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  1. 1. JonaGjylameti Mohamed Abdulmalek Jorida Cakeri Finance 332 For this project we had to evaluate the performance of Procter and Gamble by doing several calculations such as the WACC, the beta, ROIC, Economic Profit, FCF etc. After using all the historical data we also had to forecast based on our assumptions and a few analysts reports in order to be able to decide whether it’s a good investment right now and in the next five years. After calculating items such as ROIC and WACC, we made assumptions for the revenue growth, and we decided to take a look at what the analysts were predicting but we saw that they actually think the revenue growth will go up to 8.13% for the year of 2015. Based on our calculations in the forecasting part of the valuation we saw that the growth was quite low ratios and we decided to support our rates and forecast slower revenue growth rates for the company. For 2014, we predicted a growth rate of 1.8% and in 5 years from now we said the revenue growth will be about 4.1%. Mostly because of the fact that we are not that positive that Procter and Gamble would generate that many sales in the upcoming years, we are basing our argument on historical data and everything might change but at this point, the company doesn’t seem to be performing that well in this aspect.
  2. 2. We chose 4.1% as our growth rate because we have looked at the company’s past progress and also the 10-k, we saw that they are coming with new products, but they are not new inventions. In other words, they will not add much more value to the current shareholders. In the previous year their growth was 0.6%, which is low compared to their historical rates. We decided that we will want to come a long way if we will try to grow greater than 1.8% for the year of 2014. Our aim is to triple our growth for the following reasons; first, our 2013 growth rate is 0.6% but our sales for that year was at their highest compared to the previous years. Second, growing exponentially is not a good thing especially when the company is undergoing huge managerial and executive changes. After 2014 we will have our foot on the ground and have a good time to asses our new elected CEO and we will expect our new member to the company to grow the company but not by a lot for the year 2015. As of the year of 2015 come to an end, we expect the new CEO to lead the company to flourishing success in the future. Going deeper into the mathematics of the ROIC formula, we will have to talk about the breakdown of NOPLAT. We calculated NOPLAT by multiplying our assumed ratios in the assumption spreadsheet with the projected future sales. We did that because all ratios are computed in comparison to sales for the most entries in the assumption spreadsheet. For some entries we decided to take the average of the years 2011,2012, and 2013 because those are the years where the economy is back healthy and the years prior to that is considered an outlier for our valuation. The Exit Multiple we chose the 3 years figures due to the fact that it will give us a greater competitive advantage. Choosing that will enable us to eliminate competition and have a better view of the real competitors. Our 3 years exit multiple is 10.70x and the
  3. 3. reason we chose that over the two years exit multiple 11.40 is that in 3 years exit multiple we will .30x away from the leading company. In the two years exit multiple we will have a greater gap and the other companies will be grouped close to us as well. Competing head to head with the leading company and having in hand a great portion of the market share will be a factor that will work in our favor. Continuing value is the present value at a future point in time of all future cash flows when we expect stable growth rate forever. After the definition of continuing value (CV), we know that our assumed CV is based on the same basis that we projected our other entries previously. Which is excluding the years where the economy was suffering, and the lack of confidence in any investment, thus the investors were risk averse and seek other, more stable, methods to get returns for their investments. Our focus is on the past 3 years where the economy is improving. In our valuation of the forecasted assumptions we came up with excess cash being almost double as comparing it with working cash. We think that we need to minimize the excess cash compared to operating cash. The lowered amount from the excess cash should be reinvested in the company to have optimal return to our net investment. This plowback amount should enable the company to spend more on R&D, maintenance, and utilize the latest technology to get the most out of every dollar invested in the company. in lieu of producing new innovations and products, P&G should stop paying dividends or minimize their dividends payout, so that they can use that excess cash and direct it toward operating cash.
  4. 4. As for our method of calculating our invested capital, we had to forecast the entries that go in the making of Invested capital. Net PPE, intangible assets, and Goodwill are calculated on the same basis. The important theory behind our projection is that we need to exclude the years of 2008, and 2009 from our calculations, due to the bad economic time period. We took the average of the latest three years, due to the fact that those years are what we expect from the economy, and the economic fluctuations will cause us to have similar projections. The Sensitive analysis mainly shows the many various outcomes that one variable compared to another. In this evaluation we are comparing WACC compared to Exit multiples at various values. The WACC is set to be vertically and exit multiple is set horizontally. The very extreme points are the bottom left as the lowest value, and the highest is the top right corner. The analysis also will give us and the investors an idea of what to expect at every price that they will pay. In our multiples analysis we saw that we have two companies are considered in our opinion to be our peer group. We based that assumption over EBIT, Sales, 3 years exit multiple, and also over the 3 years beta. 5 years beta was a very crucial factor to add to make it look tempting for investors to look at. Our beta is the highest out of the three
  5. 5. companies but also is not high to the extent that it will scare investors away. Our 5 years beta is perfect for both risk takers and risk-averse types of investors. For our multiples we decided to choose two other competitors as the strongest of the industry, Johnson and Johnson and also Estee Lauder. Our values for the multiples were not exactly the same as in our DCF model but somehow close to each other, not entirely off of the span. The operating leases have no impact on the balance sheet or income statement. Making the adjustments in financial statements allows seeing the impact that these leases have on the ROIC and Free cash flow. This technically means that the ROIC will change based on what we had earlier but the company’s valuation does not change. No matter what happens to the ROIC either drops or increase, this changes the cost of capital but the valuation remains the same. And we could see this after making the adjustments under the operating lease tab. Based on our calculations we would say that at this time the stock for PG could be a buy but not in a large quantity, we think that the best thing to do if you decide to buy is to buy in a moderate way. Also we want to point out that it trades significantly higher than KMB and higher than its Industry peers. PG also has a lower TTM P/E multiple, and this means that it’s actually valued cheaper than its competitor JNJ , KMB and its other Industry peers. If we keep in mind the fact that PG is an operator globally and they are currently expanding in emerging markets, this means that they are a growing company in many
  6. 6. aspects. The only thing that the investor has to keep an eye out is the fact that for the next quarters the company needs to be careful with competitors and their growth rate and profit margin which is something that PG doesn’t have on “the right track” as of now. According to Tesla Motor, financing is the best way, but i believe that it is a wrong approach due to the fact that currently debt is much cheaper. Also the main idea behind this approach is that they are combining both in one, for the beginning 5 years Tesla will record that as a debt but eventually it will move to equity. and by the time all of this debt moves to equity, Tesla will generate enough money to pay the debt off. That kind of movement of Tesla Motor indicates that there is a room of growth in that industry and a positive sign for the economy. This also shows the fact that they are taking advantage of the fact that of Federal Reserve cheap capital. Both of us will graduate at the end of this term. 2 weeks, hopefully.