Download Teva - NYU Stern School of Business

Pharmaceutical Industries Ltd.
Hila Kollnesher
Ronald Adler
Eugene Katchalov
Erin Goglick
Lisa Vortsman
What to expect from us:
 What makes this grass greener
 Why its crucial to spot investment
opportunities in Emerging Markets
 Unexpected Outcomes
Investing in Israel
"The land of the prophets is becoming the land of profits"
 Impressive growth of Israel's economy has been
attracting foreign capital to Israel
 Investments in infrastructure
 Increases in industrial exports
 Privatization of government companies
 Control of inflation
 Liberalization of capital markets
 Steady growth of Israel's GDP
Israel: the land of milk and money
(what makes our project unique – its major contributions)

Sometimes it pays to search troubled regions for
investment ideas
– With Iraq out of the way, the Bush Administration will be more likely to prioritize
resolving the Israeli-Palestinian conflict
 Take advantage of Israel's Free Trade Agreements
with the EU and with the US
The taxation climate is quite favorable
Teva: Make Medicine, Not War
 World’s largest generic pharmaceutical amongst top 35
 One in every 15 prescriptions in the U.S. is a Teva product
 It produces and sells more than 300 generic drugs in North
America, Israel, and Europe; from antibiotics to painkillers and
heart medicines
 It plays the all-important patent game so well that it regularly wins
patent and marketing battles against drug companies 10x its size
– built its dominance by beating rivals to lucrative opportunities and introducing scads
of new drugs at a rapid-fire pace
 For Teva having headquarters in Israel but operating for the most
part outside, the investment pros are suggesting that the biggest
danger is that they might “lose their mail”
Teva Pharmaceuticals
 World’s number 1 generic drug
company
 About 140 generic products
 Specializes in the generic equivalents
for brand name drugs for heart disease,
heartburn, antibiotics
 Develops own proprietary drugs
focusing primarily on neurological
disorders and autoimmune diseases.
Teva Pharmaceuticals
 Founded in 1901 in Jerusalem.
 Dealt primarily with drug distribution
 1951 – IPO on Tel Aviv Stock
Exchange
 Since inception, many of company’s
successes attributed to R&D
Spending
 Major Player in this >$300 Billion
industry
Teva Pharmaceuticals
 Expansion into European
Marketplace
 Strong North American
presence:
– Teva Pharmaceuticals US
– Recent acquisition of Canadian
drug maker Novopharm
 2002 Sales: $2.08 Billion
 2002 Net Income: $278.2
Million
Teva Pharmaceuticals
Generic Pharmaceuticals Industry
 Teva Focuses primarily on:
– Human Pharmaceuticals
(generic drugs in dosage forms such as
tablets, creams, liquids, etc.)
– Active Pharmaceutical
Ingredients (used in the
manufacturing process)
Generic Drugmakers
Drugmakers
Teva Pharmaceuticals
Merck
Alpharma Inc.
Johnson & Johnson
Mylan Labs
Pfizer
Watson Pharmaceuticals
GlaxoSmithKline
IVAX
Novartis
(ranked by sales)
Life in Israel
 Creation
– Created by the UN after WWII for the Jewish people.
– Land: Majority desert, not suitable for agricultural
growth.
– Almost no natural resources, dependant on human
capital for economic growth.
 Population
–
–
–
–
80.1% Jews, 14.6% Muslims, and 2.1% Christians
Languages: Hebrew, Arabic and English
Immigration from the former Soviet Union
1 Million migrants to IL , 17% of the electorate
Education
Globally competitive in telecommunications, biotechnology and
high-tech industries
1999: 13% of employed residents were educated professions,
14.5% were professionals/technicians and 15% of the labor force
has 16 or more years of proper educations
Minimum wage law, average wage per employee is about
$1,680/yr
Employment by Occupation 2000
Skilled
Agricultural
Workers, 2%
Agents, Sales &
Services, 18%
Clerical Workers,
17%
Managers, 6%
Skilled Workers,
21%
Unskilled
Workers, 8%
Academic
Professionals,
13%
Associate
Professionals &
Technicians ,
15%
Israel’s Right to Exist
 Israel’s existence has been plagued by
numerous wars and terrorist attacks.
