate Value

PV of Residual Value

Residual Value

Cumulative PV of FCF

PV of FCF

Free Cash Flow

Investment in future

NOPAT

Year 0 is normalized

Cash
Shares outstanding

Debt
WACC

NOPAT growth
Invested capital growth
Implied ROR on incremental capital

Table 53
Quaker Oats: DCF Analysis

46.6%

12.5%

4,047

5

$--.--

135

2,595

1,400

0

3,995

2,881

4,745

1,114

231

380

118

498

2000E

50.7%

13.6%

4,168

6

$--.--

135

2,874

1,400

0

4,274

2,920

5,315

1,354

240

437

121

558

2001E

55.2%

14.8%

4,293

7

$--.--

135

3,162

1,400

0

4,562

2,959

5,953

1,603

249

500

125

625

2002E

60.0%

16.1%

4,422

8

$--.--

135

3,459

1,400

0

4,859

3,000

6,667

1,860

257

571

129

700

2003E

Return on incremental capital
3-year
5-year
10-year
26.5%
4.1%
18.3%

Packaged Food Industry Rate of Return Analysis

NOPAT growth

65.2%

17.5%

4,555

9

$--.--

135

3,765

1,400

0

5,165

3,040

7,467

2,125

265

651

133

784

2004E

77.1%
8.2%

7.7%

20.7%

4,832

11

$--.--

135

4,403

1,400

0

5,803

3,124

9,366

2,679

281

843

141

983

2006E

70.9%

19.0%

4,691

10

$--.--

135

4,080

1,400

0

5,480

3,082

8,363

2,398

273

741

137

878

2005E

10.4%
9.3%

10
15
20
14

FCF
7.7%
9.6%

CAP

Price

8.7%

83.8%

22.5%

4,977

12

$--.--

135

4,734

1,400

0

6,134

3,166

10,490

2,968

289

956

145

1,101

2007E

$56.68
$40.09

$30.17
$42.71

9.0%

91.2%

24.4%

5,126

13

$--.--

135

5,073

1,400

0

6,473

3,209

11,749

3,264

296

1,084

149

1,233

2008E

9.3%

99.1%

26.6%

5,280

9.6%

107.8%

28.9%

5,438

15

$--.--

$40.09
14

135

5,775

1,400

0

7,175

3,297

14,738

3,878

311

1,389

158

1,547

2010E

135

5,420

1,400

0

6,820

3,253

13,159

3,567

303

1,228

154

1,382

2009E

9.8%

117.2%

31.4%

5,602

16

$--.--

135

6,137

1,400

0

7,537

3,342

16,507

4,196

318

1,570

163

1,733

2011E

10.0%

127.5%

34.1%

5,770

17

$--.--

135

6,508

1,400

0

7,908

3,387

18,488

4,521

325

1,773

168

1,941

2012E

10.1%

138.6%

37.1%

5,943

18

$--.--

135

6,885

1,400

0

8,285

3,433

20,706

4,852

332

2,001

173

2,174

2013E

10.3%

150.7%

40.4%

6,121

19

$--.--

135

7,271

1,400

0

8,671

3,480

23,191

5,191

339

2,256

178

2,435

2014E

10.4%

163.9%

43.9%

6,305

20

$--.--

135

7,663

1,400

0

9,063

3,527

25,974

5,536

345

2,543

184

2,727

2015E

0.2
40.9
82.4
10.8
134.3
78.6
0.0
0.7
79.3

55.0
412.6
79.5
-

547.1

Invested capital calculation
Cash
Accounts receivable
Inventory
Other current assets
Adjusted current assets

Accounts payable
Accrued expenses
Income taxes payable
NIBCLs

Net working capital

Net P,P&E
Goodwill/other
Restructuring charges

Invested capital

76

33.2
6.5
1.0
27.7

902.8
480.1
46.8%
334.4
0.0
0.0
88.3
27.7
60.6

1993

Adjusted taxes calculation
Tax provision
Deferred taxes
Tax shield
Adjusted taxes

NOPAT calculation
Sales
Cost of goods sold
Gross margin
S,G&A
Other income
Goodwill amortization
NOPBT
Adjusted taxes
NOPAT

fiscal year
y ends September
p

598.4

416.2
100.4
-

81.8

101.7
0.0
0.0
101.7

0.0
79.0
94.1
10.4
183.5

34.3
(1.6)
4.7
40.6

987.0
524.2
46.9%
362.5
0.0
0.0
100.3
40.6
59.7

1994

Table 54
Ralcorp Holdings: Returns on Invested Capital

588.1

434.4
49.0
-

104.7

69.4
33.4
0.0
102.8

0.0
86.3
110.1
11.1
207.5

21.4
(8.7)
10.7
40.8

1,013.4
530.4
47.7%
378.1
0.0
0.0
104.9
40.8
64.1

1995

Packaged Food Industry Rate of Return Analysis

-

Cost of capital analysis
Cost of equity
Cost of debt
Debt/total capital
WACC
Return on avg. inv. cap.
Economic profit

77

1995

0 .0

1994

1 .0

2 .0

3 .0

4 .0

5 .0

6 .0

7 .0

8 .0

1 9 94

Chart 26
Ralcorp Holdings: Economic Profit

9 .0 %

W ACC

11.8%
4.9%
33.1%
9.5%
10.8%
7.8

9 .2 %

9 .4 %

9 .6 %

9 .8 %

1 0 .0 %

1 0 .2 %

1 0 .4 %

1 0 .6 %

1 0 .8 %

1 1 .0 %

Chart 25
Ralcorp Holdings: ROIC vs. WACC

R O IC

12.1%
5.7%
38.9%
9.6%
10.4%
4.7

9.2
8.0
20.7
2.3

10.4%
1.7
17.8%
38.9%
10.9%
(42.3)%

10.2%
1.6
16.8%
40.5%
10.0%
(1.7)%

10.5
13.8
9.8
2.4

1995

continued

1994

Source: Company published data; Datastream; Annual Statistical
Digest, Board of Governors of the Federal Reserve
System; CS First Boston estimates.
Note : Spun-off Ralcorp 4/1994

11.0
20.2
11.4
2.2

Capital turnover analysis
Inventory turns
Operating wkg. cap. turns
Goodwill/other turns
Net P,P&E turns

1993
Return on invested capital calculation
NOPBT margin
9.8%
Capital turns
1.7
Pretax ROIC
16.1%
Tax
31.4%
Return on invested capital
11.1%
Return on incr. inv. cap.
(144.2)%

Table 54
Ralcorp Holdings: Returns on Invested Capital

Packaged Food Industry Rate of Return Analysis

1 9 95

78

Source: Company published data.
* Includes cash outlays associated with restructuring.

Value drivers: 1994-1995
Sales
Operating Income
Incremental Working Capital
Incremental Fixed Capital
Acquisitions
Other*

Change in net working capital
Fixed Capital (net of depreciation)
Acquisitions (net of divestitures)
Other*
Investment in future growth
\
Free Cash Flow (FCF)

Sales
EBIT
Adjusted taxes
Net operating profit after taxes (NOPAT)

0

(46)

1.3%
10.3%
188.3%
48.9%
148.5%
28.6%

$27
(7)
39
0
60

1994
987.0
100
41
$60

16
91
0
106

1993
902.8
88
28
$61

Definitions
NOPAT
I
FCF

22

$23
19
0
8
42

1995
1,013.4
105
41
$64

Table 55
Ralcorp Holdings: Rates of Return on Incremental Investment

Packaged Food Industry Rate of Return Analysis

= EBIT - adjusted taxes + goodwill
= Chg w.c.+Cap ex (net) + Acq. (net)
= NOPAT - I

Packaged Food Industry Rate of Return Analysis
Table 56
Ralcorp Holdings: Value Driver Matrix
(in $ millions)
Cereal

Sales base
$670

Units
3%

Sales growth
Pricing/Mix
2%

Operating
margins
12-13%

Working and fixed
capital needs (a)
small

Business risk
low

Other risk (b)
low

Baby Food

$147

0%

2%

7-9%

small

low

low

Cookie & Cracker

$69

2%

2%

4-8%

small

low

low

Resorts

$127

8%

0%

4-5%

small

low

low

$1,013

2-3%

1-2%

10-12%

20-30%

low

low

Ralcorp Holdings

(a)Working and fixed capital needs as a percent of change in sales.
(b)Other risks include volatility in raw materials, currency risk, and reinvestment risk.
Source: Company published data, CS First Boston estimates.

79

Packaged Food Industry Rate of Return Analysis
Table 57
Ralcorp Holdings: Sum of the Parts Analysis
Ski resorts:

Branded cereal:

What is left:

Current value:

$570 million
* $210-240 million
* $330-360 million of GIS stock

Private label cereal
Beech Nut baby food
Cookie & cracker
Total
$1,070 million
* $380 million debt
* $690 million equity

Aggregate deal value:

$880 million

Stub value:

$190 million

Multiples:

80

$310 million
* $165 million (debt)
* $145 milion (22% of Vail)

0.4x sales ; 6.3x EBITDA

Sales
$250
150
80
$480

EBITDA
$5
15
10
$30

48.0
228.7
412.3
60.0
749.0
236.0
211.7
18.7
466.4

282.6
1,181.0
118.6
-

1,582.2

Invested capital calculation
Cash
Accounts receivable
Inventory
Other current assets
Current assets

Accounts payable
Accrued expenses
Income taxes payable
NIBCLs

Net working capital

Net P,P&E
Goodwill/other
Restructuring charges

Invested capital

81

85.9
(38.0)
21.9
145.8

4,802.6
3,672.6
23.5%
751.2
0.0
0.0
378.8
145.8
233.1

1982

Adjusted taxes calculation
Tax provision
Deferred taxes
Tax shield
Adjusted taxes

NOPAT calculation
Sales
Cost of goods sold
Gross margin
S,G&A
Other income
Goodwill amortization
NOPBT
Adjusted taxes
NOPAT

