Ticker:
AIPC
Sector:
Consumer/Non Cyclical
Industry: Food Processing
Recommendation:
ModerateStrong
Buy
Pricing
Closing Price
52-wk High
52-wk Low
$39.82 (4-13-10)
$40.19 (1-19-10)
$23.00 (3-06-09)
Key Statistics
Market Cap
Shares Out.
EPS (ttm)
P/E (ttm)
ROE
Profit Margin
Oper Margin
Gross Margin
Beta
$840.8 M
21.1 M
$3.82
10..44
29.58%
12.41%
18.8%
46.6%
.24
Company Background
The American International Pasta Company was founded in
1988 in Excelsior Springs, MO. Now headquartered in Kansas
City, MO AIPC has grown to the largest producer of dry pasta
in North America. AIPC produces several brand named
products, but also is one of the largest suppliers to private label
brands and the restaurant/food service industry. From the
grocery store, to the school cafeteria, to the Italian restaurant, no
matter what the age, you use AIPC’s products if you eat pasta.
Products
ANALYST NAME
Leslie Moore
Lcmp77@mail.missouri.edu
American Italian Pasta Company operates 10 major brands, including the well-known Ronco and
Martha Gooch brands. In addition to this, AIPC produces product for many private label brands,
including Wal-Mart.
Competitive Environment
AIPC’s closest competitors are Regina Pasta and Cargill, both of which are private companies.
American Italian Pasta is an interesting company in this respect. Also, considering that it
focuses on a very popular, basic foodstuff, demand for AIPC’s product is non-cyclical. This is
evidenced by its beta of .27.
Financial analysis
AIPC-2009
Market Data
Current Price
52 Week Range
Beta
PEG Ratio
Market Cap
Shares Outstanding
Institutional Ownership
P/E Ratio
EPS
Financial Data
ROA
ROE
Net Margin
Debt/Equity
39.82
$23-$40.19
0.27
1.19
840.8 Million
21.1 Million
92%
10.4
3.82
AIPC-2009
16.30%
29.58%
14.06%
0.34
2008
3.54%
10.11%
3.36%
1.05
2007
1%
3.22%
1.34%
1.4
KFT Industry Average
5.36% 12.54%
24.80%
7.48%
8.30%
70.00% -
American Italian Pasta has definitely improved its financial situation in the last couple of years.
Both ROA and ROE have increased dramatically, from 1% and 3.22% in 2007 to 16.3% and
29.58% in 2009. This can be attributed to the fact that it paid off most of its debt, evidenced by
the fact that AIPC’s Debt/Equity ratio went from 1.4 in 2007 to .34 in 2009.
As I previously mentioned, most of the companies in AIPC’s industry are private, making a
financial comparison difficult. However, I felt that Kraft was a similar enough company to make
due in a bind. When comparing AIPC to Kraft, you can see that AIPC is favorable on all of the
ratios, with half as much debt, and twice as much ROE for the shareholders than Kraft.
Stock Performance
I compared AIPC to both the S&P, using both a 5 year and 2 year trend As you can see in the
graph below AICP took a dive in 2005, and was pretty much flat from 2006 to the first part of
2008. Looking at the performance from the last two years paints a different story. During the
last two years, AIPC has steadily grown in value by about 600%, clearly beating both Kraft and
the S&P. As I mentioned earlier, I attribute this to the company deleveraging itself, but revenues
have also grown from $398 Million in 2007, to $628 Million in 2009.
5 Year Performance
2 Year Performance
Valuation
I began my evaluation using the Warren Buffet Owner Earnings Model. While I found this
application to the company fundamentally flawed in this particular case, I have included it here
for sake of consistency with the other reports
Discount Rate
In order to calculate a discount rate we must look at the risk free rate, beta, and the equity market
risk
premium. Using the beta of .27 and risk free rate of .147% (current 3 month t-bill rate) and a
market return of 10% we can calculate a discount rate of
k =.00147+ .27*(.1-.00147) = 2.9%
The exceptionally low beta drives a discount rate that is abnormally low, which ultimately results
in an intrinsic value that is too high.
