[BASIC MATERIALS:
February 7, 2010 AGRICULTURAL CHEMICALS]
Monsanto (MON)
Investment Recommendation: HOLD
Analyst: Kurt Becker
Current Price:
140
120
100
80
60
40
20
0
$74.21
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Investment Thesis
Graph 1: Historical Prices collected from
Yahoo.com
Key Index Statistics
52 Week Range
$66.57- $93.35
Market Capitalization
40.49 (B)
Shares Outstanding
546 (M)
Beta
0.7
Price/Book
4.07
Price/Sales
3.89
ROA(ttm)
10.5%
ROE(ttm)
15.78%
EPS
$2.78
Net Income
2.1B
Trailing P/E
26.71
Forward P/E
16.71
We currently have 225 shares of
Monsanto, representing 1.65% of our
portfolio, and I recommend we HOLD at
that amount. Using the Discounted FCF
valuation model I derived an intrinsic value
of $82.09 which indicates MON is fairly
valued. Monsanto continues to dominate a
market that it essentially created more than
a decade ago. Through its ongoing
commitment to research and development
and assertive capital allocation, the
company has positioned itself to grow and
remain dominant for years to come. The
company has good growth potential over
the long term, particularly in countries like
India, China, and Brazil, where the
population is increasing and agricultural
production methods need to be updated.
Monsanto is well established in developing
countries where most of the future growth
in this industry will come from, and this
gives them an edge over its competitors.
Economic
factors
will
help
Monsanto this planting season as crude oil
prices remain low and fertilizer prices are at
all time lows. The USDA predicts an increase
in amount of crops planted thus giving
Monsanto more revenue. Because of the
importance of crop yields farmers will be
looking for the best product to maximize
their yields. This is where Monsanto focuses
and benefits most. A slightly down harvest
last year will provide Monsanto a perfect
opportunity to market their new state of
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the art products. They expect to see a lot of
sales growth in this area.
The company has to create a more
positive public image and further
strengthen its Seeds and Genomics segment
to take advantage of the huge opportunities
for growth in the future. They have a very
poor public image and increasing legal costs
which is the main reason for my HOLD
recommendation. However, with the
strategic acquisitions in 2008 and 2009, the
company is on the right track to further
strengthen its presence in the industry
through diversification.
Company Analysis
Company Overview
Monsanto is an agricultural focused
company. Farmers around the world use
their innovative products to address onfarm challenges and to reduce agriculture's
overall impact on our environment.
Monsanto’s business is defined by their
seeds-and-traits strategy, so they are
constantly looking at ways to maximize the
potential of seed for farmers – both its yield
and the technology used to protect that
yield. Their business provides farmers with
the best ways to get more out of each seed.
Farmers use their seed-based products to
help them protect their harvest from weeds
and insects, produce healthier foods and
provide better animal feeds. Their business
works to meet the needs of farmers
through two business segments: Seeds and
Traits and Agricultural Productivity.
Image: Net Sales Breakdown
Business Segments
Seeds and Genomics segment: Monsanto
produces seed brands, including DEKALB,
Asgrow, Deltapine, Seminis, and De Ruiter,
and develops biotechnology traits that
assist farmers in controlling insects and
weeds. It also provides other seed
companies with genetic material and
biotechnology traits for their seed brands.
Agricultural
Productivity
segment:
Monsanto manufactures Roundup brand
herbicides and other herbicides and
provides
lawn-and-garden
herbicide
products for the residential market. Its
major products include Glyphosate-based
herbicides, Selective herbicides, and Lawnand-garden herbicides. The largest market
for lawn-and- garden herbicides is the
United States.
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Industry Analysis
Company
Country
Market
Cap(in
Bil. $)
Net
Income
(in Bil.
$)
P/E
(ttm)
MON
US
40.49
1.53
26.71
SYT
Switzerland
23.79
1.25
19.20
DOW
US
29.94
-1.39
n/a
POT
Canada
30.04
.987
31.23
Industry Profile
The chemicals industry is comprised of
companies that produce commodity
chemicals, diversified chemicals, fertilizers
and agricultural chemicals, industrial gases,
and specialty chemicals. The industry is
concentrated in areas where a few large
manufacturers hold significant market
share. The larger manufactures benefit
from supply chain integration and
economies of scale, whereas smaller
manufacturers utilize product specialization
and efficient operations in order to
compete. The industry is capital-intensive.
In 2009, the industry spent about $24
billion in capital expenditures and $27
billion on research and development. The
industry is cyclical and affected by costs for
basic commodities, especially oil and gas. It
is the second largest industry in term of
energy usage, so the prices of those
commodities greatly affect this industry.
The S&P Fertilizers & Agricultural Chemicals
Index increased 25.0% in 2009, versus a
24.3% rise in the S&P 1500 Composite
Index. This followed a decrease of 40.1% in
the S&P Fertilizers & Agricultural Chemicals
Index during 2008, versus a 38.2% drop in
the S&P 1500.