fiscal year ends September

1,463.1

1,080.6
143.0
-

239.5

490.3
20.0
9.7
520.0

48.8
255.7
382.8
72.2
759.5

207.3
33.8
16.2
189.7

4,872.4
3,559.4
26.9%
814.5
0.0
0.0
498.5
189.7
308.8

1983

1,438.2

1,053.7
130.3
-

254.2

474.7
20.5
8.9
504.1

49.6
276.5
359.4
72.8
758.3

195.1
5.9
17.0
206.2

4,980.1
3,652.8
26.7%
814.6
0.0
0.0
512.7
206.2
306.5

1984

Table 58
Ralston Purina: Returns on Invested Capital

1,819.3

1,501.4
193.3
-

124.6

595.9
20.0
16.7
632.6

58.7
259.9
359.4
79.2
757.2

225.0
1.8
51.9
275.1

5,863.9
3,708.4
36.8%
1,561.3
0.0
0.0
594.2
275.1
319.1

1985

2,952.9

1,973.0
637.1
-

342.8

822.8
21.0
45.3
889.1

55.0
478.7
631.7
66.5
1,231.9

287.6
6.5
61.9
343.0

5,514.6
3,177.9
42.4%
1,678.8
0.0
18.8
676.7
343.0
333.7

1986

Packaged Food Industry Rate of Return Analysis

2,731.2

1,731.3
628.6
-

371.3

784.9
21.7
61.1
867.7

58.6
512.8
577.6
90.0
1,239.0

237.9
16.0
76.3
298.2

5,868.0
3,134.6
46.6%
2,017.7
0.0
78.6
794.3
298.2
496.1

1987

2,828.4

1,711.9
595.2
-

521.3

753.1
25.6
92.6
871.3

59.0
526.9
559.9
246.8
1,392.6

242.4
27.5
83.0
297.9

5,875.9
3,114.7
47.0%
1,955.1
0.0
51.5
857.6
297.9
559.7

1988

3,068.2

1,765.6
743.8
-

558.8

824.9
33.8
89.5
948.2

66.6
636.3
677.8
126.3
1,507.0

224.5
18.3
82.7
288.9

6,658.3
3,653.2
45.1%
2,213.8
0.0
50.0
841.3
288.9
552.4

1989

3,396.0

2,032.5
755.8
-

607.7

839.8
34.2
63.5
937.5

71.0
672.8
702.1
99.3
1,545.2

258.7
21.7
78.9
315.9

7,101.4
3,864.1
45.6%
2,356.9
0.0
68.5
948.9
315.9
633.0

1990

3,517.1

2,183.7
758.2
-

575.2

917.1
38.3
61.4
1,016.8

74.0
672.0
735.5
110.5
1,592.0

255.9
9.8
79.3
325.4

7,375.8
3,974.3
46.1%
2,513.8
0.0
49.7
937.4
325.4
612.0

1991

3,993.9

2,306.4
1,045.5
22.9

619.1

1,057.8
39.7
63.7
1,161.2

59.5
833.9
775.7
111.2
1,780.3

221.4
(9.8)
92.3
323.5

7,752.4
4,223.1
45.5%
2,716.2
0.0
54.5
867.6
323.5
544.1

1992

3,974.5

2,331.6
931.6
22.9

688.4

1,041.7
40.8
25.1
1,107.6

57.9
763.2
803.7
171.2
1,796.0

239.1
13.4
90.5
316.2

7,902.2
4,322.0
45.3%
2,755.3
0.0
63.7
888.6
316.2
572.4

1993

3,567.6

1,897.4
851.8
63.2

755.2

984.3
39.1
31.7
1,055.1

77.1
829.1
729.9
174.2
1,810.3

186.1
(65.6)
76.8
328.5

5,234.8
3,029.6
42.1%
1,527.0
0.0
43.5
721.7
328.5
393.2

1994

3,425.4

1,350.9
1,157.7
88.6

828.2

875.5
36.4
22.9
934.8

44.3
801.4
766.2
151.1
1,763.0

228.4
(6.0)
72.5
306.9

5,622.1
3,271.9
41.8%
1,605.7
0.0
50.0
794.5
306.9
487.6

1995

3,661.3

1,455.9
1,160.2
88.6

956.6

407.9
507.7
0.0
915.6

61.1
845.6
816.2
149.3
1,872.2

214.7
(3.6)
72.3
290.6

6,114.3
3,668.1
40.0%
1,660.9
0.0
57.0
842.3
290.6
551.7

1996

16.2%
7.2%
24.6%
14.0%
-

11.6
11.9
40.5
4.1

14.6%
6.8%
13.1%
13.6%
20.3%
101.5

12.7
32.9
34.1
4.5

15.5%
7.2%
11.6%
14.6%
21.1%
95.2

13.9
30.9
38.2
4.7

14.2%
6.5%
20.2%
12.6%
19.6%
113.3

16.3
250.6
30.3
3.9

10.1%
3.2
32.7%
46.3%
17.5%
3.3%

13.5%
2.1
29.1%
37.5%
18.2%
(73.2)%

10.2
19.2
9.3
3.4

11.1%
7.0%
23.0%
10.2%
17.5%
206.2

12.3%
1.9
22.9%
50.7%
11.3%
1.3%

8.7
19.2
8.7
2.8

11.7%
5.5%
30.5%
9.8%
14.0%
98.9

12.2%
6.8%
23.7%
10.9%
20.1%
255.6

10.5
17.6
9.9
3.4

14.6%
2.1
30.3%
34.7%
19.8%
65.4%

82

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

WACC

1988

22.0%

ROIC

1993

1989

1987

1986

1985

1984

1983

1996

1995

1994

1992

1991

1990

11.9%
6.1%
28.8%
10.2%
18.7%
251.3

9.8
13.6
9.0
3.8

12.6%
2.2
27.4%
34.3%
18.0%
(3.0)%

1989

12.5%
6.6%
30.0%
10.7%
19.6%
287.3

10.1
13.3
9.4
3.5

13.4%
2.1
27.9%
33.3%
18.6%
24.6%

1990

0.0

50.0

100.0

150.0

200.0

250.0

300.0

1991

11.7%
5.9%
29.6%
10.0%
17.7%
267.9

10.0
15.0
9.7
3.4

12.7%
2.1
26.7%
34.7%
17.4%
(17.3)%

Chart 28
Ralston Purina: Economic Profit

1983

Chart 27
Ralston Purina: ROIC vs. WACC

1984

Note : 1994 and following figures refer to Ralston Purina Group; prior to 1994, Ralston Purina Company.

Source: Company published data; Datastream; Annual Statistical Digest , Board of Governors of the Federal Reserve System; CS First Boston estimates.

Cost of capital analysis
Cost of equity
Cost of debt
Debt/total capital
WACC
Return on avg. inv. cap.
Economic profit

Capital turnover analysis
Inventory turns
Operating wkg. cap. turns
Goodwill/other turns
Net P,P&E turns

10.3%
3.5
35.6%
40.2%
21.3%
9.2%

1988

1985

10.2%
3.3
34.1%
38.1%
21.1%
(63.6)%

1987

1986

1986

1985

1987

Return on invested capital calculation
NOPBT margin
7.9%
Capital turns
3.0
Pretax ROIC
23.9%
Tax
38.5%
Return on invested capital
14.7%
Return on incr. inv. cap.
-

1988

continued

1989

1984

1990

1983

1991

1982

11.5%
5.3%
37.1%
9.2%
14.5%
197.7

10.0
14.0
7.4
3.4

11.2%
1.9
21.7%
37.3%
13.6%
(14.2)%

1992

1993

Table 58
Ralston Purina: Returns on Invested Capital
1994

13.8%
1.5
20.2%
45.5%
11.0%
44.1%

7.2
9.1
6.1
2.8

11.5%
5.6%
31.7%
9.6%
10.4%
30.4

1993

11.2%
2.0
22.4%
35.6%
14.4%
(146.0)%

9.8
15.0
8.5
3.4

10.8%
4.6%
38.7%
8.4%
14.4%
237.6

1995

Packaged Food Industry Rate of Return Analysis

1996

1994

1992

11.0%
4.9%
29.2%
9.2%
13.9%
165.2

7.3
8.1
4.9
4.2

14.1%
1.6
23.2%
38.6%
14.2%
(66.4)%

1995

11.0%
4.8%
25.7%
9.4%
15.6%
218.6

7.5
4.9
5.3
4.2

13.8%
1.7
23.0%
34.5%
15.1%
27.2%

1996

(111)

Free Cash Flow (FCF)

83

Source: Company published data.
* Includes cash outlays associated with restructuring.

-4.6%
11.7%
39.9%
-18.2%
-27.4%
-46.7%
-2.6%

($130)
85
475
0
430

Change in net working capital
Capital Expenditures (net of depreciation)
Acquisitions (net of divestitures)
Other*
Investment in future growth

Value drivers 1990-1995
Sales
Operating Margin
Cash Tax Rate
Incremental Working Capital
Incremental Fixed Capital
Acquisitions
Other*

1985
$5,864
594
275
0
$319

Sales
EBIT
Adjusted taxes
Amortization of goodwill
Net Operating Profit after taxes (NOPAT)

(953)

$218
(97)
1,117
48
1,287

1986
$5,515
658
343
19
$334

384

$150
25
0
0
175

1988
$5,876
806
298
52
$560

599

$38
32
(136)
20
(47)

1989
$6,658
791
289
50
$552

-40%

-30%

-20%

1988
-10%

0%

10%

20%

30%

1989

-3%
-5%
9%

369

$49
132
55
0
236

1990
$7,101
852
316
69
$605

455

($33)
185
0
0
153

1991
$7,376
884
325
50
$608

1990

1991

1992

1993

153

$44
26
315
0
385

1992
$7,752
807
324
55
$538

1994

1995

Definitions
NOPAT
I
FCF

Rolling 3 year rate of return on incremental investment

Rates of return on incremental investment
3 years
5 years
10 years

971

$29
(8)
(516)
3
(492)

1987
$5,868
699
298
79
$479

Table 59
Ralston Purina: Rates of Return on Incremental Investment

Packaged Food Industry Rate of Return Analysis

253

$67
35
39
10
151

1994**
$5,235
689
329
44
$404

1996

= EBIT - adjusted taxes + goodwill
= Chg w.c.+Cap ex (net) + Acq. (net)
= NOPAT - I

318

$69
42
143
0
255

1993
$7,902
825
316
64
$572

263

$73
(16)
138
29
224

1995
$5,622
745
307
50
$488

324

$128
74
25
0
228

1996
$6,114
785
291
57
$552

1,689
188
479
2,356

97
13
38
147

27.0%
11.8%
14.4%
23.2%

Assets at year end
Pet & human foods
Other consumer products
Agricultural products
Total

Property additions
Pet & human foods
Other consumer products
Agricultural products
Total

Return on assets
Pet & human foods
Other consumer products
Agricultural products
Total
30.3%
2.4%
17.9%
15.6%

119
14
32
165

1,734
2,008
468
4,210

1986
525
49
84
658

84

-

500

1,000

1,500

2,000

2,500

3,000

Pet &
hum an
foods

25%

O ther
consum er
products

65%

Agricultural
products

10%

Assets at year end, 1995

Source: Company published data, CS First Boston estimates

1985
456
22
69
547

Operating profit
Pet & human foods
Other consumer products
Agricultural products
Total

Table 60
Ralston Purina: Capital Allocation

31.5%
8.1%
18.6%
18.7%

132
44
7
183

1,664
2,018
182
3,864

1987
524
164
34
721

Agricultural products

Other consumer
products

Pet & human foods

37.1%
9.1%
14.3%
20.7%

128
62
15
204

1,558
2,033
302
3,893

1988
578
186
43
807

Packaged Food Industry Rate of Return Analysis

32.7%
7.8%
17.0%
17.9%

107
78
22
207

1,667
2,421
294
4,382

1989
545
190
50
784

37.9%
8.9%
14.5%
20.1%

136
154
41
331

1,640
2,434
320
4,395

1990
621
216
46
884

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

27.1%
10.6%
14.3%
16.7%

164
125
22
311

1,816
2,920
335
5,072

1993
492
310
48
850

Property additions

28.3%
9.2%
9.9%
16.0%

155
125
27
308

1,814
2,957
379
5,151

1992
513
272
38
822

23.7%
11.2%
11.9%
15.3%

153
135
22
309

1,491
2,769
362
4,622

1994
353
311
43
708

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

33.8%
10.4%
12.3%
19.7%

192
136
47
375

1,809
2,474
349
4,632

1991
612
257
43
912

Pet & human
foods

Other
consum er
products

Agricultural
products

30.4%
12.1%
9.3%
16.4%

51
121
35
208

1,145
2,965
457
4,567

1995
348
358
43
748

$395

$1,229

$6,114

Soy Protein

Agricultural Products

Ralston Purina
Group

1-2%

5%

8%

0%

Units
2-3%

85

Source:Ralston Purina Company, CS First Boston estimates.

(b)Other risks include volatility in raw materials, currency risk, and reinvestment risk.

5-6%

0%

2%

6-7%

Sales growth
Pricing/Mix
1-2%

(a)Working and fixed capital needs as a percent of change in sales.

