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North America United States
Company
Special Report
7 September 2010
Cash Cows
Global Markets Research
Buying Firms That Will Pay Out
Binky Chadha Steve Pollard Greg Poole
Chief Strategist Head of Research Equity Focus
(+1) 212 250-4776 (+1) 212 250-5145 (+1) 212 250-9902
bankim.chadha@db.com steve.pollard@db.com greg.poole@db.com
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
MICA(P) 007/05/2010
North America United States
Special Report
7 September 2010
Cash Cows
Buying Firms That Will
Pay Out
The payout upcycle has begun
We believe the conditions are ideal for large increases in payouts, particularly
buybacks, over the next year as corporate operating cash flows are running high;
record cash balances have been accumulated; macro growth opportunities are
seen as limited; and stocks are at very attractive valuations. The payout upcycle
has already begun, with Q2 buybacks up 40% qoq and 211% yoy. In the
aggregate, firms have the potential to reduce shares outstanding by 5-6%, which
would in turn boost EPS growth by essentially the same amount. For the ex
Financials, dividends should continue to grow in line with operating cash flows
(10-15%) with the potential for higher dividend payout ratios due to higher
accumulated cash levels, reductions in uncertainty and fewer growth
opportunities. We estimate that dividends for Financial firms can increase by
$30bn or 100% once capital requirements are known. We believe the payout
theme is underappreciated and underestimated by investors; and firms that return
capital to shareholders will outperform through a volatile market.
DB analysts identify firms with the greatest potential and likelihood to return
cash to shareholders
We previously published “Buying Firms Who Will Raise Payouts” in which we
developed a strategy based purely on quantitative metrics to select stocks that
can increase payouts; in back testing the strategy outperforms the S&P 500 by
about 8% a year on average. However, bottoms up analyst views on the potential
and likelihood of sizeable payouts significantly increase the power of the strategy
by leveraging analyst insights on balance sheet capacity, growth opportunities and
especially management propensity to return cash to shareholders. Given strong
corporate financial conditions and liquidity, DB company analysts identified many
candidates. Non-Financial stocks with the greatest ability and probability to pay out
capital (relative to market cap) over the next 12 months were selected. While we
estimate significant upside to Financials payouts over the medium term, we see
the timing as being driven by regulatory considerations and their inclusion would
subject the basket to discrete event risk.
10 stocks that have the potential to pay a high total yield to investors: DTV,
IACI, KSS, PNRA, GD, IBM, COP, BLL, MGLN, T
Companies in the basket have the potential to payout a total yield on average of
15% over the next 12 months, including dividends and repurchases, as estimated
by the analysts. The average dividend yield for the basket is currently 1.5% and
the firms have repurchased an average of 6% of their stock (annualized) in the first
half of 2010. These companies have strong liquidity with an average FCF yield of
9% and cash holdings of 13% as a proportion of market cap.
Binky Chadha Steve Pollard Greg Poole
Chief Strategist Head of Research Equity Focus
(+1) 212 250-4776 (+1) 212 250-5145 (+1) 212 250-9902
bankim.chadha@db.com steve.pollard@db.com greg.poole@db.com
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
MICA(P) 007/05/2010
7 September 2010 Cash Cows
Corporate cash balances are at peak levels
Cash at non-financial corporates stands at $1.8 trillion or nearly 13% of GDP, a 70 year peak. Nearly 11% of S&P 500 ex
Financial assets are sitting in cash earning near zero returns.
Figure 1: Corporate cash is at all time highs as a ratio to Figure 2: S&P 500 ex Financial cash at record levels
GDP based on any metric
13% 13% Cash / Market Cap Cash / Assets Cash / Mkt Cap + Debt
Corporate Cash as % of GDP 14% 14%
12% Non-Financial Corporate Liquid Assets / GDP 12% S&P 500 Ex-Financials
12% 12%
11% 11%
10% 10% 10% 10%
9% 9% 8% 8%
8% 8%
6% 6%
7% 7%
4% 4%
6% 6%
5% 5% 2% 2%
Mar-50
Mar-54
Mar-58
Mar-62
Mar-66
Mar-70
Mar-74
Mar-78
Mar-82
Mar-86
Mar-90
Mar-94
Mar-98
Mar-02
Mar-06
Mar-10
Jun-82
Jun-84
Jun-86
Jun-88
Jun-90
Jun-92
Jun-94
Jun-96
Jun-98
Jun-00
Jun-02
Jun-04
Jun-06
Jun-08
Jun-10
Source: FRB, BEA, Deutsche Bank Source: Compustat, Deutsche Bank
Pressure to increase spending and payouts by $250bn-$300bn annually
Operating cash flow at over $1 trillion continues to run strong and is already at its previous peak but capex and payouts were
cut 25% and 53%, respectively, from 2008 peak levels. As a result, corporates must increase spending by $250bn-$300bn
annually on capex & payouts just to keep their cash mountains from growing further. The current spending pattern seems to
be tracking the 2003-2004 period in which firms also significantly ramped up payouts and capex.
Figure 3: Cash flow continues to grow but capex and Figure 4: Firm have to increase spending by $250bn-
payouts remain close to trough levels $300bn to keep cash hoards from growing
S&P 500 ex Financials Cash Flow & Spendings (LTM, $bn) 300 S&P 500 ex Financials Retained Cash Flow ($bn) 300
Operating Cash Flow (lhs) Payouts (Div + Rep, rhs) Capex (rhs) 250 Retained Cash Flow (OCF - Capex - Payouts) 250
1,200 800
Operating cash flow 200 200
Corporates retaining $260bn of
continues to run strong 700
1,000 150 cash flow (annualized) 150
600
100 100
800
500
50 50
600 400
0 0
300 -50 -50
400
200 -100 -100
200 Payouts and capex
were slashed 100 -150 -150
0 0 -200 -200
Jun-84
Jun-86
Jun-88
Jun-90
Jun-92
Jun-94
Jun-96
Jun-98
Jun-00
Jun-02
Jun-04
Jun-06
Jun-08
Jun-10
Jun-84
Jun-86
Jun-88
Jun-90
Jun-92
Jun-94
Jun-96
Jun-98
Jun-00
Jun-02
Jun-04
Jun-06
Jun-08
Jun-10
Source: Compustat, Deutsche Bank Source: Compustat, Deutsche Bank
Page 2 Deutsche Bank Securities Inc.
7 September 2010 Cash Cows
Ex-Financials payouts set to rise significantly
Repurchases for ex-financial firms have increased 200% from Q2 09 trough levels, but still remain 50% below peak levels.
With repurchases up 40% qoq we see this trend as continuing. Dividends have remained stable through the recession but
should grow with operating cash flow (10-15%) over the near-term with the potential for higher dividend payout ratios due to
higher accumulated cash levels, reduction in uncertainty and fewer growth opportunities.
Figure 5: Repurchases have increased considerably Figure 6: Significant potential to increase repurchases;
while dividends remain stable dividend payout rising with high cash levels?
160 S&P 500 ex Financials Repurchases & Dividends (Qtrly, $bn) 160 55% S&P 500 ex Financials Payouts as a % of Operating Cash 55%
50% Flow 50%
140 140
Repurchases
Dividends 45% 45%
120 120 LTM Repurchases / LTM Operating Cash Flow
Repurchases up 211% yoy and 40% LTM Dividends / LTM Operating Cash Flow 40%
100 approaching pre-Lehman levels 100
35% 35%
80 80
30% 30%
60 60 25% 25%
40 40 20% 20%
Dividends growing at a
20 20 15% 15%
slow, stable rate
10% 10%
0 0
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
5% 5%
Jun-84
Jun-86
Jun-88
Jun-90
Jun-92
Jun-94
Jun-96
Jun-98
Jun-00
Jun-02
Jun-04
Jun-06
Jun-08
Jun-10
Source: Compustat, Deutsche Bank Source: Compustat, Deutsche Bank
Financials dividends could increase 100%
Dividends for Financial firms should normalize with the resolution of regulatory uncertainty; once firms know how much
capital is required they can reinitiate normal dividends. We estimate dividends for Financial firms could rise as much as $30bn
or 100% over the next 2 years. Buybacks would also likely be used to return some excess capital to shareholders once capital
requirements are known.
Figure 7: Financials sitting on significant excess capital, Figure 8: Financials dividends have the potential to rise
awaiting resolution of regulatory uncertainty $30bn as the credit cycle lapses and earnings normalize
S&P 500 Financials Common Equity/Assets S&P 500 Financials Dividend Payout Ratio
10.0% 10.0% 70% 70%
9.5% 9.5% 60% 60%
9.0% 9.0% Recession
Recession 50% 50%
8.5% 8.5%
40% 40%
8.0% 8.0%
7.5% 7.5% 30% 30%
On earnings ex-
7.0% 7.0% 20% WD and prov. 20%
6.5% 6.5% On normalized
10% 10%
6.0% 6.0% earnings
0% 0%
5.5% 5.5%
Dec-89
Dec-91
Dec-93
Dec-95
Dec-97
Dec-99
Dec-01
Dec-03
Dec-05
Dec-07
Dec-09
Jun-82
Jun-84
Jun-86
Jun-88
Jun-90
Jun-92
Jun-94
Jun-96
Jun-98
Jun-00
Jun-02
Jun-04
Jun-06
Jun-08
Jun-10
Source: Compustat, Deutsche Bank Source: Compustat, Deutsche Bank
Deutsche Bank Securities Inc. Page 3
7 September 2010 Cash Cows
Figure 9: Cash Cows—Buying Firms That Will Payout
Capacity and Current Yield
2010E Current H1 2010 Potential
Cash % of FCF Div. Repur. Total Yield
Sector TIC Company Analyst Mkt Cap Yield Yield Yield (NTM) Rationale
Cons Disc DTV DirecTV Doug 6.0% 7.3% 0.0% 13.1% 20.0% Management plans to return more
Mitchelson than 100% of FCF to shareholders
to lever up balance sheet
Cons Disc IACI InterActiveCorp Jeetil Patel 51.0% 6.3% 0.0% 12.8% 35.0% Massive cash position and strong
cash flow; signs of growth story re-
emerging
Cons Disc KSS Kohl's Bill Dreher 17.0% 4.0% 0.0% 0.0% 8.0% Strong cash position, should
resume share repurchases in the
short term and potentially initiate a
dividend
Cons Disc PNRA Panera Bread Co Jason West 11.2% 5.1% 0.0% 2.8% 15.0% Strong cash position and free cash
flow generation coupled with unit
growth
Industrials GD General Dynamics Myles 8.3% 11.7% 2.7% 4.3% 7.0% Consistently high free cash flow
Walton generation; strong history of
returning cash to shareholders;
expect share repurchases to
accelerate
Info Tech IBM IBM Chris 7.7% 9.1% 2.1% 10.3% 8.6% Substantial capacity to increase
Whitmore payouts on the back of a strong
cash position and cash generation
profile
Energy COP ConocoPhillips Paul Sankey 5.1% 19.7% 3.8% 1.0% 17.0% Management plans to shrink
balance sheet through asset
disposal and return proceeds to
shareholders once debt targets are
met
Materials BLL Ball Corporation Mark Wilde 1.4% 7.3% 0.7% 6.1% 9.0% Strong FCF growth; reducing capex;
management has stated preference
for share repurchases
Health Care MGLN Magellan Health Scott Fidel 21.0% 13.3% 0.0% 10.0% 16.0% Very strong cash position and free
cash flow generation; net
beneficiary of healthcare reform
Telecom T AT&T, Inc Brett 0.9% 8.7% 6.1% 0.0% 12.0% Capacity to launch $8bn repurchase
Feldman program alongside a strong
dividend payout
Mean 13.0% 9.3% 1.5% 6.0% 14.8%
S&P 500 12.7% 7.3% 2.0% 2.5% 7.0%
Source: Deutsche Bank; Note: The S&P 500 FCF yield and cash as a % of market cap is for Non-Financial stocks only
Page 4 Deutsche Bank Securities Inc.
7 September 2010 Cash Cows
Table of Contents
DIRECTV ............................................................................................. 6
InterActiveCorp................................................................................ 10
Kohl's ................................................................................................ 12
Panera Bread Co .............................................................................. 16
General Dynamics............................................................................ 18
IBM.................................................................................................... 20
ConocoPhillips ................................................................................. 22
Ball Corporation............................................................................... 24
Magellan Health............................................................................... 26
AT&T, Inc.......................................................................................... 28
Deutsche Bank Securities Inc. Page 5
7 September 2010 Cash Cows
North America United States
TMT Cable & Satellite
7 September 2010
DIRECTV
Reuters: DTV.O Bloomberg: DTV US
Buy
Price at 3 Sep 2010 (USD) 39.05
Price target 41.00
52-week range 39.68 - 25.02
Cash Cows Price/price relative
Doug Mitchelson 40
Research Analyst
(+1) 203 863-2364 30
doug.mitchelson@db.com
20
Reaffirm Buy Rating
10
While maturing in the U.S., DTV is still growing fast ('10E 10.7% revenue/19.2%
EBITDA growth) and is well positioned, in our view, with its high-end customer 9/07 3/08 9/08 3/09 9/09 3/10
base and stringent credit standards, its leading pay TV brand, advantaged DIRECTV
distribution, opex & capex visibility and fast growing LatAm operations. FCF has S&P 500 INDEX (Rebased)
about doubled from ‘06 to ‘09, and now with its large equity shrink (repurchased Performance (%) 1m 3m 12m
16% of shares out in ‘10E, after 31% bought the prior 3 years), FCF/share should Absolute 4.9 -1.6 58.6
grow 20% in ‘10E and 27% in ‘11E. We thus maintain our Buy rating. S&P 500 INDEX -1.4 0.2 10.1
Levering To Buy Back Stock Stock & option liquidity data
DirecTV is unique among our coverage in that mgmt has decided to return more Market Cap (USDm) 34,352.3
than 100% of FCF to shareholders, levering up the balance sheet in efforts to Shares outstanding (m) 879.7
improve cost of capital efficiency. This process began this spring as DirecTV Free float (%) 99
stepped up its repurchase pace from $466m in 1Q10 to $1.723b in 2Q10, a pace Volume (3 Sep 2010) 6,366,476
that mgmt indicated would persist until the leverage reaches 2.5x, up from its Option volume (und. shrs., 1M avg.) 535,809
current 1.7x debt/TTM U.S. EBITDA. Further, mgmt then intends to begin
Implied & Realized Volatility (3M)
levering up LatAm. Given EBITDA growth and $2.5b/yr of FCF generation, this
implies an incremental $10b of share repurchases over the next 6 quarters, or 60%
another 28% of shares out. This amounts to 277% of estimate FCF generation 50%
over that stretch. We believe mgmt’s plan to return capital and optimize the 40%
30%
balance sheet is the correct approach. The U.S. operations have matured and 20%
there is little to acquire that would enhance its business. Nor do we see a 10%
0%
competitive threat that would require a significant cash reserve. In addition, cash Dec Jun Dec Jun Dec Jun
generation visibility has increased as capital spending has flattened out in the 04 05 05 06 06 07
$2.2b range, a level we believe is sustainable and appropriate. In the end, the Realized Vol Implied Vol ( ATM)
repurchases will translate reasonable EBITDA growth into very strong FCF/share
growth in 2010 and 2011.
Yield To Shareholders
Our repurchases estimate translates into a 16% return of capital this year and
another 20% in 2011, before settling down at 13% thereafter, implying the stock
is quite attractively priced.
Valuation/Risks
Our 2010E DCF target remains $41 (11% cost of equity and 7.0% pre-tax cost of
debt yielding a 9.4% WACC, and 0% terminal growth, matching sector). Risks
include overly aggressive pricing competition, the RBOC’s reaccelerating their
wired video buildouts, any damaging regulations, any pullback in share repurchase
efforts, digital disintermediation (customers cutting the cord to use online video
instead) and/or a surprising level of acquisitions.
Forecasts and ratios
Year End Dec 31 2009A 2010E 2011E
FY EPS (USD) 1.46 2.32 3.04
P/E (x) 17.3 16.8 12.9
DPS (USD) 0.00 0.00 0.00
Dividend yield (%) 0.0 0.0 0.0
Revenue (USDm) 21,565.0 23,868.9 25,695.3
Source: Deutsche Bank estimates, company data
1
Includes the impact of FAS123R requiring the expensing of stock options.
Page 6 Deutsche Bank Securities Inc.
