Analysis of Dell Computer Corporation0

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Analysis of Dell Computer Corporation
Report by Valanium Analysts: Vishal Mehta, Yuval Kwintner, Amit Wohl, Jennifer Blundo

        Investment Recommendation: MARKET PERFORMER                                                              11/23/01
RKY – NYSE (11/21/01)                    $ 26.60                      EPS Forecast
52 week range                            $ 16.63 to $30.49            FYE 12/30          2000      2001 2002E 2003E
                                                                      EPS                $0.61     $0.87 $0.98 $1.11
Revenue (1999 Est.)                      $ 32.8 B
Market Capitalization                    $ 1, 702,000,000             Ratios             Firm  Average of Competitors
Share Outstanding                        2,610 M                      P/E Ratio          58.71      132.44
                                                                      PEG Ratio           2.34       10.68
Dividend Yield                          0%                            M/B                 2.12         2.94
Avg. Daily Trading Volume               27,279,000
                                                                      Valuation Predictions
Book Value per Share (11/01) $1.83                                    Actual Current Price                          $ 26.60
Return of Equity             22.79%                                   P/E Valuation                                 $ 24.33
Return on Assets             9.23%                                    PEG Valuation                                 $ 29.45
Est. 5 Years EPS Growth Rate 11.6%                                    M/B Valuation                                 $ 6.24
                                                                      P/S Valuation                                 $ 13.47
Industry:          COMP-MICRO                                         EBO (Abnormal Earnings) Valuation             $ 3.65
                                                                      DCF Valuation                                 $ 16.66

                                                                      Performance of Dell
                                                                      Trailing             3Yr.  1Yr. 3Mo.   1Mo.
                                                                      Return-Dell         -6.2% 8.2% 14.1% 3.4%
                                                                      Return-S&P 500      -6.4%   0% 14.7% -0.8%
                                                                      Return-Competitors -14.6% 20.1% 6.2% -0.5%




Summary of Analysis:
! Assigning a MARKET PERFORMER with a price target of $20+ based on DCF valuation
  estimates and insights into the company’s growth opportunities. The company currently
  trades at roughly 36x earnings! A strengthening strategic position in new markets and the
  overall health of the company compel us to give Dell stock a market performer rating.
! Dell is well-positioned leverage efficiencies associated with its direct model to exploit higher-
  growth, higher-margin areas like servers and storage.
! The company managed to maintain profitability and cash flow throughout this market
  downturn, thus proving the strength of its business.
! Strategic alliance with Unisys on high end Servers will increase high margin enterprise
  product business in 9-12 months.
! Recent announcement of alliance with EMC on mid-range storage strengthens the
  company’s position in Enterprise products and Services.
! We project short-term revenue growth of to gradually decline from 15% in FY2002 to 7% in
  2007. We project EPS will track revenue growth.
Rating System:
BUY: A strong purchase recommendation with above average long-term growth potential.
MARKET OUTPERFORM: A purchase recommendation that is expected to marginally outperform the return of the market.
MARKET PERFORMER: A recommendation to maintain current positions with returns to match that of the market.
SELL: A recommendation to sell the security (or short the security) as it is expected to decrease in price in the medium term.

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Business Summary:

Dell Computer Corporation is one of the world's largest direct computer systems
companies with annual revenues of $32 billion. In this intensely competitive industry,
Dell distinguishes itself by its direct channel policy. By cutting “the middle man” and
building PCs, enterprise products like servers, storages, solutions to order, Dell has
revolutionized an industry once inundated with unsold inventory and products that
quickly became obsolescent. Dell’s integrated supply chain has allowed it to gain
market share while remaining profitable.


Products and Services:
Dell continues to promote its PCs as highly stable and manageable, so as to penetrate
all sectors of the market. In a market with little differentiation between vendors, Dell
continues to use price and service as a differentiator. Dell’s product strategy is based
on the standardization of product platforms. The idea is to be a technology follower
rather than an innovator. The company offers its customers a full range of computer
systems, including desktop computer systems, notebook computers, workstations,
network servers and storage products, storage area network, solutions as well as an
extended selection of peripheral hardware, computing software and related services.
Additionally, the company offers an array of services to support its customers' online
initiatives.