$2,390

Sales base
$2,100

Eveready Battery

(in $ millions)
Pet foods

Table 61
Ralston Purina: Value Driver Matrix

13-14%

4-5%

18-20%

12-14%

Operating
margins
18-19%

Packaged Food Industry Rate of Return Analysis

20-30%

medium

small

small

Working and fixed
capital needs (a)
small

low

low

low

low

Business risk
low

low

low

low

low

Other risk (b)
low

86

FCF growth

102
$--.-1

102
$--.--

85.10
95.29
106.65
119.34

6%

7%
8%
9%
10%

19.0%
-26.4%

-23.4%

3,493

3

$--.--

102

5,224

1,689

0

6,913

17.6%

3,296

102

4,950

1,689

0

6,639

5,245

6,867

1,668

342

448

198

645

1999E

Invested capital growth
5%
6%
7%
72.50
68.63
64.31
81.63
77.76
73.43
87.94
91.82
83.62
103.18
99.31
94.98
115.86
111.99 107.67

3,476

4,378

4,988

15.5%

1,689

1,689

15.1%

2

0

0

3,661.3

$--.--

6,068

6,678

6,359
5,313

5,898
5,392

5,870

1,326

650

778

(181)

598

1998E

5,870

676

739

808

676

(185)

(256)

808

554

552

808

1997E

1996A

102

8%
6%
40%
1,689
9.4%
0

4%
75.98

Sensitivity Analysis

Rate of return on incremental capital

Return on invested capital (avg)

Invested capital

Year

Shareholder value per share

Shares outstanding

Shareholder value

Debt

Cash

Corporate Value

PV of Residual Value

Residual Value

Cumulative PV of FCF

PV of FCF

Free Cash Flow

Investment in future

NOPAT

Year 0 is normalized

Shares outstanding

NOPAT growth
Invested capital growth
Implied ROR on incremental capital
Debt
WACC
Cash

Table 62
Ralston Purina: DCF Analysis

68.61
78.79
90.16
102.84

8%
59.48

26.1%

19.4%

3,703

4

$--.--

102

5,497

1,689

0

7,187

5,178

7,417

2,008

340

487

210

697

2000E

26.6%

19.7%

3,925

5

$--.--

102

5,770

1,689

0

7,459

5,112

8,010

2,347

339

531

222

753

2001E

27.1%

20.1%

4,160

6

$--.--

102

6,041

1,689

0

7,731

5,047

8,651

2,684

337

578

235

813

2002E

Packaged Food Industry Rate of Return Analysis

NOPAT growth

27.6%

20.5%

4,410

7

$--.--

102

6,312

1,689

0

8,001

4,982

9,343

3,019

335

628

250

878

2003E

28.1%

20.9%

4,675

8

$--.--

102

6,581

1,689

0

8,271

4,918

10,090

3,352

333

684

265

948

2004E

28.7%

21.3%

4,955

9

$--.--

102

6,850

1,689

0

8,539

4,856

10,898

3,684

331

744

280

1,024

2005E

29.8%
0.8%

0.0%

22.1%

5,568

11

$--.--

102

7,383

1,689

0

9,073

4,732

12,711

4,341

327

879

315

1,195

29.2%

21.7%

5,253

10

$--.--

102

7,117

1,689

0

8,807

4,794

11,770

4,013

329

809

297

1,106

2007E

10
15
20
17

2006E

FCF
0.0%
2.8%
4.2%
3.5%

CAP

Price

1.4%

30.3%

22.5%

5,902

12

$--.--

102

7,648

1,689

0

9,338

4,672

13,728

4,666

325

956

334

1,290

2008E

$95.45
$82.86
$69.91
$87.94

2.0%

30.9%

22.9%

6,256

13

$--.--

102

7,912

1,689

0

9,601

4,612

14,826

4,989

323

1,039

354

1,393

2009E

2.4%

31.5%

23.4%

6,631

14

$--.--

102

8,174

1,689

0

9,864

4,553

16,012

5,311

321

1,130

375

1,505

2010E

2.8%

32.1%

23.8%

7,029

15

$--.--

102

8,435

1,689

0

10,124

4,495

17,293

5,630

319

1,227

398

1,625

2011E

3.2%

32.7%

24.2%

7,451

16

$--.--

102

8,694

1,689

0

10,384

4,437

18,677

5,946

317

1,334

422

1,755

2012E

3.5%

33.3%

24.7%

7,898

3.8%

33.9%

25.2%

8,372

18

$--.--

$87.94
17

102

9,209

1,689

0

10,898

4,325

21,785

6,573

312

1,573

474

2,047

2014E

102

8,952

1,689

0

10,642

4,381

20,171

6,261

315

1,449

447

1,896

2013E

4.0%

34.6%

25.6%

8,874

19

$--.--

102

9,464

1,689

0

11,153

4,270

23,527

6,883

310

1,709

502

2,211

2015E

4.2%

35.2%

26.1%

9,406

20

$--.--

102

9,717

1,689

0

11,406

4,215

25,410

7,191

308

1,856

532

2,388

2016E

765.1
252.0
-

Net P,P&E
Goodwill/other
Restructuring charges

87

1,629.5

612.4

Net working capital

Invested capital

736.9
0.0
8.0
744.8

60.4
497.6
765.1
34.1
1,357.2

Invested capital calculation
Cash
Accounts receivable
Inventory
Other current assets
Current assets

Accounts payable
Accrued expenses
Income taxes payable
NIBCLs

100.6
20.9
10.7
90.4

6,039.0
4,056.5
32.8%
1,687.2
0.0
6.9
302.2
90.4
211.8

1982

Adjusted taxes calculation
Tax provision
Deferred taxes
Tax shield
Adjusted taxes

NOPAT calculation
Sales
Cost of goods sold
Gross margin
S,G&A
Other income
Goodwill amortization
NOPBT
Adjusted taxes
NOPAT

fiscal year
y ends June

1,575.4

825.6
259.2
-

490.6

881.8
0.0
23.3
905.2

65.7
544.2
761.3
24.6
1,395.7

113.3
48.4
16.4
81.3

6,572.0
4,394.1
33.1%
1,845.6
0.0
9.1
341.5
81.3
260.1

1983

1,758.9

837.9
290.1
-

631.0

926.3
0.0
7.0
933.3

70.0
580.9
863.3
50.1
1,564.3

126.0
71.3
10.6
65.4

7,000.0
4,730.8
32.4%
1,924.9
0.0
11.2
355.6
65.4
290.2

1984

1985

2,109.3

946.3
627.0
-

536.0

441.3
586.7
20.5
1,048.5

81.2
583.8
883.0
36.4
1,584.4

139.1
48.4
21.2
111.9

8,117.0
5,604.0
31.0%
2,121.7
0.0
18.2
409.5
111.9
297.6

Table 63
Sara Lee Corporation: Returns on Invested Capital

2,364.7

996.3
705.7
-

662.8

404.6
595.6
39.7
1,040.0

79.4
651.0
936.3
36.0
1,702.7

132.1
(24.5)
25.8
182.5

7,938.0
5,403.1
31.9%
2,122.8
0.0
23.1
435.1
182.5
252.6

1986

Packaged Food Industry Rate of Return Analysis

2,566.2

1,240.6
874.4
-

451.3

510.6
766.3
20.9
1,297.8

91.5
610.0
1,011.7
35.8
1,749.0

180.8
(2.2)
26.0
209.0

9,154.6
6,309.6
31.1%
2,328.7
0.0
33.6
549.9
209.0
340.9

1987

3,162.2

1,416.7
1,417.7
-

327.8

769.7
905.2
11.8
1,686.7

104.2
717.5
1,127.5
65.3
2,014.5

188.0
18.4
36.6
206.1

10,424.0
7,096.8
31.9%
2,717.5
0.0
53.1
662.8
206.1
456.7

1988

4,369.0

1,773.0
2,061.0
-

535.0

966.5
988.1
10.1
1,964.7

117.5
813.7
1,452.0
116.6
2,499.7

229.0
47.5
50.6
232.1

11,718.0
8,040.4
31.4%
2,936.1
0.0
65.4
806.8
232.1
574.7

1989

5,311.4

2,204.1
2,432.6
-

674.6

884.3
1,187.7
68.5
2,140.5

116.1
922.2
1,653.7
123.0
2,815.0

243.0
58.9
55.3
239.4

11,606.0
7,754.7
33.2%
2,992.3
0.0
82.9
941.9
239.4
702.5

1990

5,857.2

2,389.1
2,702.9
-

765.3

863.7
1,237.7
52.2
2,153.6

123.8
946.0
1,706.9
142.1
2,918.9

295.0
127.6
45.8
213.2

12,381.0
8,072.1
34.8%
3,359.2
0.0
91.6
1,041.3
213.2
828.1

1991

6,828.4

2,573.0
3,535.0
-

720.4

1,110.0
1,795.0
4.0
2,909.0

132.4
1,180.0
2,160.0
157.0
3,629.4

340.0
(45.0)
35.6
420.6

13,243.0
8,306.0
37.3%
3,891.0
0.0
118.4
1,164.4
420.6
743.7

1992

7,477.8

2,878.0
3,803.0
-

796.8

1,151.0
1,799.0
50.0
3,000.0

145.8
1,171.0
2,280.0
200.0
3,796.8

378.0
24.0
31.2
385.2

14,580.0
9,039.0
38.0%
4,377.0
0.0
139.4
1,303.4
385.2
918.3

1993

8,139.0

2,900.0
4,154.0
205.6

879.4

1,253.0
2,290.0
13.0
3,556.0

155.4
1,472.0
2,567.0
241.0
4,435.4

392.1
56.2
55.1
391.0

15,536.0
9,700.0
37.6%
4,570.0
0.0
154.3
1,420.3
391.0
1,029.3

1994

8,438.8

2,964.0
4,430.0
205.6

839.2

1,436.0
2,562.0
66.0
4,064.0

177.2
1,653.0
2,830.0
243.0
4,903.2

415.0
(17.0)
70.3
502.3

17,719.0
11,023.0
37.8%
5,292.0
0.0
164.6
1,568.6
502.3
1,066.3

1995

8,562.6

3,007.0
4,514.0
205.6

836.0

1,592.0
2,495.0
101.0
4,188.0

186.0
1,728.0
2,807.0
303.0
5,024.0

462.0
60.0
65.7
467.7

18,624.0
11,470.0
38.4%
5,603.0
0.0
180.0
1,731.0
467.7
1,263.3

1996

17.5%
8.6%
29.2%
14.9%
-

7.9
11.5
24.0
7.9

15.2%
6.6%
27.5%
12.8%
16.2%
54.9

8.6
15.5
25.4
8.0

15.8%
7.7%
22.7%
14.0%
17.4%
57.3

8.1
13.5
24.1
8.4

14.7%
6.2%
21.3%
12.9%
15.4%
48.6

9.2
7.9
12.9
8.6

9.0
8.2
10.5
7.4

11.7%
6.0%
15.3%
10.8%
13.8%
74.3

8.5
6.7
11.2
8.0

12.1%
5.1%
16.0%
11.0%
11.3%
6.1

12.9%
6.3%
19.8%
11.6%
15.9%
124.3

9.2
9.7
7.4
7.4

6.4%
3.3
21.0%
31.1%
14.4%
19.4%

88

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

WACC

1988

17.0%
ROIC

1990

18.0%

1991

1989

1987

1986

1985

1984

1983

1994

1993

1992

12.9%
5.8%
22.7%
11.3%
15.3%
150.3

8.1
9.0
5.7
6.6

6.9%
2.7
18.5%
28.8%
13.2%
9.8%

12.8%
5.9%
21.8%
11.3%
14.5%
155.6

7.0
6.9
4.8
5.3

8.1%
2.2
17.7%
25.4%
13.2%
13.6%

1990

12.2%
5.8%
15.9%
11.2%
14.8%
203.6

7.3
6.9
4.6
5.2

8.4%
2.1
17.8%
20.5%
14.1%
23.0%

1991

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

Chart 30
Sara Lee Corporation: Economic Profit

1983

Chart 29
Sara Lee Corporation: ROIC vs. WACC

1995

Source: Company published data; Datastream; Annual Statistical Digest , Board of Governors of the Federal Reserve System; CS First Boston estimates.

