JON Z. GREGORY, MBA
Portfolio of Accomplishments in Market
Research & Financial Analysis
University of Kansas
Texas A&M University
Applied Coursework & Writing Examples:
4……………............................Corporate Project Allocation & Market Analysis
5……….……………..………………………EnCana-hurdle rate for new projects
6….………………...……………Mercury Athletic Footwear-acquisition analysis
7....….………………………Google-pro forma financials for acquisition of Sprint
9……………Business Valuation & Industry Competitive Analysis: Apple, Inc.
10……………………………………………………DCF & EVA valuation results
15………………………Merger Arbitrage Memo- AirProducts, Inc. & Airgas, Inc.
18……..………………………………………………………… Security Analysis
19……………………………………………………………CPO Buy/Sell Memo
21………………………………………………………Risk Modeling & Analysis
22…….……………………………………Portfolio Construction Relative to Risk
23…………………………………………………………Real Estate Risk Analysis
24………………………………………………Financial Statement Risk Analysis
JON Z. GREGORY, MBA
Recent MBA-Finance graduate and offering over 4 years’ progressive experience in
technical sales/account management, business development, and financial analysis for
corporations. ~ Possess an established track record of revenue growth, developing
organizational models for use by management based on market and competitive analysis.
~ Desire an account manager, executive, or consultant position.
I am seeking an opportunity that will allow me to serve as a natural catalyst and inspire
the company’s clients to view our organization as the most elite and innovative in the
industry. By fully utilizing my progressive sales experience and competitive analysis
skills derived from my excellent MBA education, I have no doubt that I am well
equipped for ultimate success.
Segmentation of Consumer Markets - including top-down/bottom-up, positioning, and
Advanced User of Excel and Spreadsheet Modeling- very efficient in industry and
financial statement analysis
Capital Project Allocation-including calculating present values, formulating cash flows,
cost of equity (CAPM), market risk, cost of debt, project risk, WACC, business
investment and strategy
Business/Project Valuation utilizing various DCF, Asset, Capitalized Earnings and
Industry Multiples models
Complete Industry Competitive Analysis including past, present, and comparative
Real Option Valuation/Decision Tree Analysis- what is the value of having an option
to delay a project?
Strategic Positioning including competitive advantage analysis, NPV analysis, and
“Over the course of the brand awareness motives
Product Life Cycle/Strategic Direction-including market entry timing, 5 Forces, and
summer, it became
readily apparent to me
that Zack’s MBA
experience at the EMPLOYMENT HISTORY
University of Kansas Domann & Pittman (NFL Agency), Colorado Springs, CO Summer 2009
Marketing Analyst Intern
has prepared him not
only analytically, but Wealth Design Group, Houston, TX 2007-2008
also with an excellent Financial Services Sales Representative
applicable business Sea Gull Lighting, Houston, TX 2006-2007
principles that will Account Manager-Technical Sales
allow him to thrive in
whatever career path
he elects to pursue” EDUCATION
Master of Business Administration-Finance
~ Scott Bouska, The University of Kansas, 2010
CFO,XSF Venture; Bachelor of Science in Agricultural Business & Communication
Former Associate, Texas A&M University, 2006
To: Jide Wintoki
From: Richard Smith, Scott Mitchell, Zack Gregory
Re: Mercury Athletic Acquisition
Based on our analysis of Mr. Liedtke’s base case projections for a potential acquisition of Mercury Athletic, we have concluded
that this is a positive net present value project, and that AGI should proceed with the acquisition. Under Mr. Liedtke’s operating
assumptions, we calculate the value of Mercury’s discounted cash flows to be $624.446 million, and the acquisition price to be
$156.643 million, yielding a net present value of $467,804 for AGI.
Our calculations indicate that this project becomes even more attractive financially when potential favorable synergies between
AGI and Mercury are taken into account. A real options valuation (details below) involving inventory management and the
women’s casual line indicates that an additional $22.365 million of value would be created by the successful implementation of
fairly simple operating synergies in those two areas alone. Considering that far more possible synergies and savings are a
possibility for AGI and Mercury post-acquisition, we believe this acquisition would be an appropriate strategic move for AGI to
improve its own performance and to compete on a more level playing field with the larger companies in the industry.
To estimate the price of acquiring Mercury, we averaged the P/E multiples of comparable companies in the industry and applied
that multiple to Mercury’s 2006 net income to arrive at a likely purchase price. P/E was used because we believe it is the most
accurate reflection of the market’s view of Mercury’s recent performance and value. Kinsley Coulter and Templeton Athletic were
used as the two comparable companies because, along with AGI and Mercury, they are the only other companies in the industry
with annual revenue of less than $1 billion (Marina Wilderness also has revenue less than $1 billion, but because it is the fastest-
growing company in the industry it commands a multiple dramatically different from what Mercury could expect, therefore we
To discount the cash flows, we first had to estimate Mercury’s WACC. We did this by calculating the average asset beta for
companies in this industry, and then applied it to Mercury’s assumed leverage ratio to find the cost of equity. Combining that
information with the cost of debt and tax rate assumptions provided by Mr. Liedtke, we arrived at a WACC of 10.9%. To calculate
the terminal value of the project, we assumed a growth rate roughly equal to historical inflation in the U.S., which is 3%. Though
Mr. Liedtke’s projections have Mercury’s cash flows growing much more rapidly (8.5%) in the near term, we didn’t believe that
figure was sustainable in the long run, and thus used that more conservative inflation figure.