Competitors:
Hewlett Packard (HWP) is a global provider of computing and imaging solutions and
services for business and home with 45 billion in annual revenues. The company
provides a broad range of computing systems for the enterprise, commercial and
consumer markets. The company's Information Technology Services Group provides
consulting, education, design and installation services, ongoing support and
maintenance, proactive services like mission-critical support, outsourcing and utility-
computing capabilities. It is yet unclear whether the proposed merger with Compaq will
strengthen or weaken HP's position in the market.
International Business Machines (IBM) generates $88.7 billion in annual revenues by
using advanced information technology to provide customer solutions. IBM competes
very fiercely in Dell's product space (desktops, portables, servers, storage). The
Company operates through several operational segments that offer a variety of
solutions, including technologies, systems, products, services, software and financing.
Compaq Computer Corporation (CPQ) is a leading global provider of enterprise
technology and solutions. Compaq designs, develops, manufactures and markets
hardware, software, solutions and services, including industry-leading enterprise
storage and computing solutions, fault-tolerant business-critical solutions,
communication products, and desktop and portable personal computers that are sold in


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more than 200 countries. It is yet unclear whether the proposed merger with HP will
strengthen or weaken Compaq's position in the market.
Sun Microsystems (SUNW) utilizes open industry standards, the Solaris Operating
Environment and the UltraSPARC (Ultra Scalable Processor Architecture)
microprocessor architecture. Sun sells scalable computer and storage systems, high-
speed microprocessors, and a comprehensive line of high-performance software for
operating network-computing equipment with annual revenues of $16 billion. The
company also provides a broad range of services, including support, professional
services and education. It competes with Dell in the server space.
EMC Corporation (EMC) provides integrated solutions to enable organizations to create
an enterprise information infrastructure, which EMC calls an E-Info structure. The
company designs, manufactures, markets and supports a wide range of hardware and
software products, and provides services for the storage, management, protection and
sharing of electronic information. The company generates annual revenues of $ 8
billion from sale of product and services. EMC competes with Dell in the storage line of
business, which is most profitable and is projected to have relatively high growth
opportunities.
Gateway Corporation (GTW) is a direct marketer of personal computers (PCs) and
related products and services to consumers and businesses with annual revenue of 7
billion. Gateway develops, manufactures, markets, and supports a broad line of desktop
and portable PCs, servers and workstations used by individuals, families, small and
medium businesses, government agencies, educational institutions, and large
businesses.


SWOT Analysis:
Dell’s strength includes direct route to market, it’s relationship with suppliers and
pricing strategy.
Direct Model: Dell's business model is the envy of many competitors. Most other
competitors are in the process of developing a direct market strategy but the transition
from existing sales channel is not simple. Dell continues to gain market share by using
its knowledge about its customers.
Supplier Relationships: Dell’s integrated supply chain allows it to keep only four days of
inventory. Component price in computer industry falls almost 6% a week. The
company can provide the component price decline to its customers quickly. In addition,
Dell shares demand information with suppliers, so ensuring that inventory is kept to
minimum. Dell also enhances cash flow by effectively paying suppliers after customers
have settled invoices.
Pricing: Dell has developed a process whereby they can assess the lowest possible
price within an hour. Dell’s e-commerce infrastructure allows dynamic pricing strategy,
whereby the same product and service can be sold at different prices, depending on the
buyer.


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PC demand is seen as price elastic (prices drop, demand increases). Dell’s price
cutting strategy aims to keep demand away from competitors. Ultimately, by denying
them market share, more consolidation will occur. Gateway’s withdrawal from
European market and consolidation of HP and Compaq are indications that PC market
is in the process of consolidating. In addition, Dell should be able to capitalize on the
uncertainty surrounding the early HP/Compaq merger.