Industry Outlook
Looking ahead, the chemicals industry is
expected to soften due to the economic
correction. However, low crude oil prices
may lower production costs and strong
demand in emerging economies may offset
certain negatives. The industry may see
increased consolidation due to intense
competition, the need for cost efficiencies,
and economies of scale. The U.S. farm
economy and crop markets are generally
mature, with cultivation of corn the largest
use for agricultural chemicals. The USDA
reported in June 2009 that farmers had
planted about 87 million acres with corn for
the year, up 1% from the prior year. Much
of the growth in global nutrient use has
come from developing countries in Asia and
Latin America, as these regions' rising
populations and income levels boost the
need for grain production. I expect fertilizer
and seed companies to continue shifting
focus to these markets in coming years.
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SWOT Analysis
Strengths
Advanced Technology: Monsanto strives to
help Farmers get the most out of each acre
of land. In order accomplish this Monsanto
has developed a pipeline on three core
pillars: advanced breeding, biotechnology,
and improved agronomic practices. When
all three components are fully integrated,
crop yields have and will continue to
increase. Everything they do is aimed at
helping to make agriculture more
productive and more profitable for farmers.
Monsanto invested more than $980 million
last fiscal year researching new tools for
farmers. The company concentrates the
vast majority of its research-anddevelopment (R&D) efforts on new biotech
traits, elite germplasm, breeding, new
variety and hybrid development, and
genomics research. Other R&D projects
support the company’s current products,
including improved formulations of
Roundup herbicide. Their importance on
R&D sets the tone for Monsanto as whole.
They will remain the leader in farming
technology because of the importance of
R&D. They set an annual 10% of sales
budget for R&D. Monsanto’s main
competitive strategy is to have the most
advanced technology.
Diversification: Monsanto has their two
main business segments but each segment
is very diverse. In the Seed and Genomics
segment sales are: 18.4% from soybean
seed and traits, 11.7% from vegetables and
fruit seeds, 7.2% from other crops seeds
and traits, and 7.1% from cotton seed and
traits. Then the Agricultural Productivity
segment sales are: 81.9% from Roundup
and 18.1% from all other agricultural
products. Their biggest diversification is
geographically. They have positioned
themselves to meet all the needs of North
America and continue to have even a
greater presence in foreign countries.
Monsanto has been a pillar of excellence
abroad for much longer than their
competitors. They are in a much better
position to handle the needs of a growing
global economy.
Image: Sales Breakdown by Global Regions
Weaknesses
Litigation and Public Outlook: In February
2009, a group of residents from Sauget,
Illinois filed a suit against Monsanto and its
subsidiaries alleging that for years the
company dumped toxic and carcinogenic
chemicals that poisoned their town. Also,
Monsanto has been identified by the U.S.
Environmental Protection Agency as being a
"potentially responsible party" for 56
contaminated sites in the United States.
Monsanto has been sued, and has settled,
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multiple times for damaging the health of
its employees or residents near these
contaminated sites. Basically, there is a vast
list of lawsuits and accusations about MON.
They are criticized by many environmental
groups and in many rural areas have a very
poor brand outlook. These litigations and
criticisms
definitely
hurt
MON’s
performance and are an issue they have
dealt with for many years.
Financial Liquidity: Currently, the Quick
Ratio is 0.95 which shows a lack of ability to
cover short-term cash needs. The
company's liquidity has decreased from the
same period last year, indicating
deteriorating cash flow. Overall, the key
liquidity measurements indicate that the
company is in a position in which financial
difficulties could develop in the future.
Inventory growth rates surpassed Sales
growth rates. This indicates that MON could
experience vast inventory build-up which
could lead to liquidity problems. The payout
ratio for MON is 37.14%, while its historical
payout ratio has been 36.40%. This
indicates that dividends will not rise and if
this rising trend continues dividends could
be cut.
Opportunities
Financial Strength: Monsanto has a debt-toequity ratio that is very low at 0.19 and is
currently below that of the industry
average, implying that there has been very
successful management of debt levels. The
gross profit margin for MON is high;
currently it is at 52.00%. MON's long-term
growth rate of 58.99% based on the
average of 5 year historical eps growth
rates. MON has a high ROA of 6.26%, which
ensures that there are no structural flaws in
the company. Management has been
successful in allocating and using their
assets and has created a strong long-term
balance sheet. Somehow they need to
control their short-term debt and liquidity
problems. If that is done MON could be very
strong financially and could pay a larger
dividend.
Emerging Markets: Monsanto has a supplier
diversity pledge: “As a global company that
deals with food, feed and fiber producers in
many different countries, cultures and
environments, Monsanto understands the
importance of diversity, and have created a
Supplier Diversity Program to help meet the
need in this area.” This shows that
Monsanto is aware of their opportunities in
emerging markets and will be a leader in
those markets. India, China and Brazil are
showing the most agricultural growth
globally. At the beginning of November, the
company
opened
the
Monsanto
Biotechnology
Research
Center
in
Zhongguancun, China, to strengthen its ties
with Chinese research institutions in plant
biotechnology and genomics. The research
center will participate in early-stage
bioinformatics and genomics research and
serve as a base for collaborating with
Chinese scientists. Monsanto also has
research centers in the U.S., Brazil and
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India. As I stated before MON is already in
place to be a dominate force in these
emerging markets and they will see a
significant benefit from that dominance.
