Equity Valuation and Analysis w/eVal 3rd Edition

Financial Statements ($000s) inactive Ticker Industry Code Sector Code Company Name Common Shares Outstanding 370,000 (in 000s at most recent fiscal year end) Estimated Price/Share=$14.98 Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Fiscal Year

Estimated Price/Share=$14.98 Company Name: AMAZON COM INC Required Valuation Parameters (to compute value of common equity): ------------------------------------------------------------------------------------------------------------------------------------------> 22.60% ----------------------------> 0 ----------------------------------------------------------------------------> 6/30/2001 ------------> 1.00 Enter Cost of Debt:---------------------------------------------------------------------------------------------- 8.00% Enter Cost of Preferred Stock:-----------------------------------------------------------------------------> 9.00% Optional Valuation Parameters (to compute value to all investors): Valuation Parameters Enter Cost of Equity Capital: Enter Value of Contingent Claims on Common Equity ($000): Enter Dilution Factor for Splits Occurring Since Latest

12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025 2,804,896 3,001,238 3,211,325 3,436,118 3,676,646 3,934,011 4,209,392 4,504,049 4,819,333 5,156,686 5,517,654 5,903,890 6,317,162 6,759,363 243,238 212,287 185,275 161,700 141,125 123,168 107,496 93,818 81,880 71,461 62,368 54,432 47,506 41,461 38,499 41,194 44,078 47,163 50,465 53,997 57,777 61,821 66,149 70,779 75,734

10 11 12 13 14 15 16 17 18 19 20 21 22 -36.69% -36.69% -36.69% -36.69% -36.69% -36.69% -36.69% -36.69% -36.69% -36.69% -36.69% -36.69% -36.69% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% -2791787 -2987212 -3196317 -3420059 -3659463 -3915625 -4189719 -4482999 -4796809 -5132586 -5491867 -5876298 -6287639 1060198 1134412

Equity Valuation and Analysis with eVal Apple and the iFad Case Overview Comprehensive analysis of a growth company employing conservative accounting Assessment of company involves:Evaluation of future growth opportunitiesSustainability of current profitabilityImpact of conservative accounting on future earnings Assessment of company involves:Evaluation of future growth opportunitiesSustainability of current profitabilityImpact of conservative accounting on future earnings Assessment

Ratio Analysis (7) Ratio Analysis (8 & 9) Relative IBM, Apple does not use debt financing, thus losing out on the ability to leverage its high RNOA into an even higher ROE Relative to IBM, Apple sits on a larger balance of financial assets, which slow down its turns without commensurately increasing its

Turnaround at Bally Total Fitness Case Overview A second revenue recognition case to compare and contrast with the Boston Chicken Case. New management promotes installment membership plan that leads to dramatic turnaround in financial performance.Is it a real economic turnaround, or is it accounting gimmickry?Two key differences from Boston Chicken plan that leads to

Bally Revenue Restatement BALLY TOTAL FITNESS HOLDING CORP Consolidated Statements of Income 31-Dec-98 In Thousands Except Per Share Amounts For Period Ended Dec 31, 1998 12/31/98 Restated Net revenues: -- -- Membership revenues -- -- Initial membership fees on financed memberships originated 414,190 217,200 Initial membership fees on paid-in-full memberships originated 30,318 30,318 Dues

What Happened at Bally? Revenue growth slows and income turns negative Took a $55 million charge for membership receivable reserve at the end of 2002. CEO resigns. Switched to modified cash-basis accounting at the end of 2003, resulting in a non-cash charge of $675 million.CFO and auditor resign in 2004 in the midst

Boston Chicken Case Case Overview Rapidly growing restaurant chain is one of the hottest names on Wall Street Sales and earnings show consistent growthBut a small number of detractors argue that the strategy is flawed and the accounting numbers are misleading Sales and earnings show consistent growthBut a small number of detractors argue that

Overall Evaluation of Boston Chickens Business Strategy Financing business is lackluster, but has important synergies for franchising business. Credit risk is a big concern here. Franchise business looks great, so long as franchisees can keep paying bills.Restaurant business looks horrible and is making substantial losses and sucking up huge amounts of cash

Pro Forma Provision Computations Setting the Provision for Bad Debts at 10% of notes receivable issued during the period, we have: Provision = 10% of 1,467,065*= 146,707 *This amount is found in the investing section of the statement of cash flows Including the provision in General and Administrative Expense:Restated G&A Expense = Reported

EnCom Corporation The Analysis of Earnings Quality Defining Earnings Quality What criteria would a high quality accounting system satisfy? Accounting rate of return on equity (ROE) would provide good measure of internal rate of return (IRR) on the portfolio of projects that firm is currently invested in.Book value would provide a good measure

