CFA_Seattle_Team 7_Presentation
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The document provides an executive summary and analysis of a company. The key points are: 1) The company has high market share in targeted niches and a stable financial position with a solid balance sheet and strong banking relationships. 2) An analysis of the company's financials, industry, valuation, risks, and growth strategy is presented. 3) Using discounted cash flow and relative valuation analyses, the company's target share price is estimated to be $81.2.
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CFA_Seattle_Team 7_Presentation
- 2. Executive Summary High market share in target niches Financially stable, solid balance sheet and Strong banking relationship $- $20 $40 $60 $80 $100 $120 $140 1/3/2005 1/3/2006 1/3/2007 1/3/2008 1/3/2009 1/3/2010 1/3/2011 1/3/2012 1/3/2013 1/3/2014 1/3/2015 1/3/2016 Share Price Movement ESL: $81.2 Market Profile (02/23/2016) Closing Price $55.71 52-Week High/Low $45.12/$120.45 Avg. Volume (3M) 316,127 Diluted Shares Out. 31,215,xxx Market Cap $1.65B Beta 1.4 EV/EBITDA 14.27x Company Overview Industry Financial Analysis Valuation Risk Analysis Conclusion
- 3. Company Overview Industry Financial Analysis Valuation Risk Analysis Conclusion Seals & Ducts Wire Management Countermeasure Flares Chaff & Combustible Ordnance Aerospace Switches Military Trainer Cockpits Enhanced Vision Systems Power Distribution & Components Pressure & Temperature Engine Sensors Commercial Aerospace Connectors Advanced Materials Avionics & Controls Sensors & Systems Business Segments & Products
- 4. US 50% Outside US 50% MANUFACTURE BALANCE Commercial Aerospace 50% Defense 30% Others 20% PRODUCT BALANCE Avionics & Controls 41% Sensors 36% Advanced Materials 23% REVENUE BY SEGMENT Company Overview Industry Financial Analysis Valuation Risk Analysis Conclusion Company Overview
- 5. Company Overview Industry Financial Analysis Valuation Risk Analysis Conclusion Strategic Acquisitions & Divestitures Stable R&D Capital Injection Lean Transformation Restructure -15% -10% -5% 0% 5% 10% 15% 20% $0 $1 $1 $2 $2 $3 Billions Projected Growth and Revenue Weight Adjusted Revenue Weight Adjusted Growth Growth Strategy
- 6. Commercial Aerospace Replacement of obsolete aircraft Increase demand for air travel Large commercial aircraft expected to grow 5% through 2019 Defense U.S. spending cut (39% of global expenditure) Spending is expected to decline by 3-5% in 2016 Company Overview Industry Financial Analysis Valuation Risk Analysis Conclusion Commercial Aerospace 79% Defense 21% Revenue by Industry Sectors Industry Overview
- 7. Company Overview Industry Financial Analysis Valuation Risk Analysis Conclusion Consumers Operations Products • High Switching Cost • Premium Quality & Reputation • Lean Manufacturing Process • Restructuring • Strategic Sourcing • Global Footprint • Average management experience in Esterline – 10 years • Diverse Product lines • #1 or #2 market share in target niche • High quality products • Strong Intellectual Properties Competitive Advantages
- 8. Revenue Analysis Segmented Revenue (Statistical) $- $1 $1 $2 $2 $3 Revenue Projection (Billions) Net Sales $500 $700 $900 2008 2010 2012 2014 2016 2018 2020 Avionics & Controls (Millions) $200 $700 $1,200 Sensors & Systems (Millions) $200 $400 $600 2008 2010 2012 2014 2016 2018 2020 Advanced Materials (Millions) 0.04% Company Overview Industry Financial Analysis Valuation Risk Analysis Conclusion 3.15% 10.52% Adjusted Growth: 4.17%
- 9. Acquisitions & Divestitures 01/03/2011 Acquired Eclipse Electronic Systems 07/26/ 2011 Acquire d Souriau Group 02/15/ 2013 Acquired Gamesman (Sensors & System) 12/20/ 2013 Acquired Sunbank (AC) 02/02/2015 Acquired Barco $175M (AC) 06/09/ 2015 Divestitur e of Eclipse Electronic s Systems 07/20/2015 Divestiture of Pacific Aerospace & Electronics 11/25/2015 Divestiture of Wallop Defense System Assets (Defense) $0 $100 $200 2010 2011 2012 2013 2014 2015 Acquisition Amt. (Millions) Strategic divestitures and acquisitions showing potential synergy in the future Company Overview Industry Financial Analysis Valuation Risk Analysis Conclusion
