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Discount-Variety Stores Industry

Discount-Variety Stores Industry Module 8: Valuation Using the Abnormal Enterprise Income Growth Model Kate Johnson. Agenda for Presentation. Company Information and Comparable A ssumptions and forecasts Estimate of DG Value using the Abnormal Enterprise Income Growth Model

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Discount-Variety Stores Industry

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  1. Discount-Variety Stores Industry Module 8: Valuation Using the Abnormal Enterprise Income Growth Model Kate Johnson

  2. Agenda for Presentation • Company Information and Comparable • Assumptions and forecasts • Estimate of DG Value using the Abnormal Enterprise Income Growth Model • Comparison of values from: Residual Income Enterprise Model (7) Cost of Capital and Valuation (6) Forecasts of Cash Flows (5) • Estimate based on Horizon Percentages • Steady State • Uncertainties

  3. “Save Time. Save Money.” • Largest discount retailer in the US by number of stores • Goodlettsville, Tennessee • 11,000 stores • 40 States • Southern, Southwestern, Midwestern, Eastern US • Merchandise is typically $10 or less • Founded in 1939 • Stock publicly traded in 2009

  4. Product Types • Two brands: 1)High quality nationalbrands from leading manufacturers 2)Comparable quality privatebrand selections 10,000 SKUS/store 10$ or less

  5. How are they profitable? • Convenient Locations • Time Saving Shopping Experience • Everyday Low Prices on Quality Merchandise • Key items in a broad range of general merchandise categories • Most basic shopping needs are met in one trip

  6. Discount-Variety Stores **Costco is least comparable

  7. But DG is a Dollar Store? • Dollar General is more suited to be compared with Walmart, Target, and Costco, as not everything is $1 (DLTR) and they have produce (unlike FDO) • Characteristics such as industry and size are often chosen for comparable

  8. Store Growth • 2010-2011 Growth: 6.02% • 2011-2012 Growth: 5.72% DG is a February 2 year end

  9. Assumptions and Forecasts Parsimonious Forecasts from M4, with 2018 and 2019 added

  10. Valuation Using the Abnormal Enterprise Income Growth Model • Comparing cum-free-cash-flow earnings next year to the expected amount of earnings given this period’s earnings • AEIGM captures the notion that normally earnings would be expected to grow at the required rate of return • Earnings in the future are expected to grow at the required rate of return • Cum-free-cash flow earnings includes an element that serves as an adjustment to earnings expected within the enterprise –This adjustment piece captures earnings that may reasonably be expected to accrue outside of the enterprise as a result of the re-investment of the distribution

  11. Steady State • We must remember that the models will yield the same enterprise value if steady-state is achieved • Steady state is achieved when: 1) Sales are growing at a constant rate 2) The EPAT from each dollar of sales is constant 3) The NEA required for each dollar of sales is constant

  12. Abnormal Enterprise Income Growth Model Valuation

  13. Comparison to Residual Enterprise Income Model (M7) The modules will yield the same Enterprise Value for DG if steady-state is achieved

  14. Comparing to DCF and Cost of Capital (M6 and M5)

  15. DG Value Estimate Based on Horizon • The AEIGM has the lowest portion of estimated value coming from the periods beyond the horizon • Lowest reliance on continuing calculation

  16. Steady State • Because all of the enterprise values are the same value of $25,447,658,563, we know steady state is achieved • To check: • Sales Growing at Constant Rate -Forecasted to 2020, so two years of growing at a constant rate of 2.29% • EPAT per dollar of sales is constant • NEA required for each $ of sales constant

  17. Steady State and AEIGM • Note: Only timing difference in reaching steady state between models is the abnormal enterprise income growth model gets there one year later because the calculation of agr implicitly requires the last two estimates of NEA • To achieve a steady state in AEIG requires two years of NEA growing at the sales growth rate and one year of EPAT growing at the sales growth rate • Residual enterprise income is already in steady state (as is FCF) in T-1 whereas AEIG reaches steady state in year T

  18. Note on WACC (M6)

  19. Stock Price Hold

  20. Uncertainties • While 2013 Q4 data became available Thursday March 13, 2014, there are a few items not included in the 4Q (particularly unrealized gain on hedged transactions) that are necessary for valuation • Thus FEAT and OCI cannot be computed • Therefore actual 2013 data has not been used yet • May have to wait for the annual report

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