7 September 2010 Cash Cows
Model updated:09 August 2010 Fiscal year end 31-Dec 2006 2007 2008 2009 2010E 2011E
Running the numbers Financial Summary
North America DB EPS (USD) 1.12 1.21 1.37 1.46 2.32 3.04
Reported EPS (USD) 1.12 1.14 1.19 1.46 2.32 3.04
United States DPS (USD) 0.00 0.00 0.00 0.00 0.00 0.00
Cable & Satellite BVPS (USD) 5.26 4.94 4.41 2.97 2.27 -3.19
Valuation Metrics
Price/Sales (x) 1.6 1.8 1.3 1.1 1.4 1.1
DIRECTV P/E (DB) (x) 16.2 19.7 18.0 17.3 16.8 12.9
P/E (Reported) (x) 16.2 20.9 20.8 17.3 16.8 12.9
Reuters: DTV.O Bloomberg: DTV US P/BV (x) 4.7 4.7 5.2 11.2 17.2 nm
Buy FCF yield (%) 5.6 3.2 6.6 9.6 7.3 9.4
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0
Price (3 Sep 10) USD 39.05
EV/Sales 1.5 1.6 1.0 1.3 1.8 1.6
Target price USD 41.00 EV/EBITDA 6.6 6.6 4.0 5.5 6.8 6.0
52-week Range USD 25.02 - 39.68 EV/EBIT 9.4 11.1 7.4 10.9 11.3 9.5
Market Cap (m) USDm 34,352
EURm 26,707 Income Statement (USDm)
Sales 14,756 17,246 19,693 21,565 23,869 25,695
Company Profile EBITDA 3,391 4,170 5,015 5,313 6,335 6,891
DirecTV operates a facilities-based direct broadcast satellite EBIT 2,357 2,486 2,695 2,673 3,827 4,385
(DBS) subscription television service in the United States and
Pre-tax profit 2,299 2,405 2,477 2,325 3,347 3,660
Latin America under the DIRECTV brand name. It is the
second-largest multi-channel video service provider in the Net income 1,420 1,451 1,521 1,433 2,045 2,219
US, with nearly 18 million subscribers. DirecTV actively
deploys technologies which enable its broadband-equipped
subscribers (about 50%) to enjoy VoD, remote DVR
Cash Flow (USDm)
programming and other services, and has developed other Cash flow from operations 3,162 3,662 3,916 4,431 4,732 4,819
new technologies to pursue new opportunities, such as the Net Capex -1,880 -2,692 -2,212 -2,069 -2,208 -2,150
MDU market. AT&T commenced an exclusive distribution Free cash flow 1,282 970 1,704 2,362 2,524 2,669
pact with DirecTV in February, 2009. Equity raised/(bought back) -2,720 -1,941 -3,069 -1,661 -5,687 -7,000
Dividends paid 0 0 0 0 0 0
Price Performance Net inc/(dec) in borrowings -300 -423 2,373 91 -273 -549
Other investing/financing cash flows 3,124 748 28 0 0 2,000
40 Net cash flow 1,386 -645 1,036 792 -3,435 -2,879
Change in working capital 0 0 0 0 0 0
30
20 Balance Sheet (USDm)
10 Cash and cash equivalents 2,499 1,083 2,005 2,605 1,000 1,000
Sep 07 M ay 08 Feb 09 Oct 09 Jul 10 Property, plant & equipment 4,453 5,833 6,647 6,476 6,476 6,476
Goodwill 3,515 3,669 3,753 4,164 4,164 4,164
DIRECTV S&P 500 INDEX (Rebased) Other assets 4,674 4,478 4,134 5,015 5,708 5,708
Total assets 15,141 15,063 16,539 18,260 17,348 17,348
Margin Trends Debt 3,615 3,395 5,833 8,010 10,783 15,113
Other liabilities 4,783 5,355 5,750 6,939 4,191 4,191
28
Total liabilities 8,398 8,750 11,583 14,949 14,974 19,304
24 Total shareholders' equity 6,743 6,313 4,956 3,311 2,375 -1,956
20 Net debt 1,116 2,312 3,828 5,405 9,783 14,113
16
12 Key Company Metrics
06 07 08 09 10E 11E Sales growth (%) 12.1 16.9 14.2 9.5 10.7 7.7
EBITDA Margin EBIT Margin DB EPS growth (%) 363.5 8.0 13.8 6.4 58.9 30.7
Payout ratio (%) 0.0 0.0 0.0 0.0 0.0 0.0
Growth & Profitability
EBITDA Margin (%) 23.0 24.2 25.5 24.6 26.5 26.8
20 100 EBIT Margin (%) 16.0 14.4 13.7 12.4 16.0 17.1
15 80
ROE (%) 19.4 22.4 27.8 38.0 83.3 nm
60
10 Net debt/equity (%) 16.6 36.6 77.2 163.2 412.0 nm
40
5 20 Net interest cover (x) 23.6 20.0 9.7 7.0 7.4 5.7
0 0
06 07 08 09 10E 11E DuPont Analysis
Sales growt h (LHS) ROE (RHS) EBIT margin (%) 16.0 14.4 13.7 12.4 16.0 17.1
x Asset turnover (x) 1.0 1.1 1.2 1.2 1.3 1.5
Solvency x Financial cost ratio (x) 1.0 0.9 0.9 0.9 0.9 0.8
x Tax and other effects (x) 0.6 0.6 0.6 0.6 0.6 0.6
500 25 = ROA (post tax) (%) 9.2 9.6 9.6 8.2 11.5 12.8
400 20 x Financial leverage (x) 2.1 2.3 2.9 4.6 7.3 -104.0
300 15 = ROE (%) 19.4 22.4 27.8 38.0 83.3 -1,330.4
200 10 annual growth (%) 332.7 15.1 24.4 36.6 119.2 na
100 5 x NTA/share (avg) (x) 5.8 5.1 4.3 3.9 2.8 -0.2
0 0
= Reported EPS 1.12 1.14 1.19 1.46 2.32 3.04
06 07 08 09 10E 11E
annual growth (%) 363.5 1.7 4.3 23.3 58.9 30.7
Net debt / equit y (LHS) Net int erest cover (RHS)
Source: Company data, Deutsche Bank estimates
Doug Mitchelson
+1 203 863-2364 doug.mitchelson@db.com
Deutsche Bank Securities Inc. Page 7
7 September 2010 Cash Cows
Figure 10: DIRECTV - Summary Forecast -- U.S. Operations
(Subscribers in thousands, $ in MMs, except per unit amounts)
2007A 2008A 1Q09A 2Q09A 3Q09A 4Q09A 2009A 1Q10A 2Q10A 3Q10E 4Q10E 2010E 2011E 2012E 2013E 2014E 2015E
Gross Additions 3,847 3,904 1,175 1,048 1,086 964 4,273 925 946 1,076 974 3,921 3,921 3,921 3,921 3,921 3,921
• % Change Yr. / Yr. 1.0% 1.5% 21.9% 17.2% 8.4% -7.7% 9.5% -21.3% -9.7% -0.9% 1.0% -8.2% 0.0% 0.0% 0.0% 0.0% 0.0%
Monthly Churn 1.51% 1.47% 1.33% 1.51% 1.72% 1.52% 1.53% 1.48% 1.51% 1.73% 1.54% 1.57% 1.62% 1.61% 1.62% 1.62% 1.63%
• Avg Subscriber Life (Years) 5.5 5.7 6.3 5.5 4.8 5.5 5.4 5.6 5.5 4.8 5.4 5.3 5.2 5.2 5.2 5.1 5.1
Disconnects (2,970) (3,048) (712) (824) (948) (844) (3,328) (826) (848) (976) (874) (3,524) (3,697) (3,734) (3,772) (3,809) (3,847)
• % Change Yr. / Yr. -0.6% 2.6% 3.1% 7.8% 11.8% 13.4% 9.2% 16.0% 2.8% 3.0% 3.6% 5.9% 4.9% 1.0% 1.0% 1.0% 1.0%
Net Additions 877 856 460 224 136 119 945 100 100 100 100 397 224 187 149 112 74
• % Change Yr. / Yr. 7.0% -2.4% 67.3% 73.6% -12.8% -60.5% 10.4% -78.3% -55.4% -26.5% -16.0% -58.0% -43.7% -16.5% -20.0% -25.0% -34.0%
Period Ending Subscribers 16,831 17,621 18,081 18,305 18,441 18,560 18,560 18,660 18,760 18,860 18,960 18,960 19,184 19,370 19,520 19,632 19,705
ARPU / Mo $79.07 $83.93 $80.35 $83.16 $85.32 $92.36 $85.35 $85.47 $87.90 $89.18 $96.52 $89.79 $93.52 $98.32 $102.45 $106.12 $109.63
• % Change Yr. / Yr. 7.2% 6.1% 0.8% 1.7% 2.1% 2.1% 1.7% 6.4% 5.7% 4.5% 4.5% 5.2% 4.1% 5.1% 4.2% 3.6% 3.3%
Total Revenue $15,527 $17,310 $4,303 $4,539 $4,703 $5,126 $18,671 $4,772 $4,934 $5,033 $5,476 $20,214 $21,402 $22,744 $23,905 $24,928 $25,875
• % Change Yr. / Yr. 13.0% 11.5% 6.3% 8.2% 8.8% 8.1% 7.9% 10.9% 8.7% 7.0% 6.8% 8.3% 5.9% 6.3% 5.1% 4.3% 3.8%
Programming Expense (6,681) (7,424) (1,808) (1,862) (1,998) (2,359) (8,027) (2,014) (2,019) (2,148) (2,532) (8,713) (9,529) (10,498) (11,437) (12,435) (13,119)
• Avg Prog. Cost/Sub/Mo $34.03 $36.00 $33.76 $34.12 $36.25 $42.50 $36.69 $36.07 $35.97 $38.06 $44.63 $39.01 $41.64 $45.38 $49.01 $52.94 $55.58
• % Change Yr. / Yr. 8.8% 5.8% 1.9% 3.4% 1.8% 0.9% 1.9% 6.9% 5.4% 5.0% 5.0% 6.3% 6.7% 9.0% 8.0% 8.0% 5.0%
Retention Expense (958) (1,027) (274) (245) (266) (260) (1,045) (250) (259) (274) (268) (1,051) (1,051) (1,051) (1,019) (989) (959)
• % Change Yr. / Yr. 12.5% 7.2% 7.5% 17.2% 2.3% -14.2% 1.8% -8.8% 5.7% 3.0% 3.0% 0.6% 0.0% 0.0% -3.0% -3.0% -3.0%
Other Opexp (2,137) (2,277) (582) (590) (639) (625) (2,436) (607) (652) (656) (665) (2,580) (2,673) (2,753) (2,812) (2,871) (2,946)
• % Change Yr. / Yr. 7.0% 6.6% 11.1% 3.5% 6.9% 6.8% 7.0% 4.3% 10.5% 2.7% 6.4% 5.9% 3.6% 3.0% 2.1% 2.1% 2.6%
Total Opexp (9,776) (10,728) (2,664) (2,697) (2,903) (3,244) (11,508) (2,871) (2,930) (3,078) (3,464) (12,344) (13,253) (14,303) (15,268) (16,295) (17,024)
• Avg Total Opexp/Sub/Mo $49.70 $51.90 $49.75 $49.41 $52.67 $58.45 $53.01 $51.42 $52.20 $54.55 $61.07 $54.83 $57.91 $61.83 $65.43 $69.37 $72.13
• % Change Yr. / Yr. 6.8% 4.4% 2.6% 2.6% 0.9% -1.1% 2.1% 3.4% 5.6% 3.6% 4.5% 3.4% 5.6% 6.8% 5.8% 6.0% 4.0%
Pre-Marketing Cash Flow 5,750 6,582 1,639 1,842 1,800 1,882 7,163 1,901 2,004 1,955 2,011 7,871 8,149 8,442 8,637 8,634 8,851
• % Change Yr. / Yr. 13.5% 14.5% 3.3% 6.8% 10.8% 14.4% 8.8% 16.0% 8.8% 8.6% 6.9% 9.9% 3.5% 3.6% 2.3% 0.0% 2.5%
• PMCF Margin 37.0% 38.0% 38.1% 40.6% 38.3% 36.7% 38.4% 39.8% 40.6% 38.8% 36.7% 38.9% 38.1% 37.1% 36.1% 34.6% 34.2%
Expensed SAC / GA $494 $561 $556 $570 $572 $630 $580 $643 $645 $645 $645 $644 $643 $631 $620 $609 $599
EBITDA $3,850 $4,391 $986 $1,245 $1,179 $1,275 $4,685 $1,306 $1,394 $1,261 $1,383 $5,344 $5,628 $5,967 $6,208 $6,247 $6,503
• % Change Yr. / Yr. 19.5% 14.1% -6.7% 2.2% 11.2% 20.7% 6.7% 32.5% 12.0% 6.9% 8.5% 14.1% 5.3% 6.0% 4.0% 0.6% 4.1%
• EBITDA Margin 24.8% 25.4% 22.9% 27.4% 25.1% 24.9% 25.1% 27.4% 28.3% 25.0% 25.3% 26.4% 26.3% 26.2% 26.0% 25.1% 25.1%
Capitalized Retention (774) (537) (136) (90) (95) (98) (419) (81) (71) (87) (90) (329) (329) (329) (319) (310) (300)
• Cash Retention (1,732) (1,564) (410) (335) (361) (358) (1,464) (331) (330) (361) (358) (1,380) (1,380) (1,380) (1,339) (1,298) (1,259)
• % Change Yr. / Yr. 30.7% -9.7% -1.4% 14.3% -7.0% -23.3% -6.4% -19.3% -1.5% 0.0% 0.0% -5.7% 0.0% 0.0% -3.0% -3.0% -3.0%
Cash PMCF 4,977 6,045 1,503 1,752 1,705 1,784 6,744 1,820 1,933 1,868 1,921 7,542 7,820 8,112 8,318 8,324 8,551
• % Change Yr. / Yr. 8.4% 21.5% 5.4% 6.8% 13.9% 20.5% 11.6% 21.1% 10.3% 9.5% 7.7% 11.8% 3.7% 3.7% 2.5% 0.1% 2.7%
• Cash PMCF Margin 32.1% 34.9% 34.9% 38.6% 36.3% 34.8% 36.1% 38.1% 39.2% 37.1% 35.1% 37.3% 36.5% 35.7% 34.8% 33.4% 33.0%
• Cash PMCF/Sub/Mo $25.30 $29.24 $28.07 $32.10 $30.93 $32.14 $31.07 $32.60 $34.44 $33.09 $33.86 $33.50 $34.17 $35.07 $35.65 $35.43 $36.23
• % Change Yr. / Yr. 2.8% 15.6% 0.0% 0.3% 6.9% 13.8% 6.2% 16.2% 7.3% 7.0% 5.4% 7.8% 2.0% 2.6% 1.6% -0.6% 2.2%
• Implied Lifetime PMCF/Sub $1,676 $1,983 $2,110 $2,126 $1,798 $2,115 $2,026 $2,203 $2,281 $1,913 $2,199 $2,140 $2,115 $2,172 $2,205 $2,185 $2,223
• % Change Yr. / Yr. 9.1% 18.4% 2.2% -1.0% 1.9% 6.3% 2.2% 4.4% 7.3% 6.4% 4.0% 5.6% -1.2% 2.7% 1.5% -0.9% 1.7%
• Implied IRR of Sub Acq. 23.2% 27.6% 30.7% 34.2% 30.9% 30.9% 29.3% 0.0% 0.0% 0.0% 0.0% 28.7% 29.1% 30.7% 31.9% 32.2% 33.6%
Capitalized SAC (761) (599) (179) (130) (136) (119) (564) (115) (131) (149) (135) (530) (535) (541) (546) (552) (552)
• All-in SAC / GA $692 $715 $708 $694 $697 $753 $712 $768 $783 $783 $783 $780 $780 $769 $759 $750 $740
• % Change Yr. / Yr. 7.9% 3.3% -0.5% -1.9% -2.5% 4.0% -0.4% 8.4% 12.9% 12.4% 4.0% 9.5% 0.0% -1.4% -1.3% -1.2% -1.3%
CASH EBITDA 2,315 3,255 671 1,025 948 1,058 3,702 1,110 1,192 1,025 1,158 4,485 4,763 5,097 5,342 5,385 5,651
• % Change Yr. / Yr. 7.7% 40.6% -9.3% 1.6% 21.4% 45.9% 13.7% 65.4% 16.3% 8.1% 9.5% 21.1% 6.2% 7.0% 4.8% 0.8% 4.9%
• Cash EBITDA Margin 14.9% 18.8% 15.6% 22.6% 20.2% 20.6% 19.8% 23.3% 24.2% 20.4% 21.2% 22.2% 22.3% 22.4% 22.3% 21.6% 21.8%
• Cash EBITDA/Sub/Mo $11.77 $15.75 $12.53 $18.78 $17.20 $19.06 $17.05 $19.88 $21.24 $18.16 $20.42 $19.92 $20.81 $22.03 $22.89 $22.92 $23.94
Interest (148) (278) (82) (84) (84) (94) (344) (94) (115) (115) (114) (438) (414) (330) (239) (135) (7)
Taxes (729) (761) (82) (220) (55) (208) (565) (242) (283) (223) (268) (1,016) (1,113) (1,292) (1,438) (1,519) (1,684)
Other Capex (792) (629) (120) (130) (126) (126) (502) (117) (174) (137) (159) (587) (544) (541) (539) (538) (538)
Working Capital / Other (63) (75) 113 (132) (154) 88 (85) 310 (335) (349) (349) (723) 0 0 0 0 0
U.S. FREE CASH FLOW 584 1,512 500 459 529 718 2,206 967 285 200 268 1,720 2,692 2,935 3,126 3,193 3,422
• % Change Yr. / Yr. 7.2% 158.9% -1.0% 104.9% 46.5% 70.1% 45.9% 93.4% -37.9% -62.2% -62.7% -22.0% 56.6% 9.0% 6.5% 2.1% 7.2%
• FCF Margin 3.8% 8.7% 11.6% 10.1% 11.2% 14.0% 11.8% 20.3% 5.8% 4.0% 4.9% 8.5% 12.6% 12.9% 13.1% 12.8% 13.2%
Shares Outstanding 1,201 1,102 1,021 1,009 977 945 979 938 907 864 822 880 730 619 546 484 427
U.S. Ops FCF/Share $0.49 $1.37 $0.49 $0.45 $0.54 $0.76 $2.25 $1.03 $0.31 $0.23 $0.33 $1.95 $3.69 $4.74 $5.72 $6.60 $8.02
Total Company Net Debt (2,304) (3,830) (3,713) (3,517) (3,872) (5,740) (5,740) (5,312) (6,709) (8,598) (9,783) (9,783) (14,113) (15,585) (16,524) (17,490) (18,512)
• Net Debt Leverage 1.0x 1.2x 0.7x 0.6x 0.7x 1.6x 1.6x 0.8x 1.0x 1.2x 2.2x 2.2x 3.0x 3.1x 3.1x 3.2x 3.3x
Source: Deutsche Bank Securities Inc. estimates and company information
Page 8 Deutsche Bank Securities Inc.
