Equity Analyst Report 
Initiating Coverage 
Wednesday, 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...
Industry and Firm Analysis 
Global Trends and expenditures 
• Industry: MG734 Retail Stores – Grocery 
Stores. Upward tren...
Industry and Firm Analysis 
Growth Strategy 
• Growth based on new store openings 
• Strong and stable relations with supp...
Industry and Firm Analysis 
Accounting and Financial Highlights 
• Red flags on accounting practices 
– high operating lea...
Forecasting the Future 
Assumptions 
• 5 year time horizon (retail industry) 
• 3 stores openings per year starting from 2...
Forecasting the Future 
Interpreting results 
• ROE e RNOA accetably close to 10% 
• Low Profit Margin 
– Strategic shift ...
Valuation 
Valuation Parameters 
• Required Rate of Return on Equity at 8.92% (CAPM) 
– risk-free rate of return: 3.17% (Y...
Valuation 
Contingent Claim Adjustment 
• Weighted average exercise price: $46 
• Options outstanding at 09/26/2010: 18,94...
Valuation 
Absolute Valuation 
• Discounted Cash Flow Model 
– Valuation to Common Equity 
• PV of FCFE in the first 20 ye...
Valuation 
Sensitivity Analysis 
• Bull Case: $43.42 
– Sales growth: 11% 
– Terminal Year: 5% 
– Terminal year’s ROE: +1%...
Valuation 
EPS Forecasts and Consensus Analyst Forecast 
• No significative difference, just a wider range 
of variation 
...
Valuation 
Market-based Valuation 
WFM vs. SWY 
Item WFM SWY 
Interest rate Swaps Swaps 
Foreign Currencies Adjustments Ad...
Q&A 
Thank you! 
© Masi & Foti, 2011
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WFM - Initiating Coverage Presentation

  1. 1. Equity Analyst Report Initiating Coverage Wednesday, June 1 2011 Alessandro Masi, Daniele Foti © Masi & Foti, 2011
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12. 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 Forecast of EPS* $1.90 $2.13 $2.45 © Masi & Foti, 2011
  13. 13. Valuation Market-based Valuation WFM vs. SWY Item WFM SWY Interest rate Swaps Swaps Foreign Currencies Adjustments Adjustments Commodity Prices Price contracts Price contracts Current Economic Condition Sensitive Sensitive Total Debt/Equity (mrq) Most Equity Most Debt Merchandise Inventories Valued LIFO, remaining FIFO Valued LIFO, remaining FIFO Property and Depreciation At cost, building 20- 30 years, equipment 3-15 years At cost, building 7- 40 years, equipment 3-15 years Growth Model New stores New stores, CAPEX WFM Market-based Valuation (SWY) Year P/E SWY 2010 EPS WFM 2011e Price WFM 2011e 17.87 2.00 35.74 WFM Relative P/E Ratio Year P/E (ttm) WFM P/E (ttm) S&P 500 Relative P/E 2006 42.15 27.20 1.55 2007 37.95 24.01 1.58 2008 24.42 15.17 1.61 2009 35.87 20.52 1.75 2010 25.95 22.97 1.13 2011e 35.21 23.66 1.49 © Masi & Foti, 2011
  14. 14. Q&A Thank you! © Masi & Foti, 2011

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