Growth Rates
For the exception of 2009, AIPC has shown slow to moderate growth. Because of this, and to be
conservative, I assumed a 2% growth for 2010, 0% growth for 2011 and 2012 as we exit the
recession, 1% growth for 2013-2019, and a 1% growth rate for the perpetuity.
Intrinsic Value
After setting it up the discount rates, my model gave me a value of $192.55 per share, nearly 5
times its current price! This is definitely unusable, and can be attributed to the low discoutnt
rate. Playing with the model, a discount rate of 5% gives a per share value of $92.53, and
discount rate of 10%, (which assumes a beta of 1) gives a per share value of $42.85; when
compared to the current price of $39.82, this suggest that the stock is at least undervalued by a
few dollars, possibly more, but is hard to tell from the DCF model. Due to this, I am forced to
use the figures suggested by analysts from Thompson/Reuters found on Yahoo Finance. Five
analysts gave estimates of AIPC, with the low estimate of $41, the high of $57, and the mean
(median) estimate of $46 ($45). All of these estimates are larger the current stock price, and if
the mean/median estimates hold true, now is definitely the time to buy this stock.
Analysts on Morningstar generally feel favorable about he stock. The average rating with 1 a
buy and 3 a sell, is1.4 which I feel is fairly strong. Of the 7 analysts, 4 suggest buy, 3 hold, and
none suggest underperform or sell. Analysts expect 8.5% growth in the next 5 years, slow, but
steady. The P/E and PEG ratios for American Italian Pasta are also quite low, which generally
suggest a bargain.
Two-Stage Discounted Free Cash Flow Valuation Model (aka Warren Buffett Way Owners' Earnings Discount Model)
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)
2.90%
$
$
$
$
$
$
FIRST STAGE
Prior Year Free Cash Flow
First Stage Growth Rate (add)
Free Cash Flow
Discounted Value per annum
$
$
Sum of present value of owner earnings
5%
10%
88,288.00
(24,108.00)
24,986.00
(10,733.33)
78,432.67
Year:
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
78,432.7 $ 80,001.3 $ 80,001.3 $ 80,001.3 $ 80,801.3 $ 81,609.3 $ 82,425.4 $ 83,249.7 $ 84,082.2 $ 84,923.0
2.0%
0.0%
0.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
80,001.3 $ 80,001.3 $ 80,001.3 $ 80,801.3 $ 81,609.3 $ 82,425.4 $ 83,249.7 $ 84,082.2 $ 84,923.0 $ 85,772.2
$80,001.3 $77,746.7 $75,555.6 $74,160.5 $72,791.1 $71,447.1 $70,127.8 $68,833.0 $67,562.0 $66,314.5
$724,539.4
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
Present Value of Residual
Intrinsic Value of Company
Shares outstanding assuming dilution
Intrinsic Value per share
$
85,772.2
1.00%
$
86,630.0
1.90%
$ 4,559,471.89
$3,425,790.45
$4,150,329.89
21555
$192.55
$92.53
$42.85
Recommendation: Moderate-Strong Buy
I suggest a moderate to strong buy for the stock for several reasons. First, American
International Pasta has rid itself of most of its debt in recent years, while increasing revenue.
AIPC is in my opinion now poised to have steady growth in ROE for the next few years. Second,
AIPC operates in the non cyclical consumer goods sector. Backed by its low beta of .27, I feel
that this is a great opportunity to give the fund some non cyclical exposure, which I do not feel it
has much of. Finally, I feel that this stock is a safe way to give the fund some mid-cap exposure,
as we have invested primarily in large-cap companies. I feel that the relatively small size of the
company can allow it to continue moderate growth without running into some of the size barriers
that a lot of the large-cap companies run into.
This stock would definitely be a great bet considering the risk of a double dip recession. I feel
that the company will experience moderate growth in the next few years regardless of the
economic environment, as dried pasta is a relatively cheap, common foodstuff.
Finally, all of analyst opinions that I have run into suggest buying or holding this stock. It is
interesting to note that this mid-cap company has 92% institutional ownership, which I feel is
another green flag for investing in this company. Lastly, most analysts feel that this stock is at
least moderately undervalued. This, combined with the fact, that a dcf analysis with low growth
rates and a beta of 1, (much higher than the beta of .27) show this stock to be at least $2
underpriced, I feel that the data supports my opinion to buy this stock.
