SWM - Mark Moore

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The sensitivity analysis for both as-stated and restated models gives relatively the samemodel prices. Negative growth rates are used to bring the terminal value of the perpetuity backto equilibrium. Growth rates ranged from 0% to 60%, where lower growth rates returned toequilibrium faster and high growth rates returned to equilibrium slower. The different cost ofequity and growth rates were inputted in order to manipulate the time consistent price. In bothcases, the highest cost of equity of 16.25% resulted in the lowest model price in every differentgrowth rate, while the lowest cost of equity of 8.39% gave us the highest model prices. Eachmodel price has shown to be significantly less than the observed share price of $50.95.Considering the high explanatory power of the residual income model, we are confident insaying that <strong>SWM</strong> in overvalued.Abnormal Earnings Growth (AEG) ModelThe abnormal earnings growth (AEG) is a model based on financial theory. Incomparison with the other models, the AEG model utilizes the information obtained from thefirm’s financial statements. The AEG model uses the dividends reinvested (DRIP), normalearnings, and cumulative dividend earnings. By examining these components, analysts candetermine a firm’s ability to meet liabilities to investors. In comparing normal earnings withcumulative earnings growth per fiscal year, firms can determine the difference between actualand expected earnings for investors. In addition, the AEG model contains a very high validationlevel in comparison to the dividend and discounted free cash flow models.The first step in the AEG model is to calculate the DRIP. DRIP is computed bymultiplying the previous year’s dividend payment by the cost of equity in the previouslyforecasted 10 years. The DRIP is the amount of money investors can reinvest in the firm withtheir previously years dividend payment. Once the DRIP is calculated, the next step is tocompute the cumulative dividend earnings, which is calculated by adding the dividendreinvestment to the forecasted net income for the year. Then we compute benchmark earningsfor the next nine years. Multiplying 1 plus the estimated cost of equity by the previous year’snet income derives the benchmark or normal earnings. Now AEG can be calculated by172
subtracting the normal earnings for each year by the cumulative dividend earnings. However,these now need to be discounted back to time zero to get the present value. The present valueis calculated by multiplying each year’s AEG with its corresponding present value factor. Thepresent value factor is one divided by one plus the cost of equity, raised to the time period,t(1/((1+Ke)^t)). By summing up each of the years present values it gives us the total PV ofyear-by-year AEG’s.Once the present value of the abnormal earnings growth is found, the terminal value ofthe perpetuity needs to be calculated. However, first we need to estimate the AEG for year2019. In order to calculate its AEG, the trend over the previous ten years should be considered.By calculating the percent change in AEG over the forecasted ten years, it gave us an estimateof what the AEG will be in 2019. For both as-state and restated AEG models, we calculated apercent change of 18%, which was added to 1 and multiplied by the previous year’s AEG to getthe AEG in 2019. Once the 2019 AEG is found, it must be converted into the present value. Inorder to do this we divide the forecasted AEG by the cost of equity minus the growth rate,followed by multiplying the perpetuity by the present value factor of 2018, resulting in theterminal value perpetuity.With the present value of the forecasted years AEG and the present value of theperpetuity, the intrinsic value per share can be found. The first step in the calculation of theintrinsic value, or the model price, is to find the total average net income. The figure iscomposed of the net income from 2009, the year-by-year present value of AEG and the value ofthe terminal perpetuity. Next the total average net income is divided by the number of sharesoutstanding to develop earnings per share. The intrinsic value per share must be computednext by dividing the cost of equity by the intrinsic value per share. In order to get the timeconsistent price in 11/2/2009 dollars, the previous share price must be multiplied by 1 plus theestimated cost of equity raised to the (10/12) power.173
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Schweitzer-Mauduit International,
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Buyers Willingness to Switch……
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Net Sales/Accounts Receivable……
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Enterprise/EBITDA………………
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Competitive ForceRivalry Among Exis
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they spend money devoted to R & D.
