Price Target $74.09 Price (08/07/2013) $61.11 52-WK ($) 47.71-67.85 Market Cap ($M) $34,000 Outstanding Shares 556 Insider % 7.0 Revenue $30,750 Valuation TEV ($M) $50,590 EBITDA ($M) $7,480 EV/EBITDA 6.8x Forward P/E 10.6x Debt Management Long Term Debt/Equity N/A Total Debt/T12M EBITDA 2.4 Net Debt/EBIT 3.1 Total Debt/Capital 140.3 Profitability Return on Equity (ttm) N/A Return on Assets (ttm) 15.8% Return on Invested Capital 23.8% Du Pont Analysis Asset Turnover 1.5 Tax Burden 0.7 Interest Burden 0.9 Leverage Ratio -5.0 Liquidity Indicators Cash Ratio 0.3 Current Ratio 1.0 Quick Ratio 0.8 CFO/Avg. Current Liab 1.1 CFO/Capex 1.7 Margins TEV Margin (mrq) 164.5% Gross Margin 47.4% Operating Margin 15.7% EBITDA Margin 24.3% Profit Margin 8.6% Growth - 5 year (%) Revenue 11.5 EBITDA 12.8 Net Income to DIRECTV 15.2 Earnings Per Share 30.5 Free Cash Flow 18.8 Company Overview The DIRECTV Group, Inc. is the world's leading provider of digital television entertainment services. It markets satellite-based Pay-TV services through two geographic business segments. Through its subsidiaries and affiliated companies in the United States, Brazil, Mexico and other countries in Latin America, DIRECTV provides digital television service to 20.11 million customers in the United States and 10.91 million customers in Latin America. DIRECTV reported revenues of $7.7 billion in the second quarter of 2013. DIRECTV is composed of two main operating units - DIRECTV U.S., and Latin America, as well as DIRECTV Regional Sports Networks. DIRECTV U.S. is the largest direct-to-home (DTH) provider and the second largest Pay TV provider in the United States. As of March 31, 2013, DIRECTV U.S. had average monthly revenue per subscriber (ARPU) of $96.05. DIRECTV Latin America is a leading provider of DTH in Latin America. The business segment consists of PanAmericana, which provides services in Venezuela, Argentina, Chile, Colombia, Puerto Rico and certain other countries. It has a 93% owned subsidiary in Sky Brazil and a 41% stake (equity method investment) in Sky Mexico. Investment Thesis We issue a Buy recommendation on DIRECTV with a price target of $74.09. The target price represents approximately 6.8x the 2014E EBITDA and is an 1
average of the discounted cash flow and residual income analyses. While there are concerns in the medium-term regarding the U.S. pay TV industry, the company s solid free cash flow generation in the U.S. business, the scope of growth in Latin American business and the management s willingness to repurchase company shares leads us to a positive outlook. Integration of recent Results Revenue growth in the 3Q13 and 4Q13 estimated to 6.2% and 5.9% y-o-y. This shows the beginning of the trend in a possible consolidation of the cable TV industry. EPS increases to $5.04 from $4.58 (base case) and picks up slowly as the company tries to cope with its current challenges in Brazil and the volatile FX rates. Industry trends and competitive landscape The U.S. Pay TV industry consists of many regional and national providers that deploy various forms of technology. As of 2012, the top 5 providers, by subscriber count, accounted for approximately 63.5% of all Pay TV subscribers in the U.S. Exhibit 1: Top 5 Pay TV providers in the U.S. 2012 Subscribers Comcast 21,995 DIRECTV 20,084 DISH 14,056 Time Warner Cable 12,218 Verizon FiOS 4,726 Total Pay TV 73,079 U.S. Households Pay TV penetration (Subscribers in 000s) Source: Company filings 115,033 63.5% The industry as a whole has undergone significant change in recent years and can be characterized by primarily by declining growth rates and markets share shifts among competitors. Since 2007, the U.S. pay industry had been terribly affected by the macroeconomic factors. The collapse of the subprime market coupled with depressed employment rates and weakened housing markets stunted the growth of the industry. In addition, the number of subscribers being added is growing at a decreasing rate. In 2012, the U.S. pay TV industry added only 91,000 subscribers (versus 332,000+ in 2011), ending the year with approx. 