 Israel’s neighbors’ believe land was
unfairly taken
 Improvement in relations with neighbors:
1979 Israel-Egypt and 1994 Jordan-Israel
peace treaties.
 Israeli/Palestinian violence increased
after Sept 2000.
Military, Patriotism and Peace
 Military Draft: Israel needs to defend itself and protect its people
who are threatened by terrorism.
– All citizens, men and women, serve in the military for a certain period of time after
completing school.
 Israelis are known for their extreme patriotism.
– Very proud and will sacrifice anything,
– won’t be discouraged by terrorists and live their lives without fear.
 The two halves of Israel: Peace can’t be achieved until neighboring
countries begin to accept Israel as a country. The other half believe
peace is achievable regardless.
– Assassination of Prime Minister…current prime minister different from previous one
Israel’s Macroeconomic State and
Structure
1999 – 2000
Transition from a consumption
growth pushed by Russian
immigrants to a expert
influenced growth period.
8
6
Percent
4
2
0
-2
GDP in 2000: US$17,000
Higher than Portugal,
Greece and New Zealand.
GDP Growth Rate 1990 - 2002
6.2 5.9
7
6.7
6.8
6
5
3.3
3.3
2.4
2.3
-1.1
-0.6
Fiscal Policy
 Goals to reduce the budget deficit as a percentage of
GDP and governments debt relative to GDP.
Deficit as % of GDP
Before 1996 Domestic Deficit after Total
 Despite five changes in political leaders in the 1990’s
Israel maintained economic stability.
Privatization and Foreign Trade
 Over the past three decades Israel has induced
privatization in order to stimulate a market based economy
and help finance the budget.
 Israel is a member of both the WTO and Government
Procurement Agreement and has free trade agreements
with most of its major partners (US, EU, EFTA, Canada)
 In 2000 the trade deficit between the US and Israel (to US)
was balanced decreasing
the total deficit from US$
2.9 Billion in 1999 to US$ .7
billion in 2000. Deficits to
Asia and the EU, however,
continued to increase.
Interest Rate
Inflation Rate
 The Bank of Israel sets
the nominal interest rate
every month to maintain
the inflation target set
by the government.
Nominal Interest Rate
In comparison to more
stable economies, the
interest rate for residents
is relatively high despite
a decrease in the
nominal rate as of 2001.
The Capital Market
 The Tel-Aviv Stock exchange is the major
exchange in Israel.
 As of 1997 TASE runs on an automated system,
and allows its members to offer online services to
investors.
 The real value of stocks traded increased by
59% in 2000.
 665 companies currently listed on TASE
– Over 2000 securities with a total market capitalization of
approximately $80 billion
Current State 2001-2002
 2001-2002: Economy began to stagger due to a decline in
private consumption with a rise in public consumption.
 Israel’s GDP declined 1.1% in 2001 and .6% in 2002.
Three factors that influenced Israel’s Recession:
– Following the 9/11 attacks on WTC travel and tourism revenue declined as
the risk of traveling increased (in the ME).
– After 2000 the global economic recovery began to slow. large slump in the
global markets show signs that the market decline has not yet bottomed.
– Israel’s economy is increasingly affected by the rising security problems
as well as a possible future US war with Iraq.
 While Israel’s economic growth in GDP has slowed,
comparatively, Israel is one of the most developed
countries in Western Europe, with GDP per capita of US$
20,000 in 2001.
 Recession in past 2 years, value-added exports, a skilled
workforce, and a committed government help post positive
GDP growth by the end of 2003.
Israel’s Political System
 Three branches of government:
– legislative, executive and judicial. They also have a president
who serves a ritual function and has no real power.
 Religion in the Government
– no separation between state and religion
 Prime minister
– responsible for selecting a cabinet and forming a government
from the coalition parties.