Stage 2 of EnCom Example An incremental investment project is available to EnCom, with data as follows: EnCom can engage in a marketing campaign during period 1, with total marketing costs of $300, payable in cash at the end of period 1.The marketing project increases cash inflows at the end of periods

Stage 2 Questions 7. Compute EnComs ROE for each of the five periods using each of the above three accounting methods. Explain how each of the different accounting methods impacts EnComs ROE.Immediately expensing the costs temporarily depresses ROE, but leads to inflated ROE in the future. This is conservative accounting.Write-off of

Measuring Accruals: Sloan (1996) Sloans definition of accruals: Accruals = (DCurrent Assets DCash) - (DCurrent Liabilities DST Debt) Depreciation Expense Note that: Earnings - Cash from Operations = Accruals Deflate by total assets High Accruals => temporarily high earnings and accounting rates of returnLow Accruals => temporary low earnings and accounting rates of return High Accruals =>

EnCom Stage 1 End of Period 0 1 2 3 4 5 Discount Factor at 10% 1.0000 0.9091 0.8264 0.7513 0.6830 0.6209 DCF Valuation Cash Inflows 0 600 1,200 1,200 1,200 1,200 Cash Outflows -1,720 -720 -720 -720 -720 0 Free Cash Flow -1,720 -120 480 480 480 1,200 DCF -1,720.00 -109.09 396.69 360.63 327.85 745.11 DCF Valuation

Equity Valuation and Analysis with eVal The Gabelli Utility Trust Case Objectives To illustrate security mispricing in a setting where it is relatively straightforward to estimate intrinsic value OtherIntroduction to closed end fundsReview fair value accountingIdentify determinants of discounts and premia for closed-end funds OtherIntroduction to closed end fundsReview fair value accountingIdentify determinants of discounts

Intels Earnings Torpedo Objectives of Intel Case Illustrate the role of sales growth rates and gross margins as the two key drivers of value. Illustrate how the extrapolation of unusually high sales growth rates can have a huge impact on estimates of firm value.Make the point that investors and analysts frequently naively extrapolate

Why Was the Stock Price Drop So Large? Recompute the valuation models in questions 2 and 3, but in each case assume that sales growth and margins immediately fall back from the 2000 levels to to 1999 levels in 2001 Model 4 = $23.94Model 5 = $23.35 (a 2.5% drop)When we extrapolate

Ratio Analysis Framework for Business Analysis and Valuation 4. Financial Ratio Analysis 5. Cash Flow Analysis 4. Cash Flow Forecasts 3. Valuation Ratios 4. Complications Negative Values Value Creation and Destruction though Financing Transactions 4. Financial Ratio

The Margin versus Turnover Trade- Off 0% 5% 10% 15% 20% 25% 30% 35% 0 1 2 3 4 5 6 7 8 9 10 11 Turnover Profit Margin ROE=10% ROE=20% Factors Influencing the Margin vs. Turnover Trade-Off Lower turnover (and higher margins) result from: industry-wide production technology that requires significant capital investmentfollowing a product differentiation versus a cost leadership strategy industry-wide production technology that requires significant capital

Netflix, Inc. Case Overview Comprehensive analysis of a growth company experiencing growing pains. Management claims them to be temporary growing painsStock market senses more chronic problemsCase involves evaluation of competing perspectives and conclusion regarding companys prospects and valuation growing painsStock market senses more chronic problemsCase involves evaluation of competing perspectives and conclusion regarding companys

Accounting Analysis (5) Netflix Provision for Income Taxes: Netflix has a history of losses for both tax and financial reporting purposes. These losses produce net operating loss carryforwards (NOLS) to offset against future profits. But given the uncertainty as to whether Netflix will evergenerate enough profits to use these NOLS, they arebooking a 100% valuation

Valuation Analysis (13) The default valuation is -$49.44/share. The negative valuation arises because the default assumptions imply a terminal ROE of 3.6%, much lower than the cost of capital of 10%. Note that negative prices are not observed in practice, but we get a negative value in eVal because the default forecasting

Financial Statements ($000s) inactive Ticker Industry Code Sector Code Company Name #NFLX MG743 MG7 Common Shares Outstanding 52,732 (in 000s at most recent fiscal year end) Estimated Price/Share=$15.99 Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast

