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For this homework, it has two parts, first part is do the excel, and then second part is after finish the excel then write paper. ( sample paper has attached) but you dont have to do the sample paper now, only do the excel first.

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SBUX 2019 Student = previous excel hw

Take Home winter 2019 = requirement for the work

Sample P&G writeup = sample writing paper.

Fin 332 – Take Home Project for Starbucks

The second assignment is a take home project. I will allow you to work in groups of two if you choose.  This is not required, meaning you may work alone as well.  Given this is a take home, I expect you to work as if this were an in-class exam in terms of copying and/or sharing of information.  You are NOT to work with others unless they are part of your 2-person team.  You will abide by Drexel’s honesty code.  If for ANY reason, I suspect sharing of information, all parties will receive a “0” on the exam or possibly fail the class. You will be reported to the Dean no questions asked. No project will be accepted unless you sign off on these terms.

If you delete any rows, change how I want the calculations to be constructed, change up the tabs, etc., you will lose ten points per change you make.  Unfortunately, I have had too much experience with students copying in various different ways and therefore need to be VERY STRICT on this.  In addition, you will be signing a full statement saying you have not in anyway shared or plagiarized information.

You have until Thursday, March7th at 11:59 pm to complete the exam.  If I receive your work after the required time, you will receive a “0” for your grade.  Late assignments WILL NOT be accepted.  I am happy to give guidance on the projectbut will not sit with you while you complete each part of the exam. Office hours will be held Tuesday, March 5th from 2:30-5:00 pm and Thursday March 7th from 8:00 – 9:50 AM, 12- 3:00 pm.  All work must be shown in excel (NO COPY AND PASTE VALUES unless part of forecasting) and all qualitative questions must be answered in a word document.  If you choose to work in a group of two, only one excel file and one word document should be sent, with the names of your group on the email itself and the documents.  Make sure you upload your work to the BBLearn icon in the week 9 folder as well as upload your word document to the turnitin icon in week 9.  DO NOT give any definitions in your qualitative analysis unless specifically asked.

 

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Our final objective is to take the information we analyzed in the first homework assignment and attempt to value Starbucks (SBUX)and determine if you shouldinvest in the stock today (3/7/19).  Use the excel template provided to assess any historical and forecasted data.Most of your quantitative information will come from your calculations but if you have downloaded anything, i.e. ERP, it must be sourced appropriately (screen shots are typically sufficient and should be copied directly into excel).  Forecasts, if they come from research, must also be sourced in footnotes and/or bibliography. Lack of sourcing results in point deductions (including 10K).

 

Quantitative Analysis(70 pts)

 

  • Fill in all highlighted items on all tabs starting with the historical data through the forecasted data (necessary items are highlighted in yellow and extra comments in blue).
    1. Historical Valuation & Forecast: I’d highly suggest starting with the historical part of this tab and the WACC historical values b/c they are based on actual data and do not require opinions. All historical ratios must be calculated using the data on the ROIC tab and all forecasted data should be hardcoded in (unless you are using trend analysis or another process and therefore should show your calculation in the appropriate cells).
      1. Income/ Balance Sheet/ CF Statement:Given
      2. Historical & Forecast: This tab has both the whole Company and some breakdown of revenues. You can calculate projected sales growth either by segment, by transaction/price or by license, company revenue& other.  If you simply do company/license/other, you must still have some overall breakdown by geography. This tab (with the exception of row 68 down) should all be % and ratios as noted.
    2. ROIC: Most values have been linked up to the Income Statement, Balance Sheet and Cash Flow Statement. Some things like the break-down of depreciation and amortization should be input based on the 10K. You must convert your forecast % to actual dollar values in this tab. Operating lease data is also there. Nothing hard coded in meaning everything must be linked back to the forecast tab.
    3. Data Given on Several Tabs: There’s no calculations needed on these tabs. It’s all historical information on SBUX, Industry, Peers, etc.
    4. WACC: Calculate the WACC based on market and book values. Source appropriately for this tab.  For all yellow highlights, you should either calculate a value or link to data. You may adjust things like the risk-free rate or beta according to your predictions and/or the industry numbers given. It’s your choice which WACC (meaning MV vs BV) to use in your DCF.
    5. Operating Lease: You have a sample of this calculation on the excel worksheet we used in the online class. Fill in necessary data and calculations. Either create a separate DCF or simply adjust the current DCF for operating leases as it is a more conservative way to value. Assume current year PV, debt, etc. applies both historically and forecasted for simplicity.
    6. DCF: Calculate all yellow highlights or link data up to your ROIC tab for values already calculated. Calculate a sensitivity analysis for your exit multiple, growth rate and WACC. The spread to EV/EBITDA, WACC, and growth should reflect the historical volatility of these numbers and/or your view of things going forward.
    7. Fill in all remaining values on the excel template and calculate your equity value. Based on this calculation, should you buy, sell or hold WEN stock.
    8. Extra credit: Create best, base and worst-case scenarios, calculating the overall expected value. You’ll need three DCF’s to complete this as extra credit only – it is not required. Once you’ve completed your base case, simply make copies for the other outcomes and then change your forecasts directly in the DCF. You have to change multiple variables, explain your changes and calculate an overall expected value to receive extra credit.

