Valuation Project v03

7/24/2019 Valuation Project v03

1/15

Valuation Project

Team:

Salomon Cojab

Patrick Fong

Kevin Jin

Deeprendra Mookim

Gurpreet Singh

Companies:

Grupo Bimbo - Buy

EMC - Buy

WABSell

Spark Networks - Buy

Monster - Buy


2/15

Grupo Bimbo, S.A.B. de C.V. (BMV: BIMBO A)

1. Company Overview

Bimbo is a baked goods and packaged food company with the bulk of its operations in its home

country, Mexico, and in the US. The company also operates in the rest of Latin America and in

Spain, with both of those totaling about 15% of revenues. Bimbo is one of the largest Mexicancompanies and has begun expanding in the $408Bn global baked goods market. Their growth has

come from both geographic expansion as well as through acquisitionsshowcased by their

acquisition of Canadian snack cake company Saputo, Inc. Other recognizable brands under their

umbrella include Arnold bread, Sarah Lee, and Entenmanns.

2. DCF Valuation

For our Bimbo DCF valuation, we used the two-stage FCFF model since the company is large and

has stable cash flow. Although it is not a young high-growth firm, the large potential for Bimbos

expansion drove a high growth rate estimate for the next six years. Although it may be unlikely that

they expand their European operations, the Latin American market provides huge upside given itsrelatively small sales given the size of the region. Furthermore, Latin Americans tend to have some

similar tastes, so it is a natural expansion option.

Bimbos expansionary goals are reflected in their reinvestment rate for the next six years. The

acquisition of a Canadian company, a market which is as of now untested, shows that the company

wishes to grow aggressively in the near-term. This, combined with their acquisition of Ecuadors

Supn, has helped Bimbos net profit rise from 429.8Mn Pesos to 906.8Mn Pes os year-on-year for

the first quarter. Bimbos positive momentum and growth prospects led us to a DCF value of 56.20

Pesos per share, compared to the share price of 41.96 Pesos as of May 11th, 2015.

3. Relative Valuation

Multiples Approach

Length of High Growth Period = 6 Forever

Growth Rate = 17.04% 3.88%

Debt Ratio used in Cost of Capital Calculation 57.56% 30.00%

Beta used for stock = 0.95 0.80

Peso Riskfree rate = 3.88% 3.88%

Risk Premium = 7.07% 7.07%

Cost of Debt = 6.13% 5.50%

Effective Tax rate (for cash flow) = 19.28% 30.00%

Marginal tax rate (for cost of debt) = 30.00% 30.00%

Return on Capital = 14.20% 12.20%

Reinvestment Rate = 120.00% 31.81%


3/15

Our comparable company analysis used 92 firms in the packaged foods sector, screened with Capital

IQ. We picked EV/EBITDA as our multiple for comparison because of the importance of sales and

gross margin in the sector. The median comparable company trades at 13.7 EV/EBITDA, while

Bimbo has a multiple of 11.8. Using the median EV/EBITDA, the enterprise value for Bimbo is

308,353.85 Pesos, yielding an equity value of 245,032.00 Pesos, or 52.10 Pesos/share, or 24.16%

higher than the current stock price of 41.60 Pesos.

Regression Approach

After trying multiple combinations of variables, the three that produced the highest significance andR-squared when regressed on EV/EBITDA were the effective tax rate, Capital IQs predictedforward P/E (NTM), and Price to Boov Value. The regression results were as follows:

Therefore, the regression valuation for Bimbo was as follows:

EV/EBITDA= 1.300.1617 (41.1) + 0.7767 (31.6) +0.232 (3.6) = 20.02.

Given this EV/EBITDA, the implied share price for Bimbo is 82.48 Pesos, or 96.56% above thecurrent trading stock price of 41.60 Pesos.

4. Market Regression

The emerging market regression equation for EV/EBITDA is:

EV/EBITDA = 23.44 + 6.27(0.1703)10.29(0.2499)16.82(0.4111) = 15.02

This implies a stock price of $58.51 Pesos, 40.64% above the current stock price.