Annual Dividend Yield 4.00% Value of Contingent Claim Per Share #NAME? Number of Shares Subject to Claim (000s) 1,000 Total Value of Contingent Claim ($000s) #NAME? Residual Income Valuation ($000) Company Name NETFLIX INC Most Recent Fiscal Year End 12/31/2004 Date of Valuation 3/1/2005 Cost of Common Equity 10.00% Fiscal Year of Forecast 12/31/2005 12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010

Model Summary Sensitivity Analysis Historical Data For: Forecast Horizon 10 Years NETFLIX INC Most Recent Fiscal Year End: 12/31/2004 This Year's ROE (%) 10.21% Average ROE (last five years) 977.87% Sales Growth (last five years) #DIV/0! Terminal Year's ROE (%) 16.80% Forecast Data: This Year's Sales Growth (%) 36.40% Forecast Horizon 5 Years This Year's ROE 10.21% Terminal Year's Sales

Company Currently in Model is NETFLIX INC STEP 1 a STEP 2 aSTEP 3aVALUATION: aSTEP 3aVALUATION: a STEP 3 a VALUATION: User's Guide FORECASTING THE FUTURE: UNDERSTANDING THE PAST:

Data Center Industry Code LookUp Annual Financia Click Here f To import historical data double-click any cell or enter ticker above: Company Name Ticker Industry Sector ONTN Go Search Links to SEC filings, Company cial Data is originally from April 2006 Here for an annual update any Websites, News and Analyst Forecasts Financial Statements ($000s) inactive Ticker Industry Code Sector Code Company Name #NFLX MG743 MG7 Common Shares

Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025 12/31/2026 12/31/2027 12/31/2028 12/31/2029 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast 12/31/2020 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025 12/31/2026 12/31/2027 12/31/2028 12/31/2029 Estimated Price/Share=$12.07 Company Name: NETFLIX INC Required Valuation Parameters (to compute value of common equity): 10.00% 0 3/1/2005 1.00 Enter Cost of Debt: ----------------------------------------------------------------------------------------------> 8.00% Enter Cost of Preferred Stock: -----------------------------------------------------------------------------> 9.00% Implied Cost of Equity Calculator This calculator solves for

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Equity Value 1621977 Equity Value at Current Date 1731933 Less Contingent Claims 0 Adjusted Value 1731933 Shares Out. 52,732 Price/Share 32.84404907 Numbers below are inputs for dropdown list in Quick 'n' Dirty5 Years10 Years20 Years Numbers below are inputs for dropdown list in Quick 'n' Dirty5 Years10 Years20 Years Numbers below are inputs for dropdown list in Quick

23 24 14.22% 14.22% 5.00% 5.00% 1029973 1081472 150119 76890 47121 -31257 5262 -3173 23 24 14.22% 14.22% 5.00% 5.00% 2039436 2141408 297248 152249 93304 -61892 10420 -6284 23 2414.22% 14.22%5.00% 5.00%7989232 83886941164430 596415365507 -24245440819 -24615 23 2414.22% 14.22%5.00% 5.00%7989232 83886941164430 596415365507 -24245440819 -24615 23 24 14.22% 14.22% 5.00% 5.00% 7989232 8388694 1164430 596415 365507 -242454 40819 -24615

OVERSTOCK COM INC Consolidated Statements of Income In Thousands Except Per Share Amounts For Period Ended Jun 30, 2005 09/30/05 3m Notes Revenue Direct 61,499 40% Growth Fulfillment partner 98,797 66% Growth Total revenue $160,296 55% Growth Cost of goods sold Direct 53,504 87% of Sales Fulfillment partner 83,977 85% of Sales Total cost of

OVERSTOCK COM INC QUARTERLY FINANCIAL INFORMATION BALANCE SHEET QUARTERLY ASSETS (000s) FISCAL QUARTER ENDING 6/30/2005 3/31/2005 12/31/2004 CASH 31,350 37,611 198,678 MRKTABLE SECURITIES 88,625 155,157 88,802 RECEIVABLES 13,649 6,467 5,715 INVENTORIES 59,783 48,956 45,279 RAW MATERIALS NA NA NA WORK IN PROGRESS NA NA NA FINISHED GOODS NA NA NA NOTES RECEIVABLE NA NA NA OTHER CURRENT ASSETS 18,490 19,653 15,766 TOTAL

Overstock.com: Business Strategy Analysis Case Overview Comprehensive case that we will use throughout the course Rapidly growing e-tailerStrong sales growth and high stock price valuationBut struggling to report a profit Rapidly growing e-tailerStrong sales growth and high stock price valuationBut struggling to report a profit Rapidly growing e-tailer Strong sales growth and high stock price valuation But struggling