99.8 million subscribers. ) 2
Exhibit 2: U.S. Pay TV market Net Subscriber Additions 1 Risks - The U.S. Pay TV industry growth could be negatively affected by the emergence of a more disruptive technology/business plan. - A merger between AT&T and DISH could cost DIRECTV one of its largest reselling partners. - Competition, economic and political instability in Latin America could negatively affect growth prospects. - Increase in volatility in the FX rates. Competitive Analysis Standing as one of the industry leaders, DTV managed to beat the industry average in sales growth than its competitors with a corresponding high EBITDA growth rate. This can highlight management s ability to reduce costs. ROIC and ROA are the best in the industry. Name Mkt Cap (USD) Sales Growth (%) EBITDA Growth (%) EBITDA Margin Capex/Sales (%) ROIC ROA ROE Average $35,608.1 5.5 (0.4) 29.5 12.0 11.9 4.7 (13.1) DIRECTV 33,713.8 7.6 6.9 25.1 11.3 23.8 14.1 N.A. COMCAST CORP 118,868.9 7.7 8.1 32.4 9.1 6.5 4.3 14.1 CABLEVISION SYSTEMS 5,237.5 (0.1) (24.7) 24.4 16.0 N.A. 3.2 N.A. DISH NETWORK CORP 20,560.0 (1.2) (17.5) 20.0 6.7 10.8 3.3 N.A. TIME WARNER CABLE 33,465.1 7.0 4.4 36.1 14.5 6.5 4.4 31.3 CHARTER COMMUNICATION 13,567.6 4.6 0.9 34.8 23.3 N.A. (1.6) (110.8) Source: Bloomberg 1 Company filings 3
DIRECTV has a low EBITDA multiple and a low P/E ratio which makes it an appealing investment. In addition, DTV has one of the lowest Enterprise Value per subscribers. Name EV EV/TTM EBITDA P/E P/FCF EV /Subscriber Average $51,647.1 10.2x 24.7x 28.8x $4,658.9 DIRECTV 50,708.8 6.6x 12.4x 17.2x 2,532.8 COMCAST CORP 161,611.9 7.8x 21.3x 16.7x 7,421.6 CABLEVISION SYSTEMS 14,536.2 9.3x N.A. 8.9x 5,068.4 DISH NETWORK CORP 25,249.3 8.9x 21.2x 27.6x 1,791.7 TIME WARNER CABLE 56,663.1 7.2x 20.1x 15.3x 4,757.2 CHARTER COMMUNICATION 26,318.6 10.0x N.A. 92.1x 6,381.8 Source: Bloomberg Looking at the past performance of DTV with its competitors, DTV has performed fairly well except for the last year. Name 1 Yr Total Return (%) 5 Yr Annualized Total Return (%) Rev - 1 Yr Gr:Y EPS - 1 Yr Gr:Y Average 46.3 17.9 7.0 55.9 DIRECTV 22.4 17.5 9.2 32.4 COMCAST CORP 34.6 18.5 12.1 53.6 CABLEVISION SYSTEMS 31.2 6.7 0.1 (84.9) DISH NETWORK CORP 52.6 13.0 1.6 (58.5) TIME WARNER CABLE 34.8 29.4 8.7 38.8 CHARTER COMMUNICATION 67.7 N.A. 4.2 10.0 Source: Bloomberg 4
Valuation Using the management s guidance, the base case is created with the below mentioned projections. The best and weak cases are projected with a 5% change in revenue growth with a consequent 2% change in the COGS margin and Operating expenses margin. The tax rate is kept at a constant of 34% from 2014. Guidance is used where ever possible and straight lined when no information is available. In addition, for the supporting schedules of various balance sheet items, the assumptions are mentioned below. ASSUMPTIONS SHEET DIRECTV Base case Current case: Base case Operating assumptions 2013E 2014E 2015E 2016E 2017E Revenue growth 6.5% 6.4% 6.3% 6.3% 6.3% COGS margin 52.6% 53.7% 53.7% 53.7% 53.7% Operating expenses margin 