CFA Investment Research Challenge by ypy11747

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									CFA Investment Research
Challenge
Joe Corkin
Mauricio Franco
John Keeton
Quyen Nguyen

April 30, 2008
Executive Summary

  Recommendation:               • Market Price               $24.86
       BUY                      • Target Price               $37.00

                                • 52-Wk Range      $16.76 - $56.64
                                • Market Capitalization    $1.27B



        Key Points              •   Conservative Approach
                                •   Economy
                                •   Product Mix
                                •   High Quality at Great Prices



CFA-DFW/HSFA Student Research
Business Description

  • Leading retailer of men’s dress apparel and tuxedo rentals
  • Designer, brand name & private label merchandise
  • Dry cleaning and corporate uniform businesses
  • Purchasing & distribution
  • 1,273 retail stores under four brand names




CFA-DFW/HSFA Student Research
Revenue Breakdown

                                 2006 Sales by Brand2007 Sales by Brand

                                MW
                                65%            MW
                                               58%                         K&G
                                                                           19%


                                                       K&G
                                                       23%
                                                                          Moores
                                                                           12%
                                             Moores      Other After
                                              12%         2%   Hours
                                                                9%




CFA-DFW/HSFA Student Research
Revenue Breakdown

                                    2006 Sales by Product 2007 Sales by Product


                          Men's                                                   Men's Non-
                         Tailored                                                  Tailored
                                                  Men's                            Clothing
                         Clothing
                                                 Tailored   Men's Non-               34%
                           47%
                                                 Clothing    Tailored
                                                   41%       Clothing
                                                               37%




                                                                           Tuxedo
                                                  Tuxedo
                                                                  Other    Rentals
                                         Other    Rentals
                                                                   5%       15%
                                          5%        6%




CFA-DFW/HSFA Student Research
Industry Overview

      Industry Analysis         Competitive Positioning

  • Highly competitive          • Strong brand

  • Low-growth industry         • Product mix

  • Correlated with economy     • Customer service

  • Shift to business casual    • High quality/great price




CFA-DFW/HSFA Student Research
Valuation

                                  Model


    Comparables                                     DCF

   • Multiples        Average              • 5-YR Projections
   • Weighted Average Intrinsic            • FCF from Op. Assets
                        Value
   • Growth Adjustment                     • CAPM



                                Target Price


CFA-DFW/HSFA Student Research
Valuation: Comparables


 Ticker               Company                                TTM
                                                            P/E
   MW       The Men’s Wearhouse, Inc.         EV/                              AVERAGE
                                            EBITDA                                   P/E
  JOSB      Jos A. Banks Clothiers, Inc.
   JCP      J.C. Penney Company, Inc.                      $32.52
                                           EV/S                                      P/Sales
  JWN       Nordstrom, Inc.
   KSS      Kohl’s Corporation
                                                     P/B             PEG
    M       Macy’s, Inc.                                           (5 yr Expected)




                                                  Multiples


CFA-DFW/HSFA Student Research
Valuation: DCF



      In millions      2008        2009         2010        2011        2012

      Revenues         $2,122      $2,179        $2,358      $2,514     $2,657
              Growth      0.5%        2.7%          8.2%       6.6%        5.7%

        EBITDA            240         290           361        397         433
         CAPEX                85      115           158        133         141

      ∆ in WC           64                63           79          48          36
 • Terminal Growth Rate     5.0%             • PV Free Cash Flow             $1,818M
        FCF
 • Cost of Equity       30 10.3%                    21        102
                                          33 • PV Debt Tax Shield            131$35M
 • Cost of Debt             5.5%             • Off-Balance Sheet Liabilities    $17M


                       INTRINSIC VALUE = $34.54


CFA-DFW/HSFA Student Research
DCF Drivers

                        SAME STORE SALES GROWTH

           12%

            8%

            4%

            0%

           -4%

           -8%

          -12%
                 2000    2002   2004   2006   2008   2010   2012




CFA-DFW/HSFA Student Research
DCF Drivers

                                EBITDA MARGIN

          18%


          16%


          14%


          12%

          10%


            8%
                 2000    2002   2004   2006   2008   2010   2012




CFA-DFW/HSFA Student Research
DCF Sensitivity

     $49.00


     $44.00


     $39.00


     $34.00


     $29.00


     $24.00
              EBITDA Margin   Capex   WC Needs   Beta   Risk-Free   Term inal Grow th
                   ±1%         ±1%      ±1%      ±0.2      Rate           Rate
                                                           ±1%            ±0.5%




CFA-DFW/HSFA Student Research
Investment Risk



      • Economic conditions

      • Failed expansion strategies

      • Continued demand changes

      • Disruptions in supply




CFA-DFW/HSFA Student Research
Final Thoughts




           Why buy Men’s Wearhouse in the
            current economic environment?