5. Final Analysis

Model Summary

S R-sq R-sq(adj) R-sq(pred)

8.56184 57.11% 55.52% 39.60%

Coefficients

Term Coef SE Coef T-Value P-Value VIF

Constant 1.30 2.78 0.47 0.642

Effective Tax Rate (%) -0.1617 0.0682 -2.37 0.020 1.03

Forward P/E - Capital IQ 0.7767 0.0838 9.27 0.000 1.15

Price to BV 0.232 0.240 0.97 0.336 1.15

Regression Equation

EV/EBITDA = 1.30 - 0.1617 Effective Tax Rate [LTM] (%)

+ 0.7767 Forward P/E - Capital IQ [NTM] + 0.232 Price to BV


4/15

Bimbos global growth prospects and strong ROC drive our conclusion that its undervalued. Given

the results of each type of valuation we ran, we see recommend a buy on the firm. Their entry into

the Canadian market as well as into other regions of Latin America shows promise and, given their

successful track record with acquisitions, we believe that Bimbo will continue to grow into a global

giant in the baked and package goods sector. For the next six years, we recommend watching the

reinvestment rate as it will be significant driver of growth in the near and medium term. Beyond an

intrinsic value, we see Bimbo as a relative bargain to its peers and the overall market, so we

recommend a buy on Bimbo.

Valuation Type Result % Undervalued

Bimbo Actual 41.60 -

DCF 56.20 35%

Median EV/EBITDA 52.10 25%

Regression 82.48 98%

Market Regression 58.51 41%


5/15

EMC Corporation (NYSE: EMC)

1.

Company Overview

EMC is an American multinational corporation headquartered in Hopkinton, Massachusetts, United

States. EMC offers data storage, information security, virtualization, analytics, cloud computing and

other products and services that enable businesses to store, manage, protect, and analyze data.EMC's target markets include large companies and small- and medium-sized businesses across

various vertical markets.

2. DCF Valuation

We used a two stage FCFF discount model for EMC given that EMCsa relatively large company

growing at a moderate pace and is expected to mature as the cloud, virtualization, and flash trends

reach saturation. Thus, we expect growth to decline in the future as new flash and cloud players

enter the market. Nevertheless, we believe that EMC is positioned to grow with the overall market

(GDP growth after 5 years of high growth) and sustain a competitive advantage over time (strong

ROC versus WACC).

The key inputs that drive the DCF are the growth rates and the return on capital. We expect EMC

to grow with the overall economy after 5 years of strong grow as it is well positioned for new trends

in cloud computing and virtualization. Both of these markets are growing faster than GDP and we

expect EMC to grow share. Moreover, we expect ROC to continue forward at historical rates, given

Base Year

Current EBIT $4,228.00

BV of Debt $5,495.00

BV of Equity $22,004.00

Net Cap Ex $1,573.60

Change in NWC ($943.00)

Length of High Growth Period = 5 Forever

Growth Rate = 8.09% 2.25%

Debt Ratio used in Cost o f Capital 11.97% 9.51%

Beta used for stock = 1.06 1.00

Riskfree rate = 2.25% 2.25%

Risk Premium = 6.56% 6.56%

Cost of Debt = 3.25% 3.25%

Effective Tax rate (for cas h flow) = 22.80% 35.00%

Marginal tax rate (for cost of debt) 35.00% 35.00%

Return on Capital = 15.74% 15.74%

Reinvestment Rate = 51.39% 14.30%

Cost of Captial 8.36% 8.17%


6/15

the stickiness of the product and the large scale advantages it has over new entrants. Its incredibly

hard for new entrants to win significant share in the IT industrydata storage is mission critical and

IT employees are reluctant to change something that is working even if new entrants tout arguably

better applications.

Plugging these numbers into the model, we get an enterprise value of $54,583, which implies a

market value of $27.32 per share after making adjustments including net cash, options, and minority

interest. This compares to a closing price of 26.93.