31.7% 30.2% 30.2% 30.2% 30.2% Tax rate 36.2% 34.0% 34.0% 34.0% 34.0% Working capital assumptions AR as % of sales 8.4% 8.2% 8.2% 8.2% 8.2% Inventory as % of COGS 2.0% 2.0% 2.0% 2.0% 2.0% AP as % of COGS 8.0% 7.8% 7.8% 7.8% 7.8% Fixed asset assumptions Capital expenditures as % of revenue 5.7% 6.0% 6.0% 6.0% 6.0% Depreciation / Capital expenditures ratio 151.1% 153.4% 153.4% 153.4% 153.4% Capital structure assumptions Dividend payout ratio 0.0% 0.0% 0.0% 0.0% 0.0% Minimum cash desired 2,000.0 2,000.0 2,000.0 2,000.0 2,000.0 Debt assumptions Interest rate 5.0% 5.0% 5.0% 5.0% 5.0% Cash assumptions Interest rate 1.0% 1.0% 1.0% 1.0% 1.0% 5
Best case Operating assumptions 2013E 2014E 2015E 2016E 2017E Revenue growth 11.5% 11.4% 11.3% 11.3% 11.3% COGS margin 48.6% 49.7% 49.7% 49.7% 49.7% Operating expenses margin 29.7% 28.2% 28.2% 28.2% 28.2% Tax rate 36.2% 34.0% 34.0% 34.0% 34.0% Working capital assumptions AR as % of sales 8.4% 8.2% 8.2% 8.2% 8.2% Inventory as % of COGS 2.0% 2.0% 2.0% 2.0% 2.0% AP as % of COGS 8.0% 7.8% 7.8% 7.8% 7.8% Fixed asset assumptions Capital expenditures as % of revenue 5.7% 6.0% 6.0% 6.0% 6.0% Depreciation / Capital expenditures ratio 151.1% 153.4% 153.4% 153.4% 153.4% Capital structure assumptions Dividend payout ratio 0.0% 0.0% 0.0% 0.0% 0.0% Minimum cash desired 2,000.0 2,000.0 2,000.0 2,000.0 2,000.0 Debt assumptions Interest rate 5.0% 5.0% 5.0% 5.0% 5.0% Cash assumptions Interest rate 1.0% 1.0% 1.0% 1.0% 1.0% 6
Weak case Operating assumptions 2013E 2014E 2015E 2016E 2017E Revenue growth 4.5% 4.4% 4.3% 4.3% 4.3% COGS margin 54.6% 55.7% 55.7% 55.7% 55.7% Operating expenses margin 33.7% 32.2% 32.2% 32.2% 32.2% Tax rate 36.2% 34.0% 34.0% 34.0% 34.0% Working capital assumptions AR as % of sales 8.4% 8.2% 8.2% 8.2% 8.2% Inventory as % of COGS 2.0% 2.0% 2.0% 2.0% 2.0% AP as % of COGS 8.0% 7.8% 7.8% 7.8% 7.8% Fixed asset assumptions Capital expenditures as % of revenue 5.7% 6.0% 6.0% 6.0% 6.0% Depreciation / Capital expenditures ratio 151.1% 153.4% 153.4% 153.4% 153.4% Capital structure assumptions Dividend payout ratio 0.0% 0.0% 0.0% 0.0% 0.0% Minimum cash desired 2,000.0 2,000.0 2,000.0 2,000.0 2,000.0 Debt assumptions Interest rate 5.0% 5.0% 5.0% 5.0% 5.0% Cash assumptions Interest rate 1.0% 1.0% 1.0% 1.0% 1.0% 7
FINANCIAL STATEMENT MODEL DIRECTV Base case Quarterly Financial Data Income Statement (Year end: Dec 31) Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec ($ in millions except EPS) 1Q11A 2Q11A 3Q11A 4Q11A 1Q12A 2Q12A 3Q12A 4Q12A 1Q13A 2Q13A 3Q13E 4Q13E Revenues $6,319.0 $6,600.0 $6,844.0 $7,463.0 $7,046.0 $7,224.0 $7,416.0 $8,054.0 $7,580.0 $7,700.0 $7,873.5 $8,526.1 Cost of Revenues (3,136.0) (3,255.0) (3,525.0) (4,039.0) (3,567.0) (3,627.0) (3,957.0) (4,428.0) (3,843.0) (3,926.0) (4,207.0) (4,732.0) Gross Profit $3,183.0 $3,345.0 $3,319.0 $3,424.0 $3,479.0 $3,597.0 $3,459.0 $3,626.0 $3,737.0 $3,774.0 $3,666.4 $3,794.1 Operating Expenses (2,028.0) (2,115.0) (2,289.0) (2,210.0) (2,171.0) (2,186.0) (2,391.0) (2,328.0) (2,329.0) (2,424.0) (2,589.6) (2,541.1) Operating Income (EBIT) $1,155.0 $1,230.0 $1,030.0 $1,214.0 $1,308.0 $1,411.0 $1,068.0 $1,298.0 $1,408.0 $1,350.0 $1,076.9 $1,253.0 Interest (Expense) ($172.0) ($203.0) ($194.0) ($194.0) ($204.0) ($214.0) ($204.0) ($220.0) ($217.0) ($219.0) ($219.0) ($219.0) Net Non-Operating (Losses) 49.0 79.0 (29.0) 19.0 53.0 (56.0) 56.0 146.0 (106.0) (56.0) (56.0) (56.0) Pretax Income $1,032.0 $1,106.0 $807.0 $1,039.0 $1,157.0 $1,141.0 $920.0 $1,224.0 $1,085.0 $1,075.0 $898.0 $1,075.3 Income Tax (Expense) (349.0) (397.0) (286.0) (316.0) (416.0) (425.0) (348.0) (276.0) (387.0) (414.0) (336.6) (396.8) Tax