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The next part of our financial anal
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Company OverviewSchweitzer-Mauduit
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table also shows that SWM’s sales
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Competitive ForceDegree of Competit
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The size of the firms in the indust
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Total Assets 3500 3000 2500 2000 1
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Excess CapacityExcess capacity aris
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scale in the industry is vital to a
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1400 1200 1000 800 600 400 200 0 Pr
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RelationshipsThe relationships of t
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its product (indirectly), the threa
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it is easy for them to dictate the
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As far as the purpose of tobacco pa
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Volume per BuyersThe volume a buyer
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(SWM 10-K). Considering the overall
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Cost LeadershipCost leadership mean
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likely for the customer to return a
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of pride in being the “the world
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educing product costs. The governme
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It is evident when reading the tabl
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The second of the two accounting po
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SWM for the most part does a suffic
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Schweitzer-Mauduit and its competit
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their economic activity. If firms h
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contracts and, to a lesser extent,
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The ability to do this gives firms
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their sales in U.S. dollars to mini
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Schweitzer Mauduit 2004 2005 2006 2
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ConclusionThe accounting strategy a
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Schweitzer-Mauduit2004 2007 2006 20
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than capitalized. The only reason t
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5 Δ Sales/Cash from Sales 4 3 2
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Δ Net Sales/Accounts Receivable
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Δ Net Sales/Inventory 30 25 20 1
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0.3 CFFO/OI 0.25 0.2 0.15 0.1 0.05
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12 CFFO/NOA 10 8 6 4 2 SWM AOI UVV
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200 Δ Asset Turnover 150 100 50
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4 Δ Total Accurals/ Sales 2 0 -
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ConclusionThe ratios examined above
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of a firm’s financials. The firm
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Restated Income Statement For ye
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Research and Development Schweitz
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New taxes on Net IncomeIn millions
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Amortized Goodwill
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obligations in the past five years,
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1.200 Quick Asset Ratio 1.000 0.8
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2004 2005 2006 2007 2008SWM 25.9881
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comparison. A small ratio shows inv
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6 Inventory Turnover 5 4 3 2 1 SWM
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2004 2005 2006 2007 2008SWM 79.5248
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Profitability Ratio AnalysisProfita
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Operating Expense RatioThe operatin
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15 Operating Pro`it Margin 10 5 0
Page 122 and 123: Net Profit Margin 2004 2005 2006 20
Page 124 and 125: Return on AssetsThe return on asset
Page 126 and 127: 40 Return on Equity 20 0 -20 -40
Page 128 and 129: Internal Growth Rate 2004 2005 2006
Page 130 and 131: industry average as much as it did
Page 132 and 133: Debt/Equity RatioThe debt-to-equity
Page 134 and 135: Schweitzer-Mauduit is at a low 1.61
Page 136 and 137: Mauduit has stayed pretty stable th
Page 138 and 139: it looks to keep declining, meaning
Page 140: Gross profit is the next step in fo
Page 143 and 144: Balance Sheet143
Page 145 and 146: liabilities, we take the already fo
Page 147 and 148: Statement of Cash FlowsThe statemen
Page 149 and 150: Estimating Cost of CapitalCost of E
Page 151 and 152: Size-Adjusted Cost of EquityThe CAP
Page 153 and 154: The table below shows the liability
Page 155 and 156: The cost of capital is the interest
Page 157 and 158: declared overvalued. Prices falling
Page 159 and 160: P/E ForecastedCompany PPS EPS P/E F
Page 161 and 162: Dividends/Price RatioCompany PPS DP
Page 163 and 164: Price/EBITDACompany Market Cap EBIT
Page 165 and 166: Price/Free Cash FlowCompany Market
Page 167 and 168: November 2, 2009 we had to calculat
Page 169 and 170: Schweitzer-‐Mauduit's Free Ca
Page 171: Now that we have calculated the tot
Page 175 and 176: Long-Run Residual Income Valuation
Page 177 and 178: Cost of EquityReturn on Equity-0.14
Page 179 and 180: Growth RateReturn on Equity-0.14 -0
Page 181 and 182: Return on Equity RestatedGrowth Rat
Page 183 and 184: Once the industry analysis had been
Page 185 and 186: AppendicesSales Manipulation Diagno
Page 187 and 188: CFFO/ OI Change 2004 2005 2006
Page 189 and 190: UVV 2.170832 2.687889 2.78523 2
Page 191 and 192: Capital Structure RatiosDebt to Equ
Page 193 and 194: 3MonthRatesSUMMARY OUTPUT Regressio
Page 195 and 196: Coefficients Intercept 0.035115 X
Page 197 and 198: Total 71 0.987349 Intercept X Vari
Page 199 and 200: Total 35 0.775347 Intercept X Vari
Page 201 and 202: Total 59 1 2 0.939751 Coefficients
Page 203 and 204: Total 23 3 5 0.624714 Coefficients
Page 205 and 206: Residual Total 46 47 0.624852 0.848
Page 207 and 208: Residual Total 70 71 1 1 6 0.7615
Page 209 and 210: Residual Total 34 35 0.519917 0.775
Page 211 and 212: Price Earnings Growth(P.E.G.)Compan
Page 213 and 214: Discounted Free Cash Flowt 0 1 2 3
Page 215 and 216: Price(11/1/1988)Initial Costof Equi
Page 217 and 218: Figures in Millions (Except per S
Page 219 and 220: Growth Rate RestatedReturn on Equit
Page 221 and 222: Return on EquityGrowth RateKe -30%
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Schweitzer-‐Mauduit Restated
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Heakal, Reem. "What Are Economies o
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SWM - Mark Moore

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