Political Issues
 Political Issues affecting Business
Climate
 People afraid of investing because of constant violence
 Past agreements act as hope for the possibility of peace in the
future
– Examples: 1979 Israel-Egypt peace treaty, the Regional Conference of
1991 in Madrid
 Israel- PLO Recognition
 Signing of the Declaration of Principles
– a timetable for achieving permanent and complete peace between Israel
and Palestine
Attempting Peace
 The Interim Agreement
1995
– granted the Palestinians selfgovernment in the West Bank
 Violence breaks peace agreements
collapse
– Suicide bombing
– Israeli occupation
– Both lead to escalating hostilities
Pros for investing in Israel
 Large numbers of professionals
– 135 engineers, scientists, and physicians per capita per 10,000
people (largest per capita in the world)
 Hotbed for foreign investment
 Low corruption
– According to the Transparency International Corruption Perceptions
Index for 2003, Israel ranked 18th in the world (for a benchmark,
the United States is currently ranked 16th)
 Government Support
– Numerous support for research intensive projects and small
businesses
 Israeli Shekel pegged to a basket of 5 currencies
– The US dollar, German mark, British pound, French franc, and
Japanese yen
Cons for investing in Israel
 Instability
– Continuous conflict in the Middle East (Israel - Palestine/Much of
the Middle East, US - Iraq)
 Global Recession
– Current global economic situation is viewed by many as a “slump”
 Decline in tourism
– A vital revenue source for the country
Business and Politics

During the decade preceding 2000 moderate peace was
maintained and communications between countries continued
in hope of forming a new Middle East. Peace in the Middle
East made high growth and margin companies like TEVA
extremely attractive. From the years 1991 to 1998, when the
peace process appeared to be making strides, Teva’s stock
price rose as it increased its drug pipeline, M&A opportunities
and released Copaxone internationally. Teva has managed
to avoid any major interruption to its business, despite the
terrorism and turmoil in and around Israel. Nonetheless,
escalating conflicts in the Middle East have made more risk
averse investors shy away from the stock as war is eminent
and there appears to be no end to the on going violence.
 In order to statistically determine if Teva is affected by political
events a regression analysis was done.
The Regression Model
 Our final regression model is one that uses the political
rank as a dummy variable, P/E, P/S and Growth to predict
the stock price. The model explains 53.9% of the variation
in the stock price.
The final regression equation is:
Price Close = 10.2 + 0.34 Neg5 + 1.63 Neg4 + 0.84 Neg3
+ 0.07 Neg2 + 1.69 Neg1 + 1.90 Pos1 - 0.03 Pos2 - 0.17
Pos3 + 0.26 Pos4 - 0.04 Pos5 + 0.181 PE + 2.07 Growth 0.76 P/S + 209 Net Margin - 43.2 Beta
 A best-subset test was utilized to prove this was the most
efficient model that could be used with the highest
correlation.
Variables






















Event Date: Date upon which event in question occurred
Event Rank: Events are given a rank ranging from -5 to 5. Negative ranks represent
negative political events, the greater than rank the more serious the political crisis.
Positive ranks represent positive political events.
-5: Political official or significant member of peace process is assassinated/wounded.
-4: Troops invade, attack or occupy foreign territory or political figure resigns.
-3: Terrorist Attack injures civilians or declared end of peace talks.
-2: Riots break out in protest. Political Leaders reputation is smeared.
-1: Rejection of an interim peace agreement/supplement or pause of peace talks
0: Normal Political day for Israeli Citizens: no significant events occur.
1: Elections occur or a meeting between officials is planned.
2: A Cease fire occurs or is planned.
3: A meet between officials occurs.
4: Troops are removed from occupied areas or land turned over to Palestinians.
5: Interim peace agreements or supplements are signed or agreed upon.
PE: PE ratio for the quarter in which the event occurred
Growth: Growth rate for the quarter in which the event occurred.
P/S: Price to sales ratio for the quarter in which the event occurred.
Net margin: Net Margin for the quarter in which the event occurred.
Predicted Price: Price predicted by the model given the about input multiples.
Price Close Prior Day: Stock closing price on the day prior to the event in question.
Price Close: Stock closing price on the day of the event in question.
Percentage Change: Percentage change in price from the prior day to the day in
questions closing price.