Sales Growth Growth rate in GAAP basis sales = 238.9/91.8 = 160% Growth rate in gross basis sales = 278.8/142.8 = 95% Growth rate in gross basis sales = 278.8/142.8 = 95% Growth rate in gross basis sales = 278.8/142.8 = 95% Source: Nissim and Penman (2001) Source: Nissim and Penman (2001) Source: Nissim and Penman (2001) GAAP

Trade-Off 3: Direct versus Fulfillment Partner 0% 5% 10% 15% 20% 25% 30% 35% 0 1 2 3 4 5 6 7 8 9 10 11 Turnover Profit Margin ROE=10%(Gross-Basis: we take returns) ROE=10%(Gross-Basis: we take returns) ROE=10% (Gross-Basis: we take returns) ROE=20% Direct Fulfillment Partner (Gross-Basis: they take returns) Fulfillment Partner (Commission-Basis) Fulfillment Partner Trade-Off 4: Discount Retailer versus Department Store 0% 5% 10% 15% 20% 25% 30% 35% 0 1 2 3 4 5 6 7 8 9 10 11 Turnover Profit Margin ROE=10% ROE=20% Department Store Discount

Key Insights from Analysis Overstocks turnover looks a little slow High balance of cash and marketable securities slows down aggregate turnover ratios Aggressive use of fulfillment partners combined with gross- basis accounting for sales revenue should lead to higher turns than Amazon.com Overstocks margins are currently way too low Margins lag way behind competitors Partly due

Analyst Valuation Method Analyst report uses comparable enterprise value to revenue multiples with discount retailing peers and internet bellwethers as comparisons Argues that OSTK deserves a premium because of superior top-line growth prospectsNote that enterprise value equals market value of equity plus book value of debt less cash and short-term investments Argues that

Instructor Notes for Interpreting Margin and Turnover Ratios* Overview: The objective of this case is to illustrate the determinants of margin and turnover ratios. Textbooks frequently recommend comparing margin and turnover ratios over time and across firms to identify unusual performance. This case demonstrates that we must first identify

Accounting Analysis Identifying accounting distortions caused by estimation error, bad GAAP, or management manipulation From a valuation perspective, Correcting the distortion = Forecasting the distortions reversal From a valuation perspective, Correcting the distortion = Forecasting the distortions reversal From a valuation perspective, Correcting the distortion = Forecasting the distortions reversal But you have to know

The Deal with George Foreman the old deal with George: 60% of gross profit approximately $64 million in 1999 the new deal with George: $122 million pmt , amortized over 15 years (after 8.1 amortization 113.9 as of yr end)How will the deal change the financial statements going forward? the new deal with George:

Sirius Satellite Radio, Inc. Case Overview Comprehensive analysis of a growth company that requires economies of scale to attain profitability Company spends aggressively to increase subscriber growth in an attempt to achieve scale economies Subscriber growth falls short of target in mid 2006, causing stock price to fallIs this a buying opportunity or

Accounting Analysis (8) Assume that instead of using its current accounting practices for subscriber revenue, Sirius instead recognized subscriber revenue upon the receipt of subscriber payments. Estimate the Loss from operations that Sirius would have reported for the year ended December 31, 2005 : Restated loss from operations = Reported loss from

Forecasting Analysis (18) Evaluate the plausibility of the forecasting scenario you provided in answer to the preceding question. We will defer the answer to this question until question 22 Note that one particular challenge we face in this forecasting exercise is making sure we come up with a positive value fortotal equity. Economies of scale

Financial Statements ($000s) inactive Ticker Industry Code Sector Code Company Name SIRI MG724 MG7 Common Shares Outstanding 1,346,227 (in 000s at most recent fiscal year end) Estimated Price/Share=$2.13 Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast

Annual Dividend Yield 4.00% Value of Contingent Claim Per Share #NAME? Number of Shares Subject to Claim (000s) 1,000 Total Value of Contingent Claim ($000s) #NAME? Residual Income Valuation ($000) Company Name SIRIUS SATELLITE RADIO Most Recent Fiscal Year End 12/31/2005 Date of Valuation 6/1/2006 Cost of Common Equity 10.00% Fiscal Year of Forecast 12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010

Model Summary Sensitivity Analysis Historical Data For: Forecast Horizon 10 Years SIRIUS SATELLITE RADIO Most Recent Fiscal Year End: 12/31/2005 This Year's ROE (%) -167.62% Average ROE (last five years) -695.11% Sales Growth (last five years) #DIV/0! Terminal Year's ROE (%) 85.57% Forecast Data: This Year's Sales Growth (%) 159.00% Forecast Horizon 5 Years This Year's ROE -167.62% Terminal Year's