Cost of capital analysis
Cost of equity
Cost of debt
Debt/total capital
WACC
Return on avg. inv. cap.
Economic profit

Capital turnover analysis
Inventory turns
Operating wkg. cap. turns
Goodwill/other turns
Net P,P&E turns

6.0%
3.6
21.4%
38.0%
13.3%
43.8%

5.5%
3.4
18.4%
41.9%
10.7%
(17.6)%

1984

5.0%
3.8
19.4%
27.3%
14.1%
2.1%

1996

1989

1985

5.1%
4.0
20.2%
18.4%
16.5%
16.4%

1988

1986

5.2%
4.2
21.7%
23.8%
16.5%
(89.4)%

1987

1986

1987

Return on invested capital calculation
NOPBT margin
5.0%
Capital turns
3.7
Pretax ROIC
18.5%
Tax
29.9%
Return on invested capital
13.0%
Return on incr. inv. cap.
-

1988

continued

1989

1985

1990

1984

1991

1983

1992

12.0%
5.3%
12.6%
11.2%
11.7%
36.1

6.1
5.9
3.7
5.1

8.8%
1.9
17.1%
36.1%
10.9%
(8.7)%

1992

1982

1993

Table 63
Sara Lee Corporation: Returns on Invested Capital

11.4%
4.7%
17.0%
10.2%
12.8%
185.4

6.4
6.3
3.8
5.1

8.9%
1.9
17.4%
29.5%
12.3%
26.9%

1993

1995

Packaged Food Industry Rate of Return Analysis

1996

1994

1995

8.9%
2.1
18.6%
32.0%
12.6%
12.3%

6.3
5.8
4.0
6.0

11.6%
4.6%
16.1%
10.5%
12.9%
198.1

1994

9.1%
1.9
17.5%
27.5%
12.6%
16.8%

6.1
5.6
3.7
5.4

12.0%
5.1%
21.9%
10.5%
13.2%
208.5

11.7%
4.7%
12.7%
10.8%
14.9%
345.3

6.6
6.3
4.1
6.2

9.3%
2.2
20.2%
27.0%
14.8%
159.1%

1996

105

Free Cash Flow (FCF)

89

Source: Company published data.
* Includes cash outlays associated with restructuring.

8.5%
8.0%
32.2%
2.6%
15.5%
30.2%
4.2%

$127
80
-60
0
147

Change in net working capital
Fixed Capital (net of depreciation)
Acquisitions (net of divestitures)
Other*
Investment in future growth (I)

Value drivers 1990-1995
Sales
Operating Margin
Cash Tax Rate
Incremental Working Capital
Incremental Fixed Capital
Acquisitions
Other*

1986
$7,938
412
182
23
253

Sales
EBIT
Adjusted taxes
Amortization of goodwill
Net operating profit after taxes (NOPAT)

199

($212)
119
235
0
142

1987
$9,155
516
209
34
341

(488)

$207
316
506
34
1,063

1989
$11,718
742
232
65
575

91

$140
304
168
0
612

1990
$11,606
859
239
83
702

1989

0%

5%

10%

15%

20%

25%

30%

35%

1990

19%
15%
18%

344

$91
201
193
0
485

1991
$12,381
950
213
92
829

23

($45)
110
532
124
721

1992
$13,243
1,046
421
118
743

1991

1992

1993

144

$76
309
390
0
775

1993
$14,580
1,165
385
139
919

1994

1995

Definitions
NOPAT
I
FCF

Rolling 3 year rate of return on incremental investment

Rates of return on incremental investment
3 years
5 years
10 years

(322)

($124)
248
654
0
779

1988
$10,424
610
206
53
457

Table 64
Sara Lee Corporation: Rates of Return on Incremental Investment

Packaged Food Industry Rate of Return Analysis

773

($40)
44
156
139
299

1995
$17,719
1,404
502
170
1,072

1996

974

($3)
88
204
0
289

1996
$18,624
1,551
468
180
1,263

= EBIT - adjusted taxes + goodwill
= Chg w.c.+Cap ex (net) + Acq. (net)
= NOPAT - I

321

$83
214
412
0
709

1994
$15,536
1,266
391
154
1,029

1,826
650
740
3,216

170
58
25
252

11.4%
15.7%
10.7%
12.1%

Assets
Consumer foods
Personal products
Household & personal care
Total

Capital expenditures
Consumer foods
Personal products
Household & personal care
Total

Return on assets
Consumer foods
Personal products
Household & personal care
Total
10.7%
15.1%
11.1%
11.7%

114
74
34
222

1,884
767
853
3,504

1986
202
116
95
412

90

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Consumer
foods

33%

Personal
products

54%

Assets, 1996

Source: Company published data, CS First Boston estimates

1985
209
102
79
390

Pretax income
Consumer foods
Personal products
Household & personal care
Total

Table 65
Sara Lee Corporation: Capital Allocation

Household
& personal
care

13%

11.7%
19.4%
8.7%
12.3%

144
106
38
287

2,312
750
1,131
4,193

1987
271
146
98
515

12.9%
11.1%
6.8%
10.9%

249
254
38
540

2,778
2,319
1,426
6,523

1989
359
257
97
713

Household & personal
care

Personal products

Consumer foods

15.1%
16.5%
5.9%
12.2%

202
217
29
448

2,158
1,083
1,772
5,012

1988
326
179
105
609

Packaged Food Industry Rate of Return Analysis

11.9%
11.9%
8.0%
11.2%

211
335
39
585

3,135
3,271
1,230
7,636

1990
372
388
98
858

0%

20%

40%

60%

80%

100%

1986

13.5%
11.4%
10.7%
12.1%

193
277
53
523

3,079
3,723
1,044
7,846

1991
416
424
112
951

1987

1988

15.6%
8.1%
12.3%
10.8%

190
495
43
728

3,315
6,577
910
10,802

1993
516
536
112
1,164

1989

1990

1991

1992

1993

1994

1995

16.8%
7.7%
11.2%
10.9%

178
409
41
628

3,546
6,741
1,377
11,664

1994
594
519
154
1,267

Capital expenditures

13.7%
8.9%
9.1%
10.5%

178
286
46
510

3,275
5,691
1,023
9,989

1992
449
504
93
1,046

1996

17.6%
9.3%
11.5%
12.3%

231
273
38
542

Consumer foods

Personal
products

1996
735
631
185
1,551

4,184
6,807
1,612
12,602

Household &
personal care

16.0%
8.4%
11.2%
11.3%

182
263
35
480

4,150
6,854
1,426
12,430

1995
666
579
159
1,404

$3,440
$950
$2,900
$2,200
$2,140
$2,960
$1,460
$500
$250
$1,840

$18,640

Packaged Meats

Bakery

Coffee & Grocery

Food service

Hosiery

Knit Products

Foundations

Accessories

Aris/Direct Mail/Other

Household & Personal Care

Sara Lee

3-4%

6-8%

2-3%

6-8%

8-10%

5-6%

-1-0%

4-5%

1-2%

3-4%

8.5%

1-2%

2-3%

1-2%

1-2%

1-2%

1-2%

2-3%

0-1%

1-2%

0-1%

0-1%

Pricing/Mix

Sales growth

2-3%

Units

91

Source: Sara Lee Corporation, CS First Boston estimates.
Note: (a) Working and fixed capital needs as a % of change in sales (net of non-cash charges)
(b) Other risks include volatility in raw materials, currency risk and reinvestment risk.

5 yr avg (F91-96)

Sales base

($ in millions)

Table 66
Sara Lee Corporation: Value Driver Matrix

Packaged Food Industry Rate of Return Analysis

8.0%

8-10%

9-11%

8-10%

15-17%

12-15%

10-13%

15-17%

2-3%

12-14%

7-9%

5-7%

margins

Operating

22.3%

30-35%

small

small

medium

medium

medium

medium

medium

small

small

small

capital needs (a)

Working and fixed

low

low

low

low

low

low

low

low

low

low

low

Other risk (b)

Beta=1.10

low

low

low

low

low

low

low

low

low

low

low

Business risk

92

FCF growth

$--.-1
8,892
15.0%

$--.--

8,563
14.8%

59.69

485

485

53.40

8,988

9,894

12%

2,702

2,702

11%

100

100

42.76
47.78

9,115

11,590

12,496

9%
10%

2

10,704

11,434

8%

$--.--

11,886

11,434

63.4%

30.8%

58.05

51.75

41.12
46.13

4%
36.63

56.21

49.92

39.28
44.30

5%
34.80

54.16

47.87

37.23
42.25

6%
32.75

Invested capital growth

16.7%

9,570

3

$--.--

485

10,338

2,702

100

12,940

10,284

14,083

2,656

803

1,100

456

1,556

1999E

9.0%

15.7%

485

9,633

2,702

100

12,235

10,382

12,803

1,852

966

1,191

886

984

1,061

223

886

329

202

1,414

1998E

1,061

1,313

1,263

6.2%

51.87

45.57

34.93
39.95

7%
30.45

34.1%

17.4%

10,049

4

$--.--

485

11,052

2,702

100

13,654

10,187

15,492

3,467

811

1,233

479

1,711

2000E

14.7%

Invested capital growth
3-year
5-year
10-year

1,061

1997E

1996A

100
485

41%
2,702
11.0%

10%
5%

3%
38.28

Sensitivity Analysis

Rate of return on incremental capital

Return on invested capital (avg)

Invested capital

Year

Shareholder value per share

Shares outstanding

Shareholder value

Debt

Cash

Corporate Value

PV of Residual Value

Residual Value

Cumulative PV of FCF

PV of FCF

Free Cash Flow

Investment in future

NOPAT

Year 0 is normalized

Cash
Shares outstanding

Implied ROR on incremental capital
Debt
WACC

NOPAT growth
Invested capital growth

Table 67
Sara Lee Corporation: DCF Analysis

35.8%

18.3%

10,551

5

$--.--

485

11,773

2,702

100

14,375

10,091

17,041

4,284

817

1,380

502

1,883

2001E

37.5%

19.1%

11,079

6

$--.--

485

12,501

2,702

100

15,103

9,996

18,745

5,107

823

1,543

528

2,071

2002E

13.5%

39.3%

20.1%

11,633

7

$--.--

485

13,234

2,702

100

15,836

9,902

20,619

5,935

828

1,724

554

2,278

2003E

12.0%

41.1%

21.0%

12,215

8

$--.--

485

13,973

2,702

100

16,575

9,808

22,681

6,767

832

1,924

582

2,506

2004E

13.4%

Return on incremental capital
3-year
5-year
10-year

Packaged Food Industry Rate of Return Analysis

NOPAT growth

43.1%

22.0%

12,825

9

$--.--

485

14,716

2,702

100

17,318

9,716

24,949

7,602

836

2,146

611

2,756

2005E

47.3%
8.7%

8.5%

24.2%

14,140

11

$--.--

485

16,212

2,702

100

18,814

9,533

30,189

9,281

841

2,662

673

3,335

2007E

45.1%

23.1%

13,467

10

$--.--

485

15,463

2,702

100

18,065

9,624

27,444

8,441

838

2,391

641

3,032

2006E

9.4%
9.7%
9.6%

10
15
20
18

FCF
8.5%

CAP

Price

8.9%

49.5%

25.3%

14,847

12

$--.--

485

16,965

2,702

100

19,567

9,443

33,208

10,123

842

2,962

707

3,669

2008E

$39.62
$47.41
$44.30

$31.86

9.1%

51.9%

26.5%

15,589

13

$--.--

485

17,719

2,702

100

20,321

9,354

36,528

10,967

843

3,293

742

4,036

2009E

9.2%

54.4%

27.8%

16,369

14

$--.--

485

18,474

2,702

100

21,076

9,266

40,181

11,811

844

3,660

779

4,439

2010E

9.4%

57.0%

29.1%

17,187

15

$--.--

485

19,231

2,702

100

21,833

9,178

44,199

12,655

844

4,065

818

4,883

2011E

9.5%

59.7%

30.5%

18,047

16

$--.--

485

19,988

2,702

100

22,590

9,092

48,619

13,499

844

4,512

859

5,371

2012E

9.6%

62.5%

31.9%

18,949

17

$--.--

485

20,745

2,702

100

23,347

9,006

53,481

14,342

843

5,006

902

5,909

2013E

9.6%

65.5%

33.5%

19,896

9.7%

68.6%

35.1%

20,891

19

$--.--

$44.30
18

485

22,259

2,702

100

24,861

8,837

64,712

16,024

840

6,155

995

7,149

2015E

485

21,502

2,702

100

24,104

8,921

58,829

15,183

842

5,552

947

6,499

2014E

9.7%

71.9%

36.7%

21,936

20

$--.--

485

23,014

2,702

100

25,616

8,753

71,183

16,862

839

6,820

1,045

7,864

2016E

3.3
39.4
86.0
1.0
129.7
30.9
7.9
0.0
38.7

91.0
101.8
0.7
-

193.4

Invested capital calculation
Cash
Accounts receivable
Inventory
Other current assets
Current assets