Acquisitions to enhance market share:
Monsanto acquired a number of companies
in 2008 and 2009 to enhance its market
share. In June 2008, Monsanto acquired De
Ruiter Seeds Group, a Dutch-holding
company that owns and operates De Ruiter
Seeds. Monsanto also acquired Marmot,
which operates Semillas Cristiani Burkard
(SCB), a privately-held seed company
headquartered
in
Guatemala
City,
Guatemala. SCB is the leading Central
American corn Seed Company focused on
hybrid corn production. In December 2008,
Monsanto acquired Aly Participacoes, which
operates the sugarcane breeding and
technology companies, CanaVialis and
Alellyx. Their location and expertise in Brazil
are important, as Brazil is the world's
largest producer of sugarcane, the largest
exporter of finished sugar, and the world's
second-largest producer of ethanol. With
these acquisitions Monsanto would be able
to build a stronger platform to promote the
company's brand image and further
strengthen its market position and
customer base. They continue to diversify
and expand operations which allow them to
eliminate even more competition.
New Product Pipeline: Monsanto has a
record high 11 projects currently in their
R&D pipeline. The 4 major projects are as
follows. Corn Yield Drought Tolerant, the
drought tolerant corn, is in the fourth phase
of commercialization. This phase includes
development and testing of best trait and
germplasm combinations for commercial
launch. The company's Genuity SmartStax
Corn is also in the fourth phase of
commercialization. Genuity SmartStax corn
is the first, most durable, and highestyielding package for total weed and bug
control in corn. Genuity SmartStax moved
into Phase 4, the final step prior to the
product's planned 2010 commercial launch,
pending regulatory approvals. Monsanto's
Soy Yield Intrinsic Development, the higher
yielding soybean, moved into Phase 4. The
Roundup Hybridization System for corn
would replace detasseling in hybrid seed
corn production, thus reducing cost of
goods. RHS, which moved to Phase 3,
utilizes a transgenic corn trait created by
Monsanto. The hybrid seed generated from
this technology results in a fully fertile and
glyphosate-tolerant
plant.
Successful
commercialization of these products over
the next few years would further enhance
Monsanto's product portfolio and keep
them atop the agricultural world in product
advancement and technology.
Threats
Extensive regulations: Monsanto has come
under attack as of late for what some view
as anticompetitive behavior. The company's
glyphosate-resistant
technology
has
transformed agriculture, and many
competing seed companies cross-license
the technology because of its widespread
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acceptance. With Monsanto’s patented
genes being inserted into roughly 95
percent of all soybeans and 80 percent of all
corn grown in the U.S., the company also is
using its wide reach to control the ability of
new biotech firms to get wide distribution
for their products, according to a review of
several Monsanto licensing agreements and
dozens of interviews with seed industry
participants, agriculture and legal experts.
Stringent regulatory and legislative
requirements affect the development,
manufacture,
and
distribution
of
Monsanto's products. Obtaining permits for
mining or production or testing, planting,
and import approvals for seeds or
biotechnology traits can be time-consuming
and costly, with no guarantee of success.
The failure to receive necessary permits or
approvals could have near-and long-term
effects on the company's ability to sell some
current and future products. It appears
Antitrust investigations will be ongoing
which will potentially tie up funds for legal
assistance. If the investigations continue to
escalate then MON will see a drastic hit on
legal costs.
Financial Analysis
Historical Growth
There are no significant differences
between Monsanto’s longer term growth
and growth in recent years. Annual revenue
growth has been 9.3% per year. Total asset
growth has been 5.7% per year. Annual
E.P.S. growth has been 34.7% per year.
Equity growth has been 4.5% per year.
Monsanto’s consensus growth rate forecast
(average of Wall Street analysts) is 5.0%
which is in line with the average of the
historical growth measures.
Sales Growth Rate
80.0%
60.0%
40.0%
20.0%
0.0%
2001 2002 2003 2004 2005 2006 2007 2008 2009
-20.0%
-40.0%
Financial Positives
 MON increased it’s asset turnover
ratio 9 out of the last 10 years
 Gross Margin and Operating Margin
has increased every year for 10
years
 Return on Revenue has a 5 year
average of 9.1% which is 3.5% better
than the industry average.
 Revenue has increased every year
for 10 years.
 ROA has a 5 year average of 6.26%
which is 1% better than the industry
average.
 A low beta shows that there is low
volatility in MON
Financial Negatives
 ROE has a 5 year average that is
7.5% below the industry average.
 They have a very low dividend yield
and an increasing payout ratio.
 MON has no constant dividend
growth and appears that trend will
continue
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Valuation Technique
Monsanto is stable company who continues
to improve their business techniques and
practices. They remain at the forefront of
the industry in innovation and product
quality. In my analysis Monsanto’s historical
financial statements their financial stability
became very evident and gave me
confidence that it will continue in the
future. I used the Free Cash Flow valuation
model to derive an intrinsic value of $82.09.
