Post on 15-Dec-2015
What Does SLE Do?
• Food– Meats to large intermediaries such as supermarkets,
and foodservice distributors.– Bakery to large intermediaries and directly to
consumers.– Beverage retail and foodservice sales of coffee and
tea.
• Household Products: body care, hair care, shoe care, and insecticides. Sold to retail channels.
• Intimates and Underwear: Sold to retail channels.
SalesOperating Segment
Income
2003 2002 2003 2002
Sara Lee Meats 3,746 3,704 375 323
Sara Lee Bakery 3,276 2,976 98 97
Beverage 2,756 2,539 429 416
Household Products 2,118 1,962 369 339
Intimates and Underwear 6,399 6,455 763 596
Total business segments 18,295 17,636 2,034 1,771
Intersegment sales (4) (8) — —
Total sales and operating segment income 18,291 17,628 2,034 1,771
Amortization of intangibles — — (104) (77)
General corporate expenses — — (248) (301)
Total net sales and operating income 18,291 17,628 1,682 1,393
Net interest expense — — (198) (208)
Net sales and income before income taxes 18,291 17,628 1,484 1,185
I Will Read the Table Footnotes!(Straight from the 2003 10k.)
• Intangible amortization increased from $77 million in 2002 to $104 million in 2003 primarily as a result of a full year of amortization on intangibles acquired after the start of 2002, the acceleration of amortization on certain trademarks determined to have a shorter useful life and the impact of changes in foreign currency exchange rates.– This tells you what about the firm?
• General corporate expenses declined primarily as a result of lower minority interest expense, reduced spending on business process reengineering efforts and reduced costs of performance-based bonus plans.– This tells you what about the firm?
Relative Contribution by Division
Operating Income/Sales
before Depreciation
Fraction of Operating
Income
2003 2002 2003 2002
Sara Lee Meats 0.10 0.09 0.18 0.18
Sara Lee Bakery 0.03 0.03 0.05 0.05
Beverage 0.16 0.16 0.21 0.23
Household Products 0.17 0.17 0.18 0.19
Intimates and Underwear 0.12 0.09 0.38 0.34
Total business segments 0.11 0.10 1.00 1.00
Items to Note
• Bakery– Horrible all around. Earns very little per dollar sold, and
contributes almost nothing to the firm’s profits.
• Meats– Thin margins, but the division makes up for this in overall sales.
• Beverage and Household Products– Both divisions seem healthy under all measures
• Underwear– Margins are thin compared to beverage and household products.
– More than makes up for thin margins via sales and is by far the
biggest contributor to the firm’s profits.
Some Initial Conclusions
• There is no indication that any one division is going to do much better or worse than it has done in the past.
• Absent some indication from management that major changes are afoot it seems likely that the past SLE numbers will be fairly reflective of the future SLE numbers.– One caveat, given the bad news in the
footnotes, we might even expect to see some deterioration in the future numbers.
What Management Says
• ... net sales for the fourth quarter of fiscal 2004, ending July 3, 2004, were $5.1 billion, up 11% compared to $4.6 billion in the prior year’s fourth quarter.
• Diluted earnings per share (EPS) were $.44 for the fourth quarter, an increase of 19% compared to $.37 for last year’s fourth quarter.
• For fiscal 2004, sales were $19.6 billion, up 7% over fiscal 2003.
• Diluted EPS for the full year were $1.59, compared to $1.50 in fiscal 2003, an increase of 6%.
Sara Lee press release 8/5/2004.
Press Release and Conference Call
• The company cut long term EPS growth guidance to 5-8% from 8-10%.
• For FY04 EPS was $1.59 for a 53 week year. Equivalent to a EPS of 1.56 for a 52 week year.
• For FY05 indicated EPS would range from $1.61-1.71.– Implied growth of 1% to 9.6%.– Current inflation rate 3.3%.
• Unless earnings growth comes in at the high end of management’s projections:– Meeting management’s long term growth projection will require
substantially improved EPS growth in the intermediate future.– Need to make up for anemic near term growth.
Firm’s Current Plans(from conference call)
• Reduce costs– Closing plants.– Cutting breadth of the product line.
• In FY 2001 sold Coach Leather Products.– Since Coach was sold its stock has risen 535% since
10/2000. – Wilshire 5000 in the same period is down 22%.
• Undo the Above?– Adding trendy diet products (my
interpretation).