Description: Description of the event in question.
Descriptive Statistics
Predictor
Coef SE Coef
T
P
Constant
12.956
8.479
1.53 0.130
Neg5
0.358
3.576
0.10 0.921
Neg4
1.593
3.208
0.50 0.621
Neg3
0.736
3.150
0.23 0.816
Neg2
-0.221
3.345
-0.07 0.947
Neg1
1.387
3.166
0.44 0.662
Pos1
1.837
3.255
0.56 0.574
Pos2
-0.406
3.277
-0.12 0.902
Pos3
-0.491
3.314
-0.15 0.883
Pos4
0.179
3.348
0.05 0.957
Pos5
0.292
3.623
0.08 0.936
PE
0.11323 0.02015
5.62 0.000
Net Marg
168.56
29.63
5.69 0.000
Beta
-40.047
9.430
-4.25 0.000
S = 3.033
R-Sq = 53.9%
R-Sq(adj) = 47.2%
Analysis of Variance
Source
DF
SS
MS
F
P
Regression
13 958.125
73.702
8.01 0.000
Residual Error 89 818.955
9.202
Total
102 1777.080
Political Conclusion

Israeli companies that react in correlation with political events should have
negative beta-hats for negatively viewed events and positive beta-hats for
positively viewed events. Teva, however, has successfully created an
organization that has been successful in beating both the NASDAQ and S&P
500 over the past two years, as well as limiting its exposure to political risk.
• The regression equation shows that
Teva’s stock price is negatively correlated
with political events. An event deemed a -2
on a -5 to 5 scale was the only negative
event, on average to reduce the stocks price
(-22.1 cents). In addition, positive events,
which are likely to increase the stock price,
on average were in some instances
associated with a decrease in stock price
( +2 and +3 events). One can therefore
conclude that though political events must
have some effect on the company and the
mindset of investors, the company has
proven its ability to withstand even the worst
of events. Investors should view Teva as an
undervalued stock that is capable of high
returns with limited political risk.
Teva, S%P 500 and NASDAQ 1998 - 2003
Relative Valuation
 Our Sample
– From this group only companies that were significantly
comparable, given their focus, growth rate, cash flows and risk
were included as initial basis points. In order to control for large
difference within the sample, two outliers were removed: Bradley
Pharmaceuticals (BPRX) and First Horizon Pharmaceuti (FHRX),
leaving 32 basis points
 The Multiples:
– Peg, P/S, Net Margin
 Assumptions:
– Both the value and the standardizing variable represent the equity
claimholders of the firm
– The multiples used were uniformly estimated: accounting
principles to measure earnings multiples are consistent across all
firms in the sample.
– All simple relative valuations will utilize the median rather than the
mean, as it is often a more reliable comparison point.
Simple Valuation PEG Ratio
Company
PEG
0.46
Lannett Company
Barr Laboratories
0.91
Hi-Tech Pharmacal
0.97
Taro Pharmaceutical Industries
0.98
1
King Pharmaceuticals
0.52
Sicor
American Pharmaceutical
Partners
0.58
Able Laboratories
1.02
Flamel Technologies ADR
1.03
ICN Pharmaceuticals
0.63
Chattem
1.06
Endo Pharmaceutical Hldgs
0.65
DUSA Pharmaceuticals
NBTY
0.7
Serologicals
0.73
Biovail Corporation International
0.77
Draxis Health
0.77
Noven Pharmaceuticals
0.82
Cima Labs
0.83
Sanofi-Synthelabo ADR
0.83
Bentley Pharmaceuticals
0.85
Shire Pharmaceuticals Group
PLC
ADR
0.88
Ivax
0.89
1.1
Pharmaceutical Resources
1.14
Teva Pharmaceutical Industries
ADR
1.14
Forest Laboratories
1.23
Mylan Laboratories
1.29
Medicis Pharmaceuticals A
1.37
Watson Pharmaceuticals
1.43
Novo Nordisk ADR
1.56
Allergan
1.64
Perrigo
1.88
Mean
Median
0.989375
0.89
PEG Analysis
 For an investor looking for a simple relative valuation PEG can be
used, however with some caveats:
– High risk companies will often trade at much lower PEG ratios than low risk
firms with the same expected growth rate. This often leads to companies
appearing cheaper than the rest of the sample, however, they may be the
riskiest firm in the group.