CFA-DFW/HSFA Student Research
Index
PRESENTATION                 VALUATION ANALYSIS                  RATIO ANALYSIS
                                                                 •  Profitability
•   Executive Summary
                                • DCF Model                      •  Liquidity
•   Business Description
      – Sales by Brand             – Projections Worksheet –     •  Operating Performance & Cash
      – Sales by Product Type          Revenues                     Flows
•   Industry Overview              – Projections Worksheet –     •  Z M F Scores
•   Valuation Model                    Capex & Margins           •  Inventory Turnover vs JOSB
      – Multiples                  – Off-B/S Liabilities         •  Revenues per Store vs JOSB
      – DCF                        – Un-levered Beta             •  Revenue per Sq Ft vs JOSB
      – Drivers: Comp Sales
                                   – Beta Sensitivity            HISTORY
      – Drivers: Margins
      – Sensitivity                – Interest Rate Sensitivity   •  Comp Sales, Margins, and
•   Investment Risks               – Income Statement               Multiple History
•   Final Thought                  – Balance Sheet               •  Stock Repurchases
                                   – Free Cash Flow Graph        •  Dividend History
WALL STREET & MANAGEMENT           – Capex & Rev/Op Assets Graph •  Charts
    GUIDANCE                    • Multiples                           – MW vs Apparel Retailers
                                • Sales by Brand Forecast & Comp         Index
•   Management Guidance -         Sales History                       – MW historic price chart
    Comp Sales & EPS            • Beta Comparisons for MW             – Comp Sales vs Nonfarm
•   Wall Street EPS Projections • Recession Scenarios                    Payrolls
    vs UH Team                                                   OTHER
                                • Operating vs. Capital Leases
•   Wall Street Analyst Ratings                                  •  JOSB Snapshot
•   Institutional & Mutual Fund                                  •  CFO Presentation Slides
    Holders
                                                                      – Market Share – Men’s Dress
                                                                         Apparel
                                                                      – Market Share – Men’s Suits
                                                                      – Men’s Dress Apparel U.S.
                                                                         Sales
  CFA-DFW/HSFA Student Research                                  •  Economic Stimulus Info
DCF Model




CFA-DFW/HSFA Student Research
Projections Worksheet




CFA-DFW/HSFA Student Research
Projections Worksheet




CFA-DFW/HSFA Student Research
Off-B/S Liabilities




CFA-DFW/HSFA Student Research
Unlevered Beta




CFA-DFW/HSFA Student Research
Beta Sensitivity
                      Beta      Intrinsic Value
                      1.05           $43.50
                      1.15           $38.50
                      1.25           $34.50
                      1.35           $31.00
                      1.45           $28.50
                      1.55           $26.00
                      1.65           $24.00
                      1.75           $22.50
                      1.85           $21.00

CFA-DFW/HSFA Student Research
Interest Rate Sensitivity
      Risk-free         Cost of   Beta   Market Risk   Intrinsic
        Rate            Equity            Premium        Value
         3.0%            9.3%     1.25      5.0%       $43.00

         4.0%            10.3%    1.25      5.0%       $34.50

         5.0%            11.2%    1.25      5.0%       $28.50

         6.0%            12.1%    1.25      5.0%       $24.50

         7.0%            13.1%    1.25      5.0%       $21.00




CFA-DFW/HSFA Student Research
Income Statement




CFA-DFW/HSFA Student Research
Balance Sheet




CFA-DFW/HSFA Student Research
Free Cash Flows




CFA-DFW/HSFA Student Research
Capex vs. Revenues/Op. Assets




CFA-DFW/HSFA Student Research
Multiples




CFA-DFW/HSFA Student Research
Sales by Brand




  Comparable Store Sales Growth History:
               2000      2001    2002    2003    2004   2005    2006    2007
    MW         3.3%     -10.2%   -3.1%   7.9%    8.2%   6.2%    3.1%    -0.4%