- 10. Profitability & Liquidity 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% $0 $20 $40 $60 $80 $100 $120 $140 $160 $180 Net Income vs. Profit Margin Ratio (Millions) Net Income Profit margin Ratio - 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 Current Ratio Company Overview Industry Financial Analysis Valuation Risk Analysis Conclusion
- 11. Capitalization Analysis 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% 45.00% 50.00% $0 $1 $1 $2 $2 $3 $3 Total Long-term Debt to Equity (Billion) Long-term Debt, net of Current Maturities Total Shareholders' Equity Total Long-term Debt to Equity Company Overview Industry Financial Analysis Valuation Risk Analysis Conclusion
- 12. Valuation Methodology Discounted Cash Flow Relative Valuation Weighted Valuation • Terminal value analysis • FCF analysis • EV/EBITDA • 60% DCF • 40% Relative Valuation Company Overview Industry Financial Analysis Valuation Risk Analysis Conclusion
- 13. 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% $0 $1 $1 $2 $2 $3 $3 2016 2017 2018 2019 2020 Segmented Revenue Growth Analysis (Billions) Avionics & Controls Sensors & Systems Advanced materials Segment Adjusted Growth Probability Wbull 10% Wbase 20% Wconservative 70% Total 100% 2016E 2017E 2018E 2019E 2020E Projected Revenue 2,022,220 2,101,560 2,182,028 2,261,995 2,339,521 Projected Growth 14.0% 3.9% 3.8% 3.7% 3.4% Company Overview Industry Financial Analysis Valuation Risk Analysis Conclusion DCF Growth Analysis
- 14. Cost of Equity Risk Free Rate 2.3% Adjusted Beta 1.4 Market Return 9.5% Cost of Equity 12.6% Cost of Debt Kd For Fiscal Year 2011 2012 2013 2014 2015 5Y F Interest Expense 40,633 46,238 39,638 33,010 30,090 N/A debt issuance cost 1,069 8,818 6,211 4,295 8,467 N/A Total Debt, Fiscal Year End 1,000,000 848,700 689,100 622,500 881,400 N/A Average Debt 806,800 924,350 768,900 655,800 751,950 N/A Tax Rate 15.7% 20.9% 16.2% 20.9% 16.3% N/A Cost of debt 4.4% 4.9% 5.1% 4.6% 4.5% 4.7% Company Overview Industry Financial Analysis Valuation Risk Analysis Conclusion DCF WACC Assumption 24% 76% Total Debt Total Equity
- 15. DCF Calculation Market Capitalization (DCF) $2,735,385,931 Shares Outstanding 29,630,000 Share Price $92.3 Company Overview Industry Financial Analysis Valuation Risk Analysis Conclusion 2015 2016E 2017E 2018E 2019E 2020E (TV) Cash Flow $236,231 $98,601 $170,759 $173,937 $206,230 $3,297,397 WACC: 10.5% DCF Valuation Output
- 16. Company Overview Industry Financial Analysis Valuation Risk Analysis Conclusion 2010 2011 2012 2013 2014 2015 ESL 8.7x 9.1x 8.9x 10.4x 10.9x 14.3x MGGT 7.1x 6.9x 6.8x 10.1x 12.3x 8.7x BAE 4.6x 4.3x 5.1x 7.6x 8.3x 10.8x 0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x 16.0x 2010 2011 2012 2013 2014 2015 Historical EV/EBITDA ESL MGGT BAE Relative Valuation – EV/EBITDA
- 17. Bull (14.3x) EV from EBITDA 4.0 B Equity Value 3.3B Fully Diluted Shares Outstanding 29,630,000 Intrinsic Value per Share $112.5 Base (11.2x) EV from EBITDA 3.2 B Equity Value 2.5 B Fully Diluted Shares Outstanding 29,630,000 Intrinsic Value per Share $84.0 Conservative (8.7x) EV from EBITDA 2.5 B Equity Value 1.8 B Fully Diluted Shares Outstanding 29,630,000 Intrinsic Value per Share $59.7 $0 $20 $40 $60 $80 $100 $120 Bull Base Conservation Intrinsic Value per Share Bull Base Conservation Share Price $112.5 $84.0 $59.7 Weight 15% 25% 60% Weighted $16.9 $21.0 $35.8 Company Overview Industry Financial Analysis Valuation Risk Analysis Conclusion $73.7 Relative Valuation Output
- 18. Discounted Cash Flow $92.3 Relative Valuation $73.7 Weighted Valuation $81.2 60% 40% Company Overview Industry Financial Analysis Valuation Risk Analysis Conclusion Target Price
- 19. Feb. 2016 Potential federal securities laws violations 2013 $20 million penalty with DDTC to resolve the violation of International Traffic in Arms Regulations Probability High ER1 MR3 OR2 Medium MR2 OR1 MR1 ER2 RR3 RR2 Low RR1 Low Medium High Impact Company Overview Industry Financial Analysis Valuation Risk Analysis Conclusion Regulatory Risk Failure to meet regulatory requirements (RR1)