– Companies that attain growth by investing less in lower retention ratios will
have higher PEG ratios than companies growing at the same rate. This
often leads to companies looking cheap on a Peg basis, however they may
have high reinvestment rate and poor return on equity.
– Companies with very low or very high growth rates will tend to have higher
PEG ratios than firms with average growth rates. As an example, Teva is
in the upper third of the sample with a high growth rate of 20%.
– Though the data is easy to gather and analyze, dividing PE by expected
growth does not neutralize the effects of expected growth because the
relationship between growth and value is not linear and fairly complex.
Simple Price to Sales
DUSA Pharmaceuticals
Price/
Company
Ordered By Margin
Sales
1.9
16.30%
Net
Allergan
5.12
16.50%
Margin
NBTY
3.71
18.90%
American Pharmaceutical
Partners
4.08
20.40%
3.4
20.80%
Ivax
0.7
5.30%
Chattem
5.56
5.80%
ICN Pharmaceuticals
4.41
6.40%
Teva Pharmaceutical Industries
ADR
Pharmaceutical Resources
1.05
6.80%
Novo Nordisk ADR
5.39
21.20%
Draxis Health
1.28
7.10%
King Pharmaceuticals
5.02
22.00%
Noven Pharmaceuticals
3.09
7.70%
Able Laboratories
4.43
22.20%
Serologicals
1.14
7.90%
Medicis Pharmaceuticals A
3.07
23.20%
Mylan Laboratories
1.59
9.60%
Sicor
7.28
23.60%
Flamel Technologies ADR
1.27
10.20%
Forest Laboratories
7.02
24.40%
Barr Laboratories
1.79
11.30%
Watson Pharmaceuticals
4.51
28.80%
Shire Pharmaceuticals Group PLC
ADR
3.48
11.90%
Taro Pharmaceutical Industries
7.35
29.60%
Hi-Tech Pharmacal
2.66
12.70%
10.45
29.80%
Endo Pharmaceutical Hldgs
9.59
35.90%
Cima Labs
0.84
12.90%
Perrigo
2.56
14.40%
Biovail Corporation International
7.12
43.20%
Sanofi-Synthelabo ADR
6.86
14.40%
Lannett Company
4.75
15.40%
Mean
4.14
17.39%
Median
3.71
15.40%
Bentley Pharmaceuticals
Price/
Company
Ordered By Price to Sales
Sales
NBTY
3.71
18.90%
Net
American Pharmaceutical Partners
4.08
20.40%
Margin
ICN Pharmaceuticals
4.41
6.40%
Able Laboratories
4.43
22.20%
Watson Pharmaceuticals
4.51
28.80%
Lannett Company
4.75
15.40%
King Pharmaceuticals
5.02
22.00%
Allergan
5.12
16.50%
Novo Nordisk ADR
5.39
21.20%
Chattem
5.56
5.80%
Sanofi-Synthelabo ADR
6.86
14.40%
Forest Laboratories
7.02
24.40%
Biovail Corporation International
7.12
43.20%
Sicor
7.28
23.60%
Taro Pharmaceutical Industries
7.35
29.60%
Endo Pharmaceutical Hldgs
9.59
35.90%
Bentley Pharmaceuticals
10.45
29.80%
Mean
4.14
17.39%
Median
3.71
15.40%
Ivax
0.77
5.30%
Cima Labs
0.84
12.90%
Pharmaceutical Resources
1.05
6.80%
Serologicals
1.14
7.90%
Flamel Technologies ADR
1.27
10.20%
Draxis Health
1.28
7.10%
Mylan Laboratories
1.59
9.60%
Barr Laboratories
1.79
11.30%
1.9
16.30%
Perrigo
2.56
14.40%
Hi-Tech Pharmacal
2.66
12.70%
Medicis Pharmaceuticals A
3.07
23.20%
Noven Pharmaceuticals
3.09
7.70%
3.4
20.80%
Shire Pharmaceuticals Group PLC
ADR
3.48
11.90%
NBTY
3.71
18.90%
DUSA Pharmaceuticals
Teva Pharmaceutical Industries ADR
Simple Relative P/S Valuation Conclusions:
Fundamentally investors should look for stocks that have low Price to sales multiples with high
net margins. By analyzing the simple valuation result we see that Teva has a price to sales multiple
slightly higher than the median and a net margin slightly below the median. We can therefore
conclude that Teva is neither an extremely attractive or unattractive investment.