I used a discount rate of 6.47% and a
growth rate of 3% with a 1.5% increase for
the next 2 years. The 3% growth rate came
from numerous analysts estimates about
the eps of MON. I then used the industry
PEG which was about 1.5% to come up with
the next 2 years growth rates. The intrinsic
value I formulated indicates that MON is
fairly valued.
Free Cash Flow
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
Conclusion
Due to increasing legal costs and antitrust
investigations I recommend a HOLD on
MON. Monsanto is a strong company and I
expect them to remain strong in the future
but the short-term effects of those litigation
costs could significantly hurt Monsanto.
Until they work out their public relations
problems it will be difficult for them to be
the dominant company they strive to be.
Management is working diligently to fix that
situation so accompanying that with
management’s R&D focus MON will remain
the leader in Agricultural crop technology.
References
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$$(500)
$(1,000)
2001 2002 2003 2004 2005 2006 2007 2008 2009

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Monsanto Corp. 10-K Report
http://finance.yahoo.com
http://monsanto.com
http://research.stlouisfed.org/fred2/
http://wrds.wharton.upenn.edu/
http://wsj.com
http://www.netadvantage.standardand
poors.com/NASApp/NetAdvantage/inde
x.do
http://galenet.galegroup.com
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Balance She e t
Assets
Cash
Marketable Securities
Receivables
Inventories
Raw Materials
Work In Progress
Finished Goods
Notes Receivable
Other Current Assets
Total Current Assets
Net Property & Equipment
Property, Plant & Equip
Accumulated Depr.
Int. & Adv. to Subsidiaries
Other Non-Current Assets
Deferred Charges
Intangibles
Deposits & Other Assets
Total As s e ts
LIABILITIES & SHAREHOLDERS' EQUITY
Notes Payable
Accounts Payable
Curr. Long-Term Debt
Curr. Port. Cap. Lease
Accrued Expense
Income Taxes
Other Curr. Liabilities
Total Current Liabilities
Mortgages
Deferred Charges/Inc.
Convertable Debt
Long-Term Debt
Non-Curr. Capital Leases
Other Long-Term Liab.
08/31/09
08/31/08
08/31/07
08/31/06
08/31/05
08/31/04
08/31/03
08/31/02
08/31/01
1,956.00
22.00
2,189.00
2,934.00
417.00
1,155.00
1,362.00
1,613.00
132.00
2,809.00
2,453.00
358.00
1,072.00
1,023.00
866.00
59.00
1,906.00
1,719.00
253.00
831.00
635.00
1,460.00
22.00
1,799.00
1,688.00
216.00
753.00
719.00
525.00
150.00
1,843.00
1,664.00
167.00
563.00
934.00
1,037.00
300.00
1,979.00
1,154.00
166.00
494.00
494.00
281.00
230.00
2,733.00
1,230.00
269.00
470.00
491.00
428.00
250.00
2,141.00
1,272.00
250.00
385.00
637.00
307.00
08/31/00
131.00
2,830.00
1,357.00
329.00
328.00
700.00
2,412.00
1,253.00
782.00
7,883.00
3,609.00
7,158.00
3,549.00
2.00
557.00
602.00
7,609.00
3,323.00
6,725.00
3,402.00
33.00
636.00
534.00
5,084.00
2,656.00
5,916.00
3,260.00
21.00
3.00
492.00
5,461.00
2,418.00
5,417.00
2,999.00
50.00
333.00
4,424.00
2,339.00
4,586.00
2,247.00
40.00
303.00
4,797.00
2,627.00
4,737.00
2,110.00
61.00
1,177.00
4,973.00
2,659.00
4,459.00
1,800.00
4,663.00
1,727.00
4,040.00
1,179.00
2,751.00
1,048.00
461.00
4,931.00
2,087.00
4,604.00
2,517.00
43.00
65.00
475.00
1,174.00
389.00
488.00
4,962.00
2,280.00
4,611.00
2,331.00
51.00
4,589.00
1,237.00
462.00
4,644.00
2,378.00
5,090.00
2,712.00
32.00
42.00
680.00
2,401.00
402.00
1,339.00
829.00
1,400.00
687.00
3,439.00
505.00
3,606.00
488.00
17,877.00
17,991.00
12,983.00
11,728.00
10,579.00
9,164.00
9,461.00
8,890.00
11,429.00
11,726.00
08/31/09
08/31/08
08/31/07
08/31/06
08/31/05
08/31/04
08/31/03
08/31/02
08/31/01
08/31/00
48.00
676.00
31.00
11.00
1,090.00
13.00
34.00
649.00
236.00
24.00
514.00
4.00
253.00
369.00
29.00
157.00
326.00
276.00
136.00
290.00
133.00
35.00
275.00
358.00
722.00
457.00
95.00
158.00
525.00
1,965.00
79.00
957.00
3,756.00
2,139.00
161.00
1,025.00
4,439.00
1,650.00
150.00
356.00
3,075.00
1,328.00
234.00
175.00
2,279.00
1,289.00
208.00
11.00
2,159.00
1,013.00
122.00
968.00
994.00
944.00
1,239.00
1,894.00
417.00
1,944.00
148.00
1,810.00
159.00
2,377.00
835.00
2,757.00
962.00
641.00
770.00
1,724.00
1,792.00
1,150.00
1,639.00
1,458.00
1,075.00
1,258.00
851.00
893.00
1,700.00
1,616.00
1,255.00
1,285.00
1,349.00
937.00
1,103.00
1,049.00
676.00
666.00
7,821.00
8,617.00
5,480.00
5,203.00
4,966.00
3,906.00
4,305.00
3,710.00
3,946.00
4,385.00
Minority Interest (Liab.)