Suggested Solution to Four Valuation Models One Value Case Part A: by hand computations 1) FCF to equity (i.e. net dividends) is computed as NIt - CEt. This gives 2001 2002 2003 2004 NI 3780 3834 4026 4227 chg in CE 2000 -400 630 662 FCF to equity 1780 4234 3396

Business Strategy Analysis why wont the companys products/services become a commodity priced at the marginal cost of production? Rivalry Among Threat of Threat of Existing Firms New Entrants Substitute Products Industry growth scale economies relative price concentration first mover advantage relative performance differentiation distribution access buyers' willingness to switching costs legal barriers to

Fiscal Years Ended ------------------------------------------ December 25, December 31, December 29, 1994 1995 1996 ------------------------------------------ (53 weeks) ------------------------------------------ Revenue: Royalties and franchise related fees....... $43,603 $ 74,662 $115,510 Company stores............................. 40,916 51,566 83,950 Interest income............................ 11,632 33,251 65,048 -------

DECEMBER 31, DECEMBER 29, 1995 1996 Boston Market Financed Area Developers: - --------------------------------------- Total number of financed area developers......................... 15 14 Total number of financed area developer stores open............ 627 841 Balance sheet data: Total gross assets......................................... $513,926 $ 640,534 Total debt: To

The 80 Minute Forecast Forecasting the 3rd quarter for Tim Hortons for period ended 9/30/2012, to be announced November 8. But first, some facts about quarterly earnings and seasonality earnings and seasonality earnings and seasonality earningsquarter report filedanalyst meetingsfiscal qtr earningsquarter report filedanalyst meetingsfiscal qtr earnings quarter report filed analyst meetings fiscal qtr announced in press release with exchange press releases, blackout period, no insider trading 1 week1

seasonality in SGA/Sales (HD)? 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45 0.5 8/2/09 8/3/08 7/29/07 7/30/06 7/31/05 8/1/04 8/3/03 8/4/02 7/29/01 7/30/00 sga/sales ---- time ----- seasonality in gross margin (HD)? 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 8/2/09 8/3/08 7/29/07 7/30/06 7/31/05 8/1/04 8/3/03 8/4/02 7/29/01 7/30/00 gross margin ---- time ----- seasonality in comps (HD)? -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 8/2/09 8/3/08 7/29/07 7/30/06 7/31/05 8/1/04 8/3/03 8/4/02 7/29/01 7/30/00 Comparable store sales growth ---- time ----- 80 (now 60)

Valuation Equations or whats happening inside the computer for the period ending 0 1 2 T-1 T T+1 T+2 NOA0 NOA1 NOA2 NOAT-1 NOAT NOAT(1+g) NOAT(1+g)2 -L0 -L 1 -L 2 -L T-1 -L T -L T(1+g) -L T(1+g)2 CE0 CE 1 CE 2 CE T-1 CE

DCF to All Investors =1tPe=Pf =1tPe=Pf = 1 t Pe= Pf += )1( t t wf CrP investorsValue to investorsValue to investors Value to = += 1 )()1( t tt t dd LIrP ttpsps PSPDrPstockholders ttpsps PSPDrPstockholders tt psps PSPDrP stockholders =1t =1t = 1 t += )()1( t Value to Common Equity Pd Pps Pps Pps Value to all debtholders Value to preferred Value to preferred Value to preferred entity value common equity value preferred stock value debt value tax shield Pf = Pe + Pps +

EPS Forecasting Requires NI and average # of common shares outstanding. Forecasted stock issuance/repurchase implies a change in the # shares. Assume they are issue at end of year, at estimated price Pt+1. find Pt+1 ineP find Pt+1 ineP find Pt+1 in eP issue/repurchase dollar amount of new equity at Pt+1 to get additional # of shares 1 11 + =++ t tt DP r getting the

INTC earnings warnings 0 10 20 30 40 50 60 70 80 -10 -8 -6 -4 -2 0 2 4 6 8 10 days relative to announcement price 2001Q1 rls 2000Q3 rls What happened at Intel? what happened? 2000 2001 2002 2003 Sales growth 14.8% -21.3% 0.8% 12.6%gross margin 62.5% 50.8% 49.8% 56.7% Sales growth 14.8% -21.3% 0.8% 12.6%gross margin 62.5% 50.8% 49.8% 56.7% Sales growth 14.8% -21.3% 0.8% 12.6% gross margin 62.5% 50.8% 49.8% 56.7% forecasted real growth for next 10

