CSX Corporation_0405.doc

Document Sample
CSX Corporation_0405.doc Powered By Docstoc
					                                       CSX Corporation

Ticker
CSX                                                       I.      Stock Screener
Sector                                         Based on the Economics Committee’s
Industrials
                                       recommendation, a company in the Industrial
                                       Transportation-Railroads was selected for further
Industry                               investigation. A stock screener provided by MSN was
Industrial Transportation-RR
                                       used to identify potential investment options for the
                                       Mizzou Investment Fund. The screener returned a list of
                                       four large cap railroad companies: CSX Corp. (CSX),
Investment Recommendation
                                       Burlington Northern Santa Fe Corp. (BNI), the Union
Buy 650 shares
                                       Pacific Corp. (UNP), and the Norfolk Southern Corp.
                                       (NSC).
Pricing (as of 4/04/07)
Closing Price           $40.73
                                           After a brief review of possible candidates, CSX was
52 Week High            $42.53
                                       selected for further research, given that it had the highest
52 Week Low             $28.60
                                       ranking for both 12-month relative strength and the
                                       lowest P/E ratio. In addition, CSX had one of the lower
Market Data
                                       debt-to-equity ratios (second behind UNP) and one of the
Market Cap         $16,488.93M
                                       higher net profit margins (second behind NSC) of the
Total Assets         $24,232M
                                       four companies.
Trading Vol (3moave) 4,393,100
                                                         II.     Company Profile
Valuation
EPS(ttm)                        2.82
                                           CSX Corporation (―CSX‖ and together with its
P/E(ttm)                       13.36
                                       subsidiaries, the ―Company‖) based in Jacksonville, FL.,
PEG(ttm, 5 yr expected)         0.95
                                       owns companies providing rail, intermodal and rail-to-
Div &Yield              0.12 (1.30%)
                                       truck transload services that combine to connect more
                                       than 70 ocean, river, and lake ports. CSX’s principal
Profitability&Effectiveness
                                       operating company, CSX Transportation, Inc. (―CSXT‖)
(ttm)
                                       operates the largest railroad in the eastern United States
ROA                        5.31%
                                       with approximately 21,000-mile rail network linking
ROE                       15.51%
                                       commercial markets in 23 states, the District of
Profit Margin             13.69%
                                       Columbia, and the Canadian provinces of Ontario and
Operating Margin          22.35%
                                       Quebec.      The CSXT rail network extends from New
                                       York, Philadelphia, and Boston to the Southeast markets
                                       of Atlanta, Miami, and New Orleans and to the
                                       Midwestern cities of East St. Louis, Memphis, and
                                       Chicago.

Rosella Schad
rlsmrb@mizzou.edu
                       III Economic & Industry Environment

   The rail and intermodal companies are viewed by the Company on a combined basis as
Surface Transportation businesses. Together they serve four primary lines of business:
Merchandise, Coal, Intermodal, and Automotive.


o Merchandise generated approximately 49% of the Company’s total revenue in 2005 with
  2.9 million carloads. The Company’s merchandise business is made up of seven market
  segments: phosphates and fertilizers; metals; forest products; food and consumer;
  agricultural products; chemicals; and emerging markets. Emerging markets target high-
  growth business opportunities in specialized markets such as aggregates, processed
  materials (for example, cement), waste, military cargo, and machinery.


o Coal, which delivered more than 1.8 million carloads of coal, coke, and iron ore to
  electric utilities and manufacturers in 2005, accounted for approximately 24% of the
  Company’s total 2005 revenue. The Company serves more than 130 coal mines in nine
  states, including three of the nation’s top four coal-producing states.


o Intermodal offers a cost advantage over long-haul trucking by combining the better
  economics of longer hauls provided by rail with the short-haul flexibility of trucks
  through a network of dedicated terminals across North America. Intermodal accounted
  for approximately 2.2 million units and 16% of the Company’s total revenue in 2005.


o Automotive, which serves plants in eight states and delivers both finished vehicles and
  auto parts, transported 488,000 carloads generating 10% of the Company’s total revenue
  in 2005.


o Other revenue, such as demurrage, switching, and other incidental charges, accounted for
  1% of the Company’s total 2005 revenue. Demurrage represents charges assessed by
  railroads for the retention of cars by shippers or receivers of freight beyond a specified
  period of time. Switching revenue is generated when CSX switches cars between trains
  for a customer or other railroad.