7 September 2010 Cash Cows
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Deutsche Bank Securities Inc. Page 9
7 September 2010 Cash Cows
North America United States
TMT Internet
7 September 2010
InterActiveCorp Buy
Price at 3 Sep 2010 (USD) 25.85
Reuters: IACI.OQ Bloomberg: IACI UW Price target 28.00
52-week range 25.85 - 18.76
Cash Cows Price/price relative
Jeetil Patel Matt Chesler, CFA Herman Leung 28
Research Analyst Research Analyst Research Analyst 24
(+1) 415 617-4223 (+1) 212 250-6170 (+1) 415 617-3246 20
jeetil.patel@db.com matthew.chesler@db.com herman.leung@db.com
16
12
Underlying businesses supported by $13/share of cash 8
IAC/InterActiveCorp is a likely "cash cow" in 2010/11, particularly as the 9/07 3/08 9/08 3/09 9/09 3/10
company's underlying growth has markedly improved in 2010/2011, driven by a InterActiveCorp
cyclical ad recovery (Ask.com) and dominant position in personals (Match). As the S&P 500 INDEX (Rebased)
cyclical ad upturn continues, Ask still represents a strategic search asset that may
fit into the existing desktop search battle as well as mobile search clash. Performance (%) 1m 3m 12m
Absolute 2.6 10.1 40.0
Meanwhile, the shares are further buoyed by nearly $1.4bn in net cash (~$13/ S&P 500 INDEX -1.4 0.2 10.1
share) on the balance sheet. Buy.
Stock & option liquidity data
Buy-backs to remain the primary use of capital
Market Cap (USDm) 2,980.4
Since the spin-off in 2008, IAC has spent nearly $1bn to repurchase ~50mn Shares outstanding (m) 115.3
shares (~36% of shares outstanding). We expect buybacks to remain as the Free float (%) 100
primary use of cash as the company has no stated proclivity for large deals or Volume (3 Sep 2010) 247,758
meaningful reinvestment in its own mature businesses. Assuming another $1bn Option volume (und. shrs., 1M avg.) 18,376
of buybacks (roughly $250mn/qtr) over the next twelve months, IAC could buy
Implied & Realized Volatility (3M)
back 40mn shares which equates to 35% of current shares outstanding. This
would be on top of a 6% FCF yield over the same period. 80%
60%
A known cash cow, but also signs of growth story re-emerging
Whereas IAC has been more of a value-oriented story (sum-of-the parts approach, 40%
supported by a significant cash position), we believe that the IAC story is 20%
increasingly becoming a growth play for investors. The company grew revenues 0%
Sep M ar Sep M ar Sep M ar
by 18% Y/Y (from a low point in 2Q09) in 2Q, but more importantly IAC
07 08 08 09 09 10
represents the 3rd fastest growing business in 1H 2010 (vs. 1H 2009, relative to a Realized Vol Implied Vol ( ATM)
handful of large companies), only behind Amazon and Google while outpacing
eBay and Yahoo!
Implied Volatility (3M, ATM) vs. Peers
Valuation & risks
Our $28 price target is based on 6x our 2011E EBITDA of $288mn, in-line with the TIBX.OQ 42.4%
Internet media peer group, trading at 6-7x, and supported by 15x our 2011 AOL.N 41.4%
proforma EPS of $1.01 plus $13.00 in cash, at the low end of the peers trading at
15-19x 2011 earnings. We think an in-line multiple is warranted at this point as CNQR.OQ 35.8%
search trends remains robust, with a strong exposure to the US market, which IACI.OQ 25.3%
appears to be leading the global recovery. Risks include competition, business
execution, and general macroeconomic slowdown. * W eig ht ed - avg . o f ind ex co mp o nent s
D at a as o f 0 2 - Sep - 10
Forecasts and ratios
Year End Dec 31 2009A 2010E 2011E
1Q EPS1 -0.02 -0.00A 0.20
2Q EPS 0.02 0.24A 0.25
3Q EPS 0.34 0.24 0.26
4Q EPS 0.20 0.26 0.30
FY EPS (USD) 0.47 0.74 1.01
P/E (x) 36.6 34.9 25.6
Source: Deutsche Bank estimates and company data
1
Includes the impact of FAS123R requiring the expensing of stock options.
2
Pricing is as of September 2, 2010.
Page 10 Deutsche Bank Securities Inc.
7 September 2010 Cash Cows
Model updated:28 July 2010 Fiscal year end 31-Dec 2007 2008 2009 2010E 2011E
Running the numbers Financial Summary
North America DB EPS (USD) 0.46 1.80 0.47 0.74 1.01
Reported EPS (USD) -0.94 -1.65 -6.86 0.91 1.14
United States DPS (USD) 0.00 0.00 0.00 0.00 0.00
Internet BVPS (USD) 56.14 30.07 22.06 24.02 23.99
Valuation Metrics
Price/Sales (x) 3.3 1.8 1.8 1.8 1.7
InterActiveCorp P/E (DB) (x) 63.0 9.7 36.6 34.9 25.6
P/E (Reported) (x) nm nm nm 28.4 22.7
Reuters: IACI.OQ Bloomberg: IACI UW P/BV (x) 0.4 0.5 0.9 1.1 1.1
Buy FCF yield (%) 14.7 16.0 11.9 6.3 5.7
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
Price (3 Sep 10) USD 25.85
EV/Sales 2.3 0.5 0.4 0.8 0.7
Target price USD 28.00 EV/EBITDA 45.9 nm 5.5 5.4 4.4
52-week Range USD 18.76 - 25.85 EV/EBIT nm nm nm 8.2 6.4
Market Cap (m) USDm 2,980
EURm 2,317 Income Statement (USDm)
Sales 1,333 1,445 1,376 1,613 1,745
Company Profile EBITDA 67 -2 103 256 288
IAC/InterActiveCorp is one of the leading interactive and e- EBIT -79 -149 -1,053 168 195
commerce companies. IACI participates across multiple
Pre-tax profit -4 -345 -962 138 179
verticals such as electronic retailing (HSN, Cornerstone),
ticketing (Ticketmaster), personals (Match.com), local and Net income -144 -243 -973 105 134
search (Citysearch, Ask.com) and financial services
(RealEstate.com, Lending Tree). The company is
headquartered in New York City.
Cash Flow (USDm)
Cash flow from operations 862 -71 328 235 217
Net Capex -216 484 -38 -46 -45
Free cash flow 645 413 290 189 172
Equity raised/(bought back) -607 -156 -394 -373 0
Dividends paid 0 0 0 0 0
Price Performance Net inc/(dec) in borrowings -281 -520 0 0 0
Other investing/financing cash flows 400 390 -396 -63 0
28 Net cash flow 157 127 -499 -247 172
24 Change in working capital 364 63 130 16 -9
20
16
12 Balance Sheet (USDm)
8 Cash and cash equivalents 1,585 1,745 1,246 999 1,171
Sep 07 M ay 08 Feb 09 Oct 09 Jul 10 Property, plant & equipment 334 327 297 264 217
Goodwill 1,824 1,910 999 1,044 1,044
Int erAct iveCorp S&P 500 INDEX (Rebased) Other assets 8,847 1,268 1,473 1,432 1,360
Total assets 12,591 5,251 4,016 3,738 3,790
Margin Trends Debt 847 96 96 96 96
Other liabilities 3,128 704 764 812 817
20
Total liabilities 3,974 800 860 908 913
0
Total shareholders' equity 8,617 4,450 3,156 2,830 2,878
-20
Net debt -739 -1,649 -1,150 -903 -1,075
-40
-60
-80 Key Company Metrics
07 08 09 10E 11E Sales growth (%) nm 8.4 -4.8 17.3 8.2
EBITDA Margin EBIT Margin DB EPS growth (%) na 295.3 -73.9 57.2 36.3
Payout ratio (%) nm nm nm 0.0 0.0
Growth & Profitability
EBITDA Margin (%) 5.0 -0.1 7.5 15.8 16.5
20 10 EBIT Margin (%) -5.9 -10.3 -76.5 10.4 11.2
15
0 ROE (%) -1.7 -3.7 -25.8 3.6 4.8
10
5 -10 Net debt/equity (%) -8.6 -37.1 -36.4 -31.9 -37.3
0
-20 Net interest cover (x) nm nm nm nm nm
-5
-10 -30
07 08 09 10E 11E DuPont Analysis
Sales growt h (LHS) ROE (RHS) EBIT margin (%) -5.9 -10.3 -76.5 10.4 11.2
x Asset turnover (x) 0.1 0.2 0.3 0.4 0.5
Solvency x Financial cost ratio (x) 1.0 1.1 1.0 1.0 1.0
x Tax and other effects (x) 1.8 1.6 0.9 0.6 0.7
0 = ROA (post tax) (%) -1.1 -2.7 -21.0 2.7 3.6
-10 x Financial leverage (x) 1.5 1.4 1.2 1.3 1.3
= ROE (%) -1.7 -3.7 -25.8 3.6 4.8
-20
annual growth (%) na -122.4 -590.2 na 34.7
-30 x NTA/share (avg) (x) 56.1 44.2 26.6 25.6 23.8
-40
= Reported EPS -0.94 -1.65 -6.86 0.91 1.14
07 08 09 10E 11E
annual growth (%) na -75.1 -316.1 na 25.3
Net debt / equit y (LHS) Net int erest cover (RHS)
Source: Company data, Deutsche Bank estimates
Jeetil Patel
+1 415 617-4223 jeetil.patel@db.com
Deutsche Bank Securities Inc. Page 11
7 September 2010 Cash Cows
North America United States
Consumer Retailing/Department Stores & Broadlines
7 September 2010
Kohl's Buy
Reuters: KSS.N Bloomberg: KSS UN Price at 3 Sep 2010 (USD) 49.56
Price target 67.00
Cash Cows
52-week range 60.73 - 44.27
Price/price relative
Bill Dreher Jr Shane Higgins 70
Research Analyst Associate Analyst 60
(+1) 212 250-5427 (+1) 212 250-6620
bill.dreher@db.com shane.higgins@db.com 50
40
30
KSS to return cash to shareholders
Cash and cash equivalents are at a historic high of $2.5B, as FCF is being driven 20
by a solid operating performance of market share gaining same store sales, 9/07 3/08 9/08 3/09 9/09 3/10
leading sq ft growth with margin recovery / expansion. KSS should be in a Kohl's
position to employ cash in share buybacks and also likely dividends. We believe S&P 500 INDEX (Rebased)
this will accelerate investors returns and be a catalyst for earnings and share price Performance (%) 1m 3m 12m
expansion over the next year. We thus maintain our Buy rating. Absolute 5.6 -4.9 -8.2
S&P 500 INDEX -2.7 -1.2 8.7
Cash buildup continues; share repurchases poised to resume
At the end of Q2, Kohl’s had a strong cash position, which should enable the Stock & option liquidity data
company to resume share buybacks in the short-term (suspended since July Market Cap (USDm) 15,307.8
’08). Cash (+86.0% y/y) reached $2.52B, or approx. $8.18/sh (vs. $4.42/sh LY), as Shares outstanding (m) 308.9
FCF generation remained positive. After reaching a new 7-year credit card Free float (%) 100
agreement with Capital One in Q2, mgmt indicated that it will review its capital Volume (3 Sep 2010) 1,443,200
structure and consider resuming share repurchases, implement a dividend, or Option volume (und. shrs., 1M avg.) 600,717
both, though the board is unanimous in returning this back to shareholders, just
Implied & Realized Volatility (3M)
the form and timing of this is being finalized. In Sept. ’07, Kohl’s announced a
$2.5B share repurchase program with no expiration date. Approx. $1.9B remains 120%
under this authorization, which we believe will be utilized soon, and a dividend 100%
yield of 1.5% or greater should attract a new investor base. 80%
60%
40%
NTM total yield to reach approximately 8% 20%
Given the expected near-term resumption of share buybacks and the potential 0%
implementation of a dividend, we estimate NTM total yield will reach approx. 8%. Sep M ar Sep M ar Sep M ar
This estimate assumes a 1.5% projected dividend yield over the next year and the 07 08 08 09 09 10
completion of the company’s remaining share repurchase authorization evenly Realized Vol Implied Vol ( ATM)
split over the next two years (~$0.95B each year).
Implied Volatility (3M, ATM) vs. Peers
Valuation Attractive; Risks
KSS trades at 12.8x our FY10 est of $3.64 and 11.1x our new FY11 est of $4.17, a PCLN.OQ 45.0%
discount to its 5-yr CY ave P/E of 17x and 5-yr FY ave P/E of 15x. Our $67 PT is BBY.N 36.1%
based on 16x our FY11 EPS est, in-line with the company’s 1-yr avg CY multiple,
which we feel is appropriate given accelerating sales momentum, sq ft growth, SPLS.OQ 32.8%
and opportunity to expand margins on systems & ex-commerce investments and KSS.N 31.7%
penetration of private & exclusive brands. Risks include: macroeconomic TJX.N 28.5%
slowdown, a promotional environment, fashion risk, & weather. We reiterate our * W eig ht ed - avg . o f ind ex co mp o nent s
Buy rating. D at a as o f 0 2 - Sep - 10
Forecasts and ratios
Year End Jan 31 2010A 2011E 2012E
1Q EPS1 0.45 0.64A 0.71
2Q EPS 0.75 0.84A 0.92
3Q EPS 0.63 0.60 0.73
4Q EPS 1.40 1.55 1.82
FY EPS (USD) 3.23 3.64 4.17
Source: Deutsche Bank estimates, company data
1
Includes the impact of FAS123R requiring the expensing of stock options.
2
Prices as of September 2, 2010
Page 12 Deutsche Bank Securities Inc.