Forecasting and Valuation: Hogs and Chestnuts Who profits when the Chinese eat? Bennets Law Source: FAO (2008). Zhongpin (HOGS) Valuation Ratios price at 12/31/2010 is $15/shr, 34,660K shrs outstanding, NI = $45,590K and CE = $296,850K.P/E = 11.4 and P/B = 1.8. price at 12/31/2010 is $15/shr, 34,660K shrs outstanding, NI = $45,590K and CE =

HOGS income statement forecasts Sales 29% growth in 2010, 24% in 2011 from analyst report. Trend to 3% after that. CGS/Sales hold margins constant. With rapidly growing market, less competitive pressure on marginsSGA/Sales increase from 4.2% to 5.0% because of increased focus on branded pork productsdepreciation in steady state, way through the

HOGS PPE/Sales forecast II if capacity utilization = used/available = .65 and this statistic is going to .90, then new(PPE/Sales) = old (PPE/Sales) * (.65/.90)new PPE/Sales = .358 * (.65/.90) = .259, trending over 10 years new(PPE/Sales) = old (PPE/Sales) * (.65/.90)new PPE/Sales = .358 * (.65/.90) = .259, trending over 10

Amazon.com cuddle up with a DCF model critically evaluate a valuation model what is the analyst assuming about profitability, efficiency and leverage? are the pieces put together in a logical way?consider the option value of owning a share of AMZNhow to adjust the value estimate for employee stock options are the pieces put together in

balance sheet assumptions cash what does the analyst report assume about cash? set operating cash to 0% for all future periodswhat is the valuation implication of doing this? set operating cash to 0% for all future periodswhat is the valuation implication of doing this? set operating cash to 0% for all future periods what is the

Amazon.com -2,000,000 0 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 1999 2000 2001 2002 2003 2004 2005 AMZN what happened Key takeaways from AMZN ALWAYS forecast complete income statements and balance sheets in order to arrive at free cash flow forecasts. Always conduct a ratio analysis on your forecast financial statements to check they are plausible.When a firm is in financial distress the equity has option value! Always conduct a ratio

Chestnuts (American Lorain) and Chinese reverse mergers The Chestnut shes a fickled beast Chestnuts in China Chestnuts in China Chestnuts in China Chinas a world Current World Annual Chestnut Production (~ 1 Million Tons) South Korea, 9% Turkey, 6%China, China, 59%Japan, 9% Turkey, 6%China, China, 59%Japan, 9% Turkey, 6% China, China, 59% Japan, 9% Italy, 5% Japan, 3% Others, Eu rope, 9% Others, Eu rope, 9% Others,

valuation parameters So how did our analyst arrive at $9/share? reverse mergers ...but there has been trouble The 349 Chinese reverse mergers so what is an investor to do? there are about 10,000 publicly traded stocks around the world, dont need to own this one. If reality is that the financial statements are part reality, part

http://www.swongcpa.com/front/about/index are they bribing the auditors? shuffling money to friends and family? and what about HOGS? Disclosure: We have no positions in any stocks mentioned, and no plans to initiate any positions. China Economic Review has no interest or investments in the stocks it covers, and has strict rules for staff with regard to

AOL Time Warner Merger examine a famous merger case describe the unique valuation issues surrounding mergers/acquisitions describe some unique accounting issues surrounding mergers/acquisitionsanswer the Zen question: what is the value of an overvalued stock? describe some unique accounting issues surrounding mergers/acquisitionsanswer the Zen question: what is the value of an overvalued stock? describe some unique

EPS growth through acquisition A stock acquisition generally improves EPS if the P/E of acquirer is greater than the P/E of target. but beware of takeover premia, goodwill amortization and merger-related costs. but beware of takeover premia, goodwill amortization and merger-related costs. but beware of takeover premia, goodwill amortization and merger-related costs. EPS growth through

Accounting Rules Finance Drools CEt= CEt-1 + NItDivt, or Divt= NItDCEt Forecast Divtby forecasting NItand CEt..Divt= Nit DCEtOver life of firm, DCEt= 0, so Divt= NitAccounting NIteventually gets the right answer. Forecast Divtby forecasting NItand CEt..Divt= Nit DCEtOver life of firm, DCEt= 0, so Divt= NitAccounting NIteventually gets the right answer. Forecast Divtby forecasting NItand

In April 1996, the Company delivered 450,640 shares of common stock with a market value of approximately $15.0 million and a $6.8 million promissory note to acquire the equity interests of certain investors in Mid-Atlantic Restaurant Systems L.P. ("Mid-Atlantic"), its Boston Market area developer for the Philadelphia area. As