Sensitivity Analysis:

3.

Relative Valuation

71 Companies were used as comparable companies. We regressed based on EV/EBITDA ratios,which generated the strongest R-Squared, with est. 2-year annual revenue growth and debt/total

capital as independent variables. We also looked at effective tax rate, but the variable was not close

to being significant and we ultimately took it off the regression. Our regression led to a 25.8% R-

Squared. Based on our regression, we imply a base price of $45.24 per share. The 95% range implies

a stock price of $20.89 at the lower 95% end and $69.60 at the upper 95% end.


Stable Growth Rate

$27.32 1.00% 1.50% 2% 2.50% 3%

7% $26.96 $29.23 $31.95 $35.28 $39.43

Cost 7.50% $25.05 $26.97 $29.24 $31.96 $35.29

of Capital 8% $23.41 $25.06 $26.98 $29.25 $31.97

Stable Phase 8.50% $21.99 $23.42 $25.07 $26.99 $29.26

9% $20.74 $21.99 $23.43 $25.07 $27.00

Regression Statistics

Multiple R 0.508213

R Square 0.258281

Adjusted R Square 0.236465

Standard Error 9.944816

Observations 71

Coefficients Standard Error t Stat P-value

Intercept 14.5236136 2.278910241 6.373052 1.87407E-08

Est. Annual Revenue Growth - 2 Yr % - Capital IQ [Latest] (%) 56.9115027 15.0473068 3.782172 0.0003305

Debt/Total Capital -20.7186067 11.44199576 -1.81075 0.074596891

Base Low er 95% Multiple Upper 95% Multiple

Enterprise Value $87,701.7 $40,394.9 $135,008.5

Cash 13,472.0 13,472.0 13,472.0

Debt 5,495.0 5,495.0 5,495.0

Minority Interest 7,384.0 7,384.0 7,384.0

Options Value 426.7 426.7 426.7

Equity Value $87,868.0 $40,561.2 $135,174.9

Shares Outstanding 1,942.1 1,942.1 1,942.1

Share Price $45.24 $20.89 $69.60


7/15

According to Professor Damodarans market regression:

EV/EBITDA= 19.09 + 9.59 g - 5.00 DFR - 16.67 Tax Rate

Based on EMC, this implies a market multiple of 15.3x EV/EBITDA. Adjusting enterprise value

down to equity value, we get a value of $44.55 per share. This number is incredibly close to our base

relative valuation in part 3.

5. Final Analysis - Buy

Based on our DCF valuation, we believe that the market is appropriately valuing the company at $27

a share. When we sensitize our growth and cost of capital assumptions, we get an implied value of

between $20.74 and $39.43.

Looking at our relative valuation, if we are playing the pricing game, we think there is an asymmetric

risk reward profile in terms of what the company should trade at given its comparable firms and

given overall market valuations. Both the market regression and our relative regression imply a

valuation of about $45 a share.

With high-flying tech valuations especially in the software space, we remain weary in playing the

pricing game but we think that the game will last for the foreseeable future. Thus, we feel

comfortable putting a buy recommendation on EMC.

Price ROI

Current Price $26.9

DCF Base $27.3 1.4%

DCF Low $20.7 (23.0%)

DCF High $39.4 46.4%

Relative EV/EBITDA $45.2 68.0%

Market EV/EBITDA $44.6 65.4%


8/15

Westinghouse Air Brake Technologies (NYSE:WAB)

6. Company Overview

Wabtec is a U.S.-based multinational firm, headquartered in Wilmerding, PA. Wabtec is one of the

worlds largest equipment and services providers for the global rail industry.Wabtec has two main

business segments, freight and transit. The freight segment, which manufactures and services partsfor locomotives and freight car, composes 57% of sales, with 75% of freight sales in North America.

The firm holds 50% market share in North America for its primary breaking-related equipment. The

transit segment, which manufactures and services parts for passenger transit vehicles, such as

subways, composes 43% of sales, with 45% of those sales in North America. Wabtec is a relatively

large and stable firm and it seeks to grow internationally and through acquisitions.