7 September 2010 Cash Cows
Model updated:12 August 2010 Fiscal year end 31-Jan 2007 2008 2009 2010 2011E 2012E
Running the numbers Financial Summary
North America DB EPS (USD) 3.31 3.39 2.89 3.23 3.64 4.17
Reported EPS (USD) 3.31 3.39 2.89 3.24 3.64 4.17
United States DPS (USD) 0.00 0.00 0.00 0.00 0.00 0.00
Retailing/Department Stores & Broadlines BVPS (USD) 16.74 19.06 21.98 25.66 29.46 32.43
Valuation Metrics
Price/Sales (x) 1.3 1.2 0.8 0.9 0.8 0.8
Kohl's P/E (DB) (x) 18.3 18.4 14.5 15.0 13.6 11.9
P/E (Reported) (x) 18.3 18.4 14.5 15.0 13.6 11.9
Reuters: KSS.N Bloomberg: KSS UN P/BV (x) 4.2 2.4 1.7 2.0 1.7 1.5
Buy FCF yield (%) 9.6 nm 5.3 10.6 4.0 7.3
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0
Price (3 Sep 10) USD 49.56
EV/Sales 1.3 1.3 0.9 0.9 0.8 0.7
Target price USD 67.00 EV/EBITDA 9.4 9.5 6.9 6.4 5.6 4.8
52-week Range USD 44.27 - 60.73 EV/EBIT 11.4 11.8 9.3 8.5 7.5 6.2
Market Cap (m) USDm 15,308
EURm 11,901 Income Statement (USDm)
Sales 15,597 16,474 16,388 17,178 18,401 19,342
Company Profile EBITDA 2,202 2,257 2,077 2,302 2,564 2,847
Kohl's Corporation operates 914 discount department stores EBIT 1,815 1,805 1,536 1,712 1,930 2,184
in 47 states, evenly distributed across the US. The company
Pre-tax profit 1,774 1,742 1,425 1,588 1,808 2,062
offers a family focused, value-oriented store experience
offering products at moderate price points. The company has Net income 1,109 1,084 885 991 1,123 1,281
approximately 70% of its store based in strip shopping
centres, 10% in community and regional malls and 20% in
free standing structures. Branded product includes Vera
Cash Flow (USDm)
Wang, Tony Hawk, Chaps Women, Candies and Apt. 9. Cash flow from operations 3,099 1,234 1,698 2,234 1,486 2,011
Net Capex -1,142 -1,542 -1,013 -666 -880 -900
Free cash flow 1,957 -307 685 1,568 606 1,111
Equity raised/(bought back) -1,508 -644 -257 47 120 -260
Dividends paid 0 0 0 0 0 0
Price Performance Net inc/(dec) in borrowings -110 976 -16 -17 0 -400
Other investing/financing cash flows -277 -33 50 26 2 0
70 Net cash flow 62 -9 462 1,624 728 451
60 Change in working capital 1,574 -372 84 482 -353 32
50
40
30 Balance Sheet (USDm)
20 Cash and cash equivalents 189 181 643 2,267 2,986 3,437
Sep 07 M ay 08 Feb 09 Oct 09 Jul 10 Property, plant & equipment 5,353 6,510 6,984 7,018 7,467 7,713
Goodwill 9 9 0 0 0 0
Kohl' s S&P 500 INDEX (Rebased) Other assets 3,483 3,860 3,736 3,875 4,025 4,175
Total assets 9,034 10,560 11,363 13,160 14,478 15,325
Margin Trends Debt 1,059 2,065 2,070 2,068 2,085 1,766
Other liabilities 2,372 2,394 2,554 3,239 3,293 3,604
15
Total liabilities 3,431 4,458 4,624 5,307 5,378 5,370
14 Total shareholders' equity 5,603 6,102 6,739 7,853 9,100 9,956
12 Net debt 870 1,884 1,427 -199 -901 -1,671
11
9 Key Company Metrics
07 08 09 10 11E 12E Sales growth (%) 16.4 5.6 -0.5 4.8 7.1 5.1
EBITDA Margin EBIT Margin DB EPS growth (%) 36.4 2.2 -14.7 11.8 12.6 14.7
Payout ratio (%) 0.0 0.0 0.0 0.0 0.0 0.0
Growth & Profitability
EBITDA Margin (%) 14.1 13.7 12.7 13.4 13.9 14.7
20 25 EBIT Margin (%) 11.6 11.0 9.4 10.0 10.5 11.3
15 20
ROE (%) 19.2 18.5 13.8 13.6 13.3 13.4
10 15
5 10 Net debt/equity (%) 15.5 30.9 21.2 -2.5 -9.9 -16.8
0 5 Net interest cover (x) 44.9 28.9 13.8 13.8 15.8 17.9
-5 0
07 08 09 10 11E 12E DuPont Analysis
Sales growt h (LHS) ROE (RHS) EBIT margin (%) 11.6 11.0 9.4 10.0 10.5 11.3
x Asset turnover (x) 1.7 1.7 1.5 1.4 1.3 1.3
Solvency x Financial cost ratio (x) 1.0 1.0 0.9 0.9 0.9 0.9
x Tax and other effects (x) 0.6 0.6 0.6 0.6 0.6 0.6
40 50 = ROA (post tax) (%) 12.2 11.1 8.1 8.1 8.1 8.6
40 x Financial leverage (x) 1.6 1.7 1.7 1.7 1.6 1.6
20
30 = ROE (%) 19.2 18.5 13.8 13.6 13.3 13.4
20 annual growth (%) 25.2 -3.4 -25.6 -1.5 -2.4 1.4
0
10 x NTA/share (avg) (x) 17.3 18.3 20.9 23.8 27.4 31.0
-20 0
= Reported EPS 3.31 3.39 2.89 3.24 3.64 4.17
07 08 09 10 11E 12E
annual growth (%) 36.4 2.2 -14.7 12.2 12.3 14.7
Net debt / equit y (LHS) Net int erest cover (RHS)
Source: Company data, Deutsche Bank estimates
Bill Dreher Jr
+1 212 250-5427 bill.dreher@db.com
Deutsche Bank Securities Inc. Page 13
7 September 2010 Cash Cows
Cash growth supports potential share buyback revive
Up until late mid-FY08, Kohl’s had a consistent record of buying back its shares provided
sufficient cash availability. As the company stopped share repurchasing, its cash balances
have been growing at a high rate. As of Q2:10, the company had $2.5B compared to
$288MM in Q2:08 (or +776%), precisely the most recent quarter when the company
repurchased its own stock. In fact, management commented in the Q2:10 earnings call that
“now that the [credit card] agreement is behind us, I think we’re going to take the capital
structure under consideration with the board, and we’re going to consider a resumption of
share repurchases, the initiation of a dividend, or both. But timing I don’t want to commit to.
That’s expectations. We’re going to try to do a methodical evaluation of it like we normally do
of everything we undertake, and we’ll let you know when we have come to a decision.” We
believe such decision would make its shares more appealing to the markets, given the
healthy balance sheet and the solid operating performance.
Figure 11: Cash balances and share repurchase activity
(US$MM)
$2,800
$2,400
$2,000
$1,600
$1,200
$800
$400
$0
07
05
07
08
05
06
06
08
09
09
10
4:
2:
4:
2:
4:
2:
2:
4:
2:
4:
2:
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Cas h balance Share rep $
Source: Deutsche Bank, Company Reports
Page 14 Deutsche Bank Securities Inc.
7 September 2010 Cash Cows
This page has been intentionally left blank
Deutsche Bank Securities Inc. Page 15
7 September 2010 Cash Cows
North America United States
Consumer Restaurants
7 September 2010
Panera Bread Co Buy
Price at 3 Sep 2010 (USD) 85.02
Reuters: PNRA.OQ Bloomberg: PNRA UW Price Target 91.00
52-week range 87.77 - 53.24
Cash Cows Price/price relative
Jason West, CFA Justin Marshall 90
Research Analyst Research Associate 75
(+1) 617 217-6256 (+1) 617 217-6258 60
jason.west@db.com justin.marshall@db.com
45
30
Attractive blend of cash flow and growth 15
Panera is one of the best fundamental stories in the restaurant industry with very 9/07 3/08 9/08 3/09 9/09 3/10
strong unit-level returns (+40%), industry-leading same store sales trends (+7.6% Panera Bread Co
‘10E), healthy margins (16.7% EBITDA margins), strong free cash flow, no debt S&P 500 INDEX (Rebased)
and $9/sh in net cash. Despite an attractive cash flow profile, PNRA also
continues to post healthy growth, with double-digit annual revenue growth and Performance (%) 1m 3m 12m
Absolute 9.0 3.0 61.0
long-term EPS growth of 15-20%. Buy. S&P 500 INDEX -2.7 -1.2 8.7
Strong (and growing) cash position
At 2Q10, PNRA had $282mm in cash on the balance sheet and no debt. This Stock & option liquidity data
Market Cap (USD) 2,626.4
equates to about $9/share in net cash, the 4th highest cash-to-market cap ratio in Shares outstanding (m) 30.9
the restaurant industry. We also expect the company to generate about $125mm Free float (%) –
in free cash flow per year, despite opening ~100 new restaurants per year (6-7% Volume (3 Sep 2010) 493,500
annual new unit growth). The company also has a $600mm stock repurchase Option volume (und. shrs., 1M avg.) 109,538
authorization in place, of which ~$520mm remains unused (20% of market cap).
Potential total cash yield = 15% over 12 months
We are currently modeling a somewhat modest pace to the buyback (essentially
none in 2H10; $200mm in 2011). However, the company has the flexibility to fully
execute the remaining $520mm program over the next 2 years, without issuing
any debt. This more aggressive approach would drive about 13% upside to 2012
EPS forecasts. Also, while PNRA does not currently pay a dividend, we believe
this could also be considered, particularly if the share price moves significantly
above management’s targeted repurchase levels (not disclosed). In total, we see
a potential “total cash yield” of around 15% for PNRA over the next 12 months,
considering current cash on the balance sheet plus estimated free cash flow.
Valuation & risks
Our $91 price target assumes 23x our next 12-months EPS forecast (20x ex-cash),
a premium to the restaurant industry (16x) given above-average unit growth at
PNRA, best-in-class same store sales, high new unit returns, solid cash
flow/balance sheet, and potential upside to our earnings forecasts. Risks:
downturn in consumer spending; competitive discounting; volatility in input costs.
Note: Pricing is as of September 3, 2010.
Forecasts and ratios
Year End Dec 31 2009A 2010E 2011E
1Q EPS1 0.57 0.82A 0.96
2Q EPS 0.67 0.90A 1.08
3Q EPS 0.65 0.74 0.88
4Q EPS 1.00 1.11 1.36
FY EPS (USD) 2.91 3.57 4.27
% Change
EV/EBITDA (x) 6.8 9.0 7.8
ROE (%) 16.5 17.8 20.1
Net debt/equity (%) -41.3 -50.4 -45.1
Source: Deutsche Bank estimates, company data
1
Includes the impact of FAS123R requiring the expensing of stock options.
Page 16 Deutsche Bank Securities Inc.
7 September 2010 Cash Cows
Model updated:31 August 2010 Fiscal year end 31-Dec 2006 2007 2008 2009 2010E 2011E
Running the numbers Financial Summary
North America DB EPS (USD) 1.87 1.80 2.32 2.91 3.57 4.27
Reported EPS (USD) 1.84 1.80 2.37 2.91 3.57 4.27
United States DPS (USD) 0.00 0.00 0.00 0.00 0.00 0.00
Restaurants BVPS (USD) 12.70 14.07 16.61 19.47 21.66 21.15
Valuation Metrics
Price/Sales (x) 2.4 1.5 1.0 1.2 1.7 1.5
Panera Bread Co P/E (DB) (x) 34.0 27.2 19.5 18.8 23.8 19.9
P/E (Reported) (x) 34.7 27.2 19.1 18.8 23.8 19.9
Reuters: PNRA.OQ Bloomberg: PNRA UW P/BV (x) 4.4 2.5 3.1 3.4 3.9 4.0
Buy FCF yield (%) nm 2.1 7.0 9.6 5.1 4.8
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0
Price (3 Sep 10) USD 85.02
EV/Sales 2.3 1.4 1.0 1.1 1.5 1.3
Target price USD 91.00 EV/EBITDA 14.2 10.4 6.9 6.8 9.0 7.8
52-week Range USD 53.24 - 87.77 EV/EBIT 21.2 17.1 10.9 9.9 12.6 10.7
Market Cap (m) USDm 2,626
EURm 2,042 Income Statement (USDm)
Sales 829 1,067 1,299 1,353 1,518 1,697
Company Profile EBITDA 135 148 184 210 253 285
The company operates and franchises Panera Bread, St. EBIT 91 90 117 144 182 206
Louis Bread Co. & Paradise bakery-cafes with over 1,300
Pre-tax profit 93 90 115 145 182 209
stores in 40 states. Panera targets suburban
residents/workers with high-end baked goods, sandwiches, Net income 59 58 72 90 113 130
soups/salads and beverages. It also sells dough directly to
franchisees.
Cash Flow (USDm)
Cash flow from operations 104 154 157 215 212 209
Net Capex -107 -122 -63 -55 -78 -88
Free cash flow -4 32 94 160 134 121
Equity raised/(bought back) 9 8 20 24 33 22
Dividends paid 0 0 0 0 0 0
Price Performance Net inc/(dec) in borrowings 0 0 0 0 0 0
Other investing/financing cash flows 21 -45 19 11 2 0
90 Net cash flow 27 -4 133 195 169 143
75 Change in working capital 2 41 19 33 24 0
60
45
30 Balance Sheet (USDm)
15 Cash and cash equivalents 52 68 75 246 337 280
Sep 07 M ay 08 Feb 09 Oct 09 Jul 10 Property, plant & equipment 346 430 417 404 411 419
Goodwill 0 0 0 0 0 0
Panera Bread Co S&P 500 INDEX (Rebased) Other assets 145 201 182 187 184 184
Total assets 543 699 674 837 931 883
Margin Trends Debt 0 75 0 0 0 0
Other liabilities 145 176 175 240 262 262
18
Total liabilities 145 251 175 240 262 262
16
Total shareholders' equity 398 448 499 597 669 621
14
Net debt -52 7 -75 -246 -337 -280
12
10
8 Key Company Metrics
06 07 08 09 10E 11E Sales growth (%) 29.5 28.7 21.8 4.2 12.1 11.8
EBITDA Margin EBIT Margin DB EPS growth (%) 13.4 -3.5 28.6 25.3 22.8 19.6
Payout ratio (%) 0.0 0.0 0.0 0.0 0.0 0.0
Growth & Profitability
EBITDA Margin (%) 16.3 13.9 14.2 15.5 16.7 16.8
40 25 EBIT Margin (%) 11.0 8.4 9.0 10.6 12.0 12.2
30 20
ROE (%) 16.5 13.8 15.3 16.5 17.8 20.1
15
20 Net debt/equity (%) -13.1 1.5 -15.0 -41.3 -50.4 -45.1
10
10 5 Net interest cover (x) 986.9 186.5 72.6 204.8 279.2 nm
0 0
06 07 08 09 10E 11E DuPont Analysis
Sales growt h (LHS) ROE (RHS) EBIT margin (%) 11.0 8.4 9.0 10.6 12.0 12.2
x Asset turnover (x) 1.7 1.7 1.9 1.8 1.7 1.9
Solvency x Financial cost ratio (x) 1.0 1.0 1.0 1.0 1.0 1.0
x Tax and other effects (x) 0.6 0.6 0.6 0.6 0.6 0.6
20 1500 = ROA (post tax) (%) 12.0 9.4 10.5 11.9 12.7 14.3
0 x Financial leverage (x) 1.4 1.5 1.5 1.4 1.4 1.4
1000
= ROE (%) 16.5 13.8 15.3 16.5 17.8 20.1
-20
500 annual growth (%) -11.9 -16.2 10.7 8.1 7.8 12.9
-40 x NTA/share (avg) (x) 11.2 13.1 15.5 17.6 20.1 21.3
-60 0
= Reported EPS 1.84 1.80 2.37 2.91 3.57 4.27
06 07 08 09 10E 11E
annual growth (%) 11.4 -1.8 31.3 22.7 22.8 19.6
Net debt / equit y (LHS) Net int erest cover (RHS)
Source: Company data, Deutsche Bank estimates
Jason West, CFA
+1 617 217-6256 jason.west@db.com
Deutsche Bank Securities Inc. Page 17
7 September 2010 Cash Cows
North America United States
Industrials Aerospace & Defense Electronics
7 September 2010
General Dynamics Buy
Price at 3 Sep 2010 (USD) 59.72
Reuters: GD.N Bloomberg: GD UN Price Target 84.00
52-week range 78.67 - 55.87
Cash Cows Price/price relative
Myles Walton, CFA 105
Research Analyst 90
(+1) 617 217-6259 75
myles.walton@db.com
60
45
Commercial mix and accelerating free cash flow 30
We see GD as an attractive defense hybrid that has unique characteristics in mix 9/07 3/08 9/08 3/09 9/09 3/10
(high-end bizjets) and accounting (lack of pension volatility) that drive our positive General Dynamics
bias on the stock. The company has generated, on average, $2B of free cash flow S&P 500 INDEX (Rebased)
annually between 2003 and 2009, and we expect this to grow to $2.8B annually
on average over the next 3 years. Performance (%) 1m 3m 12m
Absolute -4.7 -12.3 1.6
Almost $6B cash returned to shareholders since 2003, and more to come S&P 500 INDEX -2.7 -1.2 8.7
GD’s high revenue base ($32B in 2009), double-digit operating margins (average
of 11% since 2003), relatively low net debt, and good working capital Stock & option liquidity data
Market Cap (USD) 22,750.4
performance have given GD the ability to generate consistently high free cash Shares outstanding (m) 381.0
flow (~80% of net income on average). The company has returned $5.8B of this Free float (%) 100
cash to shareholders since 2003 through share repurchases ($3B; 12% of shares Volume (3 Sep 2010) 1,639,200
outstanding) and dividends ($2.8B). We expect share repurchases to accelerate, Option volume (und. shrs., 1M avg.) 193,683
with the company repurchasing 37M additional shares ($2.4B; 11% yield) over the
Implied & Realized Volatility (3M)
next 3 years as it pursues EPS growth in light of slowing defense sales.