- 20. $0 $100,000 $200,000 2010 2011 2012 2013 2014 2015 Acquisition Amt. Probability High ER1 MR3 OR2 Medium MR2 OR1 MR1 ER2 RR3 RR2 Low RR1 Low Medium High Impact Company Overview Industry Financial Analysis Valuation Risk Analysis Conclusion Operation Risks Acquisition and integration Risk (OR1) Backlog (OR2)
- 21. Unfavorable market conditions due to demand reductions (MR1) 50% 30% 20% MARKET BALANCE Commercial Aerospace Defense High-end, Non-aero applications • Budget Control Act of 2011 (BCA) • Aircraft delivery Probability High ER1 MR3 OR2 Medium MR2 OR1 MR1 ER2 RR3 RR2 Low RR1 Low Medium High Impact 1250 1300 1350 1400 1450 1500 1550 1600 1650 2015 2016 2017 2018 2019 2020 Aircraft Delivery Forecast Company Overview Industry Financial Analysis Valuation Risk Analysis Conclusion Market Risks
- 22. Conclusion Strong Competitive Patented Technology Large Market Share in Niche Market Strategic Acquisitions and Divestitures Strong Liquidity Measures Company Overview Industry Financial Analysis Valuation Risk Analysis Conclusion Backlog Risk Subject to cancel Exposure from Strict Regulatory Risk
- 23. Q&A
- 24. Company Overview Industry Valuation Financial Analysis Risk Analysis Conclusion Opportunities • Robust new contracts • Growth in demand for commercial aircraft • Surge in defense spending by developing countries Threats • Intense competition • Heavy regulations in airline industry • Large Backlog subject to cancel Weaknesses • Highly dependent on US government contracts and subcontracts Strengths • Diversification • Stable Customer Source • Strong R&D Power • Actively Managed Acquisitions & Divestiture Appendix: SWOT Analysis
- 25. 0 1 2 3 4 5 Bargaining Power of Customers Bargaining Power of Suppliers Threat of Substitutes Threat of New Market Entrants Competitive Rivalry Porter’s Five Forces Company Overview Industry Valuation Financial Analysis Risk Analysis Conclusion Appendix: Competition
Editor's Notes
- Upon our analysis, there are three primary factors that drives Esterline’s growth. Thourgh Mergers and Acquisitions, Esterline can expand its operating capabilities, consolidate its business and possibly expand its product lines. By injecting money to r&d, esterline can remain competitive in the industry. Through lean manufacturing transforamtion Esterline can be more cost efficient.
- On your right, it is the statistical analysis of esterline’s three primary business segments, Avionics & controls show a stable growth over time, sensors and system has more aggressive growth, and Advanced Material has a growth approaching 0. By adding factors including M&A, Demand, Product Delivery into the growth analysis, we eventually arrived an overall adjusted growth rate of 4.17%.
- Esterline is showing a relatively stable profitability measures over time, the net income increase over time and the profitability margin remain stable. Esterline is a well managed company that has strong cashflow therefore the liquidity measures such as current ratio is showing a continuous gowth overtime.
- Because of the liquidity measures, we project that esterline will continuously paying of its debt, and therefore the total long term debt to equity ratio will decrease overtime.
- By using the wacc and the growth measures, we have arrived a stream of cash flow and a terminal value, and calculated the Market capitalization approaching 3 billion. And the share price is 92.3 from our DCF assumption
- Based on the EV/EBITDA information we have arrived three case senarios, Bull, Base, and Conservative. And we assign weight to each scenarios eventually arrived our target price of 73.7 based on our relative valuation assumption.
- In conclusion, even though Esterline is being exposed to Backlog and Regulatory risk, but based on our target price esterline still have more than
- Sources and Availability of Raw Materials and Components The sources and availability of certain raw materials and components are not as critical as they would be for manufacturers of a single product line, due to our vertical integration and diversification. However, certain components, supplies and raw materials for our operations are purchased from single sources. In such instances, we strive to develop alternative sources and design modifications to minimize the effect of business interruptions.