                                                                                          2
                                                     REVENUES




                                                 Other
                                    Aotomotive    1%
                                       10%




                      Intermodal
                         16%

                                                                              Merchandise
                                                                Merchandise   Coal
                                                                   49%        Intermodal
                                                                              Aotomotive
                                                                              Other




                                   Coal
                                   24%




        Revenue increased across all commodities. A strong industrial economy, coupled with a
shortage of rail, truck, and barge capacity allowed for substantial price increases within all
merchandise groups. While North American automotive production was relatively flat compared
to the prior year, automotive revenue and revenue-per-unit benefited from contractual price
escalations. Coal volumes and revenue improved significantly due to both increased electrical
generation by CSXT-served utilities and price increases. The overall competitive position of
Intermodal improved compared to the trucking industry due to shortage of truck capacity and
higher fuel prices creating a stronger pricing environment for Intermodal services.

        The Company’s Surface Transportation businesses remained focused on producing
continuous improvement through several key initiatives. In 2004, CSXT instituted a new
network operating plan called the ONE Plan, which defines CSXT’s scheduled train network and
is designed to improve service reliability and efficiency. CSXT is investing to ensure that
adequate resources are in place to achieve higher levels of plan execution. CXST acquired 100
additional locomotives and started implementing a new locomotive plan in late 2005.
Locomotive availability and reliability are critical to plan execution. CSXT also hired and
trained approximately 2,000 train and engine employees to keep pace with high attrition rates,
particularly conductors and engineers.

      Finally, a two-year program to expand capacity in key corridors commenced in 2005.
This expanded capacity will accommodate future growth, improve service reliability and
improve efficiency on the targeted corridors.

       Hurricane Katrina, which struck Gulf Coast in late August 2005, had a significant impact
on operations in the latter part of 2005. Approximately 100 miles of CSXT’s infrastructure was
destroyed by the storm, effectively severing CSXT’s route to and from the New Orleans
gateway. Service to local businesses on the Gulf Coast has been restored.



                                                                                             3
       CSXT’s continued efforts to reduce the frequency of personal injuries and train accidents
produced significant positive results in 2005.

(source: CSX 2005 10K)


        The U.S. railroads have trended away from cyclical performance and have shown
sustained growth. Major railroads are continuing to post strong earnings as a result of the
railroad industry’s pricing power. The confidence in the industry comes as the railroads prosper
from the surge in imports from Asia, which typically flow into the U.S. through ports and then
onto long-haul trains with lower rates than those charged by trucks. The increase in electric
production from coal burning units and the hype over alternative fuels have increased rail
shipments. Although shipment of home building supplies and automotive cargo has been on the
downswing, the railroads are maximizing revenues from increased coal and grain shipments,
including grain used to produce ethanol. These latter shipments are less vulnerable to economic
swings. Fuel surcharges had been implemented to counter rising fuel costs. In late January the
Surface Transportation Board ruled that railroad fuel surcharge practices were unacceptable. In
its decision, the STB prohibits the assessment of fuel surcharges based on a percentage
calculation of the base rate charged to freight railroad customers. The decision also prohibits
―double dipping‖—applying to the same traffic both a fuel surcharge and a rate increase based
on a cost index that includes a fuel component.

        CSX ended the 2005 year with eight consecutive quarters of revenue and operating
income growth. During 2006 capital spending increased 40 percent to $1.4 billion, with much of
the capital targeted for expansions to the transportation network. CSX booked a one-time gain in
2006 from Hurricane Katrina insurance recoveries. In 2006, the company’s earnings rose 10%,
exclusive of this gain.

       The industry is subject to a variety of risk factors: Competition, Employees and Labor
Union Relationships, Operations and Worforce Planning, Environmental Laws and Regulation,
Fuel Costs, Regulation and Legislation, Future Acts of Terrorism or War.