Operating Accruals = (NI CFO)/TA Operating Accruals = (NI CFO)/TA Operating Accruals = (NI CFO)/TA -5 -4 -3 -2 -1 0 1 2 3 4 5 0 0.05 0.1 Mean Earnings Event Year Low Accrual Portfolio High Accrual Portfolio But Earnings Performance Without Cash Performance Mean Reverts Quickly Do Investors Use the Information In Cash Flows to Evaluate the Quality of Earnings? -60 -48 -36 -24 -12 0 12 24 36 48 60 -30 0 30 60 Cumulative Abnormal Return (%) Event Month Lowest Accrual Portfolio Highest Accrual Portfolio Hedge Portfolio What Should You Watch

The Four Tops - Its the Same Old Song Pre-Paid Legal Services - Q3 1999 ? An HMO for legal expenses The Service 30 minutes on phone 2.5 hours of auto-related court timeother misc. trial time, EXCLUDING domestic acts, bankruptcy, criminal acts, alcohol or drug-relatedThe Industry105 million have some type of coverage thru work 2.5 hours

What happens if the member quits before 3 years are up? could account for as a write-off commission expense (+) xx commission advance (-) xx or could do nothing! So whats the big accounting issue in the press release? Even though commission advances increased $9.2 million as a result of increasing membership sales during the third

1 Financial Statement Analysis Overstock.com War 2 Overstock.com Overview of Business What do they do? www.overstock.com Performance? http://finance.yahoo.com/q/bc?s=OSTK&t=5y&l=on&z=l&q=l&c= 3 Overstock.com: Overview of Business Key success factors? Key risks factors? 4 Q2: What are the Critical Accounting Policies? Q2: What are the Critical Accounting Policies? Q2: What are the Critical Accounting Policies? 1. Revenue Recognition Major switch from commission basis to gross basis for fulfillment partner revenue on July 1,

11 11 11 Next, Financial Analysis Framework for of Business Analysis and Valuation Financial StatementsAnalysis Toolscompetitor financials, bond ratings, beta factors, security prices etc. StatementsAnalysis Toolscompetitor financials, bond ratings, beta factors, security prices etc. Statements Analysis Tools competitor financials, bond ratings, beta factors, security prices etc. Other Public Data: industry data, analyst reports, Strategy AnalysisAccounting AnalysisFinancial AnalysisProspective AnalysisBusiness Application Contextequity security

18 Margins and Turnover 12.8% 9% 19 19 19 Boston Chicken, 1996 Fiscal Years Ended ------------------------------------------------------- December 25, 1994 December 31, 1995 December 29, 1996 ----------------- ----------------- ----------------- <S> <C> <C> <C> Cash Flows from Operating Activities: December 25, 1994 December 31, 1995 December 29, 1996 ----------------- ----------------- ----------------- <S> <C> <C> <C>

1 1 1 Royal Caribbean Cruises Ratio Analysis and Forecasting loveboat loveboat loveboat 2 The Cruise Experience 3 Industry Growth Rates 0 1000 2000 3000 4000 5000 6000 1980 1981 1982 1983 1984 1985 1986 1987 19881989199019911992199319941995 19881989199019911992199319941995 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 annual cruise passengers (thousands) 5.6 5.8 6 6.2 6.4 6.6 6.8 7 average cruise length (days) 4 4 4 33 16 96 39466 29800 69107 2045000 1841000 1542000 0% 20% 40% 60% 80% 100% ships berths passengers 1998 Market Share All Other Royal Caribbean Cruises Carnival Cruises Cruise Industry Market Shares 5 1996 1997 1998 RCL revenue growth 14.6% 42.9% 36.0% CCL revenue growth 10.7% 10.6% 23.0% RCL revenue growth adj * 14.6% 24.2% 20.0% CCL revenue growth adj *

11 Advance Dupont breakdown Royal Caribbean Carnival RNOA= (NOI/NOA)= 10.5%= 16.9% (NOI/NOA)= 10.5%= 16.9% (NOI/NOA) = 10.5% = 16.9% 498,639/4,757,629 893,398/5,298,064 Net Operating Margin(NOI/Sales)498,639/2,636,291= 18.9%893,398/3,009,306= 29.7%x NOA Turnover(Sales/NOA)2,636,291/4,757,629= 0.5543,009,306/5,298,064 = 0.568 Net Operating Margin(NOI/Sales)498,639/2,636,291= 18.9%893,398/3,009,306= 29.7%x NOA Turnover(Sales/NOA)2,636,291/4,757,629= 0.5543,009,306/5,298,064 = 0.568 Net Operating Margin (NOI/Sales) 498,639/2,636,291 = 18.9% 893,398/3,009,306 = 29.7% x NOA Turnover (Sales/NOA) 2,636,291/4,757,629 = 0.554 3,009,306/5,298,064 = 0.568 + Spread (RNOA - NBC) 10.5% - 6.7% = 3.8% 16.9% - 4.3% =12.6% Check: ROE = RNOA