SLE Costs(More from the Conference Call)
• Cotton and other commodity costs are up.• Haynes underwear brand is under a lot of
price pressure.– Management will try to boost sales via
increased advertising.– At the very least apparel profits seem unlikely
to improve.
• SLE corporate tax rate is up and the firm projects that it will continue to rise.
Lesson
• Conference calls are important!
• You can find them on company web pages.
• Listen to them.
Lesson from the Coach Sale
• When Coach is let loose from SLE it produces profits well above market expectations.– Implies profitability was held back by having
SLE run Coach.– Certainly does not lead to confidence in SLE
management.
Conclusions for Projections
• Firm seems to be fairly stagnant. Overall, not showing any particular areas of accelerating growth or collapse.
• Absent evidence to the contrary I will assume past results are indicative of future results.
• Until recently management was using free cash flow to buy down debt, and may continue to do so in the future. (From conference call.) I am going to assume the dollar amount of debt will remains constant going forward.
Income Statement
52 Wks 52 Wks 52 Wks 52 Wks 53 Wks
1-Jul-00 30-Jun-01 29-Jun-02 28-Jun-03 3-Jul-04
Net Sales 16,454 16,632 17,628 18,291 19,566
Total Revenue 16,454 16,632 17,628 18,291 19,566
Cost of Sales 10,124 10,417 10,829 11,052 12,017
Cost of Sales/Exit 0 26 -7 0 NA
SG&A. 4,587 4,597 5,236 5,568 5,897
Sale/Coach 0 -967 0 0 NA
Sale of Business 0 528 177 -11 48
Contingent Sale Proceeds NA NA NA 0 -119
Int. Expense 252 270 304 276 271
Int. Inc. -76 -90 -96 -78 -90
Product Recall 0 0 NA NA NA
Restruct. Chrg. 0 NA NA NA NA
Total Operating Expense 14,887 14,781 16,443 16,807 18,024
Net Income Before Taxes 1,567 1,851 1,185 1,484 1,542
Provision for Income Taxes 409 248 175 263 270
Net Income After Taxes 1,158.00 1,603.00 1,010.00 1,221 1,272
Net Income Before Extra. Items 1,158 1,603 1,010 1,221 1,272
Discont. Ops. 64 663 0 0 NA
Accounting Change 0 NA NA NA NA
Net Income 1,222 2,266 1,010 1,221 1,272
Income Statement
3-Jul-99 1-Jul-00 30-Jun-01 29-Jun-02 28-Jun-03
Cash & Equiv. 279 314 548 298 942
Rcvbl., Gross 1,804 1,959 1,695 2,007 2,109
Doubtful Account -193 -195 -157 -176 -181
Finished Goods 1,602 1,941 1,715 1,619 1,810
Work in Process 470 529 454 411 405
Materials/Suppl. 463 481 413 479 489
Other 294 382 321 341 378
Business Sale 315 563 94 7 1
Total Current Assets 5,034 5,974 5,083 4,986 5,953
Balance Sheet
Other 326 465 264 192 284
Land 94 99 98 176 202
Build./Improv. 1,613 1,745 1,646 1,744 1,915
Mach./Equip. 2,756 3,188 2,891 4,299 4,917
Const. In Prog. 260 330 266 320 291
Depreciation -2,699 -3,043 -2,755 -3,384 -3,975
Trademarks 1,022 1,095 1,145 2,106 2,110
Goodwill 1,886 1,758 1,529 3,314 3,387
Total Assets 10,292 11,611 10,167 13,753 15,084
Balance Sheet
Notes Payable 1,116 2,054 101 468 75
Accounts Payable 1,645 1,762 1,505 1,321 1,286
Payroll/Benefits 779 928 812 1,147 1,195
Advertising 386 421 343 469 501
Other Taxes 89 104 84 102 112
Accrued Taxes 45 55 423 122 11
Other 1,320 1,054 1,210 1,100 1,015
Cur.Port.LT Debt 336 381 480 734 1,004
Total Current Liabilities 5,716 6,759 4,958 5,463 5,199
Long Term Debt 1,892 2,248 2,640 4,357 5,157
Total Long Term Debt 1,892 2,248 2,640 4,357 5,157
