• Share
  • Email
  • Embed
  • Like
  • Save
  • Private Content
WFM - Initiating Coverage Presentation
 

WFM - Initiating Coverage Presentation

on

  • 768 views

WFM-Nasdaq analyst's report.

WFM-Nasdaq analyst's report.

Statistics

Views

Total Views
768
Views on SlideShare
764
Embed Views
4

Actions

Likes
0
Downloads
0
Comments
0

1 Embed 4

http://www.linkedin.com 4

Accessibility

Categories

Upload Details

Uploaded via as Microsoft PowerPoint

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

    WFM - Initiating Coverage Presentation WFM - Initiating Coverage Presentation Presentation Transcript

    • Equity Analyst Report Initiating CoverageWednesday, June 1 2011 Alessandro Masi, Daniele Foti © Masi & Foti, 2011
    • Stock rating:UNDERWEIGHT• 35.21x P/E, against the 19.98x P/E of its industry• high 12.96x ttm EV/EBITDA Vs SWY’s 5.60x• extraordinary upward trend started in November 2008 (+647%)• likely to face increased competition in a fast growing sector• concerns about growth strategy based on new store openings © Masi & Foti, 2011
    • Industry and Firm Analysis Global Trends and expenditures• Industry: MG734 Retail Stores – Grocery Stores. Upward trend and expected growth in sales.• Personal consumption expenditures for food and beverages off-premises increasing since 2006. © Masi & Foti, 2011
    • Industry and Firm Analysis Growth Strategy• Growth based on new store openings• Strong and stable relations with suppliers• Creation of value through balancing the interests of customers, employees and shareholders © Masi & Foti, 2011
    • Industry and Firm Analysis Accounting and Financial Highlights• Red flags on accounting practices – high operating leases and relatively low capital leases, – no impairment provided for goodwill in B/S, – expended employment stock options• Capital structure at 98.15% equity (mkt)• ROE and RNOA, higher than 14% in 2006, recovering in 2010 from a two-year drop © Masi & Foti, 2011
    • Forecasting the Future Assumptions• 5 year time horizon (retail industry)• 3 stores openings per year starting from 2015• 1% weighted average square footage growth rate 1% starting from 2015• sales growth driven by footage expansion and comparable-store sales growth• gross PP&E to sales ratio for 2011 is the average of the ratios for the previous 3 years. Then, the moving average of the 3 previous years. Same for depreciation to PP&E ratio• dividend payout ratio up by 0.5% yearly to 4% in 2016 © Masi & Foti, 2011
    • Forecasting the Future Interpreting results• ROE e RNOA accetably close to 10%• Low Profit Margin – Strategic shift from asset-based towards product differentiator, to boost profit margin – Improved cost policy – Better margins contribute to increase RNOA (DuPont analysis) © Masi & Foti, 2011
    • Valuation Valuation Parameters• Required Rate of Return on Equity at 8.92% (CAPM) – risk-free rate of return: 3.17% (Yahoo! Finance) – stock’s sensitivity (beta): 1.15 (Yahoo! Finance) – market risk premium: 5% (estimated)• Cost of debt at 3.36% (Bloomberg) + 1% (plug-in) for internal consistency• Cost of Preferred Stock at 6.85% (estimated)• WACC = 8.84% (mainly Equity)• No dilution for splits or stock dividend © Masi & Foti, 2011
    • Valuation Contingent Claim Adjustment• Weighted average exercise price: $46• Options outstanding at 09/26/2010: 18,946• Total Value Contigent Claims ($25.53 per share): $483.70M © Masi & Foti, 2011
    • Valuation Absolute Valuation• Discounted Cash Flow Model – Valuation to Common Equity • PV of FCFE in the first 20 years: $2 billion • PV of FCFE and FCFF negative in first 2 years of forecast• Residual Income Model – Valuation to Common Equity • PV of Residual Income in the first 20 years: $970 million • But PV of residual income always positive  value recognized before!• Entity Value: $4.8 billion• Forecasted Value: $4.4 billion (EV less value of debt)• Value attributable to common equity: $4 billion (FV less contingent claims)• Forecast share price: $28.55 © Masi & Foti, 2011
    • Valuation Sensitivity Analysis• Bull Case: $43.42 – Sales growth: 11% – Terminal Year: 5% – Terminal year’s ROE: +1%• Base Case: $33.80 – Sales growth: 9% – Terminal Year: 4%• Bear Case: $22.86 – Sales growth: 7% – Terminal Year: 3% – Terminal year’s ROE: -1% © Masi & Foti, 2011
    • Valuation EPS Forecasts and Consensus Analyst Forecast• No significative difference, just a wider range of variation 2011e 2012e 2013e Forecast EPS $2.00 $2.18 $2.36 Consensus Analyst $1.90 $2.13 $2.45 Forecast of EPS* © Masi & Foti, 2011
    • Valuation Market-based Valuation WFM vs. SWYWFM Market-based Valuation (SWY) Item WFM SWYYear P/E SWY EPS WFM Price WFM Interest rate Swaps Swaps 2010 2011e Foreign Currencies Adjustments Adjustments2011e 17.87 2.00 35.74 Commodity Prices Price contracts Price contracts Current Economic Sensitive Sensitive ConditionWFM Relative P/E RatioYear P/E (ttm) P/E (ttm) Relative P/E Total Debt/Equity Most Equity Most Debt WFM S&P 500 (mrq)2006 42.15 27.20 1.55 Merchandise Valued LIFO, Valued LIFO,2007 37.95 24.01 1.58 Inventories remaining FIFO remaining FIFO2008 24.42 15.17 1.612009 35.87 20.52 1.75 Property and At cost, building 20- At cost, building 7-2010 25.95 22.97 1.13 Depreciation 30 years, 40 years, equipment 3-15 equipment 3-152011e 35.21 23.66 1.49 years years Growth Model New stores New stores, CAPEX © Masi & Foti, 2011
    • Q&AThank you! © Masi & Foti, 2011