Dell’s weakness includes limited R&D, its reliance on Microsoft and Intel and its
relatively week service business.

R&D: Dell’s traditional business model is based on a risk-averse approach to the
marketing new products. Dell does not invest significantly in R&D and relies on supplier
to provide lowest possible price and inform Dell of developments in product roadmap.
Dell’s model can be a weakness if it becomes “locked out” from an important part of the
market.

Reliance on Microsoft and Intel: Majority of PCs is based on platform created by
Microsoft and Intel. New processors and OS do not boost the market demand and
hence they rely on vendors to promote new technologies. Dell must look into forming
strategic alliances with rivals Linux and AMD, in order to mitigate some of the market
power its current suppliers have.

Services: Recently, Dell has rolled out premier enterprise product support for corporate
customers. Success in this area is crucial and needs to be monitored. As of today,
IBM, Unisys and Gentronics handle most of Dell’s customer support for enterprise
products. Dell is in the process of capturing more of those revenues by providing the
services itself.

Dell’s opportunities include expansion in global coverage, enterprise products,
services and complete solutions.

Globalization: Dell’s major opportunity is to expand its business models overseas and
gain market share from the competition. Partnerships with major resellers should be
looked into as a potential opportunity to gain greater share of the market. Sales outside
of the United States accounted for approximately 33% of the company’s revenues in
fiscal year 2001. The company’s future growth rates and success are dependent on
continued growth and success in international markets. As is the case with most
international operations, the success and profitability of those operations are subject to
numerous risks and uncertainties, including local economic and labor conditions,
political instability, unexpected changes in the regulatory environment, trade protection
measures, tax laws (including U.S. taxes on foreign operations) and foreign currency
exchange rates.

Enterprise Products: Competition like Compaq, IBM, HP has been subsidizing their PC
business with their margins from the enterprise products like Servers and Storage. Dell
is a new entrant into this market. Recent collaboration with EMC to sell their mid range


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storage and with Unisys to sell their Server products is a step towards gaining strength
in this area.

Services & Solutions: High margins will never return in the PC business. Complete
solutions will be the key to profitability in future. Currently services are 8% of total
revenues. Dell has opportunity to grow this business and expand into other areas like
consulting and support.

Major threats to Dell are the margins in the traditional PC business and uncertainty in
the lucrative service business

Margins: Perception is that Dell is gaining business by cutting margins. The reality is
that Dell is able to reduce price by cutting costs, which enables it to maintain good
margins.

Image: Dell has an image of hardware vendor and not service provider. Dell must
focus beyond its traditional strength and develop a strong service infrastructure.


Risks:

The major business challenges Dell expects to face in the near future revolve around
the growth of the service business, movement towards globalization and increased
competition in the computer industry. These trends may lead to heightened competition
and decreased margins.

In addition, margins may be affected by high warranty costs to the company. Recently,
the company announced several recalls for batteries and other hardware. This will
result in risk to the razor thin margins in the business. Also, the company has been
trying to expand into service business. It will be a challenge to gain business from rivals
like IBM who have strong presence and head start in this area.

Systematic risk includes possibility of US economy falling into recession and the risk of
downturn in foreign markets, particularly the future states of Japanese and European
economies.

Stock Performance:

Dell, unlike many of its competing firms in the computer industry, has weathered the
recent economic downturn. It managed to maintain profitability and cash flow
throughout. Its stock price has nonetheless declined significantly and is currently at $26,
almost 50% lower than what it was two years ago. In the last six months, the stock has
been very volatile and the returns in the past three months have been close to 15%.

Dell is not alone in abysmal market performance over the last twelve months.
Competitors have seen their stock price decrease an average of 78% over this time
period. (Return on competitors stock price over the last year: HWP is –40%, CPQ is –
60%, IBM is 16% and GTW is –76%).

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Quality of Earnings:

Company sales are growing in a convincing manner, as sales growth outpaces A/R
growth.