Balance Sheet
Deferred Tax 71 148 244 534 200
Pension Oblig. NA NA 38 220 1,178
Other Liabs. 701 581 525 787 901
Minority Int. 613 616 625 632 358
Total Liabilities 8,993 10,352 9,030 11,993 12,993
Balance Sheet
Pref. Stock 0 NA NA NA NA
ESOP Convertible 265 252 238 226 221
Deferred Comp. -232 -227 -223 -208 -182
Common Stock 9 8 8 8 8
Paid In Capital 508 0 0 59 1
Retained Erngs. 1,760 2,393 2,635 3,168 3,787
Comp. Income -1,006 -1,146 -1,521 -1,470 -1,734
Unearned Stock NA NA NA -23 -10
Restricted Stock -5 -21 0 NA NA
Ttl. Equity 1,299 1,259 1,137 1,760 2,091
Ttl. Liabilities & Shareholders' Equity 10,292 11,611 10,167 13,753 15,084
S/O-Common Stock 883.8 846.3 782 784.7 777.3
Ttl. Com. Shares Out. 883.8 846.3 782 784.7 777.3
Employees 138,000 154,000 141,500 154,900 145,800
# of Com. Shareholders 83,300 82,600 78,400 74,500 95,078
Balance Sheet
53 Wks 52 Wks 52 Wks 52 Wks 52 Wks
3-Jul-99 1-Jul-00 30-Jun-01 29-Jun-02 28-Jun-03
Net Income 1,131 1,158 1,603 1,010 1,221
Depreciation 352 402 392 471 532
Amort. Intang. 181 200 207 111 142
Sale/Coach NA NA -967 0 0
Sale of Business -137 0 554 101 -16
Product Recall 76 0 0 NA NA
Restruct. Charge 0 0 NA NA NA
Cash Flow Statement
53 Wks 52 Wks 52 Wks 52 Wks 52 Wks
3-Jul-99 1-Jul-00 30-Jun-01 29-Jun-02 28-Jun-03
Deferred Inc. Tax 29 48 88 21 -48
Non-$ Charges -35 -38 -62 7 40
Accounts Rec. -21 -116 42 93 86
Inventories 112 -152 25 304 -22
Current Assets -60 -47 -11 7 -10
Accounts Pay. -50 -56 -133 -417 -131
Accrued Liabil. -29 57 -218 27 30
Discont. Ops. 54 84 -24 0 0
$ from Operating Activities 1,603 1,540 1,496 1,735 1,824
Cash Flow Statement
53 Wks 52 Wks 52 Wks 52 Wks 52 Wks
3-Jul-99 1-Jul-00 30-Jun-01 29-Jun-02 28-Jun-03
Cap. Ex. -535 -647 -532 -669 -746
Acq. of Business -234 -743 -300 -1,930 -10
Disposition of Bus. 412 21 1,819 23 0
Sale of Property 158 64 65 113 81
Other, Net 7 9 13 -12 1
$ from Investing Activities -192 -1,296 1,065 -2,475 -674
Cash Flow Statement
Preferred Stock, Net 0 NA NA NA NA
Iss. Common Stock 111 84 104 109 98
Purch. Common Stock -1,279 -1,032 -643 -138 -305
Rdmpt. of Preferred NA NA 0 0 -250
Iss. Equity Sec. 50 0 NA NA NA
Borrowings LT Debt 20 725 1,023 1,362 1,773
Repay. LT Debt -284 -502 -390 -503 -995
ST Borrowings 451 1,022 -1,914 124 -395
Dividend Paid -464 -485 -486 -484 -497
$ from Financing Activ. -1,395 -188 -2,306 470 -571
FX Effects -10 -21 -21 20 65
Net Change in Cash 6 35 234 -250 644
Cash Interest Paid 242 249 251 293 302
Cash Taxes Paid 321 245 259 266 265
Net $ - Beg. Balance 273 279 314 548 298
Net $ - Ending Balance 279 314 548 298 942
Cash Flow Statement
Sara Lee Free Cash Flow ModelIncome Statement
• EBIT– Information found on the Income Statement– Net Sales – Cost of Sales – SG&A – Sale of
Business• Sale of Business is “optional.” Depends on if you
think this is a very unusual item.– My view, put it in at first. If it really is “unusual” that will
show up in the FCF figure and you can undo it later.
• Tax Rate I = 1- Net Income After Taxes/Net Income Before Taxes.
SLE FCF Model
52 Wks 52 Wks 52 Wks 52 Wks 53 Wks
1-Jul-00 30-Jun-01 29-Jun-02 28-Jun-03 3-Jul-04
EBIT 1,743.00 2,057.00 1,386.00 1,682.00 1,604.00
Cash Flow Statement
• EBITDA– EBIT + Depreciation + Amortization.– Find these on the cash flow statement.
