DCF Valuation Financial Modeling
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Page 1 file:///home/website/convert/temp/convert_html/55cf92af550346f57b98b0c1/document.xlsx FIN 286 - Summer/Fall 2013 Schedule 1 Valuation of Harley Davidson as of ~ July 1, 2013 INPUT BOX Discount Rate (WACC) 12.0% Near-term sales growth 2014 14.0% Near-term sales growth 2015 12.0% Terminal Sales & Cash Flow growth 4.0% 2.5% inflation + 1% pop growth = 3.5%; but good growth in growing markets and VERY strong brand Near-term EBIT margin 2014 15.0% Near-term EBIT margin 2015 18.0% EBIT margin - Terminal 22.0% est. Value of HOG Equity at 7/2/2 $ 12,778,817 # shares outstanding at 7/1/2012 224,139 thousand ( Q213 income statement and Tearsheet at 8/2/2013 ) HOG equity value per share $ 57.01 vs market price $ 55.54 @ July 1, 2013 $ 60.66 @ Sept 3 Full Year 3 full years historical 6 mos (actual) 6 mos. (proj) act. + proj. Projection Period 2010 2011 2012 6/30/2013 12/31/2013 2013 2014 2015 Terminal Net Operating Revenues (Sales) Motorcycles & Related Products 4,176,627 4,662,264 4,942,582 3,045,714 2,490,098 5,535,812 6,310,825 7,068,124 7,350,849 11.6% 6.0% 12.0% 14.0% 12.0% 4.0% Costs and Expenses Motorcycle COGS 2,749,224 3,106,288 3,222,394 1,924,402 1,599,888 3,556,759 % of sales 66% 67% 65% 63% 64% Gross Motorcycle Profit 1,427,403 1,555,976 1,720,188 1,121,312 890,210 1,979,053 % of sales 34% 33% 35% 37% 35.75% 35.75% took 2013 gross margin from mgt guidance Selling, Admin and Engineering Expense 1,020,371 926,832 977,782 485,033 485,033 970,066 % of motorcycle sales 24% 20% 20% 16% 19% 18% Motorcycle Operating Income (EBIT) 407,032 629,144 742,406 636,279 405,177 1,008,987 946,624 1,272,262 1,617,187 EBIT Margin % 9.7% 13.5% 15.0% 20.9% 16.3% 18.2% 15.0% 18.0% 22.0% Average EBIT % of Sales for last 4 years 14.1% Investment Income 5,442 132,963 7,369 4,164 4,164 8,328 36,444 36,444 36,444 90,357 45,266 46,033 23,090 23,090 46,180 Income Before Taxes - unlevered (EBT) 412,474 762,107 749,775 640,443 409,341 1,017,315 983,067 1,308,706 1,653,630 142,451 354,025 342,107 455,430 575,463 Taxes (@ 34.8%; firm projection at Q213 news release) 34.8% 34.8% 34.8% 34.8% 34.8% Unlevered Net IncomeFinall 412,474 762,107 749,775 640,443 266,890 663,289 640,960 853,276 1,078,167 Full Year 3 full years historical 6 mos (actual) 6 mos. (proj) act. + proj. Projection Period 2010 2011 2012 7/1/2012 12/31/2012 2013 2014 2015 Terminal Free Cash Flow Adjustments START Unlevered Net IncomeFinall 412,474 762,107 749,775 640,443 266,890 663,289 640,960 853,276 1,078,167 NWC = AR + INV - AP 363,482 381,332 402,539 361,536 442,865 504,866 565,450 588,068 8% 8.7% 8.2% 8.1% 5.9% 8% 8% 8% 8% NWC IncrementalProjected NWC Cash Flow - 81,329 62,001 60,584 22,618 Add:Depreciation(in Note 20 biz segs) 248,246 173,959 168,659 ? 124,196 248,393 209,835 235,015 264,631 near-term: depreciation as % of ca 95% 148% 97% 93% 95% 95% 95% long-term: depreciation as % of ca 90% 90% 167,730 179,988 180,416 69,267 130,733 200,000 220,879 247,384 294,034 % of sales (proj 4% near and 4% terminal) 4.0% 3.9% 3.7% 2.3% 3.6% 3.5% 3.5% 4% Guidance on CapEx at Q2 presentation deck #24 200,000 Nominal Free Cash Flows 492,990 756,078 738,018 $ 260,354 $ 630,353 $ 567,915 $ 780,323 $ 1,026,146 6/30/2016 12,826,820 Assumed cash flow date : mid-year convention 10/1/2013 6/30/2014 6/30/2015 6/30/2015 Periods 0.25 1.0 2.0 2.0 Discount Factors (calculated using mid-year convention) 0.972 0.893 0.797 0.797 Discounted Free Cash Flows $ 253,081 $ 507,067 $ 622,069 $ 10,225,462 11,607,678 88% net debt Add: Book value of cash & cash equivalents at 7/1/2012 (I used moto only, p 103 12/31/12) 863,350 Less: BV of Debt = Short-term debt + LT debt, @ 7/1/2012 (again, I used moto only from 10K 303,000 Less: BV of Pension Obligations = Pension and retirement healthcare and other LT liab @ 7/1 330,294 Plus: BV of HDFS (book shareholder's equity in HDFS @12/31/12 from 10K, p. 103) 941,083 $ 4.20 /share 12,778,817 Estimation of seasonali 2011 % 2012 % avg full year sales (from t ### $4,942,582 1st 6 mos sales (from t ### 51.5% $2,842,416 57.5% 55% last 6 mos sales ### 48.5% $2,100,166 42.5% 45% 2nd 6 mos projected 2013 1st 6 mos sales (from the Q) 3,045,714 I knew this 2nd 6 mos sales (est using 2012) 2,490,098 45% used GoalSeek to match average estimated full year 2013 sales 5,535,812 Growth Interest Expense (don't include in unlevered CFs) NWC as % of sales projection Less: Capex (also Note 20 - p.99) Nominal Terminal Value [= Terminal Nominal Free Cash Flow / (r - g)] Enterprise Value @ 7/1/2012 (=sum of discounted free cash flows) Harley Equity Value (Enterprise Value plus cash less book value of debt)
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Sample DCF Valuation
Transcript of DCF Valuation Financial Modeling
Page 1 file:///tt/file_convert/55cf92af550346f57b98b0c1/document.xlsx
FIN 286 - Summer/Fall 2013 Schedule 1Valuation of Harley Davidson as of ~ July 1, 2013
INPUT BOX
Discount Rate (WACC) 12.0%
Near-term sales growth 2014 14.0%
Near-term sales growth 2015 12.0%
Terminal Sales & Cash Flow growth 4.0% 2.5% inflation + 1% pop growth = 3.5%; but good growth in growing markets and VERY strong brand
Near-term EBIT margin 2014 15.0%
Near-term EBIT margin 2015 18.0%
EBIT margin - Terminal 22.0%
est. Value of HOG Equity at 7/2/2013 $ 12,778,817
# shares outstanding at 7/1/2012 224,139 thousand ( Q213 income statement and Tearsheet at 8/2/2013 )
HOG equity value per share $ 57.01 vs market price $ 55.54 @ July 1, 2013 $ 60.66 @ Sept 3Full Year
3 full years historical 6 mos (actual) 6 mos. (proj) act. + proj. Projection Period2010 2011 2012 6/30/2013 12/31/2013 2013 2014 2015 Terminal
Net Operating Revenues (Sales)
Motorcycles & Related Products 4,176,627 4,662,264 4,942,582 3,045,714 2,490,098 5,535,812 6,310,825 7,068,124 7,350,849
11.6% 6.0% 12.0% 14.0% 12.0% 4.0%
Costs and Expenses
Motorcycle COGS 2,749,224 3,106,288 3,222,394 1,924,402 1,599,888 3,556,759
% of sales 66% 67% 65% 63% 64%
Gross Motorcycle Profit 1,427,403 1,555,976 1,720,188 1,121,312 890,210 1,979,053
% of sales 34% 33% 35% 37% 35.75% 35.75% took 2013 gross margin from mgt guidance
Selling, Admin and Engineering Expense 1,020,371 926,832 977,782 485,033 485,033 970,066
% of motorcycle sales 24% 20% 20% 16% 19% 18%
Motorcycle Operating Income (EBIT) 407,032 629,144 742,406 636,279 405,177 1,008,987 946,624 1,272,262 1,617,187
EBIT Margin % 9.7% 13.5% 15.0% 20.9% 16.3% 18.2% 15.0% 18.0% 22.0%
Average EBIT % of Sales for last 4 years 14.1%
Investment Income 5,442 132,963 7,369 4,164 4,164 8,328 36,444 36,444 36,444
90,357 45,266 46,033 23,090 23,090 46,180
Income Before Taxes - unlevered (EBT) 412,474 762,107 749,775 640,443 409,341 1,017,315 983,067 1,308,706 1,653,630
142,451 354,025 342,107 455,430 575,463
Taxes (@ 34.8%; firm projection at Q213 news release) 34.8% 34.8% 34.8% 34.8% 34.8%
Unlevered Net IncomeFinall 412,474 762,107 749,775 640,443 266,890 663,289 640,960 853,276 1,078,167
Full Year 3 full years historical 6 mos (actual) 6 mos. (proj) act. + proj. Projection Period