rate 33.8% 35.9% 35.4% 30.4% 36.0% 37.2% 37.8% 22.5% 35.7% 38.5% 37.5% 36.9% Net Income $683.0 $709.0 $521.0 $723.0 $741.0 $716.0 $572.0 $948.0 $698.0 $661.0 $561.4 $678.5 Minority Interests (9.0) (8.0) (5.0) (5.0) (10.0) (5.0) (7.0) (6.0) (8.0) (1.0) (1.0) (1.0) Net Income to DIRECTV $674.0 $701.0 $516.0 $718.0 $731.0 $711.0 $565.0 $942.0 $690.0 $660.0 $552.3 $671.9 Depr. and amort. expense ($603.0) (606.0) (545.0) (556.0) (583.0) (570.0) (604.0) (605.0) (665.0) (718.0) (718.5) (741.8) EBITDA $1,758.0 $1,836.0 $1,575.0 $1,770.0 $1,891.0 $1,981.0 $1,672.0 $1,903.0 $2,073.0 $2,068.0 $1,795.4 $1,994.8 Wt. Avg. Comm. Shr Diluted 797.0 767.0 737.0 707.0 681.0 655.0 629.0 607.0 577.0 561.0 540.0 538.0 Diluted EPS $0.85 $0.91 $0.70 $1.02 $1.07 $1.09 $0.90 $1.55 $1.20 $1.18 $1.02 $1.25 Revenue Growth 11.5% 9.5% 8.4% 7.9% 7.6% 6.6% 6.2% 5.9% COGS Margin 49.6% 49.3% 51.5% 54.1% 50.6% 50.2% 53.4% 55.0% 50.7% 51.0% 53.4% 55.5% Operating Expenses Margin 32.1% 32.0% 33.4% 29.6% 30.8% 30.3% 32.2% 28.9% 30.7% 31.5% 32.9% 29.8% Quaterly Commonsize Income Statement Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of Revenues 49.6% 49.3% 51.5% 54.1% 50.6% 50.2% 53.4% 55.0% 50.7% 51.0% 53.4% 55.5% Gross Profit 50.4% 50.7% 48.5% 45.9% 49.4% 49.8% 46.6% 45.0% 49.3% 49.0% 46.6% 44.5% Operating Expenses 32.1% 32.0% 33.4% 29.6% 30.8% 30.3% 32.2% 28.9% 30.7% 31.5% 32.9% 29.8% Operating Income (EBIT) 18.3% 18.6% 15.0% 16.3% 18.6% 19.5% 14.4% 16.1% 18.6% 17.5% 13.7% 14.7% Interest (Expense) 2.7% 3.1% 2.8% 2.6% 2.9% 3.0% 2.8% 2.7% 2.9% 2.8% 2.8% 2.6% Net Non-Operating (Losses) 0.8% 1.2% -0.4% 0.3% 0.8% -0.8% 0.8% 1.8% -1.4% -0.7% -0.7% -0.7% Pretax Income 16.3% 16.8% 11.8% 13.9% 16.4% 15.8% 12.4% 15.2% 14.3% 14.0% 11.4% 12.6% Income Tax (Expense) 5.5% -6.0% 4.2% 4.2% 5.9% 5.9% 4.7% 3.4% 5.1% 5.4% 4.3% 4.7% Net Income 10.8% 10.7% 7.6% 9.7% 10.5% 9.9% 7.7% 11.8% 9.2% 8.6% 7.1% 8.0% Minority Interests 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.0% 0.0% 0.0% Net Income to DIRECTV 10.7% 10.6% 7.5% 9.6% 10.4% 9.8% 7.6% 11.7% 9.1% 8.6% 7.0% 7.9% Depreciation and amortizatio 9.5% 9.2% 8.0% 7.5% 8.3% 7.9% 8.1% 7.5% 8.8% 9.3% 9.1% 8.7% EBITDA 27.8% 27.8% 23.0% 23.7% 26.8% 27.4% 22.5% 23.6% 27.3% 26.9% 22.8% 23.4% 8
Annual Financial Data Income Statement $mm Actuals Projected 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E Revenues $24,102.0 $27,226.0 $29,740.0 $31,673.1 $33,700.2 $35,823.3 $38,080.2 $40,479.2 Cost of goods sold (COGS) (12,105.0) (13,955.0) (15,579.0) (16,660.1) (18,097.0) (19,237.1) (20,449.0) (21,737.3) Gross profit $11,997.0 $13,271.0 $14,161.0 $15,013.0 $15,603.2 $16,586.2 $17,631.1 $18,741.9 Operating expenses (8,101.0) (8,642.0) (9,076.0) (10,040.4) (10,177.5) (10,818.6) (11,500.2) (12,224.7) Operating profit (EBIT) $3,896.0 $4,629.0 $5,085.0 $4,972.7 $5,425.7 $5,767.5 $6,130.9 $6,517.2 Interest expense (557.0) (763.0) (842.0) (879.0) (935.0) (935.0) (935.0) (935.0) Other (expense) / income, net 175.0 118.0 199.0 199.0 199.0 199.0 199.0 199.0 Pretax profit $3,514.0 $3,984.0 $4,442.0 $4,292.7 $4,689.7 $5,031.5 $5,394.9 $5,781.2 (Taxes) / Tax benefits (1,202.0) (1,348.0) (1,465.0) (1,553.9) (1,594.5) (1,710.7) (1,834.3) (1,965.6) Tax rate 34.2% 33.8% 33.0% 36.2% 34.0% 34.0% 34.0% 34.0% Net income $2,312.0 $2,636.0 $2,977.0 $2,738.7 $3,095.2 $3,320.8 $3,560.6 $3,815.6 Minority Interests (114.0) (27.0) (28.0) ($28.0) ($28.0) ($28.0) ($28.0) ($28.0) Net Income to DIRECTV $2,198.0 $2,609.0 $2,949.0 $2,710.7 $3,067.2 $3,292.8 $3,532.6 $3,787.6 Depre and amort expense (2,446.0) (2,310.0) (2,362.0) (2,728.2) (3,101.6) (3,297.0) (3,504.7) (3,725.5) EBITDA $6,342.0 $6,939.0 $7,447.0 $7,700.9 $8,527.3 $9,064.5 $9,635.6 $10,242.6 Diluted Wt. avg shares 886 752 644 538 475 475 475 475 Diluted earnings per share $2.48 $3.47 $4.58 $5.04 $6.46 $6.93 $7.44 $7.97 Revenue growth 13.0% 9.2% 6.5% 6.4% 6.3% 6.3% 6.3% COGS margin 50.2% 51.3% 52.4% 52.6% 53.7% 53.7% 53.7% 53.7% Operating expenses margin 33.6% 31.7% 30.5% 31.7% 30.2% 30.2% 30.2% 30.2% Tax rate 34.2% 33.8% 33.0% 36.2% 34.0% 34.0% 34.0% 34.0% 9