Price to Sales and Net Margin Regression
Price to Sales
Regression Without Outliers
12
10
8
6
4
2
0
0.00%
10.00%
20.00%
Net Margin
30.00% 40.00% 50.00%
y = 20.009x + 0.6615
R2 = 0.5325
Regression Predicted Price:
Given a regression equation of: y = 20.009x + 0.6615
And Price to Sales Multiple of : 3.4
Predicted Price = 20.009*3.4+.6615 = $68.69
By analyzing Teva’s current price fluctuations we can conclude that
Teva is under-valued. Our recommendation, considering Teva’s ability
to maintain economic stability and consistently beat the market is a
strong buy.
Economic Value Added
360
350
340
330
$ Mill
320
310
300
7%
9%
10%
 Developed by Stern,
Stewart & Co.
 Maximizes
Shareholder Value
 Calculates Company’s
True Profit using
WACC
EVA (Calculated)
Using Calculated WACC Using WACC at 10% Using WACC at 9%
Total Debt
$1,161,400,000
$1,161,400,000
$1,161,400,000
$33,900,000
$33,900,000
$33,900,000
$1,195,300,000
$1,195,300,000
$1,195,300,000
6.99%
10.00%
9.00%
Net Op. Profit
$524,000,000
$524,000,000
$524,000,000
Income Tax
$84,800,000
$84,800,000
$84,800,000
NOPAT
$439,200,000
$439,200,000
$439,200,000
EVA
$355,648,530
$319,670,000
$331,623,000
BV of Equity
Total Cap
WACC
Free Cash Flows
(In Millions)
Time(Year)
Revenues
0
1
2
3
4
5
6
7
8
$3,022.32
$3,626.78
$4,352.14
$5,222.57
$6,267.08
$7,207.15
$8,288.22
$9,531.45
Less: Cost of Goods Sold
$1,707.84
$2,049.41
$2,459.29
$2,951.15
$3,541.38
$4,072.58
$4,683.47
$5,385.99
Gross Profit
$1,314.48
$1,577.38
$1,892.85
$2,271.42
$2,725.71
$3,134.56
$3,604.75
$4,145.46
Less: Selling, general, and admin (SGA)
$487.68
$585.22
$702.26
$842.71
$1,011.25
$1,162.94
$1,337.38
$1,537.99
EBITDA
$826.80
$992.16
$1,190.59
$1,428.71
$1,714.45
$1,971.62
$2,267.36
$2,607.47
$106.48
$117.13
$128.84
$141.72
$155.90
$171.49
$188.64
$207.50
720.32
875.03
1,061.75
1,286.99
1,558.56
1,800.13
2,078.73
2,399.97
83.00%
83.00%
83.00%
83.00%
83.00%
83.00%
83.00%
83.00%
597.87
726.28
881.25
1068.20
1293.60
1494.11
1725.34
1991.97
Less: Depreciation and Amortization
$2,518.60
$96.80
EBIT (Unadjusted)
*(1 - Marginal Tax Rate)
EBIT*(1-t)
Noncash Working Capital (NWC)
1377.2
Change in Noncash Working Capital (D NWC)
133.96
EBIT*(1-t)
+ Depreciation
1,511.16
597.87
1,813.39
302.23
726.28
2,176.07
362.68
881.25
2,611.28
435.21
1,068.20
3,133.54
522.26
1,293.60
3,603.57
470.03
1,494.11
4,144.11
540.54
1,725.34
4,765.72
621.62
1,991.97
96.8
106.48
117.13
128.84
141.72
155.90
171.49
188.64
207.50
544.3
332.46
398.95
478.74
574.48
689.38
792.79
911.70
1048.46
- Change in Noncash Working Capital (D NWC)
133.96
302.23
362.68
435.21
522.26
470.03
540.54
621.62
Free Cash Flow to the Firm (FCFF)