Valuation of Potential Synergies
To analyze the potential value that would be added by cooperation between AGI and Mercury, we conducted a real options
valuation involving some of the operating synergies that Mr. Liedtke thought could be realized post-acquisition. The two scenarios
we analyzed were:
Optimistic Scenario – All synergy benefits realized (50% probability):
Mercury women’s casual line turns around; 3% revenue growth, 9% EBIT margin
Adoption of AGI inventory system reduces Mercury’s DSI to
Discounted present value under this scenario: $685.479 million
Pessimistic Scenario – No synergy benefits realized (50% probability):
Women’s casual line maintained, but continues losing money (-2.3% EBIT) indefinitely
Adoption of AGI inventory system has no effect on Mercury’s inventory levels
Discounted present value under this scenario: $608.143 million
A sensitivity analysis of our results indicates that this project would remain a positive NPV project for AGI, even given
dramatically different assumptions regarding Mercury’s debt level and future revenue growth. Even using 100% debt or 0% debt
in its capital structure, Mercury’s NPV would remain positive. Additionally, discounted cash flows over the first five years (2007-
2011) are sufficient to cover our estimated purchase price, so changes in our terminal value revenue growth figure make no
difference in whether this is a positive- or negative-NPV project.
To: Jide Wintoki
From: Richard Smith, Scott Mitchell, Zack Gregory
Re: EnCana’s hurdle rate for new projects
We have calculated EnCana’s current weighted average cost of capital as being 9.29%. This is based on
EnCana’s current capital structure and existing costs of equity and debt. We believe this is the hurdle rate the
company should employ for deciding whether to undertake average-sized projects with risk levels
commensurate to the company’s existing projects.
However, additional costs (underwriting costs, new equity flotation costs) would be associated with raising
new capital to fund a major project, which would make new capital more costly than old. So we believe that
the “hurdle rate” that should be used for projects that are of greater-than-average risk or would require a
significant infusion of new capital should be 10.36%, reflecting those increased costs.
In both cases, we arrived at these figures by utilizing the capital asset pricing model to calculate the
EnCana’s cost of common equity, and using a weighted average of EnCana’s various debt issues to arrive at
the overall cost of debt. Key assumptions employed in the calculations of these figures are as follows:
Risk-Free Rate: 4.20% - Current government long-term bond yield
Market Risk Premium: 4.74% - Arithmetic average of the differences between
CDA 1-year gov’t. bonds and the S&P TSX index
Canadian Corporate Tax Rate: 36.1% - 2006 Canadian tax rate from KPMG.com article
EnCana Total Equity: $48.515 B - Current market cap
EnCana Equity Beta: 1.27 - Noted in the case
Cost of Existing Equity: 10.22% - Calculated using CAPM and assumptions above
Cost of New Equity: 15.22% - Above, plus 5% for added flotation costs
EnCana Total Debt: $8.054 B - Total of ST- and LT-debt from debt schedule
Cost of Existing Long-Term Debt: 5.81% - Current yield of publicly-traded ENC bonds
Cost of New Long-Term Debt: 6.31% - Above, plus 50 basis points for underwriting costs
Cost of Short-Term Debt: 3.52% - Average, noted in the financial statements
Figure 1: Pro Forma Financials for Google after the Acquisition of Sprint & NPV Analysis
The data set below is a simulated version similar to a statement of cash flows derived to quantify the effects
of a Google-Sprint merger. The logic behind the model begins with projected revenue as a function of
market share growth. The projected cash flows are then backed out of revenue using typical accounting and
capital budgeting principles. The model is calculated based on the following assumptions: *(all data
necessary for calculations have been drawn from YahooFinance, Reuters, and ValueLine)
For every 1% increase in market share growth, revenue increased by 2%
Google would be able to decrease cost of sales to roughly 36% of revenues down from Sprint’s
o This would largely be due to Google providing better management efficiency and is in a much
better financial position than Sprint
Google’s cost of capital is 5.70% and has zero cost of debt (Google is financed solely by equity)
o The asset beta of 0.40 for the wireless carrier industry’s dominant players was calculated and
then re-levered to Google’s cost of capital for expanding into the wireless carrier business
o Market-risk premium = 5%
o Risk-free rate = 3.69% (going rate for 10-year T bills)
*Please see Figure 2 below for further detail
The acquisition price of Sprint would be approximately $50 billion. This number is far higher than
what would be actually offered when compared to Sprint’s current Enterprise Value/EBITDA ratio,
which is meant to represent a worst-case scenario. Even under this case, the NPV of the project is
The time period of 8 years was chosen because of the valuation complexity of this merger. It is rather
difficult to correctly quantify the exact effect that Google’s acquisition of Sprint would have due to the lack
of historical comparison of these two industries merging. Five years would essentially be too few years to
determine any real meaning and 10 to 15 years would be an inaccurate measure of what the future holds.
As indicated by the positive NPV of $120.5 billion, the acquisition seems to make sense for Google. With a
quick glance, one can see that this model is largely dependent on the market share growth that Google could
obtain in the wireless provider market. Though, at first glance, the rapid capture of such significant market
share seems unlikely. However, please note this logic is under the assumption that Google will be providing
wireless data and voice service at never-before-seen prices to consumers. Such an industry shock could
trigger such rapid market share growth for Google in the wireless industry. The revenue-growth multiplier of
“2” indicates that, because of Google’s lucrative online advertising business model, revenue will grow at a
quicker pace for every percentage increase in market share. Or, the revenue to market share elasticity is 2.
The logic here is that online advertising is a more lucrative business than providing wireless service, due
largely to the fact that profit and operating margins are much larger in online advertising. The wireless
service industry is very capital intensive, which shrinks margins for the current players. However, Google’s
outstanding advertising margins will actually increase at a greater rate with the aid of being able to offer
wireless service for cheap due to the fact that more users will be online more frequently and using Google’s
web-based services, such as Google Search, Gmail, and the myriad of Google-owned sites that generate
incredible advertising profits.