7. DCF Valuation

We used a two stage FCFF discount model for WAB because it is a large firm in a relatively stable

industry. Wabtec has a higher growth rate recently due to a large backlog, which we assumed was

already factored into the reported financials, so the backlog was not valued separately. We believethat growth will decline over time as the backlog depletes, since Wabtec does not have any large

sustainable competitive advantages. The calculated reinvestment rate is also abnormally high (101%)

using the LTM numbers due to a recent acquisition, so a number more in line with its historical

reinvestment rate over the last three years was used.

The two drivers for WAB are years in high growth and return on capital. We used 5 years of high

growth to reflect the $2.32 billion in sales backlog as well as growth from recent acquisitions, but we

do not expect these factors to create a sustained high return on capital. Thus, we cannot use 10 years

of high growth because the firm is large and mature and we cannot use 0 years of high growth

because of the backlog and acquisitions. The base case return on capital is the imputed one. Thebear case return on capital is based on the industry average and the bull case return on capital is

based on the top 10thpercentile return on capital among comparable firms. We believe the imputed

return on capital during the high growth phase is most appropriate. Even in the most bullish of

scenarios in the sensitivity analysis, our estimated value is still below the current market price (as of

May 8, 2015).


9/15

8.

Relative Valuation

Multiples Approach

27 firms were used in the comparable firm analysis. The chosen companies were primarily U.S.-

based firms in the railroad, railroad equipment, or road transportation of freight industry. Firms

were also screened by a minimum market cap of $100 million. A best subsets regression with

EV/EBITDA as the dependent variable and estimated 2-year revenue growth, debt/capital,

effective tax rate, and return on capital yielded the following model:

This regression fits an EV/EBITDA multiple of 11.43 for WAB, which yields a standardized

residual of 2.28 relative to its actual EV/EBITDA of 15.80 (CapIQ). In both residual plots, WAB isin the top-right. The 11.43 EV/EBITDA multiple implies a stock price of $70.64.

9.

Market Regression

The market regression equation for EV/EBITDA is:

EV/EBITDA = 19.09 + 9.59 (.0934)5.00(.0499)16.67(.3085) = 14.25

This implies a stock price of $88.78.


10/15

10.Final Analysis

Wabtec is a large, stable firm in a mature industry that has recently been growing through

acquisitions. Its high backlog will provide a short period of high growth, but the firm does not have

sustainable competitive advantages that should generate a high excess return in perpetuity. Even

relative to its market peers and according to the market regression, the firm is overvalued. Using all

of our methods, we generate an implied value less than the current price. Accordingly, we

recommend a sell on WAB.


11/15

Spark Networks (NYSE:LOV)

1. Company Overview

Spark Networks operates dating websites and mobile applications. Membership on the companysonline singles sites is free, and registered users can post personal profiles and use the search and

validation features. The company generates revenues from monthly subscription fees that allow paidusers to initiate communication with other members. Jewish Networks, primarily JDate.com, makesup 38% of sales and Christian Networks, primarily ChristianMingle.com, makes up 58% of sales.The remainder of sales is generated from smaller properties like BlackSingles.com.

Spark Networks satisfied the money losing criteria at the time of selection. However, the company achieved TTMprofitability based off recently reported quarterly financials.

2. DCF Valuation

Key Assumptions

Sales Growth Rate 3.00% Cost of Equity 7.85%Current Operating Margin 6.20% Cost of Debt 1.66%Target Operating Margin 15.00% Initial Cost of Capital 7.66%Sales to Capital Ratio 3.30 Terminal Cost of Capital 6.65%

Rationale

The FCFF model implies 25% upside from LOVs stock price as of May 8, 2015. Spark Networksreports direct marketing expenses per segment; this expense represents a higher percentage of salesfor the Christian Networks segment since the company was previously investing heavily to establishChristianMingle.com in the online dating space. As a result, Jewish Networks make up 59% of TTMrevenues less direct marketing expenses, while Christian Networks constitute 35%. The currentoperating margins are depressed due to the prior management teams undisciplined execution ofChristianMingle growth and inadequate investment in the highly profitable JDate platform. Activistfund Osmium Partners has successfully replaced the Board and management team, with the newCEO taking the helm in January 2015. The 15% target operating margin is conservative relative topeers; IAC/InterActives Match segment, which also operates dating sites, runs at a 27% operatingmargin.