Accounts payable
Accrued expenses
Income taxes payable
NIBCLs

Net working capital

Net P,P&E
Goodwill/other
Restructuring charges

Invested capital

93

8.8
6.3
6.1
8.6

559.0
495.0
11.4%
36.5
0.0
0.2
27.7
8.6
19.1

1982

Adjusted taxes calculation
Tax provision
Deferred taxes
Tax shield
Adjusted taxes

NOPAT calculation
Sales
Cost of goods sold
Gross margin
S,G&A
Other income
Goodwill amortization
NOPBT
Adjusted taxes
NOPAT

fiscal
Fiscalyear
year ends
ends September
September

197.8

108.9
0.7
-

88.3

34.3
10.4
0.0
44.7

1.0
43.2
87.9
0.9
133.0

9.4
0.9
4.4
12.9

603.5
529.4
12.3%
44.7
0.0
0.0
29.5
12.9
16.6

1983

Table 68
Tyson Foods: Returns on Invested Capital

222.9

129.6
3.5
-

89.7

51.0
15.3
0.0
66.3

7.5
50.9
96.8
0.7
156.0

14.5
12.1
5.1
7.4

750.1
651.9
13.1%
55.0
0.0
0.2
43.5
7.4
36.0

1984

377.0

226.4
5.7
-

144.9

63.4
33.3
0.0
96.7

11.4
93.9
132.9
3.4
241.6

35.3
24.7
8.9
19.6

1,135.7
954.4
16.0%
92.3
0.0
12.9
101.9
19.6
82.3

1985

1986

438.7

347.9
5.7
-

85.1

166.6
54.0
0.0
220.6

15.0
140.1
148.6
2.1
305.7

47.6
37.6
9.5
19.5

1,503.7
1,271.9
15.4%
116.6
0.0
0.2
115.4
19.5
95.8

Packaged Food Industry Rate of Return Analysis

636.0

415.9
5.5
-

214.7

95.9
65.1
0.0
161.0

17.9
137.9
217.1
2.8
375.6

55.4
42.4
8.7
21.7

1,786.0
1,483.0
17.0%
156.6
0.0
0.2
146.6
21.7
124.9

1987

684.5

430.0
5.3
-

249.3

102.8
73.0
10.5
186.3

18.5
155.4
259.2
2.5
435.5

23.0
1.3
7.4
29.1

1,936.0
1,627.6
15.9%
183.8
0.0
0.2
124.8
29.1
95.8

1988

2,058.2

1,020.8
745.8
-

291.7

212.0
185.9
16.7
414.7

25.4
248.0
408.7
24.3
706.3

63.0
194.2
17.1
(114.1)

2,538.2
2,056.1
19.0%
271.5
0.0
4.5
215.1
(114.1)
329.3

1989

2,228.1

1,071.1
784.2
-

372.8

203.9
200.7
8.5
413.1

16.9
290.8
472.3
5.8
785.9

80.1
49.7
48.9
79.2

3,825.3
3,081.7
19.4%
416.8
0.0
25.7
352.5
79.2
273.3

1990

2,375.8

1,162.0
764.0
-

449.8

201.0
190.6
20.6
412.2

25.5
296.7
535.7
4.1
862.0

97.0
22.8
36.3
110.5

3,922.1
3,147.5
19.7%
441.4
0.0
29.2
362.4
110.5
251.9

1991

2,398.6

1,142.2
743.3
-

513.1

208.4
143.8
14.7
366.8

27.1
322.0
525.1
5.7
879.9

100.5
17.9
29.2
111.8

4,168.8
3,390.3
18.7%
446.8
0.0
29.5
361.2
111.8
249.3

1992

3,023.6

1,435.3
924.4
-

663.8

205.6
199.5
17.8
422.9

21.5
379.8
675.2
10.2
1,086.8

129.3
0.4
27.7
156.5

4,707.4
3,796.5
19.3%
535.3
0.0
30.8
406.3
156.5
249.8

1993

3,351.6

1,610.0
741.6
205.0

795.0

258.6
187.9
19.7
466.2

27.0
444.2
754.2
35.8
1,261.3

129.6
(5.0)
32.7
167.3

5,110.3
4,149.1
18.8%
552.1
0.0
29.7
438.8
167.3
271.5

1994

4,044.8

2,013.5
808.1
205.0

1,018.2

274.7
212.3
14.6
501.6

33.1
494.7
949.4
42.6
1,519.8

131.0
39.2
43.6
135.5

5,511.2
4,423.1
19.7%
616.4
0.0
25.9
497.6
135.5
362.1

1995

16.6%
6.6%
61.0%
10.5%
-

6.5
5.9
846.3
5.5

15.0%
7.1%
51.5%
10.9%
8.5%
(4.8)

6.9
6.2
922.4
5.5

15.9%
7.5%
38.5%
12.7%
17.1%
9.4

7.7
7.8
213.6
5.8

14.6%
6.5%
23.6%
12.7%
27.4%
44.3

8.5
6.9
199.7
5.0

9.0%
3.0
27.0%
19.2%
21.8%
30.0%

8.2%
2.8
23.1%
14.8%
19.6%
14.7%

8.2
6.9
326.7
4.3

11.3%
6.6%
13.6%
10.7%
23.2%
67.6

7.7%
3.4
26.3%
16.9%
21.8%
21.9%

10.1
12.3
265.3
4.3

12.2%
5.3%
17.7%
11.0%
23.5%
51.1

12.6%
6.4%
16.4%
11.6%
14.5%
19.3

7.5
6.2
368.2
4.5

6.4%
2.8
18.2%
23.3%
14.0%
(60.0)%

94

5.0%

10.0%

15.0%

20.0%

WACC

1986

25.0%
ROIC

1990

30.0%

(50.0)

0.0

50.0

100.0

150.0

200.0

250.0

1983

1988

1987

1985

1984

1983

1994

1993

1992

1991

1989

12.3%
5.9%
45.3%
9.4%
24.0%
200.7

6.2
5.7
3.4
2.5

8.5%
1.2
10.5%
(53.0)%
16.0%
17.0%

1989

12.8%
6.3%
36.5%
10.4%
12.8%
49.6

8.1
6.8
4.9
3.6

9.2%
1.7
15.8%
22.5%
12.3%
(33.0)%

1990

1991

12.1%
5.6%
26.9%
10.4%
10.9%
13.4

7.3
6.2
5.1
3.4

9.2%
1.7
15.3%
30.5%
10.6%
(14.5)%

Economic profit

Chart 32
Tyson Foods: Economic Profit

1984

Chart 31
Tyson Foods: ROIC vs. WACC

1995

Source: Company published data; Datastream; Annual Statistical Digest , Board of Governors of the Federal Reserve System; CS First Boston estimates.

Cost of capital analysis
Cost of equity
Cost of debt
Debt/total capital
WACC
Return on avg. inv. cap.
Economic profit

Capital turnover analysis
Inventory turns
Operating wkg. cap. turns
Goodwill/other turns
Net P,P&E turns

5.8%
3.4
19.5%
17.1%
16.2%
77.5%

1985

4.9%
3.1
14.9%
43.7%
8.4%
(56.9)%

1988

1986

5.0%
2.9
14.3%
31.0%
9.9%
-

1987

1986

1987

1985

1988

1984

1989

Return on invested capital calculation
NOPBT margin
Capital turns
Pretax ROIC
Tax
Return on invested capital
Return on incr. inv. cap.

1990

continued

1991

1983

1992

1982

1992

12.0%
5.2%
21.0%
10.5%
10.4%
(2.2)

7.9
6.5
5.6
3.6

8.7%
1.7
15.1%
31.0%
10.4%
(11.1)%

1993

Table 68
Tyson Foods: Returns on Invested Capital

1994

Packaged Food Industry Rate of Return Analysis

1995

1994

8.6%
1.5
13.1%
38.1%
8.1%
6.6%

6.8
5.4
6.9
3.2

11.9%
5.3%
29.0%
10.0%
8.5%
(47.4)

1993

8.6%
1.6
13.4%
38.5%
8.3%
0.1%

7.0
5.5
5.1
3.3

11.4%
4.4%
24.5%
9.7%
9.2%
(12.0)

11.8%
4.7%
34.6%
9.3%
9.8%
17.9

5.8
4.7
6.8
2.7

9.0%
1.4
12.3%
27.2%
9.0%
13.1%

1995

95

Source: Company published data.
* Includes cash outlays associated with restructuring.

7.6%
8.3%
33.9%
43.1%
28.6%
41.8%
0.0%

(13)

Free Cash Flow (FCF)

Value drivers 1990-1995
Sales
Operating Margin
Cash Tax Rate
Incremental Working Capital
Incremental Fixed Capital
Acquisitions
Other*

$55
40
0
0
95

1985
$1,136
89
20
13
$82

Change in net working capital
Fixed Capital (net of depreciation)
Acquisitions (net of divestitures)
Other*
Investment in future growth

Sales
EBIT
Adjusted taxes
Amortization of goodwill
Net operating profit after taxes (NOPAT)

25

($60)
75
55
0
71

1986
$1,504
115
20
0
$96

(78)

$130
72
0
0
202

1987
$1,786
146
22
0
$124

104

$35
16
0
0
51

1988
$1,936
184
29
0
$155

(1,135)

$42
48
1,374
0
1,465

1989
$2,538
211
(114)
4
$329

-10%1988

0%

10%

20%

30%

40%

50%

60%

70%

80%

1989

13%
8%
9%

126

$81
66
0
0
147

1990
$3,825
327
79
26
$273

68

$77
107
0
0
184

1991
$3,922
333
111
29
$252

1990

1991

1992

1993

197

$63
(11)
0
0
52

1992
$4,169
332
112
30
$249

1994

Definitions
NOPAT
I
FCF

Rolling 3 year rate of return on incremental investment

Rates of return on incremental investment
3 years
5 years
10 years

Table 69
Tyson Foods: Rates of Return on Incremental Investment

Packaged Food Industry Rate of Return Analysis

(16)

$131
74
83
0
288

1994
$5,110
409
167
30
$271

1995

(379)

$223
168
350
0
742

1995
$5,511
472
135
26
$362

= EBIT - adjusted taxes + goodwill
= Chg w.c.+Cap ex (net) + Acq. (net)
= NOPAT - I

(252)

$151
80
271
0
502

1993
$4,707
376
157
31
$250

Packaged Food Industry Rate of Return Analysis
Table 70
Tyson Foods: Value Driver Matrix
Operating
margins

Working and fixed
capital needs (a)

Business risk

Other risk (b)

3-5%

segment +

medium

low

low

6-8%

2-4%

segment -

small

low

low

$410

10%

2-4%

segment +

medium

low

low

International

$575

10%+

4-6%

segment -

medium

medium

medium

Other
Total

$160
$4,100

5-7%
8-10%

0%
3-5%

segment +
8-9%

small
medium

low
low

low
low

Sales base

Units

Food service

$2,010

8-10%

Retail

$945

Wholesale clubs

Sales growth
Pricing/Mix

Poultry

Other
Seafood

$270

Beef/Pork

$490

Mexican

$160

Prepared

$220

Animal feed/Other
Total

$270
$1,410

4-6%

0-2%

8-10%

small

low

low

$5,510

7-9%

2-3%

8-10%

25-35%

low

low

8.2%

71.7%

Tyson
Foods
5-yr avg
90-95

7.6%

Source: Company published data, CS First Boston estimates.
Note: (a) Working and fixed capital needs as a % of change in sales (net of non-cash charges).
(b) Other risks include volatility in raw materials, currency risk and reinvestment risk.