2010 2011 2012 7/1/2012 12/31/2012 2013 2014 2015 Terminal
Free Cash Flow Adjustments
START Unlevered Net IncomeFinall 412,474 762,107 749,775 640,443 266,890 663,289 640,960 853,276 1,078,167
NWC = AR + INV - AP 363,482 381,332 402,539 361,536 442,865 504,866 565,450 588,068 8% 8.7% 8.2% 8.1% 5.9% 8% 8% 8% 8%
NWC
IncrementalProjected NWC Cash Flow - 81,329 62,001 60,584 22,618
Add:Depreciation (in Note 20 biz segs) 248,246 173,959 168,659 ? 124,196 248,393 209,835 235,015 264,631
near-term: depreciation as % of capex 95% 148% 97% 93% 95% 95% 95%
long-term: depreciation as % of capex 90% 90%
167,730 179,988 180,416 69,267 130,733 200,000 220,879 247,384 294,034
% of sales (proj 4% near and 4% terminal) 4.0% 3.9% 3.7% 2.3% 3.6% 3.5% 3.5% 4%
Guidance on CapEx at Q2 presentation deck #24 200,000
Nominal Free Cash Flows 492,990 756,078 738,018 $ 260,354 $ 630,353 $ 567,915 $ 780,323 $ 1,026,146
6/30/2016
12,826,820
Assumed cash flow date : mid-year convention 10/1/2013 6/30/2014 6/30/2015 6/30/2015
Periods 0.25 1.0 2.0 2.0
Discount Factors (calculated using mid-year convention) 0.972 0.893 0.797 0.797
Discounted Free Cash Flows $ 253,081 $ 507,067 $ 622,069 $ 10,225,462
11,607,678 88%
net debtAdd: Book value of cash & cash equivalents at 7/1/2012 (I used moto only, p 103 12/31/12) 863,350
Less: BV of Debt = Short-term debt + LT debt, @ 7/1/2012 (again, I used moto only from 10K p 103) 303,000
Less: BV of Pension Obligations = Pension and retirement healthcare and other LT liab @ 7/1/2012 330,294
Plus: BV of HDFS (book shareholder's equity in HDFS @12/31/12 from 10K, p. 103) 941,083 $ 4.20 /share
12,778,817
Estimation of seasonality 2011 % 2012 % avg
full year sales (from the K) $ 4,662,264 $ 4,942,582
1st 6 mos sales (from the Q $ 2,402,788 51.5% $ 2,842,416 57.5% 55%
last 6 mos sales $ 2,259,476 48.5% $ 2,100,166 42.5% 45% 2nd 6 mos
projected 2013
1st 6 mos sales (from the Q) 3,045,714 I knew this
2nd 6 mos sales (est using 2012) 2,490,098 45% used GoalSeek to match average
estimated full year 2013 sales 5,535,812
Growth
Interest Expense (don't include in unlevered CFs)
NWC as % of sales projection
Less: Capex (also Note 20 - p.99)
Nominal Terminal Value [= Terminal Nominal Free Cash Flow / (r - g)]
Enterprise Value @ 7/1/2012 (=sum of discounted free cash flows)
Harley Equity Value (Enterprise Value plus cash less book value of debt)
E6
GHallman: You can use the model to determine the return that the stock is paying given today's price and assuming the projections of performance. To do that, use Goal Seek to set the discount rate so that the calculated price is equal to the market price. A discount rate that makes the PV of future cash flows equal to the Value today is the IRR, so that's the current annual return offered by Harley at its current price, assuming they hit the projections in the spreadsheet. This is the Implied cost of equity capital discussed on page 127 of Sheridan's book. It is a forward-looking estimate as opposed to the CAPM method, which is backward looking in terms of the data used.
Scenario SummaryCurrent Values: base case
Changing Cells:discount_rate 12% 13%Near_term_sales_growth_2014 14% 12%Near_term_sales_growth_2015 12% 10%Terminal_Sales___Cash_Flow_grow 4% 4%EBIT_margin_2013 15% 18%EBIT_margin_2014 18% 18%EBIT_margin___Terminal 22% 22%
Result Cells:HOG_equity_value_per_share $ 57.01 $ 50.20
Notes: Current Values column represents values of changing cells attime Scenario Summary Report was created. Changing cells for eachscenario are highlighted in gray.