Multiples Approach

31 companies were used in the comparable company analysis. The firms selected were primarily

consumer-facing Internet stocks with similar user acquisition economics, business model features, ornetwork effects. The multiple that produced the highest R-squared was the EV/Sales metric. Themedian EV/Sales multiple implies a stock price of $3.76 (18% upside), and the average multipleimplies a price of $5.76 (81% upside).

Regression Approach

The regression that produced the highest R-squared with statistically significant independentvariables follows:


12/15

EV/Sales = -0.49 + 6.76 NTM Revenue Growth + 13.77 NTM EBITDA Margin

Based off LOVs estimated NTM revenue growth of -3.47% and estimated NTM EBITDA marginof 16.95%, the regression equation yields an EV/Sales multiple of 1.61. This implies a stock price of

$4.32 and upside of 36%.


The market regression equation for EV/Sales is:

EV/Sales = 1.17 + 1.40 g + 6.35 Operating Margin + 5.26 DFR - 0.10 Tax rate

Based off a g of -4.72%, operating margin of 10.70%, DFR of 0%, and a tax rate of 25%, theEV/Sales is 1.76. This estimate implies a stock price of $4.67 and 47% upside.

5. Final Analysis

PriceEstimate

ImpliedROI

Current Price 3.18 -

DCF Model 3.96 25%

Median EV/Sales 3.76 18%

Average EV/Sales 5.76 81%

Comps EV/Sales Regression 4.32 36%Market EV/Sales Regression 4.67 47%

Spark Networks represents a compelling turnaround story with strong core franchises in the form ofJDate and ChristianMingle. Having translated the qualitative story into the valuation, the stockappears undervalued by the market based off the various valuation methodologies used. As a result,I recommend a buy on LOV.

Regression Statist ics

Multiple R 0.798364432

R Square 0.637385767

Adjusted R Square 0.61148475

Standard Error 1.493200254

Observations 31

ANOVA

df SS MS F Significance F

Regression 2 109.7366393 54.86831965 24.60852308 6.7956E-07

Residual 28 62.430116 2.229647

Total 30 172.1667553

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%

Intercept -0.489961815 0.472388514 -1.037200949 0.308516993 -1.45760582 0.477682191 -1.45760582 0.477682191

NTM Revenue Growth 6.755052545 1.493269804 4.523665133 0.000101872 3.696228015 9.813877076 3.696228015 9.813877076

NTM EBITDA Margin 13.76813792 2.260812894 6.08990596 1.43736E-06 9.13707264 18.3992032 9.13707264 18.3992032


13/15

Monster Beverage Corporation (NYSE: MNST)

1. Company Overview

Monster Beverage Company is a public soft drink, natural juices, and energy drink companyheadquartered in Corona, California and makes up approximately 35% of the energy drink market.

The company began in the 1930s under the Hansen Natural Sodas name. In 1988 the companydeclared bankruptcy and was acquired by the California CoPackers Corporation, and thus thecompany was rebranded as Hansen Natural Corporation. On January 5, 2012, the firm changed itsname once again to Monster Beverage Corporation. The company currently has little to no presenceoversees and looks to expand internationally. On August 14, 2014 Coca Cola announced that itwould acquire a 16.7% stake in Monster Beverage Corporation for $2.15 billion.

Monster Beverage Corporation satisfies the high growth criteria given its stock price has more than doubled over thepast year and has seen its EPS increase by over 40% over the past year.