    K&G        N/A       N/A     N/A     -0.3%   3.9%   16.4%   -1.8%   -10.9%

   Moores      8.3%      4.2%    -2.1%   -5.1%   7.1%   2.7%    8.7%    1.5%

    Total      3.3%     -10.2%   -3.1%   6.1%    7.3%   8.4%    1.9%    -2.5%




CFA-DFW/HSFA Student Research
Beta Comparison
• Our Method: Linear regression of 3 years of weekly
  returns for MW and the S&P 500 = 1.25
• Other Sources:
   – ValueLine: 1.10
   – Standard & Poor’s: 1.55
   – Yahoo! Finance: 2.40
   – Reuters: 1.66




CFA-DFW/HSFA Student Research
Recession Scenarios
                                2008    2009    2010    2011    2012
Revenue Growth                  0.5%    2.7%    8.2%    6.6%    5.7%
EBITDA Margin                   11.3%   13.3%   15.3%   15.8%   16.3%
Base Case: Intrinsic Value = $34.50
                                2008    2009    2010    2011    2012
Revenue Growth                  -1.7%   2.0%    9.1%    6.6%    5.6%
EBITDA Margin                   7.9%    9.3%    12.2%   14.2%   16.3%
Deeper Recession: Intrinsic Value = $30.00

                                2008    2009    2010    2011    2012
Revenue Growth                  0.5%    2.7%    3.9%    5.7%    5.7%
EBITDA Margin                   11.3%   13.0%   13.0%   15.3%   16.0%
Prolonged Recession: Intrinsic Value = $28.00



CFA-DFW/HSFA Student Research
Operating vs Capitalizing Leases
            Operating lease expense in current year =                 $             150.00
            Operating Lease Commitments (From footnote to financials)
                Year        Commitment ! Year 1 is next year, ….
                  1        $     147.50
                 1-3       $     246.00
                 4-5       $     163.30
            6 and beyond $       201.90

            Pre-tax Cost of Debt =            5.50%
                                          .
            From the current financial statements, enter the following
            Reported Operating Income (EBIT) =              $      229.00
            Reported Debt =                                 $      110.00
            Reported Interest Expenses =                    $        5.00

            Number of years embedded in yr 6 estimate =          1           ! I use the average lease expense over the first five years
                                                                             to estimate the number of years of expenses in yr 6
            Converting Operating Leases into debt
                 Year       Commitment Present Value
                        1 $       147.50 $       139.81
                      1-3 $       246.00 $       221.02
                      4-5 $       163.30 $       131.82
            6 and beyond $        201.90 $       146.43 ! Commitment beyond year 6 converted into an annuity for ten years
            Debt Value of leases =       $       639.08

            Restated Financials
            Debt with Operating leases reclassified as debt =                                $      749.08

            Full Operating lease adjustment
            Reported Operating income =                          $229.00
            + Current year's operating lease expense =           $150.00
            - Depreciation on leased asset =                     $106.51
            Adjusted Operating Income                            $272.49

            Adjusted EBITDA                                      $459.00

            Adjusted Intrinsic value                        $        74.43


CFA-DFW/HSFA Student Research
Management Guidance



                       Comparable Store Sales Growth            EPS

                   MW               K&G           Moores

Q1 2008        Down 4-7%        Down 11-13%     Down 1-3%     $0.18-0.20
Q2 2008        Down 1-7%        Down 11-13%       Up 1-3%        N/A
FY 2008        Down 1-7%         Down 7-9%             Flat   $1.80-2.00




CFA-DFW/HSFA Student Research
Forecast Comparison

    Fiscal period                    Wall Street Mean   U of H

      Annual              Jan 2010       $2.47          $2.49
      Annual              Jan 2009        2.01          1.91
    Quarterly             Apr 2008        0.22          0.18
    Quarterly             Jul 2008        0.82          0.75
    Quarterly             Oct 2008        0.62          0.40
    Quarterly             Jan 2009        0.35          0.58


CFA-DFW/HSFA Student Research
Analyst Ratings
1 – Strong Buy                  3
2 – Buy                         1
3 – Hold                        3
4 – Underperform                0
5 – Sell                        0

Mean Recommendation: 2.0

Sell                       Strong Buy

CFA-DFW/HSFA Student Research
Institutional & Mutual Fund Holders
Institutional Holders
PrimeCap Management Co.         5.98%
Vanguard Group Inc.             5.66%
Maverick Capital Ltd. (HF)      5.51%
Barclays Global Investors UK    5.47%
Fidelity                        5.23%


Mutual Fund Holders
Franklin Strategic Small-Mid Cap Growth       4.80%
Vanguard Horizon Fund Opportunity Portfolio   4.60%