Figure 1: Capital Budgeting Projection-Google Acquisition of Sprint
Pro Forma Financials
Sprint-Projected Revenue Growth -1.00% (in thousands)
Revenue -Growth Multiplier 2 Year 0 1 2 3 4 5 6 7 8
Cost of Revenue/Revenue Ratio 36%
Depreciation Growth 3% Revenue 32,260,000 31,937,400 31,618,026 31,301,846 30,988,827 30,678,939 30,372,150 30,068,428 29,767,744
Tax Rate 34% Market Share Growth 4.0% 10.0% 10.0% 15.0% 1.5% 1.5% 1.5% 1.5%
Capital Expenditure for Sprint 50,000,000 Market Share 10.4% 14.4% 24.4% 34.4% 49.4% 50.9% 52.4% 53.9% 55.4%
Cost of Capital 5.70% Revnue Growth-Post 8% 20% 20% 30% 3% 3% 3% 3%
Revenue-Post Merger 32,260,000 34,840,800 41,808,960 50,170,752 65,221,978 67,178,637 69,193,996 71,269,816 73,407,910
Cost of Revenue 16,435,000 12,542,688 15,051,226 18,061,471 23,479,912 24,184,309 24,909,839 25,657,134 26,426,848
EBTD 22,298,112 26,757,734 32,109,281 41,742,066 42,994,328 44,284,157 45,612,682 46,981,063
Depreciation (-) 7,416,000 7,638,480 7,867,634 8,103,663 8,346,773 8,597,177 8,855,092 9,120,745 9,394,367
EBT 14,659,632 18,890,100 24,005,618 33,395,292 34,397,151 35,429,066 36,491,938 37,586,696
Taxes (-) 4,984,275 6,422,634 8,161,910 11,354,399 11,695,031 12,045,882 12,407,259 12,779,477
Net Income 9,675,357 12,467,466 15,843,708 22,040,893 22,702,120 23,383,183 24,084,679 24,807,219
Depreciation (+) 7,638,480 7,867,634 8,103,663 8,346,773 8,597,177 8,855,092 9,120,745 9,394,367
Capital Expenditure (-) 50,000,000
Total Net Cash Flow -50,000,000 17,313,837 20,335,100 23,947,371 30,387,666 31,299,296 32,238,275 33,205,423 34,201,586
PV of Cash Flows -50,000,000 16,380,055 18,200,796 20,277,946 24,343,639 23,721,642 23,115,538 22,524,921 21,949,394
Figure 2: Google’s Cost of Capital Relative to Entry into Wireless Industry
The table below displays the derivation of Google’s cost of capital for diversifying into the wireless services
industry. The average asset beta for the wireless services industry was found and then re-levered to Google’s
equity beta in order to find the new Google Wireless cost of capital via the capital asset pricing model.
Because Google is a debt-free company, the cost of equity is the cost of capital. Please note that this is the
cost of capital for Google relative to its risk in the wireless industry, not Google as a whole. Normally,
investors would require a larger return from Google given its enormous earnings success in recent years.
However, the cost of capital displayed below shows the effects of Google’s positive reputation when it
brings it to another industry, such as wireless services.
Sprint Verizon AT&T
Stock beta 1.19 0.63 0.69
D/E 1.16 1.5 0.71
Asset Beta 0.55 0.25 0.40
Asset Beta Average 0.40
Google Wireless Beta 0.40
Market Risk Prem 5.00%
Risk-free Rate 3.69%
Cost of Equity 5.70%
Business Valuation & Industry Competitive
Gregory & Smith Capital, LLC
“Better than trusting your money to a chimp… but only slightly.”
Part 7 – Results Submitted 11.17.09
Based upon the results of our analysis of Apple, we arrive at a valuation per share of approximately $366, a premium of
approximately $161 over today’s stock price of $205.91. This difference may be due to the fact that consensus Wall Street
valuations are underestimating the revenue and profitability of the iPhone and other potential future product offerings, or are
underestimating Apple’s future “staying power” as a force in the computer and home electronics industry.
Relative valuation methods for Apple yield an expected per-share price in the $90-$100 range based on competitors’
multiples, barely half of what the stock is currently trading for. We believe that this is based on the fact have higher expectations
for Apple’s future growth rates, and thus it trades at multiples significantly larger than those of its competitors.
Our discounted cash flow/EVA valuation analysis of Apple yields a per-share price of $366.23. This figure is based on
explicitly forecasted discounted free cash flows of approximately $99 billion, and a discounted continuation value of just over
$197 billion. After accounting for Apple’s (sizable) excess cash holdings and other non-operating factors, we arrive at a total
valuation of equity of just over $330 billion for Apple, which is then divided by 901.4 million shares outstanding (including
restricted stock units).
That $366.23 represents a premium of 78% over the stock’s actual price today, which is $205.91. There are several
possible explanations for that sizable discrepancy. The first is that investors and analysts are undervaluing Apple’s current revenue
and profitability due to the effects of subscription accounting rules on the iPhone, which we project to be a large and growing
component of Apple’s revenues going forward.
Another possible reason is that investors are taking a more pessimistic view than we are of Apple’s ability to continue to
grow and remain highly profitable without CEO Steve Jobs at the helm. There is considerable uncertainty regarding Jobs’ long-
term status after bouts with cancer and a recent liver transplant, and fears regarding his future health (and that of his company)
may be priced into the company’s stock today.
A final possibility is that we have simply overestimated Apple’s future revenue (and cash flow) growth performance in
our forecasts. Thanks to the iPod, iPhone, etc., Apple is coming off a five-year stretch of revenue and cash flow growth that is
nearly unparalleled in its industry. While we believe Apple will be able to continue to prosper through continued innovation for
some time to come, we also have to concede the possibility that we have allowed the company’s atypical string of recent “hits” to
skew our forecasts in an unrealistically positive direction.
Given the uncertainties surrounding Jobs’ future, and the general difficulty of predicting the future innovation and growth
of this rapidly-evolving company, it is tough to settle on one “bulletproof” valuation method for Apple’s stock. Our estimates
varied widely, as shown in the table below:
Valuation Method Per-share Price
Actual Stock Price (11/17/09) $205.91
Discounted FCFs/EVAs $366.23
Competitors’ P/E Ratios $111.37
Competitors’ TEV/EBIT Ratios $95.30
Relative to other companies, Apple has quite an impressive TEV/EBIT ratio at 20.8. The average TEV/EBIT ratio for
Apple’s twins is 11.2. One thing to note about Apple’s higher ratio is that they appear to have far fewer shares outstanding than
their peers, such as Microsoft and HP, which ultimately results in Apple’s share price trading at a significantly higher price than its
competitors. Using the TEV/EBIT pricing method, we arrived at a price of $95.30, which is significantly below the market price
Apple is trading at currently. The most logical explanation of its lower price is because it’s based on industry data, which is much
different from the uniqueness of Apple’s data.