80%
Bizjet cycle to drive the next leg of growth
GD’s strong 2Q results highlighted to us the ability of GD’s commercial business 60%
(Gulfstream) to drive overall performance. Gulfstream will be ~30% of GD’s EBIT 40%
by 2012 on our estimates. Despite this, the company still trades at or below pure- 20%
play defense multiples (8.1x our 2011 EPS estimate, compared to an average 9x 0%
Sep M ar Sep M ar Sep M ar
for pure-play defense peers, and 14x for commercial peers. While we are
07 08 08 09 09 10
comfortable that the business jet market has at least stabilized, the recovery we Realized Vol Implied Vol ( ATM)
expect next year should provide the incremental growth needed for a re-rating.
Potential yield over next 12 month equals 7% Implied Volatility (3M, ATM) vs. Peers
We currently forecast a 7% total potential yield over the next 12 months, driven
by a 3% dividend yield and 4% repurchase yield. We’d note that the repurchase GD.N 28.4%
yield assumes a constant share price. ITW.N 27.7%
TYC.N 26.2%
Valuation & risks
Our target price of $84 is based on 11.8x our revised 2011 EPS estimate, which is DHR.N 25.3%
in-line with recent historical trading averages (past 5 years). Risks to the downside LM T.N 23.2%
include bigger-than-expect drop in Combat Systems, overall defense spending * W eig ht ed - avg . o f ind ex co mp o nent s
and new product development risk on the G650/G250. D at a as o f 0 2 - Sep - 10
Forecasts and ratios
Year End Dec 31 2009A 2010E 2011E
1Q EPS 1.54 1.54A –
2Q EPS 1.61 1.68A –
3Q EPS 1.48 1.67 –
4Q EPS 1.58 1.81 –
FY EPS (USD) 6.20 6.70 7.15
Dividend yield (%) 2.6 2.7 2.9
EV/EBITDA 5.6 5.1 4.6
Source: Deutsche Bank estimates, company data
N
ote: Pricing is as of September 2, 2010
Page 18 Deutsche Bank Securities Inc.
7 September 2010 Cash Cows
Model updated:29 July 2010 Fiscal year end 31-Dec 2007 2008 2009 2010E 2011E 2012E
Running the numbers Financial Summary
North America DB EPS (USD) 5.05 6.13 6.20 6.70 7.15 7.71
Reported EPS (USD) 5.08 6.17 6.17 6.67 7.15 7.71
United States DPS (USD) 1.09 1.34 1.49 1.64 1.76 1.93
Aerospace & Defense Electronics BVPS (USD) 29.10 25.37 32.23 35.75 39.94 44.62
Valuation Metrics
Price/Sales (x) 1.2 1.1 0.7 0.7 0.6 0.6
General Dynamics P/E (DB) (x) 16.1 12.9 9.2 8.9 8.4 7.7
P/E (Reported) (x) 16 1 12 8 92 90 84 77
Reuters: GD.N Bloomberg: GD UN P/BV (x) 3.1 2.3 2.1 1.7 1.5 1.3
FCF yield (%) 7.4 8.4 11.2 11.7 12.5 14.2
Buy Dividend yield (%) 1.3 1.7 2.6 2.7 2.9 3.2
Price (3 Sep 10) USD 59.72 EV/Sales 1.2 1.1 0.7 0.7 0.6 0.5
Target price USD 84.00 EV/EBITDA 9.3 8.2 5.6 5.1 4.6 3.9
EV/EBIT 10.5 9.2 6.4 5.9 5.3 4.5
52-week Range USD 55.87 - 78.67
Market Cap (m) USDm 22,750
Income Statement (USDm)
EURm 17,687
Sales 27,240 29,300 31,981 33,350 34,120 35,700
Company Profile EBITDA 3,540 4,117 4,235 4,496 4,625 4,883
EBIT 3,117 3,670 3,673 3,908 4,020 4,260
General Dynamics Corporation offers a portfolio of products
and services in business aviation; combat vehicles, weapons Pre-tax profit 3,047 3,604 3,513 3,746 3,890 4,130
systems and munitions; shipbuilding design and construction, Net income 2,072 2,459 2,394 2,573 2,672 2,837
and information systems, technologies and services. General
Dynamics operates through four business groups:
Aerospace, Combat Systems, Marine Systems, and Cash Flow (USDm)
Information Systems and Technology. Cash flow from operations 2,925 3,110 2,840 3,055 3,163 3,449
Net Capex -474 -490 -385 -400 -400 -400
Free cash flow 2,451 2,620 2,455 2,655 2,763 3,049
Equity raised/(bought back) -298 -1,378 -67 -758 -858 -858
Dividends paid -445 -533 -577 -634 -657 -711
Net inc/(dec) in borrowings 0 1,249 -157 -705 -750 -4
Price Performance
Other investing/financing cash flows -421 -3,228 -1,012 5 5 5
105 Net cash flow 1,287 -1,270 642 563 503 1,481
Change in working capital 244 112 -588 -438 -427 -273
90
75
60 Balance Sheet (USDm)
45 Cash and cash equivalents 2,891 1,621 2,263 2,840 3,343 4,824
30 Property, plant & equipment 2,472 2,872 2,912 2,944 2,951 2,935
Sep 07 M ay 08 Feb 09 Oct 09 Jul 10 Goodwill 8,942 11,413 12,269 12,269 12,269 12,269
Other assets 11,428 12,467 13,633 13,325 13,215 13,343
General Dynamics S&P 500 INDEX (Rebased)
Total assets 25,733 28,373 31,077 31,377 31,779 33,370
Margin Trends Debt 2,791 4,024 3,864 3,159 2,409 2,405
Other liabilities 11,174 14,296 14,790 14,600 14,594 14,921
15 Total liabilities 13,965 18,320 18,654 17,759 17,003 17,326
14 Total shareholders' equity 11,768 10,053 12,423 13,618 14,776 16,044
Net debt -100 2,403 1,601 319 -934 -2,419
13
12
Key Company Metrics
11 Sales growth (%) nm 7.6 9.2 4.3 2.3 4.6
07 08 09 10E 11E 12E DB EPS growth (%) na 21.3 1.3 8.0 6.6 7.9
EBITDA Margin EBIT Margin
Payout ratio (%) 21.3 21.5 23.9 24.3 24.3 24.5
Growth & Profitability EBITDA Margin (%) 13.0 14.1 13.2 13.5 13.6 13.7
EBIT Margin (%) 11.4 12.5 11.5 11.7 11.8 11.9
10 25
8 20 ROE (%) 17.6 22.5 21.3 19.8 18.8 18.4
6 15 Net debt/equity (%) -0.8 23.9 12.9 2.3 -6.3 -15.1
4 10 Net interest cover (x) 44.5 55.6 23.0 24.1 30.9 32.8
2 5
0 0
07 08 09 10E 11E 12E DuPont Analysis
EBIT margin (%) 11.4 12.5 11.5 11.7 11.8 11.9
Sales growt h (LHS) ROE (RHS)
x Asset turnover (x) 1.1 1.1 1.1 1.1 1.1 1.1
x Financial cost ratio (x) 1.0 1.0 1.0 1.0 1.0 1.0
Solvency x Tax and other effects (x) 0.7 0.7 0.7 0.7 0.7 0.7
= ROA (post tax) (%) 8.1 9.1 8.1 8.2 8.5 8.7
30 60
x Financial leverage (x) 2.2 2.5 2.6 2.4 2.2 2.1
20
40 = ROE (%) 17.6 22.5 21.3 19.8 18.8 18.4
10
annual growth (%) na 28.0 -5.5 -7.2 -4.7 -2.2
0
20 x NTA/share (avg) (x) 28.8 27.4 29.0 33.7 38.0 41.9
-10
-20 0 = Reported EPS 5.08 6.17 6.17 6.67 7.15 7.71
07 08 09 10E 11E 12E annual growth (%) na 21.5 0.1 8.0 7.2 7.9
Net debt / equit y (LHS) Net int erest cover (RHS)
Source: Company data, Deutsche Bank estimates
Myles Walton, CFA
+1 617 217-6259 myles.walton@db.com
Deutsche Bank Securities Inc. Page 19
7 September 2010 Cash Cows
North America United States
TMT IT Hardware
7 September 2010
IBM Buy
Price at 3 Sep 2010 (USD) 127.58
Reuters: IBM.N Bloomberg: IBM UN Price target 150.00
52-week range 134.14 - 116.76
Cash Cows Price/price relative
Chris Whitmore, CFA 140
Research Analyst 120
(+1) 415 617-3213 100
chris.whitmore@db.com
80
60
IBM remains an attractive value 40
We believe IBM’s deal pipeline for Software and Services remains healthy and we 9/07 3/08 9/08 3/09 9/09 3/10
expect IBM’s HW business will benefit from a near-term refresh of z Series IBM
(mainframe) and Power 7 across the HW portfolio in 2H-10. These product cycles S&P 500 INDEX (Rebased)
combined with the ramp of past LT services signings, incremental cost cutting
and larger share buybacks should support improving revenue and EPS trends. In Performance (%) 1m 3m 12m
Absolute -2.1 -0.3 9.7
addition, we believe the cash generating capacity of IBM is being undervalued by S&P 500 INDEX -2.7 -1.2 8.7
the equity market. We rate IBM as Buy with a $150 PT.
Stock & option liquidity data
Expect robust Cash Flow
Market Cap (USDm) 165,017.9
We expect IBM to generate approximately $15B in Free Cash Flow in FY10 and Shares outstanding (m) 1,293.4
~$17B in Free Cash in FY11. After factoring in significant stock buybacks and Free float (%) 100
dividends, we estimate IBM’s cash balance will grow to over $20B by the end of Volume (3 Sep 2010) 1,848,900
2011. This suggests there is substantial capacity for IBM to increase payouts Option volume (und. shrs., 1M avg.) 3,845,246
over the next 12-18 months. In our view the market is not appropriately valuing
Implied & Realized Volatility (3M)
the company’s growth, profit and cash generation profile and at ~11x CY11 EPS
(~9x P/FCF) we believe IBM represents an attractive value. 80%
60%
Room to raise payouts
We expect IBM to buyback ~$10B in stock this year (~6% of market value) and 40%
pay ~$3.4B in dividends (2% yield), translating into a ~8% total cash return. We 20%
expect this level of payout to continue, if not increase in 2011. As suggested 0%
Sep M ar Sep M ar Sep M ar
above, we see ample room for increased dividends and buybacks. When
07 08 08 09 09 10
considering IBM’s recent financing rates (3 year Debt with ~1% yield), its equity Realized Vol Implied Vol ( ATM)
appears very attractive.
Valuation and risk Implied Volatility (3M, ATM) vs. Peers
Our $150 PT is based on 12x 2011E EPS (lower end of IBM’s 10 year historical
range of 8-49x). We view this multiple as appropriate given IBM's growth & profit GOOG.OQ 29.3%
profile. Further, we expect improving IT demand to aid IBM’s top line revenue ORCL.OQ 29.0%
growth and operational leverage to support solid earnings. Risks to our thesis
include a dramatically slower IT spending environment, integration risk. & M SFT.OQ 28.0%
potential product transition issues. IBM .N 23.2%
* W eig ht ed - avg . o f ind ex co mp o nent s
D at a as o f 0 2 - Sep - 10
Forecasts and ratios
Year End Dec 31 2009A 2010E 2011E
1Q EPS1 1.70 1.97A 2.30
2Q EPS 2.32 2.61A 2.92
3Q EPS 2.40 2.74 3.01
4Q EPS 3.59 4.02 4.28
FY EPS (USD) 10.01 11.30 12.50
Source: Deutsche Bank estimates, company data
1
Includes the impact of FAS123R requiring the expensing of stock options.
Page 20 Deutsche Bank Securities Inc.
7 September 2010 Cash Cows
Model updated:20 July 2010 Fiscal year end 31-Dec 2006 2007 2008 2009 2010E 2011E
Running the numbers Financial Summary
North America DB EPS (USD) 6.06 7.14 8.92 10.01 11.30 12.50
Reported EPS (USD) 6.41 7.18 8.92 10.01 11.30 12.50
United States DPS (USD) 1.10 1.50 1.90 2.15 0.00 2.50
IT Hardware BVPS (USD) 18.35 19.63 9.74 16.96 19.27 24.28
Valuation Metrics
Price/Sales (x) 1.4 1.6 1.5 1.5 1.7 1.6
IBM P/E (DB) (x) 13.7 14.8 12.3 10.9 11.3 10.2
P/E (Reported) (x) 13.0 14.7 12.3 10.9 11.3 10.2
Reuters: IBM.N Bloomberg: IBM UN P/BV (x) 5.3 5.5 8.6 7.7 6.6 5.3
Buy FCF yield (%) 8.4 7.2 9.4 11.6 9.1 10.6
Dividend yield (%) 1.3 1.4 1.7 2.0 0.0 2.0
Price (3 Sep 10) USD 127.58
EV/Sales 1.5 1.7 1.7 1.7 1.8 1.6
Target price USD 150.00 EV/EBITDA 8.3 9.2 8.1 7.2 7.6 6.5
52-week Range USD 116.76 - 134.14 EV/EBIT 11.8 12.8 10.9 9.3 9.8 8.3
Market Cap (m) USDm 165,018
EURm 128,293 Income Statement (USDm)
Sales 91,424 98,784 103,630 95,757 97,901 101,503
Company Profile EBITDA 16,912 18,719 21,385 22,004 23,318 25,100
International Business Machines Corporation (IBM) provides EBIT 11,929 13,518 15,935 17,010 18,069 19,762
computer solutions through the use of advanced information
Pre-tax profit 13,317 14,409 16,712 18,137 19,747 20,956
technology. The company's solutions include technologies,
systems, products, services, software, and financing. IBM Net income 9,957 10,419 12,331 13,424 14,613 15,507
offers its products through its global sales and distribution
organization, as well as through a variety of third party
distributors and resellers.