bad recession BIG rebound class tester
18% 10% 15%-3% 12% 80%-3% 12% 6%2% 4% 4%
13% 18% 15%11% 22% 15%15% 27% 18%
$ 19.74 $ 89.09 $ 50.00
Discount Rate (WACC) 12%
Near-term sales growth 2014 14%
Near-term sales growth 2015 12%
Terminal Sales & Cash Flow growth 4%
Near-term EBIT margin 2014 15%
Near-term EBIT margin 2015 18%
EBIT margin - Terminal 22%
HOG equity value per share $ 57.01
Schedule 2
yoy % change year
2005 5,342,214 1,464,962 2005 27.4%
2006 5,800,686 8.6% as % of 2006 1,597,153 2006 27.5%
2007 5,726,848 -1.3% 0.99 933,843 2007 16.3%
2008 5,578,414 -2.6% 0.96 684,235 2008 12.3%
2009 4,287,130 -23.1% 0.74 400,000 2009 9.3%
2010 4,176,627 -2.6% 0.72 407,032 2010 9.7%
2011 4,662,264 11.6% 0.80 629,144 2011 13.5%
2012 4,942,582 6.0% 0.85 742,406 2012 15.0%
2013 ann. Est. 5,535,812 12.0% 0.95 1,008,987 2013 ann. Est. 18.2%
16.6%
Motorcycle and related SALES
Operating Income (EBIT)
Operating Margin~ EBIT margin
2006-2007 a lot of buyers used home equity loans to buy Harleys;home equity loans ended by mid-2007 with decline in house prices
0.0%
40.0% 27.4%27.5%16.3%12.3%9.3%9.7%13.5%15.0%18.2%
Operating Margin_x000d_~ EBIT
margin
Schedule 3
Simple Working Capital calculations for Motorcycle Only
3 full years historical & 6 mos actual
2010 2011 2012 6/30/2013
AR 262,382 219,039 230,079 253,819
+ Inventory 326,446 418,006 393,524 307,717
- AP 225,346 255,713 221,064 200,000
= simple NWC 363,482 381,332 402,539 361,536
motorcycle sales 4,176,627 4,662,264 4,942,582 6,091,428
% of moto sales 8.7% 8.2% 8.1% 5.9%
average 7.7%
looks like the flex-manufacturing is working, and the number is trending down
Schedule 4
Cost of Equity using CAPM
Calculation of Cost of Equity for Harley Davidson WACC
Inputs:
(A) (B) (C)
Risk Free Rate 3.40% 3.40% 3.40% (a)
Beta 1.18 2.00 2.23 (b)
Market Risk Premium 5.0% 5.0% 6.0% (c)
Cost of Equity by CAPM 9.3% 13.4% 16.8% (d)
(A) CAPM with Yahoo! Finance beta
(B) CAPM with Ibbotson beta
(C) Berk & DeMarzo text Table 10.6 shows Harley equity beta = 2.23 using monthly returns 2007-2012
(a) Source: US Treasury website; 20 year Treasury rate /www.treasury.gov/ @ 8/2/2013; 20-year rate 3.39%
(b) Beta from Yahoo! Finance and Ibbotson
(c) Source for MRP%: academic studies and my own opinion and more recent data
(d) Cost of Equity = Risk Free Rate + Beta*(Expected Risk Premium)
Cost of Equity using FF-3factor model
Fama-French Cost of Equity = 18.8%
FF Cost of Equity = Risk-free + FF-Beta X MRP + SMB prem + HML Prem
Risk Free Rate 3.40%
FF-Beta 1.36
MRP 5.0%
SMB Premium 3.72%
HML Premium 4.84%
Schedule 5
or you can use one of the credit curves below
Calculation of Cost of Debt - use bloomberg or notes to financials
Schedule 6
WACC Calculation
# shares of equity 224,139 first valuation sheet
value of equity per share $ 55.54 plug at market value TO START
total amount of equity $ 12,448,680
cost of equity 13.4% CAPM with ibbotson beta
total LT debt $ 303,000 motorcycle debt; no HDFS debt
cost of debt (pre-tax) 2.80% Harley is BBB; used curve at 5 years
tax rate 34.8% first valuation sheet
cost of debt (after-tax) 1.8%
total capital (D+E) $ 12,751,680
% equity (market value) 97.6%
% debt (book value) 2.4%
WACC 13.1%
WACC Calculation - second iteration with first calculated price
# shares of equity 224,139 first valuation sheet
value of equity per share $ 57.01 calculated price from 1st run
total amount of equity $ 12,778,817
cost of equity 13.4% blend of CAPM and Fama-French
total debt $ 303,000 cost of debt schedule
cost of debt (pre-tax) 2.80% cost of debt schedule
tax rate 34.8% first valuation sheet
cost of debt (after-tax) 1.8%
total capital (D+E) $ 13,081,817
% equity 97.7%
% debt 2.3%
WACC 13.1%