 

Qualitative Assessmentin a WORD document (30 pts)

  • Start your paper with a buy, sell or hold recommendation stating the level of valuation as compared to the current market price as of 3/7/19.Include both the current and forecasted growth strategy of SBUX and how these plans have been incorporated into your forecasts. This should incorporate both domestic, international & franchise plans. (approximately 1 page)
    1. You do NOT need to reiterate what you already wrote in your homework assignment
    2. How aggressive/conservative were you in your predictions and how did this impact your overall decision.

 

  • OUTLINE FORMAT: Explain the inputs into your DCF model. When I say “explain” I do not want a reiteration of the number or the formula but rather what determined the number in your analysis.   You must support your thought process and cannot just look at the history of the company and assume that will continue. Bullet points should be used. Do not write up a paper for this section.
  1. Revenue growth, gross and operating profit margin projections over the 2019-2023-time frame. Even if you read an analyst report you still need to explain what is behind their evaluation of SBUX growth.  Did you include the economy in your projections? Also include if your forecasts include things like restructuring and impairment costs.Include your assessment of segments, price, transaction, etc.
  2. Terminal growth rate, ROIC and Exit multiple, you used in the continuing value.
  3. Invested capital projections – include your assessment of NWC accounts (meaning what was behind your thoughts on how you came up with your forecasted values), PP&Eand intangible assets.
  4. WACC used and how you chose your inputs of Beta, Risk free rate, Risk premium, MV or BV.

 

Based upon our forecasts for P&G, we have placed a HOLD rating on the stock givenits current trading levels. Using the Exit Multiple, Key Driver, and FCF approaches we have projected a stock price for P&G in the $82 to $83 range indicating approximately a 5-6% drop in price from its current closing price of $87.25.

 

The most recent Q3 earnings call for PG did not meet our expectations. The company is still facing headwinds primarily due to foreign currency and competition. Sales in Q3 were slightly down (-1%) year-over-year, reflecting yet another quarter of negative revenue growth as P&G is restructuring its business to focus on key markets and sheds less profitable product categories. The divesture of 41 beauty brands to Coty Inc., which was completed in October 2016, negatively impacted overall revenue growth by 2 percentage points. However, the strongest negative contributor to revenue growth in the quarter was the Grooming segment, which presented a 6% drag on overall revenue growth due to unfavorable product mix (-4%) and challenging pricing (-2%). A bright spot was the Health Caresegment, which contributed 4% to net sales growth, driven by higher volumes. The results of Q3 are incorporated in our TTM, which has been a large determinant of our estimated sales growth for fiscal 2017.

As noted from PG’s CFO, a good year for PG is between 1-3% all-in sales growth and a great year 3-5% all-in sales growth. In terms of their current strategy, product innovation and repeat customers are key for PG’s developed markets especially the U.S. PG forecasted “organic sales growth for its U.S. market to be about 2% for the first half of FY 2017”[1]. Internationally, PG sees China as its biggest opportunity with their growth drivers set on “premiumization of our brands, digital execution, transforming our Go-To Market, and dedicated category- customer organization”[2].