Cash Flow (USDm)
Cash flow from operations 15,546 16,091 18,809 20,774 20,135 21,993
Net Capex -4,736 -4,968 -4,537 -3,747 -5,108 -5,266
Free cash flow 10,810 11,123 14,272 17,027 15,027 16,727
Equity raised/(bought back) -6,399 -14,705 -6,804 -4,377 -11,163 -8,000
Dividends paid -1,683 -2,148 -2,589 -2,860 -2,964 -3,101
Price Performance Net inc/(dec) in borrowings -122 12,112 -2,444 -7,463 481 0
Other investing/financing cash flows -6,611 587 -4,685 -2,885 124 0
140 Net cash flow -4,005 6,969 -2,250 -558 1,505 5,625
120 Change in working capital -1,776 -890 -1,193 418 -288 348
100
80
60 Balance Sheet (USDm)
40 Cash and cash equivalents 8,022 14,991 12,741 12,183 13,688 19,313
Sep 07 M ay 08 Feb 09 Oct 09 Jul 10 Property, plant & equipment 14,440 15,081 14,305 14,165 14,023 13,952
Goodwill 12,854 14,285 18,226 20,190 20,544 20,544
IBM S&P 500 INDEX (Rebased) Other assets 67,917 76,074 64,253 62,484 60,184 60,687
Total assets 103,233 120,431 109,525 109,022 108,440 114,496
Margin Trends Debt 22,682 35,274 33,925 26,100 26,581 26,581
Other liabilities 52,045 56,687 62,135 60,167 56,939 57,790
28
Total liabilities 74,727 91,961 96,060 86,267 83,520 84,371
24 Total shareholders' equity 28,506 28,470 13,465 22,755 24,919 30,125
20 Net debt 14,660 20,283 21,184 13,917 12,893 7,268
16
12 Key Company Metrics
06 07 08 09 10E 11E Sales growth (%) 0.3 8.1 4.9 -7.6 2.2 3.7
EBITDA Margin EBIT Margin DB EPS growth (%) 13.9 17.8 25.0 12.1 12.9 10.6
Payout ratio (%) 17.2 20.9 21.3 21.5 0.0 20.0
Growth & Profitability
EBITDA Margin (%) 18.5 18.9 20.6 23.0 23.8 24.7
10 80 EBIT Margin (%) 13.0 13.7 15.4 17.8 18.5 19.5
5 60 ROE (%) 32.3 36.6 58.8 74.1 61.3 56.3
0 40 Net debt/equity (%) 51.4 71.2 157.3 61.2 51.7 24.1
-5 20 Net interest cover (x) 42.9 22.1 23.6 42.4 51.5 63.7
-10 0
06 07 08 09 10E 11E DuPont Analysis
Sales growt h (LHS) ROE (RHS) EBIT margin (%) 13.0 13.7 15.4 17.8 18.5 19.5
x Asset turnover (x) 0.9 0.9 0.9 0.9 0.9 0.9
Solvency x Financial cost ratio (x) 1.0 1.0 1.0 1.0 1.0 1.0
x Tax and other effects (x) 0.9 0.8 0.8 0.8 0.8 0.8
200 80 = ROA (post tax) (%) 9.5 9.3 10.7 12.3 13.4 13.9
150 60 x Financial leverage (x) 3.4 3.9 5.5 6.0 4.6 4.1
= ROE (%) 32.3 36.6 58.8 74.1 61.3 56.3
100 40
annual growth (%) 17.5 13.1 60.8 26.0 -17.3 -8.1
50 20 x NTA/share (avg) (x) 19.8 19.6 15.2 13.5 18.4 22.2
0 0
= Reported EPS 6.41 7.18 8.92 10.01 11.30 12.50
06 07 08 09 10E 11E
annual growth (%) 20.7 12.1 24.2 12.1 12.9 10.6
Net debt / equit y (LHS) Net int erest cover (RHS)
Source: Company data, Deutsche Bank estimates
Chris Whitmore, CFA
+1 415 617-3213 chris.whitmore@db.com
Deutsche Bank Securities Inc. Page 21
7 September 2010 Cash Cows
North America United States
Industrials Integrated Oil
7 September 2010
ConocoPhillips Buy
Price at 3 Sep 2010 (USD) 55.05
Reuters: COP.N Bloomberg: COP UN Price target 66.00
52-week range 59.70 - 44.97
Cash Cows Price/price relative
Paul Sankey David T. Clark, CFA Silvio Micheloto, CFA 105
Research Analyst Research Analyst Research Analyst 90
(+1) 212 250-6137 (+1) 212 250-8163 (+1) 212 250-1653 75
paul.sankey@db.com david-t.clark@db.com silvio.micheloto@db.com
60
45
COP: Cash Out on Payouts 30
After a decade of growth by aggressive acquisition, COP management have 9/07 3/08 9/08 3/09 9/09 3/10
concluded that their low multiple/market rating, and the appetite of state-owned ConocoPhillips
(e.g. Chinese) oil companies with a low cost of capital to buy assets, merits a S&P 500 INDEX (Rebased)
massive disposal programme. The “shrink to grow” strategy is being aggressively
pursued. We believe the newsflow on the asset disposals will continue to be Performance (%) 1m 3m 12m
Absolute -4.4 5.9 24.5
strong, generating stock buyback - could amount to $4.7bn in 2H10. We estimate S&P 500 INDEX -1.4 0.2 10.1
$15-16bn will be available for share repurchase over the next 18 months. Buy.
Stock & option liquidity data
Targets have been met; on track to exceed $10bn+ of disposals until 2011
Market Cap (USDm) 79,378.2
Key catalysts will be the ongoing newsflow from the asset disposal program, Shares outstanding (m) 1,441.9
targeted initially in late 2009 to generate $10bn through 2011, but out of which Free float (%) 100
$5.8bn has already been completed ($4.65bn for Syncrude + $635m for Flying J Volume (3 Sep 2010) 6,221,400
marketing assets). Further current sales are North American E&P assets (12 Option volume (und. shrs., 1M avg.) 1,700,867
packages in the market), that could raise $1.5bn-2bn and bring the total proceeds
Implied & Realized Volatility (3M)
of the disposal program in 2010 to $7bn. For 2011, we believe CEO Jim Mulva
could proceed with the sale of the stake in REX pipeline + large elements of 120%
another $20bn of assets under review. In total, COP could ultimately sell ~$15bn 100%
80%
of assets, 50% ahead of its original target, given the mapped opportunities and 60%
the fact that so far the company has over-delivered on the strategy. 40%
20%
Potential total yield of ~17% over next 12m boosted by buyback 0%
Sep M ar Sep M ar Sep M ar
The company is reaching its debt paydown target (20% debt to cap attained by
07 08 08 09 09 10
year end), after which cash return is the intended destination for spare cash. We Realized Vol Implied Vol ( ATM)
estimate the potential total cash return to shareholder yield over the next 12
months to be ~17%, as a result of 3.8% dividend yield and 12.8% ($10bn) share
buyback. This is higher than the historical pattern and prompted by the cash build
up that resulted from the shift in strategy announced in December 2009. While
fears of an expensive acquisition continue to over-hang the stock given its
acquisitive history, we don’t believe deals over $2bn will be under-taken, as
stated by the company management.
$66 PT based on NAV and P/E analyses. Strategy execution is a key risk.
We value COP based on the average of our NAV and P/E analyses. Our NAV-
implied target is $69: we estimate NAV at $77 based on a bottom-up analysis of
future cash flows with a 10% discount to reflect asset risk. Our analysis of ROCE
over cost of capital yields a target P/E of 9x, which we apply to our mid-cycle EPS
estimate of $7.10 and results in a valuation of $64. The average results in our
blended $66 PT. Risks include a disappointing execution of their announced
restructuring plan, weaker oil and gas prices, and unexpected acquisitions.
Forecasts and ratios
Year End Dec 31 2009A 2010E 2011E
FY EPS (USD) 3.65 6.48 8.50
P/E (x) 12.5 8.5 6.5
Dividend yield (%) 4.2 3.8 4.2
Source: Deutsche Bank estimates, company data
1
Includes the impact of FAS123R requiring the expensing of stock options.
Page 22 Deutsche Bank Securities Inc.
7 September 2010 Cash Cows
Model updated:29 July 2010 Fiscal year end 31-Dec 2007 2008 2009 2010E 2011E
Running the numbers Financial Summary
North America DB EPS (USD) 9.13 10.61 3.65 6.48 8.50
Reported EPS (USD) 7.22 -11.05 3.24 7.53 8.51
United States DPS (USD) 1.64 1.88 1.91 2.10 2.31
Integrated Oil BVPS (USD) 54.79 36.21 42.56 44.98 48.65
Valuation Metrics
Price/Sales (x) 0.7 0.5 0.4 0.4 0.3
ConocoPhillips P/E (DB) (x) 8.4 7.1 12.5 8.5 6.5
P/E (Reported) (x) 10.6 nm 14.0 7.3 6.5
Reuters: COP.N Bloomberg: COP UN P/BV (x) 1.6 1.4 1.2 1.2 1.1
Buy FCF yield (%) 13.1 4.6 4.3 19.7 18.7
Dividend yield (%) 2.1 2.5 4.2 3.8 4.2
Price (3 Sep 10) USD 55.05
EV/Sales 0.8 0.6 0.4 0.3 0.2
Target price USD 66.00 EV/EBITDA 4.4 3.9 3.1 2.2 1.9
52-week Range USD 44.97 - 59.70 EV/EBIT 7.5 nm 6.8 3.7 2.9
Market Cap (m) USDm 79,378
EURm 61,712 Income Statement (USDm)
Sales 187,437 240,842 149,341 178,400 203,172
Company Profile EBITDA 32,853 36,713 18,170 27,365 26,751
ConocoPhillips is a c. $40bn market cap integrated oil that EBIT 19,525 -6,838 8,340 16,521 17,410
comprises a series of acquisitions, and is now essentially a Pre-tax profit 23,359 -3,523 10,032 19,487 21,505
combination of the legacy companies Phillips-Tosco-Conoco-
Gulf Canada-Arco Alaska. The result is a major US gas and Net income 11,891 -16,998 4,858 11,081 11,139
oil producer, the biggest refiner in the US, a sophisticated
niche European refiner and marketer, and a major Asian gas,
and Chinese oil, player. Volumes were 1.6 mboe/d in 2003.
Cash Flow (USDm)
Refining capacity 2.6mb/d. Chemicals are small and weak. Cash flow from operations 24,550 22,658 12,479 14,562 17,602
Net Capex -8,219 -17,459 -9,591 1,043 -4,400
Free cash flow 16,331 5,199 2,888 15,605 13,202
Equity raised/(bought back) -6,716 -8,051 13 -5,090 -10,700
Dividends paid -2,661 -2,854 -2,832 -3,036 -2,913
Price Performance Net inc/(dec) in borrowings -5,519 5,760 1,229 -5,570 0
Other investing/financing cash flows -796 -755 -1,511 -180 0
105 Net cash flow 639 -701 -213 1,729 -410
90 Change in working capital 1,750 -1,019 -538 -754 119
75
60
45 Balance Sheet (USDm)
30 Cash and cash equivalents 1,456 755 542 2,271 1,861
Sep 07 M ay 08 Feb 09 Oct 09 Jul 10 Property, plant & equipment 89,003 83,947 87,708 81,587 79,018
Goodwill 29,336 3,778 3,638 3,635 3,635
ConocoPhillips S&P 500 INDEX (Rebased) Other assets 57,962 54,385 60,700 60,199 60,911
Total assets 177,757 142,865 152,588 147,692 145,425
Margin Trends Debt 21,687 27,455 28,653 23,079 23,079
Other liabilities 65,914 59,145 60,878 59,179 59,385
20
16 Total liabilities 87,601 86,600 89,531 82,258 82,464
12 Total shareholders' equity 90,156 56,265 63,057 65,435 62,961
8 Net debt 20,231 26,700 28,111 20,808 21,218
4
0
-4 Key Company Metrics
07 08 09 10E 11E Sales growth (%) 2.1 28.5 -38.0 19.5 13.9
EBITDA Margin EBIT Margin DB EPS growth (%) -8.7 16.2 -65.6 77.3 31.2
Payout ratio (%) 9.5 nm nm nm 26.6
Growth & Profitability
EBITDA Margin (%) 17.5 15.2 12.2 15.3 13.2
40 20 EBIT Margin (%) 10.4 -2.8 5.6 9.3 8.6
20 10
ROE (%) 13.9 -23.6 8.3 17.4 17.5
0 0
-20 -10 Net debt/equity (%) 22.4 47.5 44.6 31.8 33.7
-40 -20 Net interest cover (x) 15.6 nm 6.5 15.3 23.4
-60 -30
07 08 09 10E 11E DuPont Analysis
Sales growt h (LHS) ROE (RHS) EBIT margin (%) 10.4 -2.8 5.6 9.3 8.6
x Asset turnover (x) 1.1 1.5 1.0 1.2 1.4
Solvency x Financial cost ratio (x) 0.9 1.1 0.8 0.9 1.0
x Tax and other effects (x) 0.7 2.2 0.7 0.7 0.7
50 25 = ROA (post tax) (%) 6.9 -10.6 3.3 7.4 7.6
40 20 x Financial leverage (x) 2.0 2.2 2.5 2.4 2.3
30 15 = ROE (%) 13.9 -23.6 8.3 17.4 17.5
20 10 annual growth (%) -39.7 na na 110.7 0.6
10 5 x NTA/share (avg) (x) 52.1 46.9 39.3 43.3 48.6
0 0
= Reported EPS 7.22 -11.05 3.24 7.53 8.51
07 08 09 10E 11E
annual growth (%) -25.3 na na 132.1 13.0
Net debt / equit y (LHS) Net int erest cover (RHS)
Source: Company data, Deutsche Bank estimates
Paul Sankey
+1 212 250-6137 paul.sankey@db.com
Deutsche Bank Securities Inc. Page 23
7 September 2010 Cash Cows
North America United States
Industrials Packaging
7 September 2010
Ball Corporation Buy
Price at 3 Sep 2010 (USD) 59.08
Reuters: BLL.N Bloomberg: BLL UN Price target 65.00
52-week range 59.08 - 48.25
Cash Cows Price/price relative
Mark Wilde Christopher Chun, CFA Debbie Jones 60
Research Analyst Research Analyst Research Associate 50
(+1) 212 250-5570 (+1) 212 250-8342 (+1) 212 250-2956
mark.wilde@db.com christopher.chun@db.com debbie.jones@db.com 40
30
Defensive name in an uncertain market; Maintain Buy rating 20
We regard Ball as one of the steadiest and best-managed packaging companies. 9/07 3/08 9/08 3/09 9/09 3/10
Business is performing well and trends look encouraging. With the recent Inbev Ball Corporation
acquisition, tighter capex, exit from plastics and lots of cash to return to S&P 500 INDEX (Rebased)
shareholders, Ball seems "back on track." Looking ahead, Ball is well positioned to
grow FCF and earnings as a result of recent acquisitions, investment in emerging Performance (%) 1m 3m 12m
Absolute 0.5 14.7 23.2
markets, and cost savings initiatives. We see material upside potential: Buy. S&P 500 INDEX -2.7 -1.2 8.7
Outlook for BLL: Strong normalized FCF
For 2010, we estimate Ball will generate $500+MM in FCF (~10% yield). After Stock & option liquidity data
Market Cap (USDm) 5,427.3
years of above avg. capital spending, Ball has entered a period of lower capex. Shares outstanding (m) 91.9
We believe FCF should continue to rise in 2011. BLL has repeatedly noted a Free float (%) 100
preference for share repurchases. Thus, BLL could extend repurchase activity Volume (3 Sep 2010) 180,200
beyond the $400MM expected in 2010 and continue aggressive repurchase Option volume (und. shrs., 1M avg.) 37,525
activity in 2011. We note that if BLL were to repurchase an additional $400MM
Implied & Realized Volatility (3M)
(~7%) of shares in 2011, our ’11 EPS estimate would increase by about 4-6%
depending on timing or repurchases. 100%
80%
Aggressively repurchasing stock, while maintaining financial flexibility 60%
During H1’10, BLL repurchased $250MM shares and has targeted $150+MM in 40%
H2’10. Assuming a $400MM run-rate of share-repurchase activity over the next 20%
year, BLL’s total potential yield is ~9%. Moreover, with yr-end leverage expected 0%
Sep M ar Sep M ar Sep M ar
to be just ~2.4x EBITDA, mgmt still maintains the financial flexibility to pursue
07 08 08 09 09 10
acquisitions even with significant share repurchase activity. Given uncertainty in Realized Vol Implied Vol ( ATM)
dividend tax treatment, we don’t expect BLL to raise its dividend ($0.40/share)
any time soon.
Implied Volatility (3M, ATM) vs. Peers
Valuation & Risk
Historically, Ball has traded in a forward EV/EBTIDA band of 6.5-8.5x. Our $65 VM C.N 37.1%
price target is based on 8.0x our '11 EBITDA estimate. On an EPS basis, our SQM .N 30.8%
target represents 12.5x our '11E EPS estimate, slightly above its historical mean. FM C.N 29.9%
Downside risks include FX (especially the Euro, GBP & BRL with ~28% of BLL.N 23.2%
revenues offshore), weakness in the carbonated soft drink & beer market, ARG.N 19.3%
execution risk with its recent MCC plant acquisitions, and cut backs in
government spending that could affect Ball's Aerospace business. * W eig ht ed - avg . o f ind ex co mp o nent s
D at a as o f 0 2 - Sep - 10
.
Forecasts and ratios
Year End Dec 31 2009A 2010E 2011E
FY EPS (USD) 4.05 4.65 5.20
P/E (x) 11.2 12.7 11.4
Dividend yield (%) 0.9 0.7 0.7
Revenue (USDm) 7,345.3 7,790.3 7,905.7
Source: Deutsche Bank estimates, company data
1
Includes the impact of FAS123R requiring the expensing of stock options.
Page 24 Deutsche Bank Securities Inc.