                80.0%
                70.0%
                60.0%
                50.0%
  % Change




                40.0%
                30.0%
                20.0%
                10.0%
                 0.0%
                    1995     1996        1997      1998       1999       2000      2001
                                                  Years

                                     % Growth in Sales    % Growth in A/R



Operating income is conservatively reported.


                4500
                4000
                3500
                3000
   $ Millions




                2500
                2000
                1500
                1000
                 500
                   0
                   1995       1996       1997       1998          1999      2000     2001
                                                    Year

                           Op. Inc. before Dep.(OIBD)     Op. Act. Net CF. (OANCF)




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Summary of Valuation Analysis:

Forward P/E Valuation
Derived Value = $24.33 (See Table 1)
Implied stock valuation based on comparable forward P/E method is in line with current
market valuation of Dell stock ($26.03). Valuation was based on the average forward
P/E ratio of Dell’s six main competitors. The current earnings do not reflect the future
earnings given the downturn in the economy. As a result, we think that forward PE is
more relevant for our analysis. The wide dispersion of P/E ratios for the benchmark
group questions the quality of this application of the comparable P/E ratio method.

Forward PEG Valuation
Derived Value = $29.45 (See Table 2)
Implied stock valuation using forward PEG valuation method yielded a result somewhat
higher than the current market value of Dell stock ($26.03). The current earnings do not
reflect the future earnings given the downturn in the economy. As a result, forward PEG
ratio is more relevant for our analysis. The wide dispersion of PEG ratios for the
benchmark group questions the quality of this application of the comparable PEG ratio
method.

P/S Valuation
Derived Value = $13.47 (See Table 3)
Implied stock valuation using the Price to Sales method yielded a valuation that was
significantly lower than that of the market. Several factors account for this result. First,
comparable firms in the industry have different revenue sources with different operating
margins. For example, Gateway’s mains source of revenue is from low margin
computer sales, and thus would have relatively lower P/S ratio. IBM offers many
services, some of which reap high margins, and thus having a relatively higher P/S
ratio.

Market to Book Valuation
Derived Value = $6.24 (See Table 4)
The M/B valuation method produced a substantially lowered price estimate for Dell
stock. Significant variability in market-to-book ratio across comparable firms (Gateway
at $1.48; IBM at $7.5) suggests that this particular valuation method is not very suitable.
Dell’s market to book ratio is near the lower end of this spectrum at $2.12. This is below
the competitor average of $2.94 that was used in the valuation calculation. This
difference could explain the seemingly low price of $6.34 that the valuation method
produced. (Note: The market to book ratios of Dell and it’s six competitors were
attained at www.finance.yahoo.com).

Abnormal Earnings Valuation
Derived Value = $3.65 (See Table 5)
Abnormal Earnings valuation yielded a notably lower estimate compared to Dell stock’s
current market price. Dell is generating very high earnings. While some of the money is
being reinvested in business related projects, a significant portion of it is not put to use
in firm related investment.


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This analysis does not take into account possible future dividend payments or stock
repurchases. As a result, only moderate abnormal returns are expected in future years.
In addition, any abnormal earnings currently achieved by the company are likely to be
competed away in the long run.

Long Term Growth Rate and EPS Forecasts:
Calculations based on estimated on company announced growth rate of 15% next year
and a gradual decline to a modest long-term growth rate of 7%. Current consensus EPS
projections for Dell in fiscal 2001 and 2002 are $0.75 and $0.86 respectively.

Book Value per share of $1.83 was based on www.finance.yahoo.com source.

Discounted Cash Flow Analysis
Derived Value = $16.66 (See Table 6)
DCF valuation of Dell stock yielded a value substantially lower than that, which is
reflected in the market stock price. Sensitivity analysis with respect to the after-5-year
growth rate and discount rate reveals noteworthy sensitivity to both long-term and short-
term growth projections (see table 6a and 6b). Various real options were not explicitly
factored into the valuation, resulting in an underestimation of firm value.