2. DCF Valuation

For our DCF model, the key inputs driving share price and Enterprise Value are projected growthrates and return on capital. For this reason, the narrative behind Monster and its potential as a highgrowth company in the near future are of the most importance. Monster has announced a desire toexpand oversees, and can be expected to follow behind competitor Red Bull. Red Bull, a privatecompany, has recently expanded to Asia. The recent merger with Coca Cola hands the distributionof Monster products over to Coca Cola. Thus, we assume that Monster will both increase the size ofthe market for energy drinks, especially the market that exists for US based corporations. We canalso assume that Monsters foothold in the industry will increase dramatically with its recentpartnership with Coca Cola. We believe that Monster is positioned to make another strong leap overthis next year and sustain a competitive advantage.

We assume that Monster Beverage Corporation will experience a high growth period for 7 years,

through 2018. Expansion to Asia offers tremendous upside for the global soft drinks industry as awhole. Soft drink consumption in Asia has growth from 18% 10 years ago to 30% today. Also,Asias per capita consumption is still only half of the international average, pointing to even strongerfuture potential. We see Monster experiencing growth rates above 30% through 2018, at whichpoint Monster will have established a global presence and continue growing at a lesser pace till about2021, thus having stable cash flows by 2022.The FCFF model used implies a share price of $149.48and a16% upside from MNSTs stock price as of May 9, 2015.


14/15


Multiples Approach

18 corporations were used in our comparable company analysis. Firms were selected to matchMonster Beverage Corporation as closely as possible. The companies used in the valuation were

public companies, specifically in the Soft Drinks industry, located either in the United States,Canada, European developed markets, or Asia developed markets. When comparing multiples, theEV/EBITDA metric produced a high R-squared. The median EV/EBITDA multiple of the compset implies a stock price of $65.11, and the average multiple implies a price of $103.02. It isimportant to note that Monsters EV/EBITDA is the second largest in the comp set and also thatRed Bull, their largest competitor, is not public and was not included in the comp set. MNSTcurrently trades at $128.47.

Regression Approach

A best subsets regression with EV/EBITDA showed that it would be best to control for estimatedannual revenue growth. The regression that produced the highest R-squared, solving for

EV/EBITDA, with statistically significant independent variables follows:EV/EBITDA = 4.52 + 2.204 Est. Revenue Growth - 2

Based off of MNSTs estimated annual revenue growth of 15.7%, the regression equation results inan EV/EBITDA multiple of 37.1228. This implies a stock price of $184.58, showing upside of 44%.

4.

Market Regression


15/15

The market regression equation for EV/EBITDA is:

EV/EBITDA = 19.09 + 9.59 g - 5.00 DFR - 16.67 Tax Rate

Based off a g of 15.7% (received from Cap IQ), DFR of 0%, and a tax rate of 35.2%, theEV/EBITDA is 14.73. This estimate implies a stock price of $74.54 and significant downside.

5.

Final Analysis

PriceEstimate

ImpliedROI

Current Price 128.47 -

DCF Model 149.48 16%

Median EV/EBITDA 65.11 -49%

Average EV/EBITDA 103.02 -20%

Comps EV/EBITDA Regression 184.58 44%

Market EV/EBITDA Regression 74.54 -42%

Monster Beverage Corporation presents an interesting case in regards to a recommendation. Havingtranslated the current narrative into the DCF, MNST appears to be a buy and appears to beundervalued by the market. The same can be said when taking a regression analysis usingEV/EBITDA and controlling for revenue growth.

However, as mentioned before the comp set used does not take into consideration Red Bull, a majorcompetitor, and also has MNST having the second largest EV/EBITDA ratio. The Median andAverage for EV/EBITDA in the comp set says that MNST is actually overvalued, as does themarket regression.

However, all three of these valuation methodologies ignore what we find as a compelling storydriving the DCF. Moreover, our comps regression implies that Monster Beverage Corporation ischeap. As a result, we recommend a buy on MNST.

Valuation Project v03

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