7 September 2010 Cash Cows
Model updated:30 July 2010 Fiscal year end 31-Dec 2008 2009 2010E 2011E
Running the numbers Financial Summary
North America DB EPS (USD) 3.59 4.05 4.65 5.20
Reported EPS (USD) 3.29 4.08 3.98 5.20
United States DPS (USD) 0.40 0.40 0.40 0.40
Packaging BVPS (USD) 11.33 16.86 19.25 24.24
Valuation Metrics
Price/Sales (x) 0.6 0.6 0.7 0.7
Ball Corporation P/E (DB) (x) 12.2 11.2 12.7 11.4
P/E (Reported) (x) 13.4 11.1 14.9 11.4
Reuters: BLL.N Bloomberg: BLL UN P/BV (x) 3.7 3.1 3.1 2.4
Buy FCF yield (%) 7.8 7.2 7.3 9.1
Dividend yield (%) 0.9 0.9 0.7 0.7
Price (3 Sep 10) USD 59.08
EV/Sales 0.9 0.9 1.0 0.9
Target price USD 65.00 EV/EBITDA 7.0 7.0 7.8 7.0
52-week Range USD 48.25 - 59.08 EV/EBIT 10.2 10.1 10.6 9.4
Market Cap (m) USDm 5,427
EURm 4,219 Income Statement (USDm)
Sales 7,562 7,345 7,790 7,906
Company Profile EBITDA 933 945 1,015 1,056
Ball Corporation is a manufacturer of metal and plastic EBIT 636 660 743 780
packaging, primarily for beverages and food with a large
Pre-tax profit 453 537 588 644
focus on beverage packaging. Ball also develops aerospace
and other technologies for commercial and governmental Net income 320 388 369 468
customers. Ball is the leading producer of U.S. metal
beverage cans with roughly a 33% market share and the #3
producer of food cans in the U.S. with approximately 18% of
Cash Flow (USDm)
the market. Cash flow from operations 628 456 614 725
Net Capex -298 -150 -216 -240
Free cash flow 329 306 398 485
Equity raised/(bought back) -300 2 0 0
Dividends paid -38 -38 -43 -50
Price Performance Net inc/(dec) in borrowings 127 -118 0 -100
Other investing/financing cash flows -144 83 0 0
60 Net cash flow -24 235 355 335
50 Change in working capital 55 -176 0 -20
40
30 Balance Sheet (USDm)
20 Cash and cash equivalents 127 211 718 1,053
Sep 07 M ay 08 Feb 09 Oct 09 Jul 10 Property, plant & equipment 1,867 1,949 1,838 1,803
Goodwill 1,826 2,115 2,044 2,044
Ball Corporat ion S&P 500 INDEX (Rebased) Other assets 2,549 2,214 2,547 2,589
Total assets 6,369 6,488 7,147 7,488
Margin Trends Debt 2,410 2,596 3,194 3,094
Other liabilities 2,871 2,309 2,699 2,729
14
Total liabilities 5,281 4,905 5,893 5,823
12 Total shareholders' equity 1,087 1,583 1,770 2,188
11 Net debt 2,283 2,386 2,476 2,041
9
8 Key Company Metrics
08 09 10E 11E Sales growth (%) nm -2.9 6.1 1.5
EBITDA Margin EBIT Margin DB EPS growth (%) na 12.8 14.7 11.9
Payout ratio (%) 12.0 9.7 10.0 7.7
Growth & Profitability
EBITDA Margin (%) 12.3 12.9 13.0 13.4
8 40 EBIT Margin (%) 8.4 9.0 9.5 9.9
6
30 ROE (%) 29.4 29.1 22.0 23.7
4
2 20 Net debt/equity (%) 209.9 150.7 139.9 93.3
0
10 Net interest cover (x) 4.6 5.6 5.2 5.7
-2
-4 0
08 09 10E 11E DuPont Analysis
Sales growt h (LHS) ROE (RHS) EBIT margin (%) 8.4 9.0 9.5 9.9
x Asset turnover (x) 1.2 1.1 1.1 1.1
Solvency x Financial cost ratio (x) 0.8 0.8 0.8 0.8
x Tax and other effects (x) 0.6 0.7 0.6 0.7
250 8 = ROA (post tax) (%) 5.0 6.0 5.4 6.4
200 6 x Financial leverage (x) 5.9 4.8 4.1 3.7
150 = ROE (%) 29.4 29.1 22.0 23.7
4
100 annual growth (%) na -1.1 -24.3 7.4
50 2 x NTA/share (avg) (x) 11.2 14.0 18.1 22.0
0 0
= Reported EPS 3.29 4.08 3.98 5.20
08 09 10E 11E
annual growth (%) na 24.1 -2.5 30.6
Net debt / equit y (LHS) Net int erest cover (RHS)
Source: Company data, Deutsche Bank estimates
Mark Wilde
+1 212 250-5570 mark.wilde@db.com
Deutsche Bank Securities Inc. Page 25
7 September 2010 Cash Cows
North America United States
Health Care Managed Care
7 September 2010
Magellan Health Buy
Price at 3 Sep 2010 (USD) 45.70
Reuters: MGLN.OQ Bloomberg: MGLN UW Price Target 49.00
52-week range 45.70 - 29.63
Cash Cows Price/price relative
Scott Fidel Justin Bowers, CFA 50
Research Analyst Research Associate 40
(+1) 212 250-3716 (+1) 212 250-8564
scott.fidel@db.com justin.bowers@db.com 30
20
Excess cash generation should enhance shareholder payout 10
We have included MGLN in DB's "Cash Cows" equity compendium since we 9/07 3/08 9/08 3/09 9/09 3/10
expect the company will return significant cash to shareholders through stock Magellan Health
repurchases over the next 12 months. MGLN has a significant unregulated net S&P 500 INDEX (Rebased)
cash position and the base business generates substantial free cash flow. The
company recently announced a new $350m buyback program; we forecast a Performance (%) 1m 3m 12m
Absolute 7.2 10.4 43.4
repurchase yield of 16% over the next year. We thus rate the shares a Buy. S&P 500 INDEX -1.4 0.2 10.1
MGLN ended 2Q10 with deployable cash of $305m ($9/share) and no LT
debt Stock & option liquidity data
This free cash position equates to 21% of the market cap. We expect MGLN to Market cap (USD) 1,524.9
Shares outstanding (m) 33.4
generate $203 million in free cash flow in 2010, which equates to a 14% free Free float (%) 100
cash flow yield. MGLN has been executing extremely well on the fundamentals; Volume (3 Sep 2010) 203,500
2Q10 EPS exceeded Street views by 42%. In conjunction with the 2Q report, Option volume (und. shrs., 1M avg.) 3,955
MGLN boosted its 2010 EPS guidance by 19%; the guidance increase does not
assume any future benefit from the new share buyback program. In terms of Implied & Realized Volatility (3M)
business growth, MGLN generated 17% revenue growth, 69% EBITDA growth, 60%
and 99% EPS growth in 2Q10. MGLN should also be a net beneficiary from health 50%
reform due to its overweight position in the Medicaid managed care market. 40%
30%
20%
Our model assumes total yield of 16% over the next 12 months 10%
Since MGLN does not pay a shareholder dividend, our total yield forecast is based 0%
entirely on expected share buybacks. MGLN currently has an authorization to Sep M ar Sep M ar Sep M ar
07 08 08 09 09 10
repurchase $350m in shares over the next two years; the company completed its
Realized Vol Implied Vol ( ATM)
prior two buyback programs ahead of schedule. The $350m repurchase
authorization equates to 24% of the market cap. Our model currently assumes
the company will reduce outstanding shares by 16% over the next 12 months Implied Volatility (3M, ATM) vs. Peers
based on our forecast for the buyback program to be front-end loaded given
AM M D.OQ 42.4%
significant excess free cash and the stock’s discounted valuation.
M ASI.OQ 35.8%
Valuation and Risks
To determine our 12-month TP of $49, we assign a 14x multiple to our 2011 EPS EM S.N 33.8%
forecast. This assumes shares trade at a premium to our target MCO multiple of M GLN.OQ 30.1%
9-11x to reflect stronger organic growth potential, significant net cash and no LT
debt. The primary risks to MGLN not obtaining our total yield forecast include * W eig ht ed - avg . o f ind ex co mp o nent s
D at a as o f 0 2 - Sep - 10
acquisitions, unexpected contract losses, or adverse regulatory developments.
Forecasts and ratios
Year End Dec 31 2009A 2010E 2011E
1Q EPS1 0.37 0.73A 0.82
2Q EPS 0.53 1.05 0.86
3Q EPS 0.88 0.87 0.89
4Q EPS 1.25 0.96 0.94
FY EPS (USD) 3.01 3.60 3.50
P/E (x) 11.2 12.7 13.0
Dividend yield (%) 0.0 0.0 0.0
Revenue (USDm) 2,641.8 2,975.7 3,037.5
Source: Deutsche Bank estimates, company data
1
Includes the impact of FAS123R requiring the expensing of stock options.
Page 26 Deutsche Bank Securities Inc.
7 September 2010 Cash Cows
Model updated:30 July 2010 Fiscal year end 31-Dec 2008 2009 2010E 2011E 2012E
Running the numbers Financial Summary
North America DB EPS (USD) 2.16 3.01 3.60 3.50 na
Reported EPS (USD) 2.21 3.01 3.60 3.50 4.10
United States DPS (USD) 0.00 0.00 0.00 0.00 0.00
Managed Care BVPS (USD) 22.70 26.83 28.91 30.41 36.55
Valuation Metrics
Price/Sales (x) 0.6 0.5 0.5 0.4 0.3
Magellan Health P/E (DB) (x) 18.3 11.2 12.7 13.0 0.0
P/E (Reported) (x) 17.9 11.2 12.7 13.0 11.1
Reuters: MGLN.OQ Bloomberg: MGLN UW P/BV (x) 1.7 1.5 1.6 1.5 1.3
Buy FCF yield (%) 14.8 15.6 13.3 11.0 13.7
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
Price (3 Sep 10) USD 45.70
EV/Sales 0.5 0.3 0.4 0.3 0.2
Target price USD 49.00 EV/EBITDA 5.6 3.8 4.1 4.1 3.1
52-week Range USD 29.63 - 45.70 EV/EBIT 7.8 4.8 5.1 5.5 4.2
Market Cap (m) USDm 1,525
EURm 1,186 Income Statement (USDm)
Sales 2,625 2,642 2,976 3,037 3,306
Company Profile EBITDA 220 227 277 245 258
Magellan Health Services is positioning itself to be a leading EBIT 159 180 220 183 191
provider of outsourced specialty managed care services. It
Pre-tax profit 140 164 205 167 174
currently focuses on managed behavioral health, serving 65
million lives. The Company is diversifying into other Net income 88 107 120 100 103
outsourced specialty managed care services to create a
''single source'' solution to specialty managed care needs.
Cash Flow (USDm)
Cash flow from operations 270 219 247 189 206
Net Capex -36 -33 -44 -46 -49
Free cash flow 234 185 203 143 157
Equity raised/(bought back) -116 -87 -137 -250 -100
Dividends paid 0 0 0 0 0
Price Performance Net inc/(dec) in borrowings -14 0 -1 0 0
Other investing/financing cash flows -203 -32 -20 2 -22
50 Net cash flow -99 66 45 -106 35
40 Change in working capital 45 14 18 -22 -15
30
20 Balance Sheet (USDm)
10 Cash and cash equivalents 212 197 241 136 171
Sep 07 M ay 08 Feb 09 Oct 09 Jul 10 Property, plant & equipment 88 108 102 87 68
Goodwill 418 491 486 486 486
Magellan Healt h S&P 500 INDEX (Rebased) Other assets 699 645 647 677 742
Total assets 1,418 1,441 1,477 1,385 1,467
Margin Trends Debt 100 105 88 88 88
Other liabilities 410 386 424 433 462
10
Total liabilities 509 491 512 521 549
9
Total shareholders' equity 908 950 965 864 917
8
Net debt -112 -92 -154 -48 -83
7
6
5 Key Company Metrics
08 09 10E 11E 12E Sales growth (%) nm 0.6 12.6 2.1 8.8
EBITDA Margin EBIT Margin DB EPS growth (%) na 39.6 19.6 -2.7 na
Payout ratio (%) 0.0 0.0 0.0 0.0 0.0
Growth & Profitability
EBITDA Margin (%) 8.4 8.6 9.3 8.1 7.8
15 15 EBIT Margin (%) 6.0 6.8 7.4 6.0 5.8
10 10 ROE (%) 9.7 11.5 12.5 10.9 11.6
Net debt/equity (%) -12.3 -9.7 -15.9 -5.6 -9.1
5 5
Net interest cover (x) nm nm nm nm nm
0 0
08 09 10E 11E 12E DuPont Analysis
Sales growt h (LHS) ROE (RHS) EBIT margin (%) 6.0 6.8 7.4 6.0 5.8
x Asset turnover (x) 1.9 1.8 2.0 2.1 2.3
Solvency x Financial cost ratio (x) 1.1 1.0 1.0 1.0 1.0
x Tax and other effects (x) 0.5 0.6 0.5 0.5 0.5
0 = ROA (post tax) (%) 6.2 7.5 8.2 7.0 7.2
-5 x Financial leverage (x) 1.6 1.5 1.5 1.6 1.6
= ROE (%) 9.7 11.5 12.5 10.9 11.6
-10
annual growth (%) na 18.1 9.4 -13.2 6.1
-15 x NTA/share (avg) (x) 22.7 26.2 28.7 32.2 35.5
-20
= Reported EPS 2.21 3.01 3.60 3.50 4.10
08 09 10E 11E 12E
annual growth (%) na 36.4 19.6 -2.7 17.0
Net debt / equit y (LHS) Net int erest cover (RHS)
Source: Company data, Deutsche Bank estimates
Scott Fidel
+1 212 250-3716 scott.fidel@db.com
Deutsche Bank Securities Inc. Page 27
7 September 2010 Cash Cows
North America United States
TMT Telecom Services
7 September 2010
AT&T, Inc. Buy
Price at 3 Sep 2010 (USD) 27.44
Reuters: T.N Bloomberg: T US Price target 31.00
52-week range 28.58 - 24.13
Cash Cows Price/price relative
50
Fundamentals, leverage and FCF outlook support add'l payouts, in our view 40
We believe T has the capacity to boost capital returns by 83% in 2011 via a 30
combination of a dividend increase and share repurchases. The 2010E dividend
payout is $9.9 billion based on $1.68/share, translating to a 6.1% yield. For 2011, 20
we envision a dividend raise of ~2.5% and an $8 billion buyback. We estimate 10
10% EPS growth in 2011 supported by sustained growth in wireless data 9/07 3/08 9/08 3/09 9/09 3/10
revenues and enhanced wireline operations. Further, T has achieved its net AT&T, Inc.
debt/EBITDA target of 1.5x and has recently raised 2010 FCF guidance. Buy. S&P 500 INDEX (Rebased)
th
T can raise its dividend for the 27 straight year without a coverage problem Performance (%) 1m 3m 12m
Late this year, we expect an annual per-share increase of $0.04 (2.4%), which is Absolute 2.8 10.6 9.1
S&P 500 INDEX -2.7 -1.2 8.7
the same increment as in the past 2 years. The new dividend would be $1.72,
yielding 6.3% to the current price. Our model projects FCF of $14.2 billion in 2010 Stock & option liquidity data
and $15.9 billion in 2011. Based on these forecasts, AT&T’s current annualized Market Cap (USDm) 162,691.8
dividend of $1.68/share represents 70% of 2010 FCF and 63% of 2011 FCF. Shares outstanding (m) 5,929.0
Free float (%) 100
A buyback is also doable since big acquisitions appear off the table Volume (3 Sep 2010) 5,759,800
We believe the company has the capacity to pursue an $8 billion buyback over Option volume (und. shrs., 1M avg.) 3,030,800
the next six months, which would reduce shares by 5% and boost projected 2011
EPS growth to 13%. Without a buyback, we estimate that AT&T will end next
year with a $9.5 billion cash balance and net debt/EBITDA of 1.3x. Management’s
recent comments suggest it doesn’t have any immediate interest in or
opportunities for sizable acquisitions, so we do not believe the company needs to
sit on a large cash position. Further supporting our view is mgmt’s stated priority
for use of cash which is returns of capital to shareowners.
Total payout yield could approach 12% if T pursues both actions
Combining an $8B buyback plus a $10.2B annual dividend ($1.72/sh on 5.9B
shares o/s) represents a potential yield of 11.4% on T’s current market cap. If T
makes both moves, then its projected 2011 dividend coverage would be
unchanged as the reduction in the share count would offset the higher dividend
payment per share.