what direction is this ship headed? Forecasting for the Love Boat Jackson 5 - The love you save Jackson 5 - The love you save Jackson 5 - The love you save Sales Forecast: economy to industry to firmpast futuremacroeconomic seriesindustry salespredictable series based on past dataestimaterelationforecast industry sales Sales Forecast: economy to industry to firmpast

estimating industry growth -2.0 0.0 2.0 4.0 6.0 8.0 10.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 % growth in GDP % growth in Recreation Expenditures % Rec growth = 3.23+1.14%GDP growth -5.0 0.0 5.0 10.0 15.0 20.0 25.0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998E 1999E 2000E 2001E percentage growth Real GDP Personal Consumption Expenditures Recreation Expenditures % growth in passengers the trouble is no relation! no relation! no relation! Building a Sales-Unit Model assume that % sales growth = (1+growth in berths)(1+growth in rev/berth) 1 year

price decreases of 3%, 2%, 2%, so CGS99 = .605/(1-.03) = 62.37% etc.SGA% declines in 2000 and 2001 due to economies of scale, computed as 2000 price decreases of 3%, 2%, 2%, so CGS99 = .605/(1-.03) = 62.37% etc.SGA% declines in 2000 and 2001 due to economies of scale, computed

1 Financial Statement Analysis Forecasting Home Depots fourth quarter of 2005 financial statements super freak 2 Overview of business/industry Worlds largest home improvement retailer and 2nd largest retailer in the U.S.Sell assortment of building materials, home improvement and lawn and garden Overview of business/industry Worlds largest home improvement retailer and 2nd largest retailer in the

11 What did you learn from The Home Depot Investor and Analyst Conference held on January 13, 2005 ? http://ir.homedepot.com/releases.cfm ATLANTA, Jan 19,2006 : (Carol Tome, CFO)- Sales growth of 10% to 12% (80.4 to 81.9 billion) - comps of 3.3% -Gross margin above 33.4% (ytd through Oct)- total expenses between 21.6% and

19 Next, forecasting CGS and SG&A: Are they also seasonal? 29.5% 29.6% 29.9% 30.0% 29.7% 30.2% 30.5% 30.4% 31.6% 32.0% 31.2% 31.3% 32.9% 33.4% 33.3% 33.5% 31.9% 30.8% 30.8% 32.0% 32.7% 34.2% 33.6% 33.2% 20.3% 18.6% 20.8% 21.5% 19.2% 20.7% 21.0% 18.9% 21.3% 22.4% 19.7% 20.3% 22.9% 21.1% 22.4% 23.0% 20.5% 21.6% 21.9% 23.8% 22.5% 23.7% 22.8% 24.3% 15% 17% 19% 21% 23% 25% 27% 29% 31% 33% 35% Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Gross Margin SG&A / Sales 20 Gross Margin and SGA Estimate 33.4% or aboveGM=% (Q3 this year of 33.6) x 34.2%/33.3% = 34.5%go with 34%between 21.6 and 22.6 annual (depr is included in sga in eVal data). Using 18,773,000 Q4 sales and past SGA 33.4% or

1 1 1 Debt and Default Who cares about debt and default risk? Vfirm = Vequity + Vdebt If Vfirm > > Vdebt then use PV of respective future pmts to value debt and equity If Vfirm<<Vdebt then , Vequity=0, Vdebt = PV of debt pmtsIf Vfirm = Vdebt then probability of default is crucial for both

11 11 11 The Movie Industry 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 1995 1996 1997 1998 1999 2000 box office gross sales (M) average attendance (M) $4.35/ticket $5.39/ticket 12 Multiplexes and Megaplexes average screens/theater 0 1 2 3 4 5 6 1995 1996 1997 1998 1999 2000 13 Country Cinema and City Screens Each has approximately 2800 screens Revenue = 65% tickets, 30% candy, 5% video games Revenue = 65% tickets, 30% candy, 5% video games Revenue = 65% tickets,

19 What Happened? Country Cinema (aka Carmike Cinemas) defaulted and filed for bankruptcy protection in August 2000 City Screens is AMC Entertainment Revenue declined rapidly as Megaplexes attracted more movie-goers and summer 2000 had no blockbustersinterest increased on additional borrowing from Revolving CreditCity Screens suffered only minor revenue decline more movie-goers and summer 2000