Also, when we calculated Apple’s P/E multiple, it naturally came out to be much higher than their competitors as well.
Apple’s P/E ratio was 32.32 relative to the competitor average of 17.71. Again, the P/E ratio is likely higher than Apple’s peers
due to the fewer number of shares outstanding. When using the P/E multiple pricing method, we arrived at a price of $111.37.
Again, this is far below the current trading price of $205.91 but higher than the $95.30 that was found with the TEV/EBIT method.
A likely reason the P/E pricing method gives a lower price is again due to the fact that Apple’s price is driven upward by the fewer
shares of common stock outstanding.
Our objective in this project has been to objectively (without reliance on “expert” estimates or current market prices)
determine the value of Apple, Inc. This involves less a look at where it has been than where it is going—how much cash flow can
we expect Apple to accrue in the years and decades to come? That future focus makes Apple both an intriguing and somewhat
challenging company to value, because the nature of its business has changed quite dramatically over the past five years—it has
gone from being a run-of-the-mill computer company to being a broad-based, innovative consumer electronics company. Its
financial performance has undergone a similarly dramatic makeover in the process, as shown in the graph below:
35,000.0 iPhone Introduced
15,000.0 iPod debuts
99 00 01 02 03 04 05 06 07 08
Once financially struggling, Apple is now generating cash at an eye-popping rate, producing massive revenue growth
rates and healthy operating profit margins while employing low levels of invested capital—a display of extreme financial
efficiency. The extremes between the Apple of just five years ago and the Apple of today are so stark that it makes it difficult to
gauge what the future Apple will look like—will it be the struggling also-ran (the first, flat, part of the curve above), the bold,
innovative, efficient financial titan (the second part of the curve), or something in between?
For all its success, there are many questions about Apple’s trajectory going forward—CEO/visionary Steve Jobs’ health
and continued involvement are in question after he underwent a liver transplant earlier this year. Some of the product lines that
have fueled Apple’s massive growth are already showing their age (the iPod), while others (the iPhone, the MacBook laptop) have
dozens of formidable competitors aiming to overtake them. And there’s also the fundamental question of whether any company
can continue cranking out “hit” products at the rate Apple has during its renaissance.
For these reasons, our financial forecasts attempted to split the middle between the two extreme outcomes of Apple
immediately falling back to the pack or continuing to grow at astronomical rates forever and ever. Generally speaking, our forecast
calls for Apple to continue to grow at a significant rate for the next five-plus years, before beginning to gradually and inevitably
fall back to the pack as some products age and others are overtaken by the competition, a trajectory illustrated by the five-year
Apple Sales Forecast 2009 2010 2011 2012 2013 5-yr. CAGR
Total Revenue (millions) $36,574 $46,460 $56,101 $69,172 $81,261 20.1%
A) Mac Desktops $4,635 $5,098 $5,864 $6,861 $7,752 6.7%
B) Mac Laptops $9,271 $11,302 $12,997 $14,557 $16,012 13.0%
C) Mac Tablet/Other innovations -- $750 $1,875 $5,675 $7,875 1293.3%
D) iPod $8,069 $8,311 $7,896 $7,343 $6,609 -6.3%
E) Other music (iTunes Store) $4,008 $5,210 $7,295 $10,577 $14,808 34.7%
F) iPhone/related services $6,925 $11,080 $14,404 $17,284 $19,013 59.5%
G) Peripherals/Hardware $1,327 $1,433 $1,677 $2,013 $2,314 6.9%
H) Software/Services $2,339 $3,275 $4,094 $4,913 $6,878 25.5%
After this five-year horizon we project Apple regressing to the mean somewhat in terms of its growth and profitability.
However, assuming Apple continues to manage its business and its finances with a level of skill and efficiency similar to what it
has shown over the past five years, we expect that it will continue to be a profitable and viable company into the indefinite future.
Our projections show it producing free cash flow of more than $25 billion per year a decade from now, with operating profit
margins of nearly 18%. Given its current financial fundamentals, our projections for future growth, and the relatively number of
shares (i.e. claimants) on its massive cash reserves and growth potential, we estimate Apple’s value at $366 per share, some $161
higher than it is currently trading for.
Gregory & Smith Capital, LLC
“Better than trusting your money to a chimp… but only slightly.”
Part 6 – Continuation Value Submitted 11.10.09
Our calculations indicate that Apple’s continuation value is $1,061,885 million, a figure we arrived at by using the cash-
flow value driver formula. We rejected an alternative figure computed using EVA due to concerns over the rate of implied EVA
growth, and the proportion of value created by RONIC relative to ROIC. We computed a liquidation value of approximately
$23,434 million for Apple, but we don’t foresee many realistic scenarios in which management will be compelled to liquidate the
company. We computed a relative valuation (using TEV/EBIT) of $182,068 million, but rejected that figure as being too low
relative to the other values we had considered.
Continuing Value Computations
Our starting invested capital figure for these computations is -$19,039 million, which is derived from the final year of our
medium term forecast for Apple. This number is negative because Apple has employed a strategy of using low-to-negative levels
of invested capital, and we expect that to be their operating model going forward as well—many of the figures related to the
negative figure are related to particular accounting methods for the iPhone, and those don’t figure to be going away anytime soon.