                                                                                                4
                                                IV Risks

Competition

        The Company experiences competition in the form of pricing, service, reliability, and
other factors from other transportation providers including railroads, and motor carriers that
operate similar routes across it service area, and to a less significant extent, barges, ships, and
pipelines. Transportation providers such as motor carriers and barges utilize public rights-of-
way that are built and maintained by governmental entities while CSXT and other railroads must
build and maintain rail networks using largely internal resources. The Company could be
negatively impacted if the scope and quality of these alternative methods of transportation
materially increase, or if legislation is passed providing materially greater opportunities for
motor carriers with respect to size or weight restrictions.

Employees and Labor Union Relationships

        CSXT considers relations with its unions and union employees generally to be good.
Most of CSXT's employees are represented by labor unions and are covered by collective
bargaining agreements. The bargaining agreements contain a moratorium clause that precludes
serving new bargaining demands until a certain date. Generally speaking, these agreements are
bargained nationally by the National Railway Labor Conference, so all bargaining on agreement
changes begins at the same time. The round of bargaining that started in 2000 was recently
concluded when agreements were reached with all of the unions. Most of the moratoriums
negotiated in the 2000 round have expired and in November 2004 the parties were free under the
collective bargaining agreements to serve new bargaining demands and start a new round of
national bargaining.

        The current status of 2004 negotiations is that CSXT and the other railroads participating
in national bargaining are in mediation with eight unions, are bargaining with four other unions
and have not started bargaining with one union. The railroads had asked the National Mediation
Board for a release from mediation with respect to seven of the eight unions in mediation, but
now have informed the National Mediation Board that they are voluntarily withdrawing that
request pending a decision in the lawsuit brought by the United Transportation Union which
challenges certain aspects of the railroads' bargaining demands. The outcome of the 2004 round
of negotiations is uncertain at this time.

        In the rail industry, negotiations have generally taken place over a number of years and
previously have not resulted in any extended work stoppages. The agreements reached in the
2000 round of bargaining will continue to remain in effect until new agreements are reached. The
parties are not permitted to either strike or lockout until the Railway Labor Act's lengthy
procedures (which include mediation, cooling-off periods, and the possibility of Presidential
intervention) are exhausted.




                                                                                                 5
Operations and Workforce Planning

       In an environment of continued high demand for rail services, CSXT has experienced
some network difficulties, including congestion and reduced velocity on its rail system. In
addition, changes in demographics, training requirements and the availability of qualified
personnel, could each have a negative impact on CSXT's ability to meet demand for rail service.

Environmental Laws and Regulation

       The Company's operations are subject to wide-ranging federal, state and local
environmental laws and regulations concerning, among other things, emissions to the air,
discharges to water, the handling, storage, transportation and disposal of waste and other
materials, and cleanup of hazardous material or petroleum releases.

        The Company generates and transports hazardous and non-hazardous waste and materials
in its current operations, and it has done so in its former operations. In certain circumstances,
environmental liability can extend to formerly owned or operated properties, leased properties
and properties owned by third parties or Company predecessors, as well as to properties
currently owned and used by the Company.

        Environmental liabilities have arisen and may also arise from claims asserted by adjacent
landowners or other third parties in toxic tort litigation. The Company has been and may be
subject to allegations or findings to the effect that it has violated, or is strictly liable under,
environmental laws or regulations, and such violations can result in the Company's incurring
fines, penalties or costs relating to the cleanup of environmental contamination.

         Although the Company believes it has appropriately recorded current and long-term
liabilities for known future environmental costs, it could incur significant costs as a result of any
of the foregoing, and may be required to incur significant expenses to investigate and remediate
known, unknown or future environmental contamination.

Fuel Costs

         Fuel prices and supply are influenced considerably by international political and
economic circumstances. Because of the fuel surcharge program and cost escalation clauses in
long-term contracts, which include a fuel element, a portion of the Company’s revenues varies
with the price of fuel. In 2004, CSX suspended entering into new swaps in its fuel hedge
program and fuel surcharges became the primary vehicle through which CSX manages fuel price
volatility.