 

In PG’s FY 2017 guidance, foreign currency is expected to be “2-3% drag on the company’s all-in sales growth resulting in their expectation for FY 2017 to be flat”[3].We feel foreign currency is going to continue to be a headwind for PG due to the outlook of rising U.S. interest rates driving the strength of the USD. Internationally, China has become a concern due to PG losing market share in the country “primarily driven to the Baby Category”[4]. Political unrest in Brazil and Venezuela along with trouble in economies that are dependent on oil makeus feel international sales growth will still be a challenge.Analyst research has reflected closer to 2-3% growth per year based on the full restructuring succeeding& emerging market pickup. We forecast PG can remain flat in ’17and adjusted down our future estimates due to foreign currency (as US interest rates are expected to continue to rise), softness internationally in sales, and industry /population growth trends. Our estimates are .40% in ‘17, 1.4% in ‘18, 1.9% in ‘19, 2.3% in ‘20, 2.7% in ‘21. (see segment for more detail)

 

Our sensitivity analysis most definitely had an impact on our investment decision, particularly when looking at WACC vs Growth. When WACC was above 6.5%,our decision would have changed from “Hold” to “Sell” in all growth cases. When WACC was 5.3% our decision would have changed from “Hold” to “Buy” in all growth cases. As we see more upside risk in WACC give current economic conditions, we stayed in the “Hold” camp unless the EV/EBITDA multiple dropped below 12.70 then we would have placed a “Sell” rating on PG.

 

The EV/EBITDA multiple we chose was13.2 implying a 2% growth rate. In comparison to Colgate-Palmolive which our speaker described as PG’s closest competitor, our 13.2 multiple is more conservative than Colgate’s multiple of 15.98. We feel 13.2 is a realistic assumption due to PG’s 5-year average being 13.21 and 13.2 being slightly in the middle between its median level EV/EBITDA multiple of 12.03 and it’s all time high of 14.28. This multiple also implied growth between 1.5-2% terminal growth which is in line with our assumptions.

 

 

Outline Format:

A.