Annual Commonsize Income Statement Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold (COGS) -50.2% -51.3% -52.4% -52.6% -53.7% -53.7% -53.7% -53.7% Gross profit 49.8% 48.7% 47.6% 47.4% 46.3% 46.3% 46.3% 46.3% Operating expenses -33.6% -31.7% -30.5% -31.7% -30.2% -30.2% -30.2% -30.2% Operating profit (EBIT) 16.2% 17.0% 17.1% 15.7% 16.1% 16.1% 16.1% 16.1% Interest expense -2.3% -2.8% -2.8% -2.8% -2.8% -2.6% -2.5% -2.3% Other (expense) / income, net 0.7% 0.4% 0.7% 0.6% 0.6% 0.6% 0.5% 0.5% Pretax profit 14.6% 14.6% 14.9% 13.6% 13.9% 14.0% 14.2% 14.3% (Taxes) / Tax benefits -5.0% -5.0% -4.9% -4.9% -4.7% -4.8% -4.8% -4.9% Net income 9.6% 9.7% 10.0% 8.6% 9.2% 9.3% 9.4% 9.4% Minority Interests -0.5% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% Net Income to DIRECTV 9.1% 9.6% 9.9% 8.6% 9.1% 9.2% 9.3% 9.4% Depre and amort expense -10.1% -8.5% -7.9% -8.6% -9.2% -9.2% -9.2% -9.2% EBITDA 26.3% 25.5% 25.0% 24.3% 25.3% 25.3% 25.3% 25.3% The graph below tracks the price movement along with the components of the income statement. It can be noted that as the price kept increasing, the SG&A remained more or less constant even as the revenues kept appreciating. A simultaneous increase in the operating income (lower portion) can be seen. Source: Bloomberg 10
Annual Balance Sheet Data Balance Sheet $mm Actuals Projected 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E Cash & cash equivalents $1,502.0 $873.0 $1,902.0 $5,253.6 $9,347.5 $13,679.9 $18,317.7 $23,279.9 Accounts receivable 2,001.0 2,474.0 2,696.0 2,660.5 2,763.4 2,937.5 3,122.6 3,319.3 Inventory 247.0 280.0 412.0 333.2 361.9 384.7 409.0 434.7 Other current assets 503.0 614.0 544.0 544.0 544.0 544.0 544.0 544.0 PPE 6,679.0 7,438.0 8,395.0 7,472.2 6,392.6 5,245.1 4,025.2 2,728.5 Other assets 6,977.0 6,744.0 6,606.0 6,606.0 6,606.0 6,606.0 6,606.0 6,606.0 Total assets $17,909.0 $18,423.0 $20,555.0 $22,869.5 $26,015.5 $29,397.3 $33,024.4 $36,912.5 Accounts payable $951.0 $1,195.0 $1,208.0 $1,332.8 $1,411.6 $1,500.5 $1,595.0 $1,695.5 Other current liabilities 3,499.0 3,548.0 4,333.0 4,333.0 4,333.0 4,333.0 4,333.0 4,333.0 Long term liabilities 13,429.0 16,522.0 20,045.0 20,045.0 20,045.0 20,045.0 20,045.0 20,045.0 Revolver 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total liabilities $17,879.0 $21,265.0 $25,586.0 $25,710.8 $25,789.6 $25,878.5 $25,973.0 $26,073.5 Common stock / additional paid $5,563.0 $4,799.0 $4,021.0 $3,500.0 $3,500.0 $3,500.0 $3,500.0 $3,500.0 Convertible preferred stock 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Retained earnings / accumulated (5,757.0) (7,906.0) (9,452.0) (6,741.3) (3,674.1) (381.2) 3,151.4 6,939.0 Other equity-related 224.0 265.0 400.0 400.0 400.0 400.0 400.0 400.0 Total equity $30.0 ($2,842.0) ($5,031.0) ($2,841.3) $225.9 $3,518.8 $7,051.4 $10,839.0 Balance check 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 11