        Despite the fuel surcharge program, the Company could be negatively impacted if a fuel
supply shortage were to arise, whether due to OPEC or other production restrictions, lower
refinery outputs, a disruption of oil imports or otherwise, and any subsequent price increases
could further increase the potential impact.




                                                                                                   6
Regulation and Legislation

        The Company is subject to various regulatory jurisdictions, including the Surface
Transportation Board (""STB'') of the United States Department of Transportation (""DOT''), the
Federal Railroad Administration of DOT and other state and federal regulatory agencies for a
variety of economic, health, safety, labor, environmental, tax, legal and other matters.
Legislation passed by Congress or regulations issued by these agencies can significantly affect
the revenues, costs and profitability of the Company's business.

Future Acts of Terrorism or War

        Terrorist attacks, such as those that occurred in the United States in September 2001, in
Spain in March 2004, or in England in July 2005, and any government response thereto or war
may adversely affect results of operations, financial condition and liquidity. The Company's rail
lines and physical plant may be direct targets or indirect casualties of acts of terror or war, which
could cause significant business interruption and result in increased costs and liabilities and
decreased revenues and have a material adverse effect on results of operations, financial
condition or liquidity. In addition, insurance premiums charged for some or all of the coverage
currently maintained by the Company could increase dramatically or the coverage may no longer
be available.




                                                                                                   7
                                         V Financials




CSX’s P/E ratio is lower than the Industry, Sector and S&P 500.




CSX has demonstrated they can produce higher profit margins. And with more than half of
CSX’s coal contracts, which are currently priced below the spot market, coming up for renewal
this year, repricing these contracts should support higher profit margins.




CSX’s Dividend Yields have historically been weak but were especially strong in 2006.




                                                                                           8
CSX has an aggressive capital spending plan to support infrastructure improvements. Their
expected 5 Yr. Growth Rate for EPS reflects favorable rail shipments in their region.




CSX’s Quick Ratio and Current Ratio is stronger than the Industry and reflects the company’s
ability to cover current liabilities.




CSX’s ROE has improved in the last year over its 5 Yr. Average and is expected to continue as a
result of CSX’s steady progress in such areas as on-time performance.




CSX has historically lagged the industry in efficiency metrics. Implementation of a work
management program is designed to improve this area of performance.


                                                                                             9
                                             VI Valuation

Two betas were calculated as an estimate of volatility compared to the market. The first
calculation (Exhibit F) looks at 3-year monthly adjusted returns of CSX to the S&P. The
calculation’s result is a beta of 1.33. The second calculation is from a levered position. The
calculation’s result is a beta of 0.85, which is close to the beta, 0.84, for the industry and 0.87 for
the sector from www.yahoo.finance.com.

                     Inputs
 Tax Rate                0.30
 BV Debt             5,093.00
 BV Equity           7,954.00
 Unlevered
 Beta                   0.59*
                     Output
 Levered Beta    0.854446693

The levered beta (* unlevered beta from Portfolio Committee) is more representative of the
volatility of CSX’s stock given its current debt ratio. The cost of equity for the firm was
estimated using the CAPM:

Ke      =       Rf     +        β(Rp)    =      4.79%        +      0.85(3%)       =            7.34%




                                                                                                    10
       To value the firm I used two valuation models, a Free Cashflows to Equity (FCFE) model
(Exhibit D) and 2-stage Dividend Discount model (Exhibit E). For both of these models I relied
heavily (65%) on Fundamental Estimates of Growth, moderately (30%) on Outside Prediction of
Growth, and minimally (5%) on Historical Growth Rates.           I chose the heavier weight on
fundamental growth because its flexibility for changes in asset and liability mix. The moderate
weight on outside prediction of growth reflects concern with analysts’ prediction of 16% growth
in a time of rising fuel and labor costs. And because CSX is implementing a new logistics
process to increase efficiency and reliability, I think its historical performance should not
influence future growth performance. In addition, the high growth period lasts for three years in
both models.