Income Statement
In Millions of USD (except for per share
items)
Revenue
Other Revenue, Total
Total Revenue
Cost of Revenue, Total
Gross Profit
Selling/General/Admin. Expenses, Total
Research & Development
Depreciation/Amortization
Interest Expense(Income) - Net Operating
Unusual Expense (Income)
Other Operating Expenses, Total
Total Operating Expense
Operating Income
Interest Income(Expense), Net NonOperating
Gain (Loss) on Sale of Assets
Other, Net
Income Before Tax
Income After Tax
Minority Interest
Equity In Affiliates
Net Income Before Extra. Items
Accounting Change
Discontinued Operations
Extraordinary Item
Net Income
Preferred Dividends
Income Available to Common Excl. Extra
Items
Income Available to Common Incl. Extra
Items
Basic Weighted Average Shares
Basic EPS Excluding Extraordinary Items
Basic EPS Including Extraordinary Items
Dilution Adjustment
Diluted Weighted Average Shares
Diluted EPS Excluding Extraordinary Items
Diluted EPS Including Extraordinary Items
Dividends per Share - Common Stock
Primary Issue
Gross Dividends - Common Stock
Net Income after Stock Based Comp.
Expense
Basic EPS after Stock Based Comp.
Expense
Diluted EPS after Stock Based Comp.
Expense
Depreciation, Supplemental
Total Special Items
Normalized Income Before Taxes
Effect of Special Items on Income Taxes
Income Taxes Ex. Impact of Special Items
Normalized Income After Taxes
Normalized Income Avail to Common
53 weeks ending
52 weeks ending
52 weeks ending
52 weeks ending
2009-10-02
2008-09-26
2007-09-28
2006-09-29
628.16
569.20
398.12
367.02
628.16
569.20
398.12
367.02
451.51
446.89
308.82
284.78
176.65
122.31
89.30
82.25
62.35
74.39
55.05
58.33
0.89
4.79
-0.11
27.97
514.75
526.07
363.76
371.08
113.41
43.12
34.36
-4.06
-
-
-
-
0.01
96.92
88.29
88.29
88.29
-
-0.09
16.79
19.11
19.11
19.11
-
0.24
5.18
5.35
5.35
5.35
-
0.91
-32.65
-30.41
-30.41
-30.41
-
88.29
19.11
5.35
-30.41
88.29
19.11
5.35
-30.41
0.00
21.55
4.10
-
0.00
19.38
0.99
-
0.00
18.95
0.28
-
0.00
18.39
-1.65
-
0.00
0.00
0.00
0.00
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
In Millions of USD (except for per share
53 weeks ending
items)
2009-10-02
Basic Normalized EPS
Diluted Normalized EPS
4.13
In Millions of USD (except for per share
As of 2009-10-02
As
items)
52 weeks ending
2008-09-26
-
52 weeks ending
2007-09-28
-
52 weeks ending
2006-09-29
of 2008-09-26 As of 2007-09-28 As of 2006-09-29
Balance Sheet
Cash & Equivalents
30.96
Short Term Investments
-
Cash and Short Term Investments
30.96
Accounts Receivable - Trade, Net
45.83
Receivables - Other
-
Total Receivables, Net
45.83
Total Inventory
51.00
Prepaid Expenses
-
Other Current Assets, Total
28.57
Total Current Assets
156.36
Property/Plant/Equipment, Total - Gross
516.37
Accumulated Depreciation, Total
-225.16
Goodwill, Net
-
Intangibles, Net
79.07
Long Term Investments
-
Other Long Term Assets, Total
3.42
Total Assets
530.06
Accounts Payable
29.85
Accrued Expenses
24.15
Notes Payable/Short Term Debt
0.00
Current Port. of LT Debt/Capital Leases
5.90
Other Current liabilities, Total
-
Total Current Liabilities
59.90
Long Term Debt
104.10
Capital Lease Obligations
-
Total Long Term Debt
104.10
Total Debt
110.00
Deferred Income Tax
52.97