Discussion of Valuation Methods

From our analysis, we believe that the DCF valuation is the most reliable and true to
economic fundamentals among the proposed valuation methods. We acknowledge that
this valuation fails to capture important and valuable embedded real options in the
underlying business venture. It is therefore likely to underestimate the true value of the
company. As a general rule of thumb, we mark up DCF valuation of technology firms by
20%+ to account for any real option value present. As a result, our target value for Dell
stock is $20+.

Dell has managed to weather this economic downturn and maintain profitability and
growth throughout. We strongly believe that the Dell business model is likely to yield
good results in the short to medium term. The uncertainties associated with the
Compaq-HP merger talks will most likely only strengthen Dell's position in the market.
The expansion into the server and storage markets will likely improve short-term profit
margins and overall profitability.

After factoring in all the discussed valuation issues, we believe that the current market
price overvalues the company




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Appendices: Spreadsheets with Analysis for each Valuation Technique:


                                Table 1: Forward PE Ratio
Competitor                            Symbol           Price Per Share1             EPS 2         Forward P/E Ratio 3
Apple Computer Inc.                    AAPL                  17.37                  $0.61               28.48
Compaq Inc.                            CPQ                   10.35                   0.15               69.00
Gateway Inc.                           GTW                    8.46                   0.16               52.88
Hewlett-Packard Inc.                   HWP                   17.89                   1.28               13.98
IBM                                     IBM                  96.47                   4.81               20.06
Sun Microsystems Inc.                 SUNW                   10.29                   0.23               44.74
                                  Average (Competitors) 4                                                 32.88
                                                   Industry Fwd.                  Forward             Expected Share
                                      Symbol                 P/E ratio              EPS2                     Price5
Dell                                   DELL                   32.88                 $0.74                   $24.33

1 - Price per share as reported on 7/20/01
2 - Sales per share for 1 years forward basis
3 - Calculated by (Price per share)/(Forward EPS)
4 - Average of competitors P/E ratios (only used competitors with positive ratio)
5 - Average of competitors Forward P/E ratio x Forward Earnings




                                      Table 2: Forward PEG Ratio
Competitor                            Symbol               Forward P/E         5 Yr. E Growth Rate3           Fwd. PEG4
Apple Computer Inc.                    AAPL                   28.48                     10.0                    2.85
Compaq Inc.                            CPQ                    69.00                     14.0                    4.93
Gateway Inc.                           GTW                    52.88                     13.5                    3.92
Hewlett-Packard Inc.                   HWP                    13.98                     12.0                    1.16
IBM                                     IBM                   20.06                     12.0                    1.67
Sun Microsystems Inc.                 SUNW                    44.74                     20.0                    2.24
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                                 Average (Competitors)                                                      2.65
                                                                             Fwd.             5 Yr.              Exp.
                                      Symbol               Forward PE        EPS2        Growth Rate
                                                                                                        3
                                                                                                                Price6
                                        Dell                  2.65           0.74           15%               $    29.45

1 - Price per share as reported on 7/20/01
2 - Earnings per Share estimate for current year
3 - Estimated annual growth rate for the next five years
4 - Calculated by (Price per share)/(EPS)/(5 Yr. Growth Rate * 100)
5 - Average of competitors Forward PEG ratio (only used competitors with positive PEG ratio)
6 - Aveage of competitors Fwd. PEG ratio x Fwd. EPS of Dell x (5 Yr. Growth rate of Dell x 100)




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                         Table 3: Price to Sales Ratio
Competitor                      Symbol          Price Per Share1 Sales/Share 2             P/S Ratio 3
Apple Computer Inc.              AAPL                 17.37         $16.09                    1.08
Compaq Inc.                      CPQ                  10.35          21.72                    0.48
Gateway Inc.                     GTW                   8.46          22.81                    0.37
Hewlett-Packard Inc.             HWP                  17.89          23.30                    0.77
IBM                               IBM                 96.47          51.57                    1.87
Sun Microsystems Inc.           SUNW                  10.29           4.97                    2.07
                             Average (Competitors) 4                                          1.11
                                               Industry                                  Expected Share
                                Symbol          Price/Sales ratio       Sales2               Price5
Dell                             DELL                2.12 3             $12.18              $13.47