        The 2-stage Dividend Discount Model reflects a higher ROE of 12% during the high
growth period, and an ROE of 9.7 % during the stable growth period thereafter. The FCFE
model takes into account the increased capital expenditures the company is expecting to spend
on infrastructure during the next three years and associated higher depreciation expense. Other
assumptions created for the models was that the beta increased slightly during the stable growth
period to 0.87, the debt/equity ratio increased in the stable growth period, the retention ratio is
higher during the high growth period, and the company is expected to pay a higher interest rate
on borrowing during the high growth period because of higher default risk.

        From the 2-stage Dividend Discount Model, I determined an intrinsic value of $42.55 and
from the FCFE model I determined an intrinsic value of $44.34. The primary difference between
the dividend discount model and the free cashflows to equity model lies in the definition of
cashflows. The more common occurrence is for the value from the FCFE model to exceed the
value from the dividend discount model. In both instances, the valuation of CSX indicates that
the stock is undervalued.




                                                                                                11
                                      VII Stock Performance




For the last year, CSX has outperformed the other large railroads UNP, BNI, NSC, and the S&P.




CSX’s stock price has remained above its 300 day moving average for a considerable time.
CSX’s stock price appears to have significant support and demonstrates the capability for
attractive future returns. Accordingly, CSX should be included in the Mizzou Investment
Portfolio.



                                                                                           12
                                 VIII Analysts’ Expectations




I recommend buying 650 shares, which would put our position at 1.9% of the portfolio.

I recommend a stop loss of $32.50.

The risk to capital factor = (Current Share Price – Stop Loss Price)*(#of shares) / $IFM
                           = ($39.88-$32.50) * 650 shares / $1,259,789.51 = 0.38%, which falls
under our 1% guideline.

                                       IX Recent News

        The growth in overall transportation demand is expected to continue over the next 20
years, while the need to transport more and more imported products to the major population
center drives demand for freight rail services.
        CSX is well positioned to capitalize on this opportunity since its rail and intermodal
networks serve the densely-populated Northeast and rapidly growing Southeast. Train capacity is
being expanded from Chicago, the nation’s largest rail hub, to both New York and Florida.




                                                                                                 13
                              X Appendices

Exhibit A: Income Statement




                                             14
Exhibit B: Balance Sheet




                           15
16
Exhibit C: Statement of Cash Flows




                                     17
Exhibit D: Two-Stage FCFE Discount Model Output

                                          Two-Stage FCFE Discount Model

         This model is designed to value the equity in a firm, with two stages of growth, an initial
                   period of higher growth and a subsequent period of stable growth.
 Assumptions
 1. The firm is expected to grow at a higher growth rate in the first period.
 2. The growth rate will drop at the end of the first period to the stable growth rate.
 3. The free cashflow to equity is the correct measure of expected cashflows to stockholders.

 The user has to define the following inputs:
 1. Length of high growth period
 2. Expected growth rate in earnings during the high growth period.
 3. Capital Spending, Depreciation and Working Capital needs during the high growth period.
 4. Expected growth rate in earnings during the stable growth period.
 5. Inputs for the cost of equity.



                                                               Inputs to the model
 Current Earnings per share =                                      $2.22                   (in currency)
 Current Dividends per share =                                     $0.33                   (in currency)
 Current Capital Spending/sh =                                     $3.75                   (in currency)
 Current Depreciation / share =                                    $1.97                   (in currency)
 Current Revenues/ share =                                        $22.00
 Working Capital/ share =                                          $0.34                   (in currency)
 Chg. Working Capital/share =                                      $0.61

 Enter length of extraordinary growth period =                                                     3                (in years)

 Do you want to enter cost of equity directly?                                                    Yes              (Yes or No)
 If yes, enter the cost of equity =                                                              7.34%             (in percent)
 If no, enter the inputs to the cost of equity
 Beta of the stock =                                                0.85
 Riskfree rate=                                                    4.79%                    (in percent)
 Risk Premium=                                                     3.00%                    (in percent)

 Earnings Inputs
 Do you want to use the historical growth rate?                                                   Yes               (Yes or No)
 If yes, enter EPS from five years ago =                                                         $0.78             (in currency)

 Do you have an outside estimate of growth ?                                                       Yes             (Yes or No)
 If yes, enter the estimated growth:                                                             16.00%            (in percent)