  • Tax rate – We researched the historical tax rate and observed slight increases from 22% in 2011 to 25% in 2016. We feel tax reform by the Trump administration is ways away from becoming legislation due to political gridlock; therefore, we decided to keep the effective tax rate constant at 25% to keep the forecasting consistent with future years.
  • Sales Segment Growth– The sales segment growth was based off our trailing twelve month assessments. We forecast growth rates to remain the same in FY ‘17, for each segment to keep results slightly above flat. For the future years, we see Fabric generally increasing about a .5% to 1% due to increased market penetration of fabric enhancers and beads. We see health care continuing to excel at a nice pace with growth plateauing at 4.5% based in industry expectations. We see the bleeding in Grooming stop in FY ‘20 and return to growth as the product pipeline is strong, which is slightly pessimistic to analysts who view Grooming returning to growth in FY‘19. (Factset). We see Beauty marginally increasing each year plateauing at 2% in FY ‘19 due to stabilization from brand divestitures as part of the COTY deal. Beauty worldwide has been strong as evidenced by the international sales in this segment. We also see pricing power in this segment as the products remaining have stong brand loyalty and units sold are strong. Finally, for Baby, Feminine, & Family, we view this segment returning to growth in FY ’18 and plateauing at 2.5% in FY‘20; however, we are nowhere near as optimistic as analysts “2.71% in FY ‘18” due to concerns with China as we mentioned in the Baby Category.
  • Gross Margin and Operating Margin – PG went through large restructuring changes previously, but now that those changes appear to be finished (we adjusted past years to see actual margins wo these costs), we don’t predict more restructuring in their future. We also didn’t assume impairments as well. All other operating expenses we assumed in our forecasts.  However, PG has announced that they will be implementing a new “$10 billion productivity and supply chain program from 2017 to 2021”[5].  This new program is meant to streamline supply networks across the United States and create a more direct way to link PG to their customers. Because of this and analyst research, we see gross margins and operating margins increasing to 52.55% and 24.75% by FY ‘21. We aren’t nearly as optimistic due to foreign currency concerns driving up costs internationally and increased R&D spending incurred so the company can continue to innovate to improve sales growth. We forecast gross margins increasing .25%-.5% each year to 51.25% and Operating margins rising .2%-.5% to 24.2% by FY ‘21. We also see the higher margin healthcare and beauty division driving some of this growth now that the product line has been paired down.
  • Growth rate– We presumed a 2% long term growth rate for PG. Historically the U.S. economy has been growing at about 2-2.5% and we don’t see PG being able to outperform the U.S. economy. Also, PG reported weakness internationally as we mentioned earlier in our report; therefore, we are being moderately conservative with a 2% terminal growth rate. This also aligns with industry research as consumer staples will tend to grow with GDP are not very volatile to economic trends.
  • ROIC– Our terminal ROIC projection is 12.4%. We see NOPLAT rising slightly $400M each year offset $3 billion of increased capital needs; thus, causing ROIC to grind slowly up to 12.4%. This estimation is slightly higher than the PG’s 6 year average ROIC of 11.07%. still pretty conservative as the restructuring is showing signs of success thus returning the Company to higher ROI.
  • EV/EBITDA multiple– Our estimation for this multiple was 13.2. We determined this was by looking at the average EV/EBITDA ratios and its closest competitors. Terry from PG mentioned Colgate- Palmolive as a close competitor with a EV/EBITDA of 15.98; however, we feel this is too high because PG’s multiple has never reached 15.98 historically. We chose 13.2 because it’s a more appropriate near PG’s 5-year average of 13.21 and given the restructuring is almost complete, we feel this is in line with the future growth of the firm.
  • Operating Cash – For Operating cash as % of revenues we chose 5% because it closest to the industry standard of cash as percentage of revenues excluding PG. PG is a bit of an outlier with their cash being historically about 8.95% on a 5-year average.
  • Goodwill – We projected to be flat for the foreseeable future due to the fact their last major acquisition was Gillette in 2005.
  • Capex– We estimated capital expenditures to stay approximately 5%-6% of sales. Historically and as mentioned in PG’s FY ‘17presentation CAPEX is “expected between about 5%-5.5% of sales.”[6]
  • PP&E and NWC– We see PP&E ramping up from 31% in ‘17 to 35% in ‘21 as the firm continues to expand overseas. As the restructuring is stated to end next year, NWC needs will increase due to restructuring being over and the company needed new equipment as well for growth and as part of their planned supply chain overall.
  • Intangible Assets– We estimate intangibles to incrementally return to their historical average of 38.5% as NWC needs increase due to restructuring ending.
  • DSO-We estimate that our DSO ratio slightly increases in our forecasting years returning to average levels of 27 days in 2021. We attribute the prior years due to declining sales and divesting brands equating to less accounts receivable.
  • DIO– We forecast DIO increasing back to normal averages of 58 by 2021. We attribute the precipitous drop in inventory from 2014 to 2015 that stayed consistent in 2016 due to divesting businesses. We see inventory picking back for our future expected sales growth forecasts.
  • DPO-Our DPO ratio shows our accounts payable decreasing steadily to the 5-year average of 80 by 2021. FY 2016’s DPO of 100 days appears to be an outlier when looking at the company’s historical operating cycle. DPO was 100 days just once in 2016 out of the past 15 years of historical data. Much of this was due to their restructuring efforts and with the Company returning to more efficiency overall, this will improve DSO, DIO and DPO

Sources:

http://www.snl.com/interactive/newlookandfeel/4004124/CAGNY2017Handout.pdf

http://www.pginvestor.com/Cache/1001223393.PDF?O=PDF&T=&Y=&D=&FID=1001223393&iid=4004124

http://www.pginvestor.com/Cache/1001216941.PDF?O=PDF&T=&Y=&D=&FID=1001216941&iid=4004124

https://seekingalpha.com/article/4065580-procter-and-gamble-pg-q3-2017-results-earnings-call-transcript?page=1

http://www.pginvestor.com/Cache/1500090608.PDF?O=PDF&T=&Y=&D=&FID=1500090608&iid=4004124

[1] PG CAGNY 2017 Presentation

[2] PG 2016 Analyst Day Presentation

[3] PG Q3 2017 Earnings Presentation

[4] PG Q3 2017 Earnings Transcript

[5] PG 2016 Annual Report

[6] PG Q3 2017 Earnings Presentation

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