Our g is 6.5%, which we believe will be the equilibrium Revenue/EBIT/NOPLAT growth rate for Apple in the continuation
The big challenge for Apple is determining continuation ROIC and RONIC values, as Apple’s projected use of negative
invested capital skews those two numbers in unexpected ways. We projected our ROIC and RONIC for the continuation period for
Apple to be -170% and -100%, respectively—these represent approximately a 40% decrease from the (more-negative) ROIC and
RONIC employed during the forecast period.
Under typical conditions RONIC should converge toward WACC, but since Apple has several sustainable competitive
advantages (its operating systems, products and brand) plus its extremely efficient use of capital, we believe that qualifies it as an
exception to that convergence-to-WACC rule. Finally, our WACC is 11.87%, a factor that carries over from our medium-term
forecast, as we do not predict any major changes in Apple’s capital structure.
Continuation Value (Cash Flows)
Using the convergence formula (which nulls out future value creation through investment), we arrived at a continuation
value of $447,839 million for Apple. This figure represents the continuing value of the capital Apple will have invested by the end
of the explicit forecast period, without taking into account the effects of any future investment. This is a reasonable estimate for
what it forecasts (which is the continued value generated only by Apple’s existing invested capital base), but is not a reasonable
estimate for the continuation value of Apple as a whole—clearly the company will continue to grow and create value through its
growth for the foreseeable future.
The Value Driver Cash Flow formula yields a continuation value of $1,061,885 million for Apple. Embedded in this
figure are implicit estimates of investment rate, initial NOPLAT, and initial FCF. These numbers, frankly, are a bit odd—the year
T+1 NOPLAT represents a 76% year-over-year increase in NOPLAT, and an 89% year-over-year increase in FCF. Both are far
higher, percentage-wise, than at any other year-over-year point in our forecast period and lead us to question the validity of this
result. It is possible that we made an error in our forecasting that causes this portion of the forecast to produce unsustainably high
We have some question also about our implied investment rate of -6.5%, but believe that it is not a completely unrealistic
figure. As a tech company, Apple has much less need for PP&E and other investments in fixed assets than a manufacturing or
retail firm would. And at the rate technology is advancing, for all we know Apple employees will be doing their work on tiny
computers implanted in their brains by 2023, eliminating the need for new investments in computers, printers, desks, buildings,
etc. The example is somewhat facetious, but it illustrates the point that while you would think Apple would need a positive net
investment rate to replenish its resources, it seems theoretically possible the company could allow its capital base to decline over
time without compromising its productivity.
We did not recalculate the continuation value using the unlevered cost of capital—since Apple does not employ debt the
levered and unlevered costs are the same, and debt tax shields would have no effect on Apple’s continuing value.
Continuation Value (EVA)
Using the EVA continuation value formulas, we arrive at $466,879 million as the value of Apple derived from its existing
invested capital at the end of the explicit forecast period. As above, the implied EVA at time T+1 seems a bit high given historical
trends in Apple’s EVA figures. At $55,091 million, the 2024 EVA represents a 71% increase from the year prior.
The value added by additional invested capital is $614,046 million. This figure seems unrealistically high given that our
forecast calls for Apple to make very little investment in additional capital in the continuation period (a -6.5% net investment rate).
We’ve also assumed a different (lower, at -100%) investment rate for additional capital, on the premise that Apple’s best
investments and blockbuster ideas will have been largely exhausted by 15 years from now, yet this formula still predicts greater
value from future ideas and investments than Apple’s existing slate of cash cows. This result really doesn’t pass the logic test, in
This results in a total continuation value of $1,080,925.4 million, roughly the same as we arrived at using the cash flows
methodology. However, this figure is made up of approximately 40% value created by existing capital and 60% value to be created
by future capital; a proportion that, again, seems out of whack given Apple’s projected minimal investment in new capital, and the
fact that their “well” of ideas has to run dry at some point between now and 2023. The proportion isn’t so vastly off-kilter that we
believe we have to reject it entirely, but it does provide a basis to wonder about its validity.
The difference between the two continuation values amounts to $19,039 million, which is the invested capital figure for
the last year of the explicit forecast period, and amounts to only a 1.7% difference between the two continuing value figures.
Because of the problems noted above with the odd proportion of existing to additional value in the EVA formula, we favor the
$1,061,885 figure computed using cash flows. Particularly given the quirkiness of Apple’s invested capital numbers and the fact
that its WACC could change at some point, going with the relatively stable and reliable NOPLAT-and-cash flow-derived figure
seems like the better option to us.
We came out with a total liquidation value of $23,434,700. This was calculated using the following weights: 20% of PP&E, 50%
of inventory, 50% of accounts receivable. We then added intangibles and subtracted total liabilities. It is very difficult to discern
what assets and intangibles make up the value of a company like Apple and it’s even harder to place a number on the value that is
created from such a strong brand name.
The TEV/EBIT multiple came out to about 4.57 currently. This is a bit lower than the price to book value of 6.51, but still a pretty
accurate estimate. Currently, the industry’s P/E ratio is around 32. In 15 years, we would expect the ratio to decline to around 25
or even less due to the attracted competition of high returns that will soon erupt in the telecommunications/personal electronic
device sector. The current price to sales ratio for Apple is 4.97. We would expect this number to increase in the immediate future,
but start to decline for the reasons mentioned above.
On February 11, 2010 Air Products and Chemicals, Inc. (APD) confirmed its attempt at a hostile takeover of Airgas, Inc. (ARG). The bid
is an all-cash offer valued at $60 per share or $5.1 billion of Airgas stock. Currently, the Airgas board of directors is against the merger and is
pleading with shareholders not to accept the offer claiming that Air Products has “grossly undervalued” Airgas Inc. i
It will be revealed from our research that undervalued bid for ARG has taken place as signaled by instant adjustment by the market on the bid
announcement date. With near certainty that the deal was unlikely to go through under the existing bid price, risk arbitrage spread was eliminated
immediately at market open on announcement day.
Buyer is an Industry Leader: Air Products (NYSE:APD)
Attempting a hostile takeover is Air Products and Chemicals, Inc. (APD), a Delaware-based industrial gas company.