 Do you want to calculate the growth rate from fundamentals?                                                           Yes         (Yes or No)
 If yes, enter the following inputs:
 Net Income Currently =                                            $1,145.00                                       (in currency)
 Interest Expense Currently =                                       $423.00          Last year                     (in currency)
 Book Value of Debt =                                              $5,093.00                           $6,248.00   (in currency)
 Book Value of Equity =                                            $7,954.00                           $6,811.00   (in currency)
 Tax Rate on Income=                                                 30.00%                                         (in percent)
 The following will be the inputs to the fundamental growth formulation:
 ROC =                                       11.04%        D/E =                                 64.03%            (in percent)
 Retention =                                 85.14%        Interest Rate=                         8.31%            (in percent)
 Do you want to change any of these inputs for the high growth period?                                                 Yes         (Yes or No)
 If yes, specify the values for these inputs (Please enter all variables)
 ROC =                                       11.32%        D/E =                                 60.00%            (in percent)
 Retention =                                 86.29%        Interest Rate=                         9.80%            (in percent)

 Specify weights to be assigned to each of these growth rates:
 Historical Growth Rate =                                                                         5.00%            (in percent)
 Outside Prediction of Growth =                                                                  30.00%            (in percent)
 Fundamental Estimate of Growth =                                                                65.00%            (in percent)

 Enter growth rate in stable growth period?                                                      3.00%             (in percent)




                                                                                                                                                 18
Beta
Will the beta to change in the stable period?                                      Yes         (Yes or No)
If yes, enter the beta for stable period =                                         0.87

Capital Spending, Depreciation & Working Capital
Do you want all these items to grow at the same rate as earnings ?                                 No         (Yes or No)
If not, enter the growth rates for each of the following items:
                                      Capital Spending          Depreciation     Revenues
High Growth                                  25%                   10%             16%         (in percent)
Stable Growth                            Do not enter           Do not enter        7%         (in percent)

Do you want to keep the current fraction of working capital to revenues?                            No        (Yes or No)
Specify working capital as a percent of revenues:                                   3%         (in percent)

Do you want to use the current debt ratio as your desired mix?                                    Yes         (Yes or No)
If no, enter the following inputs for financing mix,
Desired debt financing proportion - Capital Spending                                           (in percent)
Desired debt financing proportion - Working Capital                                            (in percent)

Capital spending and Depreciation during Stable Growth
Is capital spending to be offset by depreciation in stable period?                                 No         (Yes or No)
Do you want to compute your reinvestment rate from fundamentals?                                  Yes
Return on equity in stable growth period                                                          10%
If no, enter capital expenditures as % of depreciation in stable growth                                       (in percent)


                                                    Output from the program
Cost of Equity =                                                  7.34%

Proportion of Debt: Capital Spending (DR)=                                        37.50%
Proportion of Debt: Working Capital (DR)=                                         37.50%

Current Earnings per share=                                                       $2.22
(Capital Spending - Depreciation)*(1-DR)                                          $1.11
Change in Working Capital * (1-DR)                                                $0.38
Current FCFE                                                                      $0.73

Growth Rate in Earnings per share
                                                        Growth Rate               Weight
Historical Growth =                                             23.27%             5.00%
Outside Estimates =                                             16.00%            30.00%
Fundamental Growth =                                            12.08%            65.00%
Weighted Average                                               13.82%

Growth Rate in capital spending, depreciation and working capital
                                                            High Growth        Stable Growth
Growth rate in capital spending =                              25.00%           Do not enter
Growth rate in depreciation =                                  10.00%           Do not enter
Growth rate in revenues =                                      16.00%              7.00%

Working Capital as percent of revenues =                                          3.31%        (in percent)
The FCFE for the high growth phase are shown below (upto 6 years)
                                                               1                    2              3                         Terminal Year
Earnings                                                     $2.53                $2.88          $3.27                           $3.37
- (CapEx-Depreciation)*(1-DR)                                $1.58                $2.17          $2.94                           $0.99
-Chg. Working Capital*(1-DR)                                 $0.07                $0.08          $0.10                           $0.05
Free Cashflow to Equity                                      $0.88                $0.62          $0.24                           $2.33
          Present Value                                      $0.82                $0.54          $0.19