Valuation, price target and risks
Improved EPS trends should shift focus back to P/E, which looks attractive at
10.9x. Our 12-month PT of $31 is based on 3 equally weighted methods (EPS,
EBITDA, DCF). Risks include economic weakness, intensifying wireless
competition, legislative/regulatory reforms and loss of iPhone exclusivity.
Forecasts and ratios
Year End Dec 31 2009A 2010E 2011E
FY EPS (USD) 2.12 2.29 2.51
P/E (x) 12.1 12.0 10.9
DPS (USD) 1.64 1.68 1.68
Dividend Yield (%) 6.4 6.1 6.1
Revenue (USD) 122,513.0 123,781.3 125,772.1
Source: Deutsche Bank estimates, company data
1
Includes the impact of FAS123R requiring the expensing of stock options.
2
Pricing is as of September 2, 2010.
Page 28 Deutsche Bank Securities Inc.
7 September 2010 Cash Cows
Model updated:26 July 2010 Fiscal year end 31-Dec 2007 2008 2009 2010E 2011E 2012E
Running the numbers Financial Summary
North America DB EPS (USD) 2.77 2.81 2.12 2.29 2.51 2.71
Reported EPS (USD) 1.94 2.14 2.10 2.29 2.51 2.71
United States DPS (USD) 1.42 1.60 1.64 1.68 1.68 1.68
Telecom Services BVPS (USD) 18.69 16.24 17.29 17.90 18.74 19.77
Valuation Metrics
Price/Sales (x) 2.0 1.6 1.2 1.3 1.3 1.3
AT&T, Inc. P/E (DB) (x) 14.2 11.8 12.1 12.0 10.9 10.1
P/E (Reported) (x) 20.3 15.5 12.2 12.0 10.9 10.1
Reuters: T.N Bloomberg: T US P/BV (x) 2.2 1.8 1.6 1.5 1.5 1.4
Buy FCF yield (%) 6.7 6.7 11.2 8.7 9.8 10.1
Dividend yield (%) 3.6 4.8 6.4 6.1 6.1 6.1
Price (3 Sep 10) USD 27.44
EV/Sales 2.5 2.2 1.8 1.8 1.7 1.7
Target price USD 31.00 EV/EBITDA 6.9 6.1 5.2 5.1 4.8 4.5
52-week Range USD 24.13 - 28.58 EV/EBIT 10.6 9.4 8.5 8.2 7.7 7.1
Market Cap (m) USDm 162,692
EURm 126,484 Income Statement (USDm)
Sales 119,892 123,737 122,513 123,781 125,772 127,782
Company Profile EBITDA 43,909 43,856 41,498 43,590 45,477 46,641
AT&T ranks among the leading providers of EBIT 28,572 28,500 25,651 27,113 28,437 29,711
telecommunications services in the United States and the Pre-tax profit 18,299 20,063 18,867 21,351 23,514 25,548
world. The company offers services and products to
consumers in the U.S. and services and products to Net income 11,951 12,771 12,413 13,604 14,911 16,055
businesses and other providers of telecommunications
services worldwide.
Cash Flow (USDm)
Cash flow from operations 34,242 33,573 34,342 32,861 34,291 34,515
Net Capex -17,888 -20,335 -17,335 -18,635 -18,373 -18,051
Free cash flow 16,354 13,238 17,007 14,226 15,918 16,464
Equity raised/(bought back) -8,404 -5,758 28 5 0 0
Dividends paid -8,743 -9,507 -9,670 -9,947 -9,961 -9,961
Price Performance Net inc/(dec) in borrowings 1,184 10,423 -4,403 -2,594 0 0
Other investing/financing cash flows -839 -8,657 -1,116 -1,863 0 0
50 Net cash flow -448 -261 1,846 -173 5,957 6,504
40 Change in working capital -1,644 -2,291 737 -698 0 0
30
20 Balance Sheet (USDm)
10 Cash and cash equivalents 1,970 1,792 3,741 3,555 9,512 16,016
Sep 07 M ay 08 Feb 09 Oct 09 Jul 10 Property, plant & equipment 95,890 99,088 100,053 102,286 103,619 104,740
Goodwill 70,713 71,829 72,782 73,484 73,484 73,484
AT&T, Inc. S&P 500 INDEX (Rebased) Other assets 107,071 92,536 92,270 91,248 89,239 88,043
Total assets 275,644 265,245 268,846 270,573 275,854 282,283
Margin Trends Debt 64,115 74,991 72,081 68,785 68,785 68,785
Other liabilities 96,162 93,504 94,444 95,642 95,973 96,307
40
Total liabilities 160,277 168,495 166,525 164,427 164,758 165,092
36
Total shareholders' equity 115,367 96,750 102,321 106,146 111,096 117,191
32
Net debt 62,145 73,199 68,340 65,230 59,273 52,769
28
24
20 Key Company Metrics
07 08 09 10E 11E 12E Sales growth (%) 39.9 3.2 -1.0 1.0 1.6 1.6
EBITDA Margin EBIT Margin DB EPS growth (%) 18.4 1.4 -24.7 8.4 9.7 7.7
Payout ratio (%) 73.3 74.7 78.2 73.2 66.8 62.0
Growth & Profitability
EBITDA Margin (%) 36.6 35.4 33.9 35.2 36.2 36.5
50 15 EBIT Margin (%) 23.8 23.0 20.9 21.9 22.6 23.3
40
30 10 ROE (%) 10.4 12.0 12.5 13.1 13.7 14.1
20 Net debt/equity (%) 53.9 75.7 66.8 61.5 53.4 45.0
10 5
Net interest cover (x) 8.1 8.4 7.6 8.6 8.8 9.2
0
-10 0
07 08 09 10E 11E 12E DuPont Analysis
Sales growt h (LHS) ROE (RHS) EBIT margin (%) 23.8 23.0 20.9 21.9 22.6 23.3
x Asset turnover (x) 0.4 0.5 0.5 0.5 0.5 0.5
Solvency x Financial cost ratio (x) 0.9 0.9 0.9 0.9 0.9 0.9
x Tax and other effects (x) 0.5 0.5 0.6 0.6 0.6 0.6
80 10 = ROA (post tax) (%) 4.4 4.7 4.6 5.0 5.5 5.8
60 8 x Financial leverage (x) 2.4 2.5 2.7 2.6 2.5 2.4
6 = ROE (%) 10.4 12.0 12.5 13.1 13.7 14.1
40
4 annual growth (%) 19.7 16.2 3.6 4.7 5.2 2.5
20 2 x NTA/share (avg) (x) 18.7 17.8 16.8 17.6 18.3 19.3
0 0
= Reported EPS 1.94 2.14 2.10 2.29 2.51 2.71
07 08 09 10E 11E 12E
annual growth (%) 2.7 10.7 -2.1 9.4 9.6 7.7
Net debt / equit y (LHS) Net int erest cover (RHS)
Source: Company data, Deutsche Bank estimates
Brett Feldman
+1 212 250-4621 brett.feldman@db.com
Deutsche Bank Securities Inc. Page 29
7 September 2010 Cash Cows
Consolidated Summary Forecasts
Figure 12: Annual Consolidated Summary Forecasts for AT&T
Annual Forecasts ($M) CAGR CAGR
Consolidated Summary 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E '09-'14 '10-'15
Wireline 67,889 63,514 61,215 60,058 59,814 59,980 60,500 61,372 -1.0% 0.1%
Wireless 49,174 53,504 57,889 61,505 64,049 66,221 68,311 70,449 5.0% 4.0%
Directory & Other 6,674 5,495 4,677 4,210 3,920 3,686 3,500 3,354 -8.6% -6.4%
Revenue 123,737 122,513 123,781 125,772 127,782 129,887 132,311 135,175 1.6% 1.8%
% Growth 3.2% -1.0% 1.0% 1.6% 1.6% 1.6% 1.9% 2.2%
EBITDA 43,848 41,601 43,577 45,477 46,641 47,703 48,831 50,080 3.3% 2.8%
% Growth -0.1% -5.1% 4.8% 4.4% 2.6% 2.3% 2.4% 2.6%
% Margin 35.4% 34.0% 35.2% 36.2% 36.5% 36.7% 36.9% 37.0%
Operating Income 23,038 21,451 23,824 26,097 28,181 30,362 32,293 34,170 8.5% 7.5%
% Growth 12.9% -6.9% 11.1% 9.5% 8.0% 7.7% 6.4% 5.8%
% Margin 18.6% 17.5% 19.2% 20.7% 22.1% 23.4% 24.4% 25.3%
EPS (GAAP) $2.16 $2.12 $2.29 $2.51 $2.71 $2.91 $3.10 $3.29 8.0% 7.5%
% Growth 11.3% -1.9% 8.4% 9.7% 7.7% 7.4% 6.7% 6.1%
Dividend $1.60 $1.64 $1.68 $1.68 $1.68 $1.68 $1.68 $1.68
% Growth 12.7% 2.5% 2.4% 0.0% 0.0% 0.0% 0.0% 0.0%
Capex 20,309 17,294 18,635 18,373 18,051 17,922 17,827 17,779
% Growth 14.6% -14.8% 7.8% -1.4% -1.8% -0.7% -0.5% -0.3%
% of Revenue 16.4% 14.1% 15.1% 14.6% 14.1% 13.8% 13.5% 13.2%
Net Debt 73,199 68,340 65,230 59,273 52,769 46,069 38,924 31,239
Net Debt / EBITDA 1.7x 1.6x 1.5x 1.3x 1.1x 1.0x 0.8x 0.6x
EBITDA / Interest Expense 13.0x 12.4x 13.8x 14.1x 14.4x 14.8x 15.1x 15.5x
Average Cost of Debt 4.9% 4.6% 4.6% 4.7% 4.7% 4.7% 4.7% 4.7%
Source: Deutsche Bank estimates and company reports
Figure 13: Quarterly Consolidated Summary Forecasts for AT&T
Quarterly Forecasts ($M)
Consolidated Summary 2008 1Q09 2Q09 3Q09 4Q09 2009 1Q10 2Q10 3Q10E 4Q10E 2010E 2011E
Wireline 67,889 16,162 15,989 15,749 15,614 63,514 15,421 15,396 15,223 15,175 61,215 60,058
Wireless 49,174 12,838 13,222 13,627 13,817 53,504 13,897 14,242 14,869 14,881 57,889 61,505
Directory & Other 6,674 1,457 1,403 1,358 1,277 5,495 1,212 1,170 1,167 1,129 4,677 4,210
Revenue 123,737 30,457 30,614 30,734 30,708 122,513 30,530 30,808 31,259 31,185 123,781 125,772
% Growth 3.2% -0.9% -0.8% -1.5% -0.7% -1.0% 0.2% 0.6% 1.7% 1.6% 1.0% 1.6%
EBITDA 43,848 10,624 10,401 10,280 10,296 41,601 10,799 10,947 10,949 10,883 43,577 45,477
% Growth -0.1% -5.6% -9.8% -2.5% -2.1% -5.1% 1.6% 5.2% 6.5% 5.7% 4.8% 4.4%
% Margin 35.4% 34.9% 34.0% 33.4% 33.5% 34.0% 35.4% 35.5% 35.0% 34.9% 35.2% 36.2%
Operating Income 23,038 5,740 5,500 5,372 4,839 21,451 6,007 6,114 5,924 5,780 23,824 26,097
% Growth 12.9% -4.0% -16.2% -4.4% -0.7% -6.9% 4.7% 11.2% 10.3% 19.4% 11.1% 9.5%
% Margin 18.6% 18.8% 18.0% 17.5% 15.8% 17.5% 19.7% 19.8% 19.0% 18.5% 19.2% 20.7%
EPS (GAAP) $2.16 $0.53 $0.54 $0.54 $0.51 $2.12 $0.59 $0.61 $0.56 $0.54 $2.29 $2.51
% Growth 11.3% -7.5% -14.7% -1.5% 25.7% -1.9% 10.7% 12.8% 3.3% 6.6% 8.4% 9.7%
Dividend $1.60 $0.41 $0.41 $0.41 $0.41 $1.64 $0.42 $0.42 $0.42 $0.42 $1.68 $1.68
% Growth 12.7% 2.5% 2.5% 2.5% 2.5% 2.5% 2.4% 2.4% 2.4% 2.4% 2.4% 0.0%
Capex 20,309 3,348 4,037 4,202 5,707 17,294 3,331 4,904 4,800 5,600 18,635 18,373
% Growth 14.6% -21.2% -24.2% -20.0% 4.1% -14.8% -0.5% 21.5% 14.2% -1.9% 7.8% -1.4%
% of Revenue 16.4% 11.0% 13.2% 13.7% 18.6% 14.1% 10.9% 15.9% 15.4% 18.0% 15.1% 14.6%
Net Debt 73,199 70,538 69,372 66,497 68,340 68,340 66,844 68,621 65,650 65,230 65,230 59,273
Net Debt / EBITDA 1.7x 1.7x 1.7x 1.6x 1.7x 1.6x 1.5x 1.6x 1.5x 1.5x 1.5x 1.3x
EBITDA / Interest Expense 13.0x 12.6x 11.9x 12.1x 13.0x 12.4x 14.1x 14.5x 13.2x 13.3x 13.8x 14.1x
Average Cost of Debt 4.9% 4.5% 4.6% 4.6% 4.4% 4.6% 4.3% 4.7% 4.7% 4.7% 4.6% 4.7%
Source: Deutsche Bank estimates and company reports
Page 30 Deutsche Bank Securities Inc.
7 September 2010 Cash Cows
Appendix 1
Important Disclosures
Additional information available upon request
For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see
the most recently published company report or visit our global disclosure look-up page on our website at
http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the
undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in
this report. Binky Chadha
Equity rating key Equity rating dispersion and banking relationships
Buy: Based on a current 12- month view of total share-holder
return (TSR = percentage change in share price from current 500 49% 50%
price to projected target price plus pro-jected dividend yield ) 400
, we recommend that investors buy the stock.
300
Sell: Based on a current 12-month view of total share-holder 42% 36%
return, we recommend that investors sell the stock 200
Hold: We take a neutral view on the stock 12-months out 100 1% 25%
and, based on this time horizon, do not recommend either a 0
Buy or Sell.
Buy Hold Sell
Notes:
1. Newly issued research recommendations and target prices
always supersede previously published research. Companies Covered Cos. w/ Banking Relationship
2. Ratings definitions prior to 27 January, 2007 were: North American Universe
Buy: Expected total return (including dividends) of 10% or
more over a 12-month period
Hold: Expected total return (including dividends) between -
10% and 10% over a 12-month period
Sell: Expected total return (including dividends) of -10% or
worse over a 12-month period
Deutsche Bank Securities Inc. Page 31
7 September 2010 Cash Cows
Regulatory Disclosures
1. Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the
"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
2. Short-Term Trade Ideas
Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent
or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at
http://gm.db.com.
3. Country-Specific Disclosures
Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian
Corporations Act.
EU countries: Disclosures relating to our obligations under MiFiD can be found at http://globalmarkets.db.com/riskdisclosures.
Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration
number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117.
Member of associations: JSDA, The Financial Futures Association of Japan. Commissions and risks involved in stock
transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction
amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price
fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange
fluctuations.
New Zealand: This research is not intended for, and should not be given to, "members of the public" within the meaning of the
New Zealand Securities Market Act 1988.
Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any
appraisal or evaluation activity requiring a license in the Russian Federation.
Page 32 Deutsche Bank Securities Inc.
Deutsche Bank Securities Inc.
North American locations
Deutsche Bank Securities Inc. Deutsche Bank Securities Inc. Deutsche Bank Securities Inc. Deutsche Bank Securities Inc.
60 Wall Street One International Place 222 South Riverside Plaza 3033 East First Avenue
New York, NY 10005 12th Floor 30th Floor Suite 303, Third Floor
Tel: (212) 250 2500 Boston, MA 02110 Chicago, IL 60606 Denver, CO 80206
United States of America Tel: (312) 537-3758 Tel: (303) 394 6800
Tel: (1) 617 217 6100
Deutsche Bank Securities Inc. Deutsche Bank Securities Inc. Deutsche Bank Securities Inc.
1735 Market Street 101 California Street 700 Louisiana Street
24th Floor 46th Floor Houston, TX 77002
Philadelphia, PA 19103 San Francisco, CA 94111 Tel: (832) 239-4600
Tel: (215) 854 1546 Tel: (415) 617 2800
International locations
Deutsche Bank Securities Inc. Deutsche Bank AG London Deutsche Bank AG Deutsche Bank AG
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