CFA-DFW/HSFA Student Research
Ratio Analysis – Profitability




CFA-DFW/HSFA Student Research
Ratio Analysis - Liquidity




CFA-DFW/HSFA Student Research
Ratio Analysis – Oper. Performance & Cash Flow




CFA-DFW/HSFA Student Research
Ratio Analysis – Z M F Scores




CFA-DFW/HSFA Student Research
Inventory Turnover

                     3.0



                     2.6
    COGS/Inventory




                     2.2



                     1.8



                     1.4



                     1.0
                           1998   1999   2000   2001   2002   2003   2004   2005   2006   2007

                                           MW            JOSB




CFA-DFW/HSFA Student Research
Revenues per Store

                                        $2.6


                                        $2.4
     Revenues per Store (in millions)




                                        $2.2

                                        $2.0

                                        $1.8

                                        $1.6

                                        $1.4

                                        $1.2

                                        $1.0
                                               1998   1999   2000    2001   2002   2003   2004   2005   2006   2007


                                                                MW             JOSB




CFA-DFW/HSFA Student Research
Revenues per Sq. Ft.

                        $330


                        $320

                        $310
   Revenues per SQ FT




                        $300

                        $290


                        $280

                        $270


                        $260

                        $250
                               2001   2002    2003   2004   2005   2006   2007


                                             MW      JOSB




CFA-DFW/HSFA Student Research
Comp Store Sales & Margins

             2000       2001    2002    2003   2004   2005   2006   2007

  Comp
   Store
             3.3%     -10.2%    -3.1%   6.1%   7.3%   8.4%   1.9%   -2.5%
  Sales
  Growth
  SG&A
             28.0%     29.6%    29.7% 30.7% 31.1% 30.5% 31.4% 35.1%
  Margin
  EBIT
             10.6%      5.7%    5.4%    5.9%   7.6%   9.6%   11.9% 10.8%
 Margins

    P/E       8.4       15.3    13.1    11.3   9.4    15.1   12.8   16.3




CFA-DFW/HSFA Student Research
Stock Repurchase

                               2004   2005     2006     2007
Authorized purchase (millions) $50    $40      $100     $90
Total costs (millions)                $90.3    $40.3    $106.1
Shares repurchased (thousands)        3,200    1,134    2,985
Average price per share               $28.21   $35.53   $35.54



Total Authorized ~    $280M
Total Repurchased ~ $236M
Remaining Available ~ $44M




CFA-DFW/HSFA Student Research
Dividend History

   2006                              2007
1st quarter       $0.05          1st quarter    $0.05
2nd quarter       $0.05          2nd quarter    $0.06
3rd quarter       $0.05          3rd quarter    $0.06
4th quarter       $0.05          4th quarter    $0.06
                                 (8.5% Dividend Payout)



2008
1st quarter       $0.07 (1.2% Dividend Yield)




CFA-DFW/HSFA Student Research
MW vs DJ US Apparel Retailers Index




    Source: BigCharts.com



CFA-DFW/HSFA Student Research
Stock Chart




    Source: BigCharts.com




CFA-DFW/HSFA Student Research
Correlation with Non-farm Payroll




      Source: CFO Presentation




CFA-DFW/HSFA Student Research
JOSB
•   Market Cap:            $441M
•   52-Wk Range:           $18.81 - $46.16
•   2007
     – Sales:              $604M
     – EBITDA Margin:      16.8%
     – TTM P/E             8.9

•   Beta
     – Linear regression of 3 years of weekly returns for JOSB and the S&P
       500 = 2.05
     – ValueLine: 1.60
     – Standard & Poor’s: 1.48
     – Yahoo! Finance: 2.62
     – Reuters: 1.56



CFA-DFW/HSFA Student Research
Market Share Total Dress Apparel




    Source: CFO Presentation



CFA-DFW/HSFA Student Research
Market Share – Men’s Suits




Source: CFO Presentation



CFA-DFW/HSFA Student Research
Men’s Dress Apparel U.S. Sales




      Source: CFO Presentation


CFA-DFW/HSFA Student Research
Economic Stimulus
• 2001 Tax Rebate
    – According to Congressional Budget Office, rebate
      checks increased total consumption by 0.8% in the
      quarter issued and 0.6% in the subsequent quarter.
    – In 2001, $38 billion in rebate checks were
      distributed (about 0.4% of GDP)
• 2008 stimulus package is $168 billion.




CFA-DFW/HSFA Student Research

								
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