APD is a global supplier of atmospheric gases to energy, industrial, technology, and health care clientele. They also
embrace the title of the world’s largest supplier of hydrogen and helium. Air Products currently employs
approximately 19,000 workers and operates in more than 40 countries.
APD Industry Sector S&P 500
Quick Ratio (MRQ) 0.99 0.39 0.62 0.83
Current Ratio (MRQ) 1.3 0.52 0.87 0.97
APD’s financial condition
LT Debt to Equity (MRQ) 73.6 7.31 25.16 121.6 is superior relative to its
Total Debt to Equity (MRQ) 87.78 12.56 38.92 176.66 competition, ARG’s is not.
Interest Coverage (TTM) 91.07 0.06 0.11 10.45 ii
APD’s financial condition is superior relative to the rest of the industry. Worth noting is APD’s modest debt-to-equity ratio of 0.88 compared
with the industry 1.25. Also likely contributing is its Standard & Poor’s AAA credit rating. APD boasts the ability to cover interest expense 449x
relative to the industry average of just 59.7x or the market average of only 24.6x. Air Products seems to be utilizing their assets more efficiently
than their counterparts boasting a return on assets figure of 6.4 compared to the industry 2.4. iii
While Air Products and Airgas are not in identical businesses, they are in similar businesses that will not alter Air Products’ strategy should they
acquire Airgas. In fact, the acquisition of Airgas would allow Air Products to achieve their strategy of becoming the biggest player in the North
American industrial gas market as well as one of the leading integrated gas companies in the world.
Target is financially Subpar: Airgas, Inc. (NYSE:ARG)
Airgas, Inc (ARG) is an industrial gas distribution and production company that operates on a massive scale in the
United States. Currently, Airgas is the largest distributor of industrial, medical and specialty gases in the United States
as well as the largest producer of nitrous oxide and dry ice. They are the largest liquid carbon dioxide producer in the
Southeast and the fifth largest producer of atmospheric gases in the U.S. Moreover, Airgas is one of the largest U.S.
suppliers of safety equipment. The paramount advantage of Airgas is their enormous supply chain and distribution
network across the United States.
Though Airgas is a leader in the industrial equipment wholesale industry in terms of scale magnitude, their financial condition appears to be
inferior to their peers. Airgas falls short in two major areas: amount of debt and interest coverage. Airgas has roughly twice the debt-to-equity
ratio of the industry at 1.07 (vs. 0.56).
ARG Industry Sector S&P 500
Quick Ratio (MRQ) 0.78 0.39 0.62 0.83
Current Ratio (MRQ) 1.63 0.52 0.87 0.97
LT Debt to Equity (MRQ) 92.26 7.31 25.16 121.6
Total Debt to Equity (MRQ) 106.51 12.56 38.92 176.66
Interest Coverage (TTM) 6.29 0.06 0.11 10.45 iv
The firm is only able to cover their interest expense 6x over compared to an industry average of 17.0x! This is likely a factor contributing to
Airgas’s S&P credit rating of BBB. Also, Airgas is only able to cover their short-term obligations 1.6 times versus the industry standard of 2.3 as
noted by their current ratio. Finally, Airgas seems to be earning a smaller return than their counterparts with an ROA of 4.8 (vs. 6.3-industry) and
a return on invested capital of just 5.3 compared to their peer average of 7.8.
Airgas’s strategy does not seem to be in tune with their potential buyer, Air Products. The most obvious sign is that this situation is now a hostile
bid on the part of Air Products, ignoring the wishes of Airgas management. Air Products is likely focusing on taking advantage of Airgas’s
enormous distribution network in order to become the largest industrial gas company in the United States. According to Airgas’s annual
statements, their strategy seems to be one of conservative diversification, which hedges against volatile economic and business cycles. This
would account for the very diverse product and services portfolio of Airgas. Air Products seems to be clearly focusing only on the industrial gas
segment, which could put the combined company in a riskier state relative to economic cycles.
A major factor in this hostile bid is the pending litigation involving the New York-based law firm, Cravath, Swaine & Moore, LLP. Since 2001,
the law firm represented Airgas until suddenly dropping them to represent Air Products in 2009. After Airgas rejected Air Products tender offer,
Air Products sued Airgas with CS&M as their legal counsel claiming that Airgas was failing to consider its offers. To counter, Airgas quickly
sued Cravith, Swaine, & Moore claiming that they breached conflict of interest laws and should not be allowed to represent Air Products in the
case since the law firm used to represent Airgas. Air Products is claiming that CS&M has represented them since the 1960’s, well before Airgas
even existed. Also, CS&M is claiming that they only provided minor financial work for Airgas. According to Reuter’s, analysts believe that Air
Products’ long history and the lack of pertinent services that CS&M provided for Airgas will help the judge to rule in favor of Air Products.
Should this be the case, this hostile bid is ultimately left up to the shareholders of Airgas.
On Monday, February 22, 2010, the board of directors of Airgas, the largest shareholders of the company, unanimously rejected Air Products’
bid for Airgas claiming that Air Products “significantly undervalues” Airgas and its potential for future growth. The shareholders rejected this bid
when the price of Airgas stock closed at $43.53 or 38% below the premium offered. v
The Combined Company
The popular opinion among analysts is that the merger would add approximately $250 million worth of synergies to the pro-forma statements.
Many of the synergies would arise from cost savings and increased profitability as the economy continues to improve. The merger is said to be
immediately accretive to earnings per share as well as GAAP earnings. The two companies bring different strengths to the table in order to
achieve these synergies. Air Products brings their engineering technology expertise as well as industry leadership in tonnage. Airgas would offer
their robust distribution network and leadership in packaged gases. The combined company would create one of the largest integrated industrial
gas companies in the world and the largest in the United States. vi
Financing Secured by J.P. Morgan Chase Bank N.A.