Growth Rate in Stable Phase =                                                      3.00%
FCFE in Stable Phase =                                                             $2.33
Cost of Equity in Stable Phase =                                                   7.40%
Price at the end of growth phase =                                                $52.92

Present Value of FCFE in high growth phase =                                                    $1.55
Present Value of Terminal Price =                                                               $42.79
Value of the stock =                                                                            $44.34


Estimating the value of growth
Value of assets in place =                                                         $9.81
Value of stable growth =                                                           $7.19
Value of extraordinary growth =                                                   $27.34
Value of the stock =                                                              $44.34




                                                                                                                                         19
Exhibit E: Two-Stage Dividend Discount Model Output
                          Two-Stage Dividend Discount Model

                  This model is designed to value the equity in a firm, with two stages of growth, an initial
                            period of higher growth and a subsequent period of stable growth.

 Assumptions
 1. The firm is expected to grow at a higher growth rate in the first period.
 2. The growth rate will drop at the end of the first period to the stable growth rate.
 3. The dividend payout ratio is consistent with the expected growth rate.

 The user has to define the following inputs:
 1. Length of high growth period
 2. Expected growth rate in earnings during the high growth period.
 3. Dividend payout ratio during the high growth period.
 4. Expected growth rate in earnings during the stable growth period.
 5. Expected payout ratio during the stable growth period.
 6. Current Earnings per share
 7. Inputs for the Cost of Equity

                                                            Inputs to the model
 Current Earnings per share =                           $2.22               (in currency)
 Current Dividends per share =                         $0.33                (in currency)

 Enter length of extraordinary growth period =                                    3            (in years)

 Do you want to enter cost of equity directly?                                  Yes           (Yes or No)
 If yes, enter the cost of equity =                                            7.34%          (in percent)
 If no, enter the inputs to the cost of equity
 Beta of the stock =                                    0.85
 Riskfree rate=                                        4.79%                 (in percent)
 Risk Premium=                                         3.00%                 (in percent)

 Do you want to use the historical growth rate?                                 Yes            (Yes or No)
 If yes, enter EPS from five years ago =                                       $0.78          (in currency)

 Do you have an outside estimate of growth ?                                     Yes          (Yes or No)
 If yes, enter the estimated growth:                                           16.00%         (in percent)

 Do you want to calculate the growth rate from fundamentals?                                      Yes         (Yes or No)
 If yes, enter the following inputs:
 Net Income Currently =                               $1,145.00         Last year             (in currency)
 Book Value of Equity =                               $7,954.00                   $6,811.00   (in currency)
 Tax Rate on Income=                                    30.00%                                 (in percent)
 The following will be the inputs to the fundamental growth formulation:
 ROE =                               8.38%            (in percent)
 Retention =                        85.14%            (in percent)
 Do you want to change any of these inputs for the high growth period?                                           Yes        (Yes or No)
 If yes, specify the values for these inputs (Please enter all variables)
 ROE =                              12.00%            (in percent)
 Retention =                        86.29%            (in percent)
 Do you want to change any of these inputs for the stable growth period?                                         Yes        (Yes or No)
 If yes, specify the values for these inputs
 ROE =                               9.70%            (in percent)


 Specify weights to be assigned to each of these growth rates:
 Historical Growth Rate =                                                      5.00%          (in percent)
 Outside Prediction of Growth =                                                30.00%         (in percent)
 Fundamental Estimate of Growth =                                              65.00%         (in percent)



                                                                                                                                          20
                                                     Output from the program
Cost of Equity =                                    7.34%

Current Earnings per share=                         $2.22

Growth Rate in Earnings per share
                                              Growth Rate              Weight
Historical Growth =                                 23.27%             5.00%
Outside Estimates =                                 16.00%             30.00%
Fundamental Growth =                                10.35%             65.00%
Weighted Average                                    12.69%

Payout Ratio for high growth phase=                                    13.71%

The dividends for the high growth phase are shown below (upto 10 years)
                                   1                2                     3
         Dividends              $0.34             $0.39                 $0.44

