Some good questions. More detail:
1) I've been assuming 301 million shares outstanding, fully diluted. The latest 10Q says 301.82 as of Feb. 9, 2000.
2) I made the assumption that depr. and amort. minus capital investments would come out a wash. This comes from seeing that they have been close to a wash for the past 2-3 years and assuming the battery business has a somewhat higher ratio of cap. investment to depreciation than the lower-tech-manufacturing pet food business.
3) I didn't have the right facts on RAL's passive investment ownership. I incorrectly used the "Investments and Other Assets number of $2.5 billion. I believe I should use $1.7 billion. I also assumed that, since they had a similar amount of debt, about $2.4 billion (including current maturities, notes payable, and some of the income taxes and other liabilities), that reasonable managers would sell the equities and pay the debt if they couldn't get a return on the equities at least equal to the debt service of $150 million. Assuming a return on the equities is one way to look at it: 6% of $1.7 billion would be about $100 million. You offered another way to look at it, which is to simply divide the $1.7 billion by the shares. $1700mil/301mil = $5.65/share. This way is better in that it avoids having to estimate the composite growth rate of the operating co. and the investments. My 11% estimate does take into account that the investment assets probably won't grow as fast as the operating earnings. I would move the growth estimate up to 12% for just the pet food business.
4) To get to the pet food business owner earnings, I started with the $435 million pro forma earnings for 9/99 and subtracted the $35 million equity earnings, the $3.2 million restructuring adjustment, the $79 million SAILS gain, the $55 million extraordinary gain, and the $10 million extraordinary tax benefit. From this I get $252 core business earnings, after tax and after interest expense (all above numbers are after tax according to the pro forma income statement note (c). Assuming depr. plus amort. minus cap. expenditures is a wash, this is also the after-interest owner earnings. If I add back the $155 million interest expense to the $252 million, I get $407 million. Then, as you said, I multiplied by 1.06 to get the March 2000 trailing 12 mo. owner earnings before interest of $431 million. Subtracting back the $155 million interest gives me $276 million pet food business owner earnings. Dividing by 301 million shares gives me $0.917/share earnings. Assuming a 3% dividend on a price of $19.50/share and a 12% growth rate (for the pet food bus. only now), I can justify a p/e of 15. 15 x $0.917 = $13.75. Add the $5.65 equity investments and I get $19.40.
These estimates weren't made quite as conservatively as my first ones, but I also believe I've left out some positives, like that there is probably another $100 to $150 million of free cash flow unaccounted for which could be used to pay debt or buy shares.
Thanks for the questions. I appreciate that you want us to get the numbers and assumptions right.
Let me know what you think.
Brendan |