96

Beta = 0.80

97

FCF growth

145
$--.-1

145
$--.--

31.43
35.91
40.80
46.15

9%

10%

11%
12%

13%

7.0%
11.1%

17.1%

5,229

43.67

33.43
38.32

28.95

2%
24.85

3

$--.--

145

1,014

2,046

100

2,961

6.6%

5,076

145

782

2,046

100

2,728

3,263

4,180

(302)

162

208

152

360

1998E

12.1%

40.95

35.61

26.23
30.71

3%
22.13

37.98

27.74
32.64

23.26

4%
19.16

Invested capital growth

4.6%

(238)

2,234

4,754

2,046

2,046

9.0%

2

100

0

4,045

$--.--

1,708

4,280

3,766
3,192

2,361
2,173

4,205

(464)

1

2

323

324

1997E

18.0%

34.73

24.49
29.39

20.01

5%
15.91

26.0%

7.5%

5,386

4

$--.--

145

1,261

2,046

100

3,207

3,334

4,640

(128)

174

243

157

400

1999E

26.7%

Invested capital growth
3-year
5-year
10-year

4,205

(466)

(506)

75

(466)

709

288

75

203

362

75

1996E

1995A

145

0

26%
2,046
8.6%

11%
3%

1%
27.33

Sensitivity Analysis

Rate of return on incremental capital

Return on invested capital (avg)

Invested capital

Year

Shareholder value per share

Shares outstanding

Shareholder value

Debt

Cash

Corporate Value

PV of Residual Value

Residual Value

Cumulative PV of FCF

PV of FCF

Free Cash Flow

Investment in future

NOPAT

Year 0 is normalized

Cash
Shares outstanding

Implied ROR on incremental capital
Debt
WACC

NOPAT growth
Invested capital growth

Table 71
Tyson Foods: DCF Analysis

28.0%

8.1%

5,547

5

$--.--

145

1,520

2,046

100

3,467

3,408

5,151

59

187

282

162

444

2000E

30.2%

8.7%

5,714

6

$--.--

145

1,794

2,046

100

3,740

3,483

5,717

258

199

326

166

492

2001E

11.5%

32.5%

9.4%

5,885

7

$--.--

145

2,081

2,046

100

4,027

3,559

6,346

468

210

375

171

547

2002E

9.3%

35.1%

10.2%

6,062

8

$--.--

145

2,381

2,046

100

4,327

3,637

7,044

690

222

430

177

607

2003E

10.4%

Return on incremental capital
3-year
5-year
10-year

Packaged Food Industry Rate of Return Analysis

NOPAT growth

37.8%

10.9%

6,243

9

$--.--

145

2,695

2,046

100

4,641

3,717

7,819

924

234

492

182

673

2004E

43.9%
21.5%

22.3%

12.7%

6,624

11

$--.--

145

3,362

2,046

100

5,308

3,883

9,634

1,426

257

637

193

830

2006E

40.7%

11.8%

6,431

10

$--.--

145

3,022

2,046

100

4,968

3,799

8,679

1,169

245

560

187

747

2005E

19.2%
17.5%
19.7%

10
15
20
14

FCF
22.3%

CAP

Price

20.8%

47.3%

13.7%

6,822

12

$--.--

145

3,715

2,046

100

5,662

3,968

10,693

1,693

268

722

199

921

2007E

$33.42
$48.32
$30.71

$20.80

20.2%

51.0%

14.8%

7,027

13

$--.--

145

4,082

2,046

100

6,028

4,055

11,870

1,973

279

818

205

1,022

2008E

19.7%

54.9%

15.9%

7,238

19.2%

59.2%

17.1%

7,455

15

$--.--

$30.71
14

145

4,855

2,046

100

6,801

4,236

14,624

2,565

302

1,042

217

1,259

2010E

145

4,462

2,046

100

6,408

4,144

13,175

2,263

291

924

211

1,135

2009E

18.8%

63.8%

18.5%

7,679

16

$--.--

145

5,261

2,046

100

7,207

4,329

16,233

2,878

313

1,174

224

1,398

2011E

18.4%

68.8%

19.9%

7,909

17

$--.--

145

5,681

2,046

100

7,627

4,424

18,019

3,203

324

1,321

230

1,552

2012E

18.1%

74.1%

21.5%

8,146

18

$--.--

145

6,114

2,046

100

8,060

4,521

20,001

3,539

336

1,485

237

1,722

2013E

17.8%

79.9%

23.1%

8,391

19

$--.--

145

6,560

2,046

100

8,506

4,621

22,201

3,886

347

1,668

244

1,912

2014E

17.5%

86.1%

24.9%

8,642

20

$--.--

145

7,020

2,046

100

8,966

4,722

24,643

4,244

358

1,871

252

2,122

2015E

333.3
2,987.8
4,721.9
463.3
8,506.3
2,626.3
1,386.4
405.1
4,417.7

4,088.6
7,961.0
1,257.8
-

Invested capital calculation
Cash
Accounts receivable
Inventory
Other current assets
Current assets

Accounts payable
Accrued expenses
Income taxes payable
NIBCLs

Net working capital

Net P,P&E
Goodwill/other
Restructuring charges

98

13,307.4

1,155.9
80.5
189.7
1,265.1

Adjusted taxes calculation
Tax provision
Deferred taxes
Tax shield
Adjusted taxes

Invested capital

37,037.7
25,286.1
31.7%
8,564.6
7.5
29.4
3,224.0
1,265.1
1,958.9

1982

NOPAT calculation
Sales
Cost of goods sold
Gross margin
S,G&A
Other income
Goodwill amortization
NOPBT
Adjusted taxes
NOPAT

13 companies,
p
, fiscal year
y

13,593.3

8,389.5
1,392.6
55.4

3,811.1

3,227.8
1,285.7
440.6
4,954.1

381.0
3,192.7
4,634.6
556.9
8,765.2

1,306.8
188.1
163.9
1,282.6

39,057.5
26,255.1
32.8%
9,284.5
15.5
35.6
3,569.0
1,282.6
2,286.4

1983

14,796.6

9,135.6
1,471.8
55.4

4,189.2

3,667.7
1,510.1
411.6
5,589.5

421.9
3,705.9
5,145.2
505.6
9,778.7

1,443.5
276.9
169.0
1,335.6

42,886.0
29,115.5
32.1%
10,055.6
12.1
42.6
3,769.6
1,335.6
2,434.0

1984

16,271.3

10,139.3
1,849.4
85.9

4,282.6

3,465.4
2,189.1
346.5
6,001.0

452.4
3,646.4
5,238.7
946.1
10,283.6

1,461.4
246.2
246.9
1,462.2

46,997.4
31,980.6
32.0%
11,002.7
8.9
65.9
4,088.9
1,462.2
2,626.8

1985

Table 72
Packaged Foods Composite: Returns on Invested Capital
1986

18,552.1

12,044.5
2,763.1
85.9

3,744.4

4,238.1
2,416.7
590.3
7,245.1

488.6
4,265.7
5,780.6
454.6
10,989.5

1,753.9
295.0
254.5
1,713.5

49,396.4
32,727.5
33.7%
12,171.3
12.3
73.2
4,583.1
1,713.5
2,869.6

Packaged Food Industry Rate of Return Analysis

20,560.0

13,162.7
3,493.3
85.9

3,904.0

4,579.7
3,157.1
736.7
8,473.5

562.3
4,737.6
6,285.6
792.0
12,377.4

2,003.0
265.7
242.5
1,979.7

57,507.5
38,034.2
33.9%
14,301.0
22.3
169.4
5,364.0
1,979.7
3,384.3

1987

24,234.1

14,329.6
5,279.6
85.9

4,625.0

5,204.4
3,713.4
635.4
9,553.2

569.9
5,252.9
6,829.1
1,526.4
14,178.1

1,818.4
139.8
266.5
1,945.1

60,766.5
39,775.6
34.5%
15,400.0
9.6
195.6
5,796.0
1,945.1
3,850.9

1988

28,915.7

16,365.6
7,228.3
156.0

5,321.8

5,835.8
4,606.5
580.2
11,022.5

612.2
6,022.7
8,047.2
1,662.2
16,344.3

1,997.7
315.1
365.0
2,047.6

68,729.1
45,363.4
34.0%
17,020.5
9.8
239.8
6,594.7
2,047.6
4,547.2

1989

33,226.9

18,728.9
8,484.5
261.3

6,013.5

5,974.2
5,469.2
771.2
12,214.6

617.8
6,959.1
8,937.9
1,713.2
18,228.0

2,372.4
270.3
473.5
2,575.6

77,910.0
51,960.0
33.3%
18,543.1
11.8
323.9
7,742.6
2,575.6
5,167.0

1990

37,749.9

20,931.3
11,479.1
261.3

5,339.5

7,131.7
5,386.9
869.8
13,388.4

772.8
6,918.3
9,460.9
1,575.8
18,727.9

2,778.6
114.7
516.5
3,180.4

86,088.7
56,622.7
34.2%
20,907.5
9.1
343.8
8,911.3
3,180.4
5,730.9

1991

41,786.9

22,800.8
13,271.1
284.2

5,715.0

8,053.4
6,277.9
889.4
15,220.7

775.3
7,752.2
10,575.6
1,832.6
20,935.7

2,960.2
14.0
458.4
3,404.6

91,209.2
59,404.7
34.9%
22,914.4
10.9
417.3
9,318.3
3,404.6
5,913.7

1992

45,506.8

24,583.5
14,427.5
372.0

6,495.7

6,853.4
7,980.2
700.7
15,534.4

879.7
8,104.7
11,011.1
2,034.6
22,030.1

3,061.3
116.3
445.1
3,390.0

95,507.3
62,083.4
35.0%
24,221.0
13.6
471.1
9,687.6
3,390.0
6,297.6

1993

46,533.4

25,231.5
14,797.3
926.0

6,504.7

7,280.4
9,317.6
759.9
17,357.9

810.8
8,814.2
11,885.5
2,352.0
23,862.5

3,127.7
26.5
493.0
3,594.2

98,033.0
64,267.1
34.4%
24,029.2
11.0
472.9
10,220.7
3,594.2
6,626.5

1994

52,393.9

24,679.4
20,621.9
1,173.0

7,092.7

7,786.0
9,662.0
687.3
18,135.4

728.0
9,483.3
12,813.2
2,203.6
25,228.0

3,207.0
358.1
594.4
3,443.3

101,925.7
66,494.9
34.8%
25,231.8
17.0
555.6
10,771.7
3,443.3
7,328.3

1995

16.8%
7.4%
28.2%
14.1%
-

7.8
7.3
29.4
4.7

15.0%
6.9%
24.8%
13.0%
17.0%
540.9

8.4
8.5
28.0
4.7

15.7%
7.3%
25.9%
13.5%
17.1%
516.1

8.3
8.3
29.1
4.7

14.2%
6.3%
20.2%
12.6%
16.9%
669.5

9.0
8.7
25.4
4.6

9.3%
2.8
26.1%
36.9%
16.5%
25.6%

9.1
8.9
16.5
4.4

12.1%
6.4%
18.8%
11.0%
17.3%
1,234.4

9.3%
2.7
24.7%
37.4%
15.5%
10.6%

8.5
8.5
17.9
4.1

12.1%
5.2%
18.2%
10.8%
16.5%
989.5

12.8%
6.3%
17.1%
11.7%
17.2%
1,240.8

8.9
8.8
11.5
4.2

9.5%
2.5
23.9%
33.6%
15.9%
12.7%

99

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

WAC C

1985

18.0%

RO IC

1990

1994

1993

1992

1991

1989

1988

1987

1986

1984

1983

12.5%
6.0%
17.2%
11.4%
17.1%
1,521.9

8.5
8.3
9.5
4.2

9.6%
2.4
22.8%
31.0%
15.7%
14.9%

1989

12.8%
6.2%
17.4%
11.6%
16.6%
1,557.6

8.7
7.9
9.2
4.2

9.9%
2.3
23.3%
33.3%
15.6%
14.4%

1990

12.3%
5.7%
20.9%
10.9%
16.1%
1,866.2

9.1
9.3
7.5
4.1

10.4%
2.3
23.6%
35.7%
15.2%
12.5%

1991

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

Chart 34
Packaged Foods Composite: Economic Profit

1984

1983

Chart 33
Packaged Foods Composite: ROIC vs. WACC

1995

Source: Company published data; Datastream; Annual Statistical Digest , Board of Governors of the Federal Reserve System; CS First Boston estimates.
Note : Data is an aggregation of those of CPB, CAG, CPC, GIS, HNZ, HSY, IBC, K, MCCRK, OAT, RAL, SLE, TYSNA

Cost of capital analysis
Cost of equity
Cost of debt
Debt/total capital
WACC
Return on avg. inv. cap.
Economic profit

Capital turnover analysis
Inventory turns
Operating wkg. cap. turns
Goodwill/other turns
Net P,P&E turns

8.7%
2.9
25.1%
35.8%
16.1%
13.1%

1985

8.8%
2.9
25.5%
35.4%
16.4%
12.3%

1988

1986

9.1%
2.9
26.3%
35.9%
16.8%
114.6%

1987

1986

1987

Return on invested capital calculation
NOPBT margin
8.7%
Capital turns
2.8
Pretax ROIC
24.2%
Tax
39.2%
Return on invested capital
14.7%
Return on incr. inv. cap.