Cash Flow Statement Annual Cash Flow Statement Actuals Projected 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E Net income $2,710.7 $3,067.2 $3,292.8 $3,532.6 $3,787.6 Depreciation 2,728.2 3,101.6 3,297.0 3,504.7 3,725.5 Accounts receivable 35.5 (102.9) (174.1) (185.1) (196.7) Inventory 78.8 (28.7) (22.8) (24.2) (25.8) Other current assets 0.0 0.0 0.0 0.0 0.0 Other assets 0.0 0.0 0.0 0.0 0.0 Accounts payable 124.8 78.8 88.9 94.5 100.5 Other current liabilities 0.0 0.0 0.0 0.0 0.0 Long-term liabilities 0.0 0.0 0.0 0.0 0.0 Cash from operations activities $5,678.0 $6,115.9 $6,481.8 $6,922.5 $7,391.0 Capital expenditures (1,805.4) (2,022.0) (2,149.4) (2,284.8) (2,428.8) Cash from investing activities ($1,805.4) ($2,022.0) ($2,149.4) ($2,284.8) ($2,428.8) Dividends 0.0 0.0 0.0 0.0 0.0 Revolver 0.0 0.0 0.0 0.0 0.0 Common Stock / additional paid in capital (521.0) 0.0 0.0 0.0 0.0 Convertible preferred stock 0.0 0.0 0.0 0.0 0.0 Other equity-related 0.0 0.0 0.0 0.0 0.0 Cash from financing activities ($521.0) $0.0 $0.0 $0.0 $0.0 Net change in cash during period $3,351.6 $4,093.9 $4,332.4 $4,637.7 $4,962.3 12
Supporting Schedules Actuals Projected 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E Accounts receivable roll-forward Accounts receivable, beginning of period (BOP) balance $2,696.0 $2,610.6 $2,660.6 $2,775.0 $2,894.3 +/- additions (85.4) 50.0 114.4 119.3 124.5 Accounts receivable, end of period (EOP) $2,001.0 $2,474.0 $2,696.0 $2,610.6 $2,660.6 $2,775.0 $2,894.3 $3,018.7 AR as % of sales 8.3% 9.1% 9.1% 8.4% 8.2% 8.2% 8.2% 8.2% Inventory roll-forward Inventory, beginning of period (BOP) balance $412.0 $339.4 $361.4 $377.0 $393.2 +/- additions (72.6) 22.1 15.5 16.2 16.9 Inventory, end of period (EOP) balance $247.0 $280.0 $412.0 $339.4 $361.4 $377.0 $393.2 $410.1 Inventory as % of COGS 2.0% 2.0% 2.6% 2.0% 2.0% 2.0% 2.0% 2.0% Accounts payable roll-forward Accounts payable, beginning of period (BOP) balance $1,208.0 $1,357.5 $1,409.6 $1,470.3 $1,533.5 +/- additions 149.5 52.1 60.6 63.2 65.9 Accounts payable, end of period (EOP) b $951.0 $1,195.0 $1,208.0 $1,357.5 $1,409.6 $1,470.3 $1,533.5 $1,599.4 AP as % of COGS 7.9% 8.6% 7.8% 8.0% 7.8% 7.8% 7.8% 7.8% PP&E roll-forward PP&E, beginning of period (BOP) balance $8,395.0 $7,489.5 $6,450.2 $5,366.1 $4,235.4 + Capital expenditures 1,771.5 1,946.7 2,030.5 2,117.8 2,208.8 -Depreciation (2,676.9) (2,986.1) (3,114.5) (3,248.4) (3,388.1) PP&E, end of period (EOP) balance $6,679.0 $7,438.0 $8,395.0 $7,489.5 $6,450.2 $5,366.1 $4,235.4 $3,056.1 Capital expenditures as % of revenue 5.7% 6.0% 6.0% 6.0% 6.0% Depreciation / Capital expenditures ratio 151.1% 153.4% 153.4% 153.4% 153.4% Retained earnings roll-forward Retained earnings, beginning of period (BOP) balance ($9,452.0) ($7,594.0) ($5,516.6) ($3,327.8) ($1,022.9) + Net income 1,858.0 2,077.4 2,188.8 2,305.0 2,426.2 - Dividends 0.0 0.0 0.0 0.0 0.0 Retained earnings, end of period (EOP) b($5,757.0) ($7,906.0) ($9,452.0) ($7,594.0) ($5,516.6) ($3,327.8) ($1,022.9) $1,403.3 Dividend payout ratio 0.0% 0.0% 0.0% 0.0% 0.0% 13
Revolver roll-forward Revolver, beginning of period (BOP) balance $0.0 $0.0 $0.0 $0.0 $0.0 +/- additions 0.0 0.0 0.0 0.0 0.0 Revolver, end of period (EOP) balance $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Cash at BOP 1,902.0 5,253.6 9,347.5 13,679.9 18,317.7 Minimum cash desired 2,000.0 2,000.0 2,000.0 2,000.0 2,000.0 Excess cash at BOP (98.0) 3,253.6 7,347.5 11,679.9 16,317.7 Excess cash plus cash generated during period (prior to revolver 3,253.6 7,347.5 11,679.9 16,317.7 21,279.9 Interest rate on debt 5.0% 5.0% 5.0% 5.0% 5.0% Interest expense $0.0 $0.0 $0.0 $0.0 $0.0 Interest rate on cash 1.0% 1.0% 1.0% 1.0% 1.0% Interest income $35.8 $73.0 $115.1 $160.0 $208.0 14