1 - Price per share as reported on 7/20/01
2 - Sales per share for trailing twelve months
3 - Calculated by (Price per share)/(Sales per share)
4 - Average of competitors P/S ratios
5 - Average of competitors P/S ratio x Sales per share of Dell




                            Table 4: Market to Book Valuation
Competitor                    Symbol       Book Value1                   Price1            M/B Ratio
Apple Computer Inc.            AAPL             11.01                    17.37                1.58
Compaq Inc.                     CPQ              6.93                    10.35                1.49
Gateway Inc.                    GTW              5.73                     8.46                1.48
Hewlett-Packard Inc.            HWP              7.27                    17.89                2.46
IBM                             IBM             12.87                    96.47                7.50
Sun Microsystems Inc.          SUNW              3.26                    10.29                3.16
                             Average (Competitors)                                            2.94
                                                                                         Expected Share
                                                                                             Price
Dell                             DELL                 2.12 3                                 6.24 4

1 - As of 7/20/01; all relate to MRQ (most recent quarter); (http://finance.yahoo.com)
2 - Average competitors M/B Ratio
3 - Obtained thru http://finance.yahoo.com
4 - Industry M/B Ratio x BV/Share of Dell




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                              Table 5: Abnormal Earnings Valuation
Discount Rate                       17.50%
Book Value/Share                     $1.83
                                 2001 2002        2003     2004     2005       2006     2007   2008   2009   2010 >2011
EPS Estimates                      0.87    0.98     1.11     1.24     1.37       1.49     1.59
Dividend Paid                      0       0        0        0        0          0        0
Book Value                       $1.83 $2.81      $3.92    $5.16    $6.53      $8.01    $9.60
Abnormal Earnings                $0.73 $0.66      $0.62    $0.56    $0.46      $0.34    $0.19
PV of ABE                                $0.56    $0.45    $0.34    $0.24      $0.15    $0.07
Total Value                      $3.65

1 - EPS will grow at 15% in 2002 and decline to 7% by 2007
2 - Assume that dividends listed for the yg
3 - BV calculated using formulat BVx = BV x-1 + Ex - Divx
4 - Abnormal Earnings is calculated using the formula AEx = Ex - (r * BVx-1)
5 - BV + Sum of Present Value of Abnormal Earnings




       Table 5a:
       Abnormal
       Earnings
      Robustness
    DR               Value
    $3.65
   16.00%      $               3.89
   16.50%      $               3.80
   17.00%      $               3.72
   17.50%      $               3.65
   18.00%      $               3.57
   18.50%      $               3.50
   19.00%      $               3.43
   19.50%      $               3.36
   20.00%      $               3.29
   20.50%      $               3.22
   21.00%      $               3.16




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                      Table 6: Income Statement & Cash Flows Projections
                                          All dollar amounts in millions except per share amounts.