1988

continued

1989

1985

1990

1984

1991

1983

1992

1982

1993

Table 72
Packaged Foods Composite: Returns on Invested Capital

12.2%
5.4%
17.9%
11.0%
14.9%
1,554.6

8.6
8.9
6.9
4.0

10.2%
2.2
22.3%
36.5%
14.2%
4.5%

1992

1994

Packaged Food Industry Rate of Return Analysis

1995

1994

10.4%
2.1
22.0%
35.2%
14.2%
32.0%

8.2
7.3
6.6
3.9

12.1%
5.4%
21.9%
10.6%
14.4%
1,736.7

1993

10.1%
2.1
21.3%
35.0%
13.8%
10.3%

8.7
7.8
6.6
3.9

11.6%
4.7%
19.9%
10.2%
14.4%
1,828.3

11.8%
4.8%
22.0%
10.2%
14.8%
2,267.4

8.0
7.0
4.9
4.1

10.6%
1.9
20.6%
32.0%
14.0%
12.0%

1995

333.3
2,987.8
4,721.9
463.3
8,506.3
2,626.3
1,386.4
405.1
4,417.7

4,088.6
7,961.0
1,257.8
-

Invested capital calculation
Cash
Accounts receivable
Inventory
Other current assets
Current assets

Accounts payable
Accrued expenses
Income taxes payable
NIBCLs

Net working capital

Net P,P&E
Goodwill/other
Restructuring charges

100

13,307.4

1,155.9
80.5
189.7
1,265.1

Adjusted taxes calculation
Tax provision
Deferred taxes
Tax shield
Adjusted taxes

Invested capital

37,037.7
25,286.1
31.7%
8,564.6
7.5
29.4
3,224.0
1,265.1
1,958.9

1982

NOPAT calculation
Sales
Cost of goods sold
Gross margin
S,G&A
Other income
Goodwill amortization
NOPBT
Adjusted taxes
NOPAT

16 companies, fiscal year

13,593.3

8,389.5
1,392.6
55.4

3,811.1

3,227.8
1,285.7
440.6
4,954.1

381.0
3,192.7
4,634.6
556.9
8,765.2

1,306.8
188.1
163.9
1,282.6

39,057.5
26,255.1
32.8%
9,284.5
15.5
35.6
3,569.0
1,282.6
2,286.4

1983

14,796.6

9,135.6
1,471.8
55.4

4,189.2

3,667.7
1,510.1
411.6
5,589.5

421.9
3,705.9
5,145.2
505.6
9,778.7

1,443.5
276.9
169.0
1,335.6

42,886.0
29,115.5
32.1%
10,055.6
12.1
42.6
3,769.6
1,335.6
2,434.0

1984

16,271.3

10,139.3
1,849.4
85.9

4,282.6

3,465.4
2,189.1
346.5
6,001.0

452.4
3,646.4
5,238.7
946.1
10,283.6

1,461.4
246.2
246.9
1,462.2

46,997.4
31,980.6
32.0%
11,002.7
8.9
65.9
4,088.9
1,462.2
2,626.8

1985

Table 73
Packaged Foods Composite: Returns on Invested Capital
1986

18,552.1

12,044.5
2,763.1
85.9

3,744.4

4,238.1
2,416.7
590.3
7,245.1

488.6
4,265.7
5,780.6
454.6
10,989.5

1,753.9
295.0
254.5
1,713.5

49,396.4
32,727.5
33.7%
12,171.3
12.3
73.2
4,583.1
1,713.5
2,869.6

Packaged Food Industry Rate of Return Analysis

20,560.0

13,162.7
3,493.3
85.9

3,904.0

4,579.7
3,157.1
736.7
8,473.5

562.3
4,737.6
6,285.6
792.0
12,377.4

2,003.0
265.7
242.5
1,979.7

57,507.5
38,034.2
33.9%
14,301.0
22.3
169.4
5,364.0
1,979.7
3,384.3

1987

24,234.1

14,329.6
5,279.6
85.9

4,625.0

5,204.4
3,713.4
635.4
9,553.2

569.9
5,252.9
6,829.1
1,526.4
14,178.1

1,818.4
139.8
266.5
1,945.1

60,766.5
39,775.6
34.5%
15,400.0
9.6
195.6
5,796.0
1,945.1
3,850.9

1988

28,915.7

16,365.6
7,228.3
156.0

5,321.8

5,835.8
4,606.5
580.2
11,022.5

612.2
6,022.7
8,047.2
1,662.2
16,344.3

1,997.7
315.1
365.0
2,047.6

68,729.1
45,363.4
34.0%
17,020.5
9.8
239.8
6,594.7
2,047.6
4,547.2

1989

33,226.9

18,728.9
8,484.5
261.3

6,013.5

5,974.2
5,469.2
771.2
12,214.6

617.8
6,959.1
8,937.9
1,713.2
18,228.0

2,372.4
270.3
473.5
2,575.6

77,910.0
51,960.0
33.3%
18,543.1
11.8
323.9
7,742.6
2,575.6
5,167.0

1990

37,925.1

20,980.1
11,585.2
261.3

5,359.8

7,155.3
5,404.1
869.8
13,429.2

776.3
6,953.8
9,477.6
1,581.3
18,789.0

2,779.9
114.7
523.0
3,188.2

86,408.4
56,984.1
34.1%
21,006.7
168.8
348.6
8,935.1
3,188.2
5,746.9

1991

41,943.0

22,846.9
13,361.8
284.2

5,734.3

8,073.7
6,289.2
889.4
15,252.3

778.8
7,782.7
10,586.3
1,838.7
20,986.6

2,960.3
14.0
461.9
3,408.2

91,560.5
59,714.5
34.8%
22,996.4
70.2
422.3
9,342.1
3,408.2
5,934.0

1992

56,046.5

27,589.4
22,072.2
372.0

6,384.9

8,238.5
8,029.0
745.0
17,012.5

995.2
8,495.3
11,808.6
2,098.4
23,397.5

3,147.4
42.8
452.3
3,556.8

103,831.8
66,714.5
35.7%
27,103.3
13.6
693.3
10,720.9
3,556.8
7,164.1

1993

57,798.4

28,567.3
22,482.1
926.0

6,749.1

8,616.3
9,333.9
810.9
18,761.2

1,057.9
9,269.7
12,773.2
2,409.5
25,510.3

3,391.5
106.9
502.1
3,786.6

107,011.3
69,308.7
35.2%
26,960.4
11.0
700.7
11,453.9
3,786.6
7,667.3

1994

63,819.5

28,296.1
28,279.8
1,173.0

7,243.7

8,387.9
10,591.7
819.8
19,799.5

852.0
10,120.6
13,799.4
2,271.2
27,043.2

3,456.4
392.3
739.2
3,803.4

111,537.9
72,034.2
35.4%
28,277.2
17.0
784.9
12,028.3
3,803.4
8,224.9

1995

16.8%
7.4%
28.2%
14.1%
-

15.0%
6.9%
24.8%
13.0%
17.0%
540.9

8.4
8.5
28.0
4.7

15.7%
7.3%
25.9%
13.5%
17.1%
516.1

8.3
8.3
29.1
4.7

9.0
8.7
25.4
4.6

14.2%
6.3%
20.2%
12.6%
16.9%
669.5

9.1
8.9
16.5
4.4

12.1%
6.4%
18.8%
11.0%
17.3%
1,234.4

8.5
8.5
17.9
4.1

12.1%
5.2%
18.2%
10.8%
16.5%
989.5

12.8%
6.3%
17.1%
11.7%
17.2%
1,240.8

8.9
8.8
11.5
4.2

101

7. 0 %

9. 0 %

11 . 0 %

13 . 0 %

15 . 0 %

17 . 0 %

W ACC

1985

19 . 0 %

R O IC

1989

1993

1992

1991

1990

1988

1987

1986

1984

1983

12.5%
6.0%
17.2%
11.4%
17.1%
1,521.9

8.5
8.3
9.5
4.2

9.6%
2.4
22.8%
31.0%
15.7%
14.9%

12.8%
6.2%
17.4%
11.6%
16.6%
1,557.6

8.7
7.9
9.2
4.2

9.9%
2.3
23.3%
33.3%
15.6%
14.4%

1990

11.4%
5.3%
19.4%
10.2%
16.2%
2,117.1

9.1
9.3
7.5
4.1

10.3%
2.3
23.6%
35.7%
15.2%
12.3%

1991

0. 0

50 0 . 0

1, 0 0 0 .0

1, 5 0 0 .0

2, 0 0 0 .0

2, 5 0 0 .0

3, 0 0 0 .0

3, 5 0 0 .0

Chart 36
Packaged Foods Composite: Economic Profit

1984

1983

Chart 35
Packaged Foods Composite: ROIC vs. WACC

1994

Source: Company published data; Datastream; Annual Statistical Digest , Board of Governors of the Federal Reserve System; CS First Boston estimates.
Note : 1983-1990 data is an aggregation of those of CPB, CAG, CPC, GIS, HNZ, HSY, IBC, K, MCCRK, OAT, RAL, SLE, TYSNA
1991 & 1992 data is an aggregation of the above plus MSTR
1993 & 1994 data is an aggregation of all of the above plus NA and RAH

Cost of capital analysis
Cost of equity
Cost of debt
Debt/total capital
WACC
Return on avg. inv. cap.
Economic profit

7.8
7.3
29.4
4.7

9.5%
2.5
23.9%
33.6%
15.9%
12.7%

1985

Capital turnover analysis
Inventory turns
Operating wkg. cap. turns
Goodwill/other turns
Net P,P&E turns

9.3%
2.8
26.1%
36.9%
16.5%
25.6%

9.3%
2.7
24.7%
37.4%
15.5%
10.6%

1986

8.7%
2.9
25.1%
35.8%
16.1%
13.1%

1995

1989

1987

8.8%
2.9
25.5%
35.4%
16.4%
12.3%

1988

1988

9.1%
2.9
26.3%
35.9%
16.8%
114.6%

1987

1986

1989

1985

1990

1984

1991

1983

1992

1982
Return on invested capital calculation
NOPBT margin
8.7%
Capital turns
2.8
Pretax ROIC
24.2%
Tax
39.2%
Return on invested capital
14.7%
Return on incr. inv. cap.

