Module 9 – Valuation of Equity

1. Module 9 – Valuation of Equity Wilbur Benitez March 25, 2014

2. Cabela’s Overview • Was founded in 1961 and has been a leader in outdoor gear since • Leading retailer in hunting, fishing and outdoor gear • Went public in June 2004 • Market Cap of 4.8B • Total revenues of 3.6M in 2013 • Two main segments • Merchandise sales and financial services • Currently seeking to expand with smaller stores • Traditionally has operated using large “Legacy” stores

3. Current Expansion • Current retail segment consists of 48 stores • 2013: Seven next generation stores were opened • New stores are more productive and generate higher returns on invested capital • 12.5% increase in retail space (5.8 million square feet in 2013) • Future plans • 2014: fourteen next generation stores are scheduled to open • 2015: three next generation stores have been announced

4. Industry Risk • Decline in discretionary consumer spending (non-essential goods) • Unseasonal weather conditions • Difficult economic conditions • Consumer spending, oil prices, unemployment rates, etc. • Cyber security breaches (Target) • Decreased consumer confidence • Political and economic uncertainty in foreign countries • Many vendors are located in countries such as China, Mexico and various Eastern Asian and European countries • Political unrest, wars, work stoppages etc. • Current and future government regulations (firearms) • Laws and regulations related to hunting and fishing licenses • State and Federal regulations related to items such as firearms and ammunition

5. Introduction to Valuation of Equity • Equity Calculation • In order to determine the value of ownership of the enterprise we subtract the value of debt • This is straightforward because debt is on the balance sheet

6. Going Forward Assumptions • WAAC = 10.60% • Perpetual growth rate: 2% • Revenue growth rates: • Sales revenue: 9% • Financial services: 8% • Other revenue : 2% • EPAT and NEA are based on previous computation • Forecast • Additional forecasted years are needed in order to allow NEA to properly adjust for the fluctuation in growth rates • Initially sales, financial services revenue and other revenue each have different growth rates

7. Reason for different growth rates

8. Computation of NFL • We can use our calculation of NFL to arrive at equity value by subtracting it from Enterprise value

9. Analyst forecasts as a shortcut

10. Analyst forecasts as a shortcut • Earnings growth rate of 8.3% is computed based on analyst forecast

11. Implied Forecast from Valueline • Growth rate in RE is negative because the cost of equity is higher than the EPS growth rate

12. Residual earnings model • This model suggest a share price much lower than the current share price • We can interpret this as a “very rough” way to use analyst forecast

13. Residual Earnings AdjustmentUsing Value Line Estimates • Using Valueline forecasted growth rates we obtain a reasonable estimate for residual earnings • Using the residual earnings model, we get a value of $44.17 per share

14. Valuation date adjustment Today Mid-year [3,2385,394 ∙ (1+.106).5] $3,455,1350 • [3,2385,394 ∙ (1+.106)84/365] • $3,362,460

15. Sensitivity Analysis Assumed Forecast • This allows us to test various scenarios • “Best case” • “Worst case”

16. Discounted Cash Flows Model

17. Sensitivity Analysis

18. Sensitivity Analysis • Started with 2013 EPM and grew by 10% annually • Projected sales to increase by 13% based on prior year sales

19. Justification for higher growth rates • Margins are expected to increase due current expansion plans • The idea is to position smaller stores in settings that would not be viable for Legacy stores • Expansion update • By the end of 2015, the new stores will have increased retail square footage by 18%

20. Final Comments • Equity value indicates ownership value • Valuation can be enhanced by using mid-year adjustments • Sensitivity analysis is a useful tool to test various scenarios and to understand the significance of various forecast

21. Questions?