Discout rate = Rf + BETA*MRP
Rf                                            3.50%
BETACAPM                                       2.15
MRP                                           6.50%
DR                                           17.50%                Historical Values                  Projected Values                          TV
                                                          1997 1998      1999     2000 2001 2002   2003     2004    2005              2006     2007
Revenue                                                  7,759 12,327 18,243 25,265 31,888 36,671 41,585 46,492 51,234               55,641   59,535
Cost of Goods Sold                                       6,093 9,605 14,137 20,047 25,445 28,830 32,693 36,550 40,279                43,742   46,804
Gross Profit                                             1,666 2,722 4,106 5,218 6,443 7,842 8,892 9,942 10,956                      11,898   12,731
Gross Profit Margin                                      21.5% 22.1% 22.5% 20.7% 20.2% 21.4% 21.4% 21.4% 21.4%                       21.4%    21.4%
SG&A Expense                                               952  1,406 2,060 2,761 3,675 4,211 4,776 5,339 5,884                       6,390    6,837
Operating Income                                           714  1,316 2,046 2,457 2,768 3,630 4,117 4,603 5,072                       5,508    5,894
Operating Margin                                          9.2% 10.7% 11.2% 9.7%        8.7% 9.9%   9.9%     9.9%    9.9%              9.9%     9.9%
Nonoperating Income                                        33    52       38       188  531   0      0        0       0                 0        0
Nonoperating Expenses                                       0     0        0        0    0    0      0        0       0                 0        0
Income Before Taxes                                        747  1,368 2,084 2,451 3,194 3,630 4,117 4,603 5,072                       5,508    5,894
Income Taxes                                               216   424      624      785  958 1,103 1,250 1,398 1,541                   1,673    1,790
Net Income After Taxes                                     531   944    1,460 1,666 2,236 2,528 2,866 3,205 3,531                     3,835    4,104
EPS                                                                                    0.87 0.98   1.11     1.24    1.37              1.49     1.59
Diluted EPS                                                                            0.81 0.92   1.04     1.17    1.29              1.40     1.49

Revenue Growth                                                 58.9% 48.0% 38.5%           26.2%     15.0% 13.4% 11.8% 10.2% 8.6%              7.0%
Cost of Goods Sold                           % Sales     78.5% 77.9% 77.5% 79.3%           79.8%     78.6% 78.6% 78.6% 78.6% 78.6%            78.6%
SG&A Expense                                 % Sales     12.3% 11.4% 11.3% 10.9%           11.5%     11.5% 11.5% 11.5% 11.5% 11.5%            11.5%
Income Taxes                                  % IBT      28.9% 31.0% 29.9% 32.0%           30.0%     30.4% 30.4% 30.4% 30.4% 30.4%            30.4%

Net Income                                                                1,460    1,666   2,236     2,528   2,866   3,205   3,531   3,835    4,104
Depreciation & Amortization                                                103      156     240       236     268     300     330     359      384
Tax benefits - employee stock plans                                        444     1,040    929      1,157   1,312   1,467   1,616   1,755    1,878
Special charges                                                              0      194     105        0       0       0       0       0        0
Gain on sales of investments                                                -9      -80    -307        0       0       0       0       0        0
Other                                                                      20       56      109        0       0       0       0       0        0
Operating Working Capital                                                  367      812     671       896    1,016   1,136   1,252   1,359    1,455
Non-current assets and liabilities                                         51       82      271       178     202     225     248     270      289
CFO                                                                       2,436    3,926   4,254     4,995   5,664   6,332   6,978   7,578    8,109

Depreciation & Amortization                  % Sales                      0.6%     0.6%     0.8%     0.6%    0.6%    0.6%    0.6%    0.6%     0.6%
Tax benefits - employee stock plans          % Sales                      2.4%     4.1%     2.9%     3.2%    3.2%    3.2%    3.2%    3.2%     3.2%
Special charges                              Non Core                     0.0%     0.0%     0.0%     0.0%    0.0%    0.0%    0.0%    0.0%     0.0%
Gain on sales of investments                 Non Core                     0.0%     0.0%     0.0%     0.0%    0.0%    0.0%    0.0%    0.0%     0.0%
Other                                        Non Core                     0.0%     0.0%     0.0%     0.0%    0.0%    0.0%    0.0%    0.0%     0.0%
Operating Working Capital                    % Sales                      2.0%     3.2%     2.1%     2.4%    2.4%    2.4%    2.4%    2.4%     2.4%
Non-current assets and liabilities           % Sales                      0.3%     0.3%     0.8%     0.5%    0.5%    0.5%    0.5%    0.5%     0.5%

CAPX                                                                       296      401     482       577    654     732     806      876      937

