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FINAL VALUATION

FINAL VALUATION. Lauren Walaszczyk. Industry. Mature but is subject to great volatility The past 5 years have been troublesome for the auto industry Increasing fuel prices Economy was in a recession Demand for more fuel efficient cars Raw materials (ex: steel) price increased

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FINAL VALUATION

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  1. FINAL VALUATION Lauren Walaszczyk

  2. Industry • Mature but is subject to great volatility • The past 5 years have been troublesome for the auto industry • Increasing fuel prices • Economy was in a recession • Demand for more fuel efficient cars • Raw materials (ex: steel) price increased • All auto makers are expanding into the emerging markets • Import and exports have been increasing between countries especially with China • Labor and materials are more affordable • As the global economy starts to recover and disposable income increase, car sales are predicted to increase • Will call for more efficient operations and to keep down the overcapacity of cars • Continue creating new models and environmentally friendly cars

  3. Quick Background • Headquarter: Tokyo, Japan • IFRS Accounting • Products (enterprise activities) • New/Used Cars (74%) • Motorcycles (14%) • Boats (3%) • Financial Services (6%) • Other Brands • Acura • America generates the most revenue • Competitors • Toyota • GM • Ford

  4. Internal Strengths: • Diversified products • Large amount of R&D • Brand recognition • Large market share in Asia and America • Positive Financials • Opportunities: • Growing global demand • Depreciating Yen • New models • Demand for motorcycles • Offer low interest rates • Threats: • High competition • New competition with fuel efficiency • Sales dependent on disposable income and gas prices • Rising raw material costs • Appreciating Yen • Natural disasters: Japan earthquake and Thailand flood • Internal Weaknesses: • Product recalls • Weak market share in Europe

  5. NEA

  6. NEA – Trend Analysis • Compared to 2010 there has not been a lot of growth

  7. NEA - Growth • Very up and down from year to year • 2012 has made 2013 look like a high growth year

  8. NFL

  9. EPAT • Extremely volatile

  10. EPAT – Trend Analysis • EPAT decreases until 2013 • The large decrease in 2011 is due to foreign currency adjustments

  11. EPAT -Growth • Drastic changes in growth from year to year

  12. FEAT

  13. ROE • Highly levered • About $0.09 stays within the company

  14. What happened in 2012? • In 2011, Japan experienced a massive tsunami and 4 earthquakes • Disruption in the supply chain and in production  limited auto supply • Honda has a March 31 year end • So the loss from these natural disasters were reflected in the 2012 financial statements • As a result, 2013 looks like a great year for Honda with a spike in growth

  15. Valuation Considerations • Using the trend analysis or growth analysis seems irrelevant • 2012 and 2013 are too skewed • Does not show a trend for forecasting or what will happen in the future • Following the trend would show no growth in forecasting the next 5 years • Going farther back than 2010 poses issues as well because of the recession • Off balance sheet items do not provide any great information for valuing the company • Pose only a 1% change to NEA and EPAT • Operating leases, pension and deferred tax assets/liabilities • Therefore, sticking with parsimonious assumptions to value Honda • The more simple valuation provides most reasonable and best estimate for forecasting • Forecasting each line item would not be accurate • Too hard to tell where Honda is headed based on the historical trends • Not comparable to the other auto companies because Honda is on IFRS accounting

  16. Assumptions

  17. Sales Growth • Growth assumption = 4 % • Steps: • Average the sales growth 5.8 % • Analysts opinion for industry is 2.4 % • Averaged 5.8 % and 2.4 % • The average sales growth rate high due to the jump in 2013 • Analysts predicting between 3.5% - 4%

  18. Enterprise Profit Margin • EPM from sales is more stable • EPM from sales shows that the enterprise operations are consistently profitable • Assume 6 % • Steps: • Average EPM 2.65 % • Average EPM from sales 8.9 % • Averaged the two EPMs • Did not want to completely disregard the original EPM • Comparing the sale of products to the cost to make the product

  19. Enterprise Asset Turnover • Assume 1.3 • Has remained stable • Not much growth with NEA • Seems efficient compared to most of the companies

  20. Forecasts • Sales growth rate 4 % • Enterprise Profit Margin (EPM) 6 % • Enterprise Asset Turnover (EATO) 1.3

  21. Cost of Enterprise Capital • Risk of operations • WACC = [Rd * (Vd/Vent)] + [Req * (Veq/Vent)] • WACC assumption = 9.61%

  22. Valuation

  23. Discounted Cash Flow • Discount rate of 9.61% (WACC) • Same parsimonious assumptions

  24. Residual Enterprise Income • NEA is the anchor • Accounting based valuation • Negative REI  resources are not being used efficiently or resources are not generating enough profit • Return on book value will not catch up to the estimated enterprise value

  25. Abnormal Enterprise Income Growth • Capitalized next period EPAT is the anchor • Compare cumulative cash flow of next year to expected amount of earnings • Estimated intrinsic value

  26. Sensitivity Analysis

  27. Analysts’ Forecasts – Value Line

  28. Earnings per share g = 7.25% • Dividends per share g = 5.37%

  29. Equity Valuation Using Dividend Discount Model • Current Stock Price - ¥ 3,428

  30. Analyst’s Recommendations

  31. Updating Value to 4/22 • As of 3/31/2013 ¥ 6,258,778 • ¥ 3,456 per share • Updating to today • ¥ 6,912,905 Enterprise Value • ¥ 3,817 per share

  32. Final Recommendation • Buy

  33. QUESTIONS?

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