1992

11.3%
5.0%
16.7%
10.3%
14.9%
1,837.0

8.6
8.9
6.9
4.0

10.2%
2.2
22.3%
36.5%
14.1%
4.7%

1993

Table 73
Packaged Foods Composite: Returns on Invested Capital

1994

Packaged Food Industry Rate of Return Analysis

1995

1994

10.7%
1.9
19.8%
33.1%
13.3%
28.7%

8.4
8.0
4.8
3.7

9.8%
4.4%
17.8%
8.9%
13.5%
2,627.2

1993

10.3%
1.9
19.1%
33.2%
12.8%
8.7%

8.8
8.6
4.7
3.8

9.4%
3.8%
16.1%
8.5%
14.6%
2,985.2

9.6%
3.9%
17.9%
8.5%
13.5%
3,027.0

8.1
7.2
3.9
3.9

10.8%
1.7
18.8%
31.6%
12.9%
9.3%

1995

11.2%
32.1%

Sara Lee

Tyson Foods

102

35.0%

15.0%

25.0%

30.0%

25.0%

30.0%

25.0%

25.0%

10.0%

30.0%

15.0%

20.0%

15.0%

20.0%

25.0%

20.0%

total cap

Targ debt/

* 30-year Treasury bond rate and spreads, as of 10/25/96

35.9%

22.3%

Quaker Oats
18.2%

31.9%

Nabisco Holdings Corp.

Ralston Purina

40.0%

Ralcorp Holdings

18.8%

Morningstar

6.8%

McCormick

15.6%

20.7%

H.J. Heinz

Kellogg

15.0%

General Mills

Interstate Bakeries

19.0%

CPC International

9.1%

23.8%

ConAgra

Hershey Foods

12.4%

total cap

Campbell Soup

Company

Packaged Food Companies

0.76%

A-

0.58%

AA0.64%

0.47%

AA

0.72%

0.47%

AA+

A

0.44%

AAA

A+

Spread

Rating

0.80

1.10

0.85

1.00

1.15

1.05

0.85

1.10

1.00

1.00

1.00

0.90

1.15

0.90

1.00

1.05

Beta

Tax rate =

Debt/

38.0%

Equity risk prem ium =

Industrial bond spreads*:

6.8%
4.9%

Risk free rate = 30-year government Treasury bond rate* =

Assumptions

Cost of debt = (risk free rate + spread)*(1-tax rate)

Current

A-

AA-

A-

BBB-

A-

BBB

B+

A

AAA

BB-

AA-

A+

A+

A

BBB

AA-

bond rating

BB-

BB

BB+

BBB-

BBB

BBB+

Rating

Cost of equity = risk free rate + (beta)*(equity risk premium)

WACC = (% equity to total capital)(cost of equity) + (% debt to total capital)(cost of debt)

Definition

Table 74
Packaged Foods Composite: Weighted Average Cost of Capital

Packaged Food Industry Rate of Return Analysis

10.1%

8.6%

11.0%

9.4%

9.7%

10.5%

9.8%

9.6%

10.3%

11.0%

10.0%

10.6%

9.9%

11.3%

9.9%

10.0%

10.5%

WACC

Current

2.89%

2.30%

1.31%

1.13%

1.08%

0.92%

Spread

Year
1996
1996
1995
1996
1996
1995
1996
1995
1995
1995
1995
1995
1995
1996
1996
1995

Price
(11/03)
81.00
51.00
79.38
57.50
35.25
49.88
43.88
64.75
24.38
17.50
37.75
36.00
20.38
73.88
37.50
29.75
46.23

Shares
(MM)
235
245
146
159
390
154
37
211
79
15
267
135
33
102
485
145
177

103

Source: Company published data, Value Line, CS First Boston estimates

* Based on most current fiscal year end.

Company
Campbell Soup
ConAgra
CPC International
General Mills
H.J. Heinz
Hershey Foods
Interstate Bakeries
Kellogg
McCormick
Morningstar
Nabisco Holdings Corp.
Quaker Oats
Ralcorp Holdings
Ralston Purina
Sara Lee
Tyson Foods
Group Averages

Table 75
Support Data
Current
Debt
2,689.0
3,900.0
2,723.0
1,622.4
3,582.5
770.7
300.0
995.2
447.0
175.0
4,726.0
1,400.0
375.9
1,674.6
2,296.0
2,046.2
1,857.7

Enterprise
Value
21,683.5
16,415.0
14,313.6
10,787.9
17,330.0
8,451.4
1,924.7
14,670.4
2,382.4
437.5
14,812.8
6,267.6
1,046.6
9,195.1
20,498.3
6,367.9
10,411.6

Packaged Food Industry Rate of Return Analysis

Invested
Capital*
5,606
6,802
5,679
2,222
6,848
2,409
1,151
3,235
1,232
123
10,715
3,595
588
3,661
8,563
4,045
4,154.54
ROIC*
17.8%
12.9%
13.3%
26.6%
13.1%
14.2%
6.8%
23.8%
12.1%
9.9%
7.7%
8.1%
10.9%
15.1%
14.8%
9.0%
13.5%

Current
WACC
10.5%
10.0%
9.9%
11.3%
9.9%
10.6%
10.0%
11.0%
10.3%
9.6%
9.8%
10.5%
9.7%
9.4%
11.0%
8.6%
10.1%

ROIC-WACC
Spread
7.3%
2.9%
3.4%
15.3%
3.2%
3.6%
-3.2%
12.9%
1.8%
0.2%
-2.2%
-2.4%
1.2%
5.7%
3.7%
0.3%
3.4%

Ent. Value/
Inv. Cap.
Multiple
3.9 X
2.4 X
2.5 X
4.9 X
2.5 X
3.5 X
1.7 X
4.5 X
1.9 X
3.6 X
1.4 X
1.7 X
1.8 X
2.5 X
2.4 X
1.6 X
2.7 X

Cash flow
growth rate
11.0%
9.5%
12.0%
9.0%
10.0%
10.5%
7.0%
7.0%
12.5%
9.0%
6.0%
3.5%
7.5%
9.5%
11.0%
8.4%

EPS
growth rate
12.0%
13.5%
13.0%
12.0%
11.5%
11.5%
7.5%
8.0%
16.0%
15.5%
5.0%
3.5%
12.5%
11.0%
13.0%
10.3%

Rating
Hold
Hold
Hold
Buy
Hold
Hold
Buy
Buy
Buy
Hold
Hold
Buy
Hold
Buy
Buy
Hold

FY
JUL
M AY
DEC
M AY
APR
DEC
M AY
DEC
NOV
DEC
DEC
JUN
SEP
SEP
JUN
SEP

34.00

38.35

Calendar EPS
95A
96E
3.00
3.45
2.20
2.50
3.67
3.95
2.50
2.95
1.70
1.90
1.70
2.00
0.75
1.55
3.48
3.07
1.17
1.12
0.75
0.92
1.18
1.40
0.77
1.35
1.34
1.00
3.15
3.50
1.70
1.95
1.44
0.45

TK R
CPB
CAG
CPC
GIS
HNZ
HSY
IBC
K
M CCRK
M STR
NA
OAT
RAH
RAL
SLE
TY SNA

41.35

97E
3.90
2.85
4.45
3.50
2.10
2.20
2.20
3.65
1.30
1.30
1.70
1.80
1.05
4.00
2.20
1.60

Price
(11/08)
81.13
52.00
79.88
58.25
36.63
49.88
45.25
66.75
23.75
17.38
38.75
38.25
20.63
76.13
38.75
28.38
46.98
730.82

97E
20.8
18.2
17.9
16.6
17.4
22.7
20.6
18.3
18.3
13.4
22.8
21.3
19.6
19.0
17.6
17.7
18.9
17.7

Shares
(MM )
235
245
146
159
390
154
37
211
79
15
267
135
33
102
485
145

P/E Ratio
96E
23.5
20.8
20.2
19.7
19.3
24.9
29.2
21.7
21.2
18.9
27.7
28.3
20.6
21.8
19.9
63.1
22.2
19.1

52-Wk
Range
84-51
52-38
80-65
61-52
37-30
52-30
46-20
81-63
26-19
19-10
39-27
38-30
29-19
76-56
39-30
30-21
A
A
A

A

A
A

A
A

CS First Boston

Relative P/E
96E
97E
23.4
17.7
9.1
3.2
6.1
1.6
3.6
(5.8)
1.2
(1.3)
30.9
28.3
53.2
16.4
14.1
3.5
11.3
3.4
(0.9)
(24.4)
45.2
29.0
48.7
20.2
8.2
11.1
14.1
7.7
4.3
(0.3)
230.9
0.3
16.5
6.7
0.0
0.0

Fiscal EPS
95A
96E
2.80
3.17
2.06
2.34
3.67
3.95
2.35
3.00
1.59
1.75
1.70
2.00
0.45
0.86
3.48
3.07
1.17
1.12
0.75
0.92
1.18
1.40
0.77
1.35
1.40
0.98
3.10
3.56
1.62
1.83
1.51
0.60
1.85
1.99
34.00
38.35

Debt
2,689.0
3,900.0
2,723.0
1,622.4
3,582.5
770.7
300.0
995.2
447.0
175.0
4,726.0
1,400.0
375.9
1,651.4
2,296.0
2,046.2

%
1.7
1.8
2.1
3.4
3.2
1.4
1.2
2.5
2.4
0.0
1.6
3.0
0.0
1.6
2.2
0.4
2.2
1.9

Estim ated
growth rate
3-5 years
11%
12%
11%
12%
10%
10%
20%
13%
11%
15%
20%
20%
10%
13%
12%
13%

1996
1997
Enterprise/
Enterprise/
EBITDA
EBITDA
13.1
11.6
9.4
8.5
9.5
8.7
10.6
9.2
9.3
8.7
11.9
10.9
8.5
7.3
11.3
9.7
11.5
9.6
13.8
8.3
10.4
9.5
10.3
8.8
8.9
7.8
9.1
8.6
9.2
8.5
12.3
8.4
10.3
9.2

Dividends
$
1.38
0.95
1.64
2.00
1.16
0.72
0.54
1.68
0.56
0.00
0.62
1.14
0.00
1.20
0.84
0.12
0.91
13.95

Michael J. Mauboussin (212) 325-3108

EBITDA
1996
1997
7.05
8.00
7.20
7.95
10.40
11.35
6.45
7.40
4.90
5.25
4.60
5.05
6.30
7.35
6.30
7.35
2.55
3.05
2.10
3.50
5.45
5.95
4.70
5.50
3.60
4.10
10.10
10.80
4.75
5.10
3.45
5.05

97E
3.60
2.65
4.45
3.10
1.92
2.20
1.95
3.65
1.30
1.30
1.70
1.80
0.85
4.05
2.05
1.40
2.44
41.35

P/E Ratio
96E
97E
25.6
22.5
22.2
19.6
20.2
17.9
19.4
18.8
20.9
19.1
24.9
22.7
52.6
23.2
21.7
18.3
21.2
18.3
18.9
13.4
27.7
22.8
28.3
21.3
21.0
24.3
21.4
18.8
21.2
18.9
47.3
20.3
25.9
20.0
19.1
17.7

This memorandum is for informative purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy, any security. While the information contained herein has been
obtained from sources believed to be reliable, we do not represent that it is accurate or complete and it should not be relied upon as such. We may from time to time have long or short positions in and buy and sell securities
referred to herein. This firm may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any company mentioned in this report.
© 1996, CS First Boston Corporation

Company
Campbell Soup
ConAgra
CPC International
General M ills
H.J. Heinz
Hershey Foods
Interstate Bakeries
Kellogg
M cCormick
M orningstar
Nabisco Foods
Quaker Oats
Ralcorp Holdings
Ralston Purina
Sara Lee
Tyson Foods
Group Average (weighted)
S&P 500

Note: (#) = primary.

Company
Campbell Soup
ConAgra
CPC International
General M ills
H.J. Heinz
Hershey Foods
Interstate Bakeries
Kellogg
M cCormick
M orningstar
Nabisco Holdings Corp.
Quaker Oats
Ralcorp Holdings
Ralston Purina #
Sara Lee #
Tyson Foods
Group Average
S&P 500

Table 76
Packaged Food Industry Universe

Packaged Food Industry Rate of Return Analysis

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