Preferred Stock
Common Stock Net
Capital Surplus
Retained Earnings
Treasury Stock
6.00
9,695.00
2,682.00
1,577.00
6.00
9,495.00
1,138.00
1,177.00
6.00
6.00
3.00
3.00
3.00
3.00
9,106.00 8,879.00 8,588.00 8,315.00 8,077.00 8,050.00
-405.00 -1,099.00 -1,572.00 -1,645.00 -1,733.00 -1,645.00
814.00
623.00
500.00
266.00
3.00
8,056.00
173.00
3.00
7,853.00
2.00
Total Share holde r Equity
10,056.00
9,374.00
7,503.00
6,525.00
5,613.00
5,258.00
5,156.00
5,180.00
7,483.00
7,341.00
Total Liab & Ne t Worth
17,877.00
17,991.00
12,983.00
11,728.00
10,579.00
9,164.00
9,461.00
8,890.00
11,429.00
11,726.00
Total Liabilitie s
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INCOME STATEMENT
08/31/09
08/31/08
08/31/07
08/31/06
08/31/05
08/31/04
08/31/03
08/31/02
08/31/01
08/31/00
11,724.00
4,962.00
6,762.00
1,098.00
2,561.00
3,103.00
11,365.00
5,188.00
6,177.00
980.00
2,476.00
2,721.00
8,563.00
4,277.00
4,286.00
780.00
2,088.00
1,418.00
7,294.00
3,775.00
3,519.00
710.00
1,638.00
1,171.00
6,294.00
3,290.00
3,004.00
588.00
1,674.00
742.00
5,423.00
2,896.00
2,527.00
509.00
1,415.00
603.00
3,373.00
1,796.00
1,577.00
330.00
776.00
471.00
4,673.00
2,493.00
2,180.00
527.00
1,334.00
319.00
-13.00
123.00
2,967.00
845.00
24.00
315.00
110.00
2,926.00
899.00
20.00
57.00
139.00
1,336.00
402.00
12.00
12.00
134.00
1,049.00
337.00
17.00
-366.00
115.00
261.00
104.00
-118.00
91.00
394.00
128.00
-452.00
57.00
-38.00
-27.00
-36.00
81.00
202.00
73.00
5,462.00
2,817.00
2,645.00
560.00
1,305.00
780.00
121.00
-101.00
99.00
459.00
164.00
5,493.00
2,770.00
2,723.00
588.00
1,253.00
882.00
212.00
-152.00
184.00
334.00
159.00
2,098.00
11.00
2,007.00
17.00
922.00
71.00
695.00
-6.00
157.00
98.00
266.00
1.00
-11.00
-12.00
129.00
-1,822.00
295.00
175.00
-26.00
Net Income
2,109.00
2,024.00
993.00
689.00
255.00
267.00
-23.00
-1,693.00
295.00
149.00
Outstanding Shares (th)
545,407
548,593
545,609
543,177
268,191
264,413
262,681
261,413
258,112
258,043
CASH FLOW STATEMENT
08/31/09
08/31/08
08/31/07
08/31/06
08/31/05
08/31/04
08/31/03
08/31/02
08/31/01
08/31/00
2,109.00
548.00
-1,240.00
2,024.00
573.00
75.00
993.00
527.00
194.00
255.00
488.00
362.00
267.00
452.00
195.00
295.00
554.00
-444.00
632.00
347.00
-23.00 -1,693.00
302.00
460.00
-697.00
345.00
19.00 1,984.00
185.00
12.00
211.00
149.00
546.00
-534.00
42.00
468.00
1,737.00
1,261.00
-214.00
1,108.00
616.00
671.00
-370.00
-281.00
-258.00 -1,541.00
3.00
155.00
89.00
-72.00
-210.00
-109.00
-224.00
-347.00
-382.00
-52.00
-12.00
-15.00
-10.00
-20.00
-582.00
-148.00
-205.00
62.00
-124.00
-469.00
-433.00
24.00
63.00
176.00
752.00
97.00 -1,188.00
-96.00
-125.00
102.00
-37.00
146.00
-116.00
20.00
Net Sales
Cost of Goods Sold
Gross Profit
R&D Expenditure
SG&A Expense
Income Befor Dep & Amort
Depreciation & Amort.