• Net Capital Expenditures– Property Plant and Equipment (PP&E) + Sale of
Property (Assets).• Can leave out Sale of Property if you do not think they are
asset sales.
• Change in Working Capital– ΔWC = Accounts Receivable + Accounts Payable +
Inventories.
SLE FCF Model
52 Wks 52 Wks 52 Wks 52 Wks 53 Wks
1-Jul-00 30-Jun-01 29-Jun-02 28-Jun-03 3-Jul-04
EBIT 1,743 2,057 1,386 1,682 1,604
EBITDA 2,276 2,659 1,985 2,264 2,278
NetCapEx -377 -583 -467 -556 -665
ΔWC 41 -324 -66 -20 -67
Balance Sheet
• Total Debt– Total Debt + Current Portion of Long Term Debt + Notes
Payable• Current Portion of Long Term Debt represents long term debt
instruments due in one year or less.• Notes Payable represents short term debt.
– Some people do not include Notes Payable. If you do drop them then you need to drop the interest paid on them as well.
• Debt Interest Rate = Cash Interest Paid/Total Debt– Cash Interest Paid from the Cash Flow Statement– Debt is reported year end. Want average outstanding debt.
Average year end with year end.• Example: Average debt for SLE year end 30-Jun-01 equals:
– (Total Debt from year end 1-Jul-00 + Total Debt from year end 30-Jun-01)/2
– which is (3,344+4683)/2.
SLE FCF Model
52 Wks 52 Wks 52 Wks 52 Wks 53 Wks
1-Jul-00 30-Jun-01 29-Jun-02 28-Jun-03 3-Jul-04
EBIT 1,743 2,057 1,386 1,682 1,604
EBITDA 2,276 2,659 1,985 2,264 2,278
NetCapEx -377 -583 -467 -556 -665
ΔWC 41 -324 -66 -20 -67
Cash Int. 242 249 251 293 302
Total Debt 3,344 4,683 3,221 5,559 6,236
% Rate 7.24% 6.20% 6.35% 6.67% 5.12%
Items from Multiple Statements
• Free Cash Flow Before Taxes = EBITDA + Net Cap. Ex. + ΔWC – Cash Interest Paid.
• Free Cash Flow = EBITDA + Net Cap. Ex. + ΔWC – Cash Taxes Paid – Cash Interest Paid
• Cash Interest Paid from the Cash Flow Statement.
• Tax Rate II = Cash Taxes Paid/FCF Before Taxes.
SLE FCF Model52 Wks 52 Wks 52 Wks 52 Wks 53 Wks
1-Jul-00 30-Jun-01 29-Jun-02 28-Jun-03 3-Jul-04
EBIT 1,743 2,057 1,386 1,682 1,604
EBITDA 2,276 2,659 1,985 2,264 2,278
NetCapEx -377 -583 -467 -556 -665
ΔWC 41 -324 -66 -20 -67
Cash Int. 242 249 251 293 302
Total Debt 3,344 4,683 3,221 5,559 6,236
% Rate 7.24% 6.20% 6.35% 6.67% 5.12%
Cash Tax 321 245 259 266 265
Tax Rate I 26.10% 13.40% 14.77% 17.72% 17.51%
Avg. TR I 17.90%
FCF 1,377 1,258 942 1,129 979
SLE FCF Model52 Wks 52 Wks 52 Wks 52 Wks 53 Wks
1-Jul-00 30-Jun-01 29-Jun-02 28-Jun-03 3-Jul-04
EBITDA 2,276 2,659 1,985 2,264 2,278
NetCapEx -377 -583 -467 -556 -665
ΔWC 41 -324 -66 -20 -67
Cash Int. 242 249 251 293 302
Cash Tax 321 245 259 266 265
Tax Rate I 26.10% 13.40% 14.77% 17.72% 17.51%
Avg. TR I 17.90%
FCF BT 1165 901 602 813 570
FCF 1,377 1,258 942 1,129 979
Tax Rate II 27.55% 27.19% 43.02% 32.72% 46.49%
Avg. TR II 35.40%
Stock Pricing
• All Equity FCF = FCF – Tax Rate×Cash Interest Paid.