In order to successfully acquire a majority stake in ARG, APD will need $7 billion to purchase all outstanding shares.vii As of December, 2009
APD had cash and marketable securities that totaled $323 million. To make up for the difference, JP Morgan Chase Bank NA has committed
$6.724 billion through a term loan credit facility.
Furthermore there will be certain debt covenants APD will have to adhere to regarding debt
relative to firm EBITDA but our confidence of such covenants is high given APD’s current
The absence of risk arbitrage financial strength. As long as the integrity and general premise of this deal remains the same, JP
spread suggest an undervalued Morgan is prepared to move forward.
bid price or unlikely merger
With regard to repaying these sizeable loans, APD will combine the opportunity to refinance with
payments from internally generated revenues. Despite many pending conditions necessary for
this deal to go through, Air Products obtaining financing is not among them. Those conditions necessary for deal success include:
I. Share tendered at expiration date once combined with the current stake represent at least a majority stake of outstanding diluted shares.
II. Airgas Board of Directors give up preferred stock purchase rights that would otherwise enabled them to interfere with this merger
III. Cooperation from Airgas Board of Directors
IV. Successful early compliance with Hart-Scott Rodino Antitrust Improvements Act of 1976 premerger notification and waiting period
V. No other parties come into agreement with ARG that prevents APD from acquisition or disables the opportunities for synergies and value
The investment bank acting as deal maker for this deal is J.P. Morgan. McKenzie Partners Inc is the information agent.
APD seeking share of U.S. Packaged Air Market through ARG
The development of APD’s offer into hostile takeover came from numerous declines by the ARG board of directors. On October 15, 2009, the
CEO’s of the two companies met to discuss the potential of a merger but with little success. ARG CEO McCausland expressed the likely
disinterest of the ARG board of directors.
Following multiple attempts and lower-than-expected ARG earnings reports on October 29, 2009 and January 28, 2010, APD’s current all-cash
offering was in fact a revision of two other prior offers.
The first offer was an all-stock deal that valued ARG stock at 0.7296 of APD but constituted a 27% premium of the current market price. This
discount of ARG stock by APD was immediately shot down and expressed disinterest to move forward with revisions followed. The second offer
was a cash and stock blend that raised the market price premium to 33% and an offer tender at $62 per share. The current offer is an all-cash bid
at $60 per share and reflects APD’s final attempt of acquisition. This final attempt has become a hostile takeover whereby APD has decided to
offer this tender publicly to ARG shareholders.
Risk Arbitrage Spread
In accordance with L’Habitant, risk arbitrage spread opportunities exist between the initial bid price and the closing market price one day after
the announcement. It is in that spread that arbitrageurs seek to achieve their returns. The inherent bet on a merger deal going through closes the
spread until bid price and market price converges to zero. Therefore the rate in which that spread closes is a viable proxy signaling likelihood of a
successful deal when the bid price is a reasonable premium of the market price. In this case, we are leaning more on the belief that the $60 per
share bid is an undervaluation of ARG stock.
Figure 1: Instant market price jumps grossly shorten risk arbitrage windows as seen on February 5th, 2010 for Airgas Inc.
Any opportunity window for arbitrage was kept extremely short. The $60.00 per share bid price was made on the morning of February 5 th, 2010
and the opening price that very same day was $62.65, eliminating the entire spread instantly as trading opened. The only other risk arbitrage
opportunities that seem possible would come from renegotiation of a bid price that better reflects a premium of ARG’s value or an extension
beyond the current April deadline.
Airgas Board of Directors statement <www.finance.yahoo.com>
Air Products Inc. (NYSE:APD), <http://www.reuters.com/finance/stocks/financialHighlights?symbol=APD.N>
Airgas Inc (NYSE:ARG) <www.moneycentral.msn.com>
Airgas Inc., Financial Strength <www.reuters.com>
Airgas Inc. <www.finance.yahoo.com>
Information regarding the combined company <www.cnbc.com>
ARG SEC filings, exhibit (A)(1)(i), Offer to Purchase for Cash All Outstanding Shares from APD. Offer expire April 9, 2010 at 24:00
Zack Gregory Ticker: CPO
May 13, 2009 Rating: Buy
Share Price: $21.13 Industry: Food Processing
over the next one to two years. This, along with the current
recession, presents an attractive opportunity for investors to hop
into this rollercoaster slowly rounding the turn and is about to
have its price buggy pulled rapidly upward
Corn, Who Cares?
Corn is just a simple product produced by simple farmers that has
no real impact on the world except as a food source and a couple
of minor alternative uses, right? One might be a fool to make such
In the high-tech, flashy world of Google, Microsoft and Apple, it a grand and false assumption! Corn Products International is an
can become effortless to forget about the quiet and subtle giants of indispensable part of everyday life of the American and global
the domestic and global economy. While Apple has delivered an citizen. The company boasted net sales of $3.94 billion in 2008
unbelievable iPhone and Google is taking over the internet in a and operates in over 15 countries world-wide. For those who are
trendy and stylish way, certain companies, such as Corn Products keen on the term “diversification”CPO supplies more than 60
International (CPO), are quietly supplying the entire economy industries and sectors across the globe with its products and
with products or raw materials that are creating lasting services. Its staple product is high-fructose corn syrup in which it
dependencies with their customers, such as Coca-Cola. Do you supplies global giants Coca-Cola and Pepsi among others2. Corn
think corn is just what’s for dinner? Think again! From products international simply cannot be escaped by the global
pharmaceutical to the automobile to the food industry, Corn citizen. Much like Google is to the internet, CPO is a part of the
Products International is quietly rumbling along behind the scenes lives of most everyone on earth!
making unbelievable headway in establishing itself as one of the
biggest backbones to America’s economy. Corn Products is a Corn-fed: Fundementals of a Solid Company
strong buy and hold for the following reasons:
Upon an initial viewing of CPO’s fundamentals, a notable figure
A very attractive PEG ratio of 0.46 (I can hear value that leaps up and slaps you in the face is its uncanny ROE of
investors Googling CPO as I type!) 17.68%. CPO is in a league of its own relative to the rest of the
An unbelievable Return on Equity of 17.68%, relative to industry, which only boasts an industry average ROE of 3.13%.
its industry average of 3.13%1 CPO has an incredible 5-year expected EPS growth rate of 15%!