Sensitivity Analysis Diluted EPS based on various revenue growth assumptions (column) and COGS margin assumptions (row) 2013 COGS margin $5.04 48.0% 50.0% 52.0% 54.0% 56.0% 9.5% $6.98 $6.21 $5.44 $4.66 $3.89 8.0% $6.87 $6.11 $5.35 $4.59 $3.83 2013 Revenue growth range 6.4% $6.76 $6.01 $5.26 $4.51 $3.76 5.0% $6.66 $5.92 $5.18 $4.44 $3.70 3.5% $6.55 $5.82 $5.09 $4.36 $3.63 1.0% $6.37 $5.66 $4.95 $4.24 $3.52 2014 COGS margin $6.46 48.0% 50.0% 52.0% 54.0% 56.0% 9.5% $9.42 $8.46 $7.50 $6.53 $5.57 8.0% $9.28 $8.33 $7.38 $6.43 $5.48 2014 Revenue growth range 6.4% $9.13 $8.19 $7.25 $6.32 $5.38 5.0% $8.99 $8.07 $7.14 $6.22 $5.30 3.5% $8.85 $7.94 $7.03 $6.12 $5.20 1.0% $8.61 $7.72 $6.83 $5.94 $5.05 2015 COGS margin $6.93 48.0% 50.0% 52.0% 54.0% 56.0% 9.5% $10.10 $9.07 $8.05 $7.02 $5.99 8.0% $9.94 $8.93 $7.92 $6.91 $5.90 2015 Revenue growth range 6.4% $9.78 $8.78 $7.79 $6.79 $5.79 5.0% $9.64 $8.65 $7.67 $6.69 $5.70 3.5% $9.48 $8.51 $7.55 $6.58 $5.61 1.0% $9.23 $8.28 $7.34 $6.39 $5.44 15
DCF Valuation 16
Free Cash Flow Buildup $mm Projected 2013P 2014P 2015P 2016P 2017P Fiscal year end 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 EBIT 4,972.7 5,425.7 5,767.5 6,130.9 6,517.2 tax rate 36.2% 34.0% 34.0% 34.0% 34.0% EBIAT 3,172.6 3,581.0 3,806.6 4,046.4 4,301.3 Depreciation 2,728.2 3,101.6 3,297.0 3,504.7 3,725.5 Accounts receivable 35.5 (102.9) (174.1) (185.1) (196.7) Inventory 78.8 (28.7) (22.8) (24.2) (25.8) Other current assets 0.0 0.0 0.0 0.0 0.0 Other assets 0.0 0.0 0.0 0.0 0.0 Accounts payable 124.8 78.8 88.9 94.5 100.5 Other current liabilities 0.0 0.0 0.0 0.0 0.0 Long-term liabilities 0.0 0.0 0.0 0.0 0.0 Unlevered cash from operations 2,967.2 3,048.7 3,189.0 3,389.9 3,603.5 Capital expenditures (1,805.4) (2,022.0) (2,149.4) (2,284.8) (2,428.8) Unlevered free cash flows $4,334.4 $4,607.7 $4,846.2 $5,151.5 $5,476.0 Period 1 2 3 4 5 Discount factor 92.7% 86.0% 79.8% 74.0% 68.6% Present value of free cash flows 4,019.6 3,962.6 3,865.0 3,810.1 3,755.9 Terminal Value Perpetuity approach FCF in last forecast period (t) 5,476.0 FCF t+1 5,530.8 Long term growth rate (g) 1% Terminal value 80,948.2 Present value of terminal value 55,521.2 Enterprise value 74,934.4 Exit EBITDA multiple approach Terminal year EBITDA 10,242.6 Terminal value EBITDA multiple 7.3x Terminal value 74,771.0 Present value of terminal value 51,284.4 Enterprise value 70,697.6 17
Net Debt Debt - Revolver 20,045.0 Debt equivalent - convertible preferr 0.0 Cash (1,902.0) Net debt 18,143.0 Valuation Perpetuity Exit EBITDA Enterprise value 74,934.4 70,697.6 Net debt 18,143.0 18,143.0 Equity value 56,791.4 52,554.6 Equity value per share $105.56 $97.69 % premium / (discount) over market share p 72.7% 59.9% Sensitivity Analysis Equity value per share (growth rate vs WACC) $105.56 7% 8% 9% 10% 1% $125.36 $102.15 $84.75 $71.23 2% $151.25 $119.96 $97.63 $80.89 3% $190.07 $144.90 $114.79 $93.30 4% $254.78 $182.31 $138.83 $109.85 Equity value per share (exit multiple vs WACC) $97.69 7% 8% 9% 10% 6.5x $90.70 $87.24 $83.90 $80.68 7.5x $104.19 $100.30 $96.55 $92.93 8.5x $117.67 $113.35 $109.20 $105.19 9.5x $131.15 $126.41 $121.84 $117.44 18