CAPX                                         % Sales                      1.6%     1.6%     1.5%     1.6%    1.6%    1.6%    1.6%    1.6%     1.6%

FCF                                                                       2,140    3,525   3,772     4,418   5,009   5,601   6,172   6,703    68,273

Discount Factor                                                                                      0.8510 0.7243 0.6164 0.5245 0.4464 0.3799
PV(FCF)                                                                                               3,759 3,628 3,452 3,237 2,992 25,937
Company Valuation                        $     43,006
Basic Shares Outstanding (Mil)              2,582
Fully Diluted Shares Outstanding (Mil)      2,746
Price Per Share                            $ 16.66
Fully Diluted Price Per Share            $      15.66




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 Table 6a: DCF Sensitivity to Discount Rate (across) and Short Term Growth Rate (down)
$ 16.66     10%       11%        12%       13%        14%      15%      16%       17%
 16.0%        17.3       17.7      18.2      18.6       19.1     19.5     20.0      20.5
 16.5%        16.4       16.8      17.2      17.6       18.0     18.5     18.9      19.4
 17.0%        15.5       15.9      16.3      16.7       17.1     17.5     17.9      18.4
 17.5%        14.8       15.2      15.5      15.9       16.3     16.7     17.1      17.5
 18.0%        14.1       14.5      14.8      15.2       15.5     15.9     16.3      16.6
 18.5%        13.5       13.8      14.1      14.5       14.8     15.2     15.5      15.9
 19.0%        12.9       13.2      13.5      13.9       14.2     14.5     14.9      15.2
 19.5%        12.4       12.7      13.0      13.3       13.6     13.9     14.3      14.6
 20.0%        11.9       12.2      12.5      12.8       13.1     13.4     13.7      14.0
 20.5%        11.5       11.7      12.0      12.3       12.6     12.9     13.2      13.5
 21.0%        11.1       11.3      11.6      11.8       12.1     12.4     12.7      13.0
 21.5%        10.7       10.9      11.2      11.4       11.7     12.0     12.2      12.5
 22.0%        10.3       10.6      10.8      11.0       11.3     11.6     11.8      12.1
 22.5%        10.0       10.2      10.4      10.7       10.9     11.2     11.4      11.7
 23.0%         9.7        9.9      10.1      10.3       10.6     10.8     11.1      11.3


 Table 6b: DCF Sensitivity to Discount Rate (across) and Long Term Growth Rate (down)
$ 16.66     3%         4%         5%       6%         7%       8%      9%        10%
 16.0%        14.5       15.5      16.6      17.9      19.5     21.6     24.2      27.6
 16.5%        14.0       14.8      15.8      17.0      18.5     20.3     22.5      25.5
 17.0%        13.4       14.2      15.1      16.2      17.5     19.1     21.1      23.6
 17.5%        12.9       13.7      14.5      15.5      16.7     18.1     19.8      22.0
 18.0%        12.5       13.2      13.9      14.8      15.9     17.1     18.7      20.6
 18.5%        12.1       12.7      13.4      14.2      15.2     16.3     17.7      19.4
 19.0%        11.7       12.2      12.9      13.7      14.5     15.6     16.8      18.3
 19.5%        11.3       11.8      12.4      13.1      13.9     14.9     16.0      17.3
 20.0%        11.0       11.5      12.0      12.6      13.4     14.2     15.2      16.4
 20.5%        10.6       11.1      11.6      12.2      12.9     13.7     14.6      15.6
 21.0%        10.3       10.8      11.2      11.8      12.4     13.1     13.9      14.9
 21.5%        10.0       10.4      10.9      11.4      12.0     12.6     13.4      14.3
 22.0%         9.8       10.1      10.6      11.0      11.6     12.2     12.9      13.7
 22.5%         9.5        9.8      10.2      10.7      11.2     11.7     12.4      13.1
 23.0%         9.2        9.6       9.9      10.4      10.8     11.3     11.9      12.6




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