Growth Rate in Stable Phase =                                          3.00%
Payout Ratio in Stable Phase =                                         69.07%
Cost of Equity in Stable Phase =                                       7.40%
Price at the end of growth phase =                                     $51.37

Present Value of dividends in high growth phase =                                  $1.01
Present Value of Terminal Price =                                                  $41.54
Value of the stock =                                                               $42.55


Estimating the value of growth
Value of assets in place =                                             $4.46
Value of stable growth =                                               $3.27
Value of extraordinary growth =                                        $34.82
Value of the stock =                                                   $42.55


                              Growth Rate        Extraordinary                  Growth period    Value
                              : First phase        Growth                            0          $28.17
                                 2.69%             $24.62                            1          $30.31
                                 3.69%             $25.56                            2          $32.55
                                 4.69%             $26.52                            3          $34.91
                                 5.69%             $27.50                            4          $37.38
                                 6.69%             $28.50                            5          $39.98
                                 7.69%             $29.52                            6          $42.70
                                 8.69%             $30.56                            7          $45.56
                                 9.69%             $31.62                            8          $48.57
                                 10.69%            $32.69                            9          $51.72
                                 11.69%            $33.79                            10         $55.03
                                 12.69%            $34.91
                                 13.69%            $36.04
                                 14.69%            $37.20
                                 15.69%            $38.37
                                 16.69%            $39.57
                                 17.69%            $40.79
                                 18.69%            $42.02




                                                                                                         21
Exhibit F: Beta Calculation from three-year monthly adjusted returns
S&P Adj Close CSX Adj Close    S&P Return      CSX Return    Beta
      1391.97          37.02    -1.055572141    -1.594896332 1.326892
      1406.82          37.62    -2.184614529     2.562704471
      1438.24          36.68     1.405908482     6.845324789
        1418.3         34.33     1.261575148    -3.972027972
      1400.63          35.75     1.646660958     0.817822899
      1377.94          35.46      3.15080286     8.639705882
      1335.85          32.64     2.456627449     8.618968386
      1303.82          30.05     2.127426253    -0.066511473
      1276.66          30.07     0.508581326    -13.83954155
        1270.2          34.9     0.008660804     5.247285887
      1270.09          33.16    -3.091690129    -2.096250369
      1310.61          33.87     1.215566041      14.5417653
      1294.87          29.57     1.109584121     7.959109164
      1280.66          27.39     0.045309668     3.710715638
      1280.08          26.41     2.546683864     5.429141717
      1248.29          25.05     -0.09523962           4.375
      1249.48             24     3.518612108     6.477373558
      1207.01          22.54    -1.774074104    -1.442938347
      1228.81          22.87     0.694894004     5.830633966
      1220.33          21.61    -1.122202596    -3.354203936
      1234.18          22.36      3.59682036     6.781279847
      1191.33          20.94     -0.01426773     2.596766291
        1191.5         20.41      2.99520249     3.867684478
      1156.85          19.65    -2.010858977    -3.676470588
      1180.59           20.4    -1.911764706     0.840336134
        1203.6         20.23     1.890338365     3.584229391
      1181.27          19.53    -2.529044821    -0.255362615
      1211.92          19.58     3.245812816     5.099302201
      1173.82          18.63     3.859493895     4.780652418
        1130.2         17.78     1.401424752     9.888751545
      1114.58          16.18      0.93639064     5.133203379
      1104.24          15.39     0.228733253            1.25
      1101.72           15.2    -3.429052277    -4.522613065
      1140.84          15.92     1.798907806     3.713355049
      1120.68          15.35     1.208344622     3.089321692
        1107.3         14.89    -1.679082942     1.568894952
      1126.21          14.66




                                                                        22
Exhibit G: References

www.finance.yahoo.com
www.morningstar.com
www.moneycentral.msn.com
www.zacks.com
www.reuters.com
www.valueline.com
http://online.wsj.com.
www.csx.com
www.uprr.com
http://pages.stern.nyu.edu/~adamodar/




                                        23

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:13
posted:8/13/2011
language:English
pages:23