EVA Analysis As can be seen below, the EVA has grown at a very steady and rapid rate from 2006 to 2012, and starts to grow at a slower pace as in the year 2013-2014. This can be attributed to the problems the company is facing in Latin America from competition and the expected industry stagnation. EVA is tied to stock return, so it is imperative to keep constant tabs on the EVA in the future. 2006 2007 2008 2009 2010 2011 2012 2013 2014E Total Debt $8,398.1 $8,750.0 $11,583.0 $14,949.0 $17,879.0 $21,265.0 $25,586.0 $25,710.0 $25,789.0 Equity 6,743.0 6,313.0 4,956.0 3,311.0 30.0 (2,842.0) (5,031.0) (2,841.3) 225.9 Total 15,141.1 15,063.0 16,539.0 18,260.0 17,909.0 18,423.0 20,555.0 22,868.7 26,014.9 % Debt 55.5% 58.1% 70.0% 81.9% 99.8% 115.4% 124.5% 112.4% 99.1% % Equity 44.5% 41.9% 30.0% 18.1% 0.2% -15.4% -24.5% -12.4% 0.9% Rate of Debt 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Tax rate 35.0% 35.0% 35.0% 38.4% 35.6% 37.4% 36.4% 36.8% 36.0% Risk-Free Rate 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Beta 0.92 0.92 0.92 0.92 0.92 0.92 0.92 0.92 0.92 Equity Risk Premium 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% Cost of Equity 9.4% 9.4% 9.4% 9.4% 9.4% 9.4% 9.4% 9.4% 9.4% WACC 6.0% 5.8% 5.1% 4.2% 3.2% 2.2% 1.7% 2.4% 3.3% Common Equity 6,743.0 6,313.0 4,956.0 3,311.0 30.0 (2,842.0) (5,031.0) (2,841.3) 225.9 Total Debt 8,398.1 8,750.0 11,583.0 14,949.0 17,879.0 21,265.0 25,586.0 25,710.0 25,789.0 Invested Capital 15,141.1 15,063.0 16,539.0 18,260.0 17,909.0 18,423.0 20,555.0 22,868.7 26,014.9 EBIT*(1-t) 1,455.4 1,615.9 1,751.8 1,646.9 2,509.5 2,896.2 3,236.2 3,149.8 3,452.1 ROIC 9.6% 10.7% 10.6% 9.0% 14.0% 15.7% 15.7% 13.8% 13.3% EVA 551.3 740.6 911.4 876.5 1,930.9 2,497.0 2,892.9 2,603.7 2,605.7 3,500 3,000 2,500 2,000 1,500 1,000 500 EVA 0 2006 2007 2008 2009 2010 2011 2012 2013 2014E 19
30,000 25,000 20,000 15,000 10,000 5,000 Invested Capital 0 2006 2007 2008 2009 2010 2011 2012 2013 2014E Residual Income Analysis The residual income continues to decrease over the long term as the company reaches it maturity. Using the average book value of equity and the average number of shares, we get the equity value per share equal to $30.92. Residual Income (Millions) FY2013 FY2014 FY2015 FY2016 FY2017 Net Income $2,710.7 $3,067.2 $3,292.8 $3,532.6 $3,787.6 Equity Capital (2841.3) 225.9 3518.8 7051.4 10839.0 Cost of Equity (%) 9.36% 9.36% 9.36% 9.36% 9.36% Equity Charge (265.9) 21.1 329.4 660.0 1014.5 Residual Income 2976.7 3046.1 2963.5 2872.6 2773.0 Period 1 2 3 4 5 Discount Factor 91.4% 83.6% 76.5% 69.9% 63.9% Present Value $2,721.9 $2,547.0 $2,265.8 $2,008.4 $1,772.8 Total Present Value 11315.9 Avgerage Book Value 3758.8 Total Equity Value 15074.6 Avgerage Number of Shares 487.6 Equity Value per Share $30.92 20
EPS Consensus Source: Zacks Investment Research Arriving at the Price Target We arrive at the price target in three steps: - We take the prices from the three cases (Best, base and weak case) in the DCF valuation. - We generate the prices from the three cases using the EBITDA multiple. - We take the average of these two prices (Perpetuity and Exit EBITDA) in each of the three scenarios and finally take a weighted average between the three cases. It should be noted that the weak case was given a 50% weight, the best case a 10% weight and the base case a 40% weight. - This method gives us a price target equal to $92.60, which is a 51.5% upside potential. DCF Equity Value Per Share Perpetuity Exit EBITDA Weights Weighted Average Base Case $105.56 $97.69 40% $40.65 Best Case $184.40 $167.21 10% $17.58 Weak Case $70.3 $67.1 50% $34.37 Equity Value Per Share $92.60 Upside Potential 51.5% 21
In addition, we combine this price target with the target generated from the residual income method and take a weighted average of the two. This leads us to our conclusion price target of $74.09, which is a 21.2% upside potential. Price Target Weight EVPS using Residual Income Valuation $30.92 30% $9.27 EVPS using DCF valuation $92.60 70% $64.82 Equity Value Per Share $74.09 Upside Potential 21.2% 22