Non-Operating Income
Interest Expense
Income Before Taxes
Prov. For Inc. Taxes
Minority Interest (Inc.)
Investment (Gain/Loss)
Other Income
Net Income Before Extra Items
Extra Items & Disc. Ops.
Cash Flow Provided By Operating Activity
Net Income(Loss)
Depreciation/Amortization
Net Increase/(Decrease) In Assets/Liab.
Cash Provision (Used) by Disc. Operations
Other Adjustments -- Net
Net Cash Provision (Used) By Operations
819.00
127.00
140.00
689.00
519.00
349.00
9.00
108.00
2,236.00
2,799.00
1,854.00
1,674.00
Cash Flow Provided By Investing Activity
(Incr.) Decr. In Property, Plant & Equip.
(Acq.) Disp. of Subs. Business
(Inc.) Decr. in Securities Invest.
Other Cash Provisions (Used) By Investing
Net Cash Provision (Used By Investing
-916.00
-918.00
-509.00
-29.00 -1,007.00 -1,362.00
222.00
-24.00
-40.00
29.00
190.00
67.00
-71.00
-723.00
-2,027.00
-1,911.00
-625.00
-1,667.00
-262.00
Issue (Purchase) Of Equity
Issue (Repayment) Of Debt
Incr.(Decr.) In Borrowing
Dividends, Other Distribution
Other Cash Inflow, (Outflow)
-359.00
-71.00
-112.00
-552.00
-247.00
292.00
82.00
-419.00
-78.00
-114.00
-273.00
-5.00
-258.00
2.00
138.00
-139.00
-207.00
-61.00
-319.00
44.00
-174.00
-66.00
-51.00
27.00
-141.00
Net Cash Prov. (Used) by Financing
-1,065.00
-102.00
-583.00
-117.00
-582.00
-243.00
191.00
-518.00
Effect of Exchange Rate on Cash
Cash or Equivalents at Year Start
Cash or Equivalents at Year End
-105.00
1,613.00
1,956.00
77.00
866.00
1,613.00
46.00
1,460.00
866.00
3.00
525.00
1,460.00
1,037.00
525.00
281.00
1,037.00
428.00
281.00
307.00
428.00
343.00
747.00
-594.00
935.00
-512.00
756.00
-147.00
121.00
-935.00
Cash Flow Provide By Financing Activity
Net Change in Cash or Equivalents
10 | P a g e
723.00
-7.00
-416.00
369.00
26.00
131.00
176.00
105.00
Lockheed Martin
Enter Current Market Value for Equity
Current stock price
Number of shares common stock outstanding
Market value of common stock
$74.21
546
$40,519
Enter Current Market Value for Long-Term Debt
Estimated value of long-term debt
$1,724
Enter Current Market Value for Short-Term Debt
Estimated value of short-term debt
$79
Enter Current Market Value for Preferred Stock
Estimated value of lpreferred stock
$0
Estimate Percent of Firm that will be Financed by Long-term Debt
Current percent of firm financed with long-term
debt
4.07%
Target percent financed with long-term debt=
15%
Estimate Percent of Firm that will be
Financed by Preferred Stock
Current percent of firm financed with preferred
stock
0.00%
Target percent financed with preferred stock =
0.00%
Estimate Percent of Firm that will be
Financed by Short-term Debt
Current percent of firm financed with short-term
debt
0.19%
Target percent financed with short-term debt =
0.19%
Estimate Cost of Equity
Beta=
0.7
Risk-free rate=
3.59%
Market risk premium =
4.98%
Cost of equity=
7.08%
Estimate Cost of Long-term Debt
Bond rating for company's debt
Spread for bond rating
A1.00%
Tax rate=
32.0%
Cost of long-term debt=
After-tax cost of long-term debt=
4.59%
3.12%
Inputs to Estimate Cost of Preferred Stock
Yield on preferred stock
Current coupon rate (preferred
dividend/preferred stock)
Cost of preferred stock =
5.00%
0.00%
5.00%
Inputs to Estimate Cost of Short-term Debt
Prime rate
Adjustment to prime
3.25%
0.50%
Cost of short-term debt
3.75%
After-tax cost of short-term debt
2.55%
Estimated WACC
6.47%
11 | P a g e
Lockheed Martin
Two-Stage Discounted Free Cash Flow Valuation Model (aka Warren Buffett Way Owners' Earnings Discount Model)
6.47%
assuming discount rate (k) of
Free Cash Flow ("owner earnings") in 2009:
Net Income
Average Increase in Working Capital (subtract)
Depreciation (add)
Amortization (add)
Average Capital Expenditures (subtract)
Free Cash Flow (Owner Earnings)
$
$
$
$
$
$
2,109.00
(561.00)
548.00
(450.00)
1,646.00
Please read the comments I have added in cells B5 through B9.