52 Wks 52 Wks 52 Wks 52 Wks 53 Wks
1-Jul-00 30-Jun-01 29-Jun-02 28-Jun-03 3-Jul-04
FCF 1,377 1,258 942 1,129 979
All Equity FCF TR I 1,313 1,224 904 1,077 926
All Equity FCF TR II 1,291 1,169 853 1,025 872
Note: TR I uses TR as calculated for the year. TR II uses the average tax rate calculated over five years (35.40%).
Some Finance at Last!
• What is rE?– Yahoo has the equity beta listed as .35. That is just not
believable.– Consumer products may be less volatile than the market, but not
by much.– Very low and very high betas are more likely than not due to
measurement error.– Running regression of rSLE-rf = α+β(rm-rf) over the last five years
yields an even lower estimate of .03!– Time to give up and use 1.– Assuming rf = 2.1% per annum (as reported on the St. Louis
Federal Reserve web page), and the market risk premium equals its historical average of 8% this yields rE of 10.1%.
WACC• Debt-Equity Ratio
– Get total equity value from CRSP.– Get total debt from earlier calculation.
1-Jul-00 30-Jun-01 29-Jun-02 28-Jun-03 3-Jul-04
Total Debt 3,344 4,683 3,221 5,559 6,236
Equity Mkt. Cap 16,342 14,810 16,196 14,621 18,169
D/E 0.205 0.316 0.199 0.380 0.343
• Debt increasing at about 10% per year.
• D/E increasing modestly.
• SLE has been buying other companies.
• Tax rate: Will use both TR I and TR II averages and see what happens.
WACC Continued• Using WACC formula year by year:
1-Jul-00 30-Jun-01 29-Jun-02 28-Jun-03 3-Jul-04
Total Debt 3,344 4,683 3,221 5,559 6,236
Equity Mkt. Cap 16,342 14,810 16,196 14,621 18,169
D/E 0.205 0.316 0.199 0.380 0.343
% Rate 7.24% 6.20% 6.35% 6.67% 5.12%
WACC TR I 9.29% 8.96% 9.32% 8.83% 8.60%
WACC TR II 9.18% 8.64% 9.11% 8.51% 8.36%
• Declining somewhat. Mostly from lower debt rates.• Lack of trend, plus increasing D/E implies a WACC of
8.60% or 8.36%. Both are probably too low. Try them for now.
Stock Value Using WACC
• Set growth rate to 1%.– Seems too high given earlier discussion.– Using All Equity FCF from TR I of 927.– PV = 926/(.0860-.01) = 12,187.– Total shares outstanding = 790.– Price per share = 12,194/790 = $15.42– With TR II: PV = 872/(.0836-.01) = 11,841.– Price per share = $14.98.– Current share price (8/23) = 21.96.
Stock Value Using APV
• PV AEFCF with 1% growth:– 926/(.101-.01) = 10,177.
• Debt Tax Shield With TR I– Debt payments have been growing slowly.– Start with 305 and no additional growth.– DTS = 305×.1790/.0512 = 1,066.
• Enterprise Value = 10,177 + 1,066 = 11,243.• Equity = 11,243 – 6,236 = 5,007.• Stock Price = 5,007/790 = $6.34
APV with TR II
• Enough already!
• Use TR II as an exercise for your own use.
• I get a price per share of $6.90.
Modifying the APV Model
• Perhaps the debt tax shield is too low.
• Debt has been growing.– Can expect tax shield to grow too.
• Assume debt tax shield grows at 1% per year. Same as the firm’s FCF.
• DTS = 305×.1790/(.0512-.01) = 1,324
• Stock Price = $6.66
APV with Even Faster Debt Growth?
• Debt cannot grow faster than the firm forever.– If it does eventually the firm will be all debt financed
and the debt will be forced to grow at the same rate as the firm.
• Alternative is to grow the debt at a faster rate than the firm for X years and then drop it down.
• If this happens will the debt discount rate remain the same?– Unlikely. Need to adjust that to account for the lower
quality debt.– In the end realistic scenarios are unlikely to greatly
modify SLE’s value by enough to bring the model’s value up to the current stock price.
Lesson
• If your model says the stock price is too high.– And your model already has assumptions that
you believe overstate the firm’s value.– Quit working and declare victory!
• Converse holds if your model says the stock price is too low.– If you believe the assumptions already
understate the firm’s value, quit modeling!
Things to Do
• Robustness checks.– Assumed a measly 1% growth rate. What if
management is right and growth comes in at 8%?
– Assumed a beta of 1 when discounting. What if you assume a somewhat lower value like .8?
• Is there really good evidence it should be .8, or 1 or even 1.2?