5-year projected earnings growth of at least 15% and 10 This dwarfs the industry rate of 5.87.. Just as impressive, CPO
year historical earnings growth of 29%! has a 10-year historical earnings growth of roughly 27%. To
A safe company! It currently has a debt-to-equity ratio of paint this hidden gem’s picture relative to value, we stack its
0.62, relative to an industry average of 1.27 and an S&P current P/E on top of the growth, which spits out a beautiful PEG
average of 1.06. 1 ratio of 0.46 (Peter Lynch may even applaud this discovery).
Finally, if one likes to heed the advice of Warren Buffett (and one
Artificial Sweetener, Artificial Price might consider doing so), CPO would fit nicely with Buffett’s
criteria of a “safe company” with its phenomenal debt ratio of
In the Summer of 2008, the agricultural giant, Bunge, tried to take 0.62. In such a high and fixed cost industry, CPO is floating
over Corn Products International in order to gain more market peacefully compared with the S&P 500 average of 1.06. 1
share in the industry. Before the deal was fully realized the
takeover was sacked due to a severe down tick in commodities,
which caused Bunge’s stock to collapse. Bunge took Corn Got Corn?
Percent CPO is
Products along for the ride and caused its stock price to plummet 20
by association. With the market being an efficient mechanism, 15
investors are starting to understand that Corn Products is a shining 10 CPO
star beneath the former merger controversy and is likely to see a 5
large increase in share price
ROE (5 EPS (5 Debt Ratio S&P
year avg.) year. avg)
CPO, Quietly Amassing Fortunes
Not Everyone is Perfect…But Some Are Close!
Though Corn Products has achieved almost double the growth of the S&P 500 over the past 10 years that is not to say there are not potential
hindrances to owning the stock. However, it must be noted that the risks do not appear to be firm-specific. Because of slower economic times,
earnings in the short-run have fallen short of estimates due to such occurrences as Coca-Cola’s and Pepsi’s aggregate decrease in demand of their
carbonated beverages. Also, harder economic times have resulted in increased input costs for the short term for Corn Products due to the lack of
demand for some of the “corn co-products” that CPO normally utilizes to hedge against the cost of inputs. Also, political problems in South
Korea have resulted in much higher corn and distributions costs in the short-term Like most companies, CPO is expected to pick up momentum
somewhere in 2010, which is when we should start to see CPO stride ahead of the pack. Its immense product diversification and continual
innovation are expected to reward patient investors nicely.vii
Valuation: Where the Diamond is Lifted From the Rough
The figure below is a simple Discounted Present Value analysis of this stock over the next 5 years relative to earnings growth. To show the
impressive nature of this stock I have made very conservative estimates that will still show impressive returns and intrinsic value. We will
assume: 1) a modest earnings growth rate of only 12%, 2) a risk-adjusted discount rate of just 12%, and finally 3) security pricing grounded in a
forward P/E ratio of roughly 14%. The forward P/E is based on the assumption that Corn Products International is an excellent business with
high earnings and is operating in a recession-like atmosphere currently. 1
CPO is a Steal for only $20.36!
Expected EPS EPS in 5 Years Stock Price in Intrinsic
Growth 5 Years Economic
10.0% 5.67 79.37 47.78
11.0% 5.93 83.04 50.00
12.0% 6.20 86.85 52.29
13.0% 6.49 90.80 54.67
14.0% 6.78 94.88 57.13
Immaculate Management: Separating the Chaff from the Crop
Corn Products International is currently headed by the talented Samuel C. Scott III who has been at the top since 2001and president since 1997.
He is also a director of Motorola and Abbott Laboratories. Scott has been with the company since 1997 and excelled in the corn industry for over
20 years. Since Scott has been at the helm (or near it), CPO has enjoyed roughly 10 years of unprecedented earnings growth in excess of 25%!5
Scott owns 253,960 shares of stock in the company worth $5.1 million. Roughly 83% of CPO’s stock is owned by institutional investors,
including Axa, Vanguard Group, and Prudential. It seems that due to the uncertainty of the current recession, insiders have sold a few shares
lightly (0.8%), but nothing indicates that it is due to any negative inside information and is solely due to uncertain economic conditions.
Beta Analysis and Safety
5 Year Avg. R-Squared P-Value
0.86 0.22 0.33
Risk-averse investors will smile at the above 5-year average beta of 0.86, which indicates that it is 14% less volatile than the overall market. This
beta of 0.86 was derived using the weekly returns of CPO and the S&P and running a regression analysis. Also, found in the regression is the
tell-tale sign of a 0.22 R-squared figure that suggests CPO’s stock precariousness is not greatly affected by the overall market. In fact, 72% of
Corn Product’s volatility cannot be explained by fluctuations in the market and are more likely attributed to firm-specific risks, which in this
company’s case, is a great thing. 6
Also, Graham and Dodd investors will salivate at the company’s safety net in which it boasts a current debt-to-equity ratio of just 0.62! This
itself is an exciting figure. However, when compared to the industry and S&P averages of 1.27 and 1.06, respectively, it leaves quite an imprint
on the mind. By leveraging the company just above the half-way mark, CPO has been able to enjoy 21% dividend growth rates and achieve net
income growth rates of roughly 30% in the past 5 years . 2
Recommendation: Is There Any Doubt?
Corn Product’s stock price has appeared to be pushed artificially low due to current economic conditions and a failed attempt at a merger with
Bunge. Because of CPO’s talented management, especially when it comes to cost containing and hedging input costs, the company should be
able to produce above average earnings growth in the long haul and its stock price will likely double (maybe even triple) in the next 3 to 5 years.
For those smart investors seeking long-term capital appreciation I strongly recommend Corn Products International as a BUY.