-916.00
-918.00
FIRST STAGE
$
Prior Year Free Cash Flow
First Stage Growth Rate (add)
Free Cash Flow
Discounted Value per annum
$
2013
2012
2011
2010
1,646.0 $ 1,695.4 $ 1,771.7 $ 1,878.0
5.0%
6.0%
4.5%
3.0%
1,695.4 $ 1,771.7 $ 1,878.0 $ 1,971.9
$1,695.4 $1,664.0 $1,656.7 $1,633.8
-509.00
-370.00
-210.00
-281.00
-109.00
-224.00
-382.00
-582.00
Year:
2019
2018
2017
2016
2015
2014
$ 1,971.9 $ 2,070.5 $ 2,174.0 $ 2,282.7 $ 2,396.8 $ 2,516.7
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
$ 2,070.5 $ 2,174.0 $ 2,282.7 $ 2,396.8 $ 2,516.7 $ 2,642.5
$1,503.0
$1,524.1
$1,545.4
$1,567.1
$1,611.2 $1,589.0
$15,989.6 <----- This number represents the sum of present values of the free cash flow that we expect in the first stage (which in this case is ten years long)
Sum of present value of owner earnings
SECOND STAGE
Residual Value
Free Cash Flow in year 10
Second Stage Growth Rate (g) (add)
Free Cash Flow in year 11
Capitalization rate (k-g)
Value at end of year 10
$
$
$
2,642.5
1.50%
2,682.1
4.97%
53,966.46
546
$82.09
Shares outstanding assuming dilution
Intrinsic Value per share
2009
Capital Exp
Average
765
561
-916.00
-450.10
<----- This cell establishes the "perpetuity with growth" discount rate
<-----This is the present value in year 2020 of a perpetuity starting in that year (NOT the present value as of today)
$28,830.45 <----- Now we must discount cell B28 back ten periods since B28 is only the PV in year 2020. This is the value of the second stage free cash flow
$44,820.10 <----- The sum of the the first and second stage free cash flows
Present Value of Residual
Intrinsic Value of Company
Change in
NOWC
Average
<----- This number equals the free cash flow in year 2019, which we have already added to the value via cell B19
<----- We are growing the number for only one year so we can start the perpetuity in year 2020
2008
3,313
-918.00
2007
2006
693
885
-509.00
-370.00
2005
1,160
-281.00
2004
2003
(145)
322
-210.00
-109.00
12 | P a g e
2002
(2,625)
-224.00
2001
2000
681
-382.00
-582.00
Lockheed Martin
Industry Analysis
Company Name
INC
ASHLAND
CORP
CABOT
CHEMICAL
DOW
PONT
DU
CHEMICAL
EASTMAN
CORP
FMC
CORP
OLIN
CORP
PENFORD
INDUSTRIES
PPG
VANGUARD
AMERICAN
INDUSTRIES
CF
CO
MONSANTO
MIRACLE-GRO
SCOTTS
INDUSTRIES
TERRA
CARBON
CALGON
PRODUCTS
AIR
INC
AIRGAS
INC
PRAXAIR
CORP
ALBEMARLE
CHEMICALS
ARCH
CORP
BALCHEM
INDUSTRIES
CYTEC
INC
ECOLAB
INC
FULLER
FLAVORS
INTL
CORP
LUBRIZOL
TECHNOLOGIES
MINERALS
CORP
NEWMARKET
GROUP
OM
CORP
POLYONE
CHEMICAL
QUAKER
INTER0TIO0L
RPM
Corp
SCHULMAN
TECHNOLOGIES
SENSIENT
SIGMA-ALDRICH CORP
CO
STEPAN
CORP
VALSPAR
INC
ZEP
Corp
Agrium
CORP
Celanse
CORP
Ferraro
CORP
Georgia Gulf
Grace
WR
Yearly Average
Total Average
Monsanto
ROR
ROA
ROE
On
Return
2008
2.1
2.7
1
6.3
4.9
10.6
8.9