237.93
142.23
168.68
200.23
237.86
402.78
461.74
529.40
31.00
33.48
36.16
39.05
42.18
45.55
49.19
53.13
206.93
108.75
132.52
161.18
195.69
357.23
412.55
476.27
-67%
16%
16%
16%
41%
13%
13%
-47%
22%
22%
21%
83%
15%
15%
- Capital Expenditures (CapEx)
Interest Expense
Free Cash Flow to Equity (FCFE)
Average Grow th in FCFF and FCFE
Grow ths in FCFF (Used to calculate FCFF in Year 11)
Grow ths in FCFE
8%
18%
FCFF in Year 11
751.90
Term inal Value = FCFFn+1/ (WACC - Gn)
Term inal Value
Free Cash Flow to the Firm (FCFF)
24,815.06
237.93
142.23
168.68
200.23
237.86
402.78
461.74
529.40
237.93
142.23
168.68
200.23
237.86
402.78
461.74
529.40
31.00
33.48
36.16
39.05
42.18
45.55
49.19
53.13
206.93
108.75
132.52
161.18
195.69
357.23
412.55
476.27
+ Terminal Value @ EOY10
Total Cash Flow s to Firm
Interest Expense
Free Cash Flow to Equity
Terminal Value
 Calculated by using
Stable Growth
Formula
 FCFF(n+1)/ (WACC-gn)
 Growth Rate taken
from U.S. Ten Year
Treasury Bond
FCFF in Year 11
751.9 Mill.
Terminal Value = FCFFn+1/ (WACC - Gn)
Terminal Value = 751.9M/(6.99%-3.96%)
Terminal Value = 24815.1815
Target Price Calculation
 Used Terminal value
and Free Cash Flows
to Calculate Value Of
Assets
 Target Price: $52.79
 Current Price $44.16
Value of Op Assets (Discounted WACC) (in 000s)
+ Cash and Equivalents
14982.67728
809.9
Value of Firm
15792.57728
- Firm's Debt
1,899.00
PV of Equity
13,893.58
Divided by: Shares Outstanding
263.2 Mil ion Shares
Target Price per Share
$52.79
Current Price
$44.16
Altman EM Z-Score Model
 Used to calculate risk of debt in Emerging
Market Countries
 Z-Score = 3.25 + (6.56)*X1 + (3.26)*X2 +
(6.72)*X3 + (1.05)X4
 X1 = Working Cap./ Total Assets
 X2 = Retained Earnings/ Total Assets
 X3 = EBIT/ Total Assets
 X4 = BV of Equity/ Total Liabilities
Altman Z-Score Model
Z Score = 3.25 + X1(6.56)+ X2 (3.26) + X3(6.72) + X4(1.05)
Year 2002
Year 2001
3.25 + 1.952631 + 0.948168 + 0.725332 + 0.012747 = 6.8888774
3.25 + 2.729636 + 0.914255 + 0.660891 + 0.015669 = 7.5704518
6.888877446 Is an A+ Rating for 2002
7.570451761 Is an AA Rating for 2001
Profitability & Growth Ratios
Profitability Ratios
ROA
ROE
Net Profit Margin
Gross Profit Margin
1997 1998 1999 2000 2001 2002
8.70% 4.80% 6.70% 5.20% 8.00% 8.87%
17.30% 10.70% 15.60% 12.90% 20.20% 22.43%
9.58% 6.36% 9.13% 8.46% 13.38% 16.29%
15.31% 11.02% 15.05% 14.51% 17.81% 19.83%
Sales % Growth
Op Income % Growth
Net Income % Growth
1997 1998 1999 2000 2001 2002
17.09% -0.09% 14.87% 36.51% 18.69% 21.26%
44.34% -23.53% 54.70% 35.36% 49.51% 43.05%
46.58% -33.64% 64.79% 26.50% 87.84% 47.59%
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