3.7
3.4
8.4
17.5
17.7
3.9
22
8.9
10.5
6
11.2
7.9
2.5
8.2
5.9
7.3
1.4
9.6
6.3
4.9
4.5
7.8
0.4
1.9
3.6
0.9
7.3
15.5
2.3
4
2.8
13.2
5.5
0
0
0
6.36
5.5
2007
2.6
4.9
5.4
9.8
4.7
6
7.9
1.3
7.2
8.6
13.5
10.8
4.9
8.6
4.4
10.4
5.6
12.5
9.8
3.3
9.1
5.9
7.8
7.2
10.9
4.4
0
5.7
10.9
4.8
2.8
1.3
1.3
6.6
15.3
1.1
4.7
2.5
8.4
5.2
0
2.1
3.7
6.14
9.1
6.26
11.30
3.6
0.41
-7.52
Revenues (%)
2005
2006
21.5
2.5
0
3.5
9.8
7.6
7.5
11.1
7.9
5.5
5.2
6.2
5.9
4.7
1.3
0.9
5.8
6.4
10
8
0
1.7
2.5
9.5
4.8
4.2
1.1
0.2
0
0
8.7
8.5
4.5
4.8
9.6
11.9
5.5
6
3
1
13.2
12.2
7.3
2
7
7.5
4.1
5.5
9.7
10.8
3
4.5
5.3
4.9
3.9
4.6
2.2
3.6
0.9
2.5
0.4
2.5
0
6.2
2.2
2
4.3
6
15.5
15.4
1.3
0.6
5.4
5.9
4.3
3.9
8.6
0.8
4.4
6.1
0.9
1
4.8
4.2
0.6
2.6
5.21
5.10
2004
4.8
6.3
7
6.5
2.6
8.6
2.6
0
7.1
9.6
4.1
5
0
4.5
1.7
8.2
3.8
10.6
3.6
1.5
11.9
0
7.4
2.5
9.6
0
6.3
3.7
9.3
0
2.2
4.1
2.3
7.1
16.5
1.1
5.9
0
9.7
0
1.5
0
2.6
4.69
on
Return
2008
3.1
3.1
1.2
5.7
5.8
11.5
9.2
5
3.9
7.5
31.1
13
5
31.2
9.7
8.6
6.2
9.2
6.8
3
12.3
5.2
9.5
1.5
8.4
6.3
5
9.3
9.3
0.7
2.8
3.3
2
5.9
13.2
6.1
4
6.2
16.9
4.8
0
0
0
7.27
5.85
2007
3.3
4.9
6.1
9
5.3
5.7
6
1.7
7.2
7.3
22.6
7.5
6.3
11.4
4.6
8.7
6.1
9.6
8.6
4.2
13.1
5.1
9.3
7.1
9.5
4.1
0
10.4
7.2
7.3
4.1
1.3
2.6
5.2
12.5
2.6
4.6
5.7
9.7
4.1
0
3
3.1
6.46
13 | P a g e
(%)
Assets
2005
2006
28
2.7
0
3.5
9.9
8.1
5.9
9.7
9.6
6.8
3.9
5.3
8.2
8.7
1.4
1
6.8
7.6
12.4
6.9
0
2.6
1.6
6.3
4.9
4.9
1.1
0
0
0
7
6.9
5.4
5.3
7.2
9.2
4.6
5.6
3.7
1.3
16.2
14.7
5.5
1.9
8.5
9
5.5
6.3
7.7
8.9
2.9
4.1
4.6
4.4
6.2
8
2.1
1.7
1
3.6
0.5
3.4
0
6.6
4.2
4
3.1
4.7
13.3
12.4
2.5
1.1
5.5
5.9
0
8.5
10.4
1.1
3.5
5.2
0.9
1.1
11.6
9.7
0.5
2.1
5.53
5.37
2004
5.5
5
6.4
4.9
2.8
6
3.3
0
7.9
12.6
4.6
2.9
0
4.7
1.8
6.2
4.4
7.7
2.9
1.7
13.7
0
8.9
3.3
8.4
0
5.3
5
9.9
0
2.9
4.2
4.1
5
14.1
2
5.6
0
10.8
0
1.5
0
1.9
4.60
on
Return
2008
5.5
6.9
3.5
22.5
18
33.5
23
11.6
14.4
13.5
54.2
23.8
14.5
74.3
16.7
20.7
17.5
26.5
16.6
8.8
18.4
11.8
25.6
2.8
38.6
15.6
7.5
24.1
12.5
1.9
8.7
10.5
4.2
11.1
22.8
18.8
9.8
18.7
36.7
58.2
0
0
0
18.24
18.82
2007
6.4
10.5
15.8
29.7
15.6
15
16.7
4.1
22.1
14.4
38.1
13.1
12.6
35.7
9.7
20
17.6
24.3
19.9
11.7
19.1
14
23.6
12.8
32.5
11.1
0
25.4
12.3
26.2
12.8
4.3
5.4
10.2
20.6
8
11.7
18.1
20.4
35.3
0
13.7
0
16.06
(%)
Equity
2005
2006
62.2
5.4
0
7.6
32.9
23
20.6
35.1
39.8
22.5
12.1
14.6
35.7
30.9
4
2.6
18
22.6
26
15.2
0
4.4
2.9
11.5
12.5
10.6
3.6
0
0
0
15.8
15.8
14.5
14.9
19.5
23.4
14
14.6
11
4.1
19.7
18
14
5.4
19.9
22.1
10.8
11.9
21.1
24.9
7.6
11.7
6.8
6.8
17
20.3
5.3
3.6
5
16.2
1.5
10.8
0
20.7
7.2
7.6
6.9
10
21.1
20.9
8.3
3.7
14.3
15.2
0
26.4
26.5
2.7
419.5
77.7
3.2
3.9
52.3
30.3
0
0
24.03
15.11
2004
16.1
10.7
26.1
17.1
15.3
24
19.2
21.1
25.3
259.5
5.2
18.4
3.6
14.7
12.2
20.8
8.1
5
17.8
21.7
6.7
23.7
7.8
15.3
30
7.6
10.4
6.8
11.9
21.1
6.3
15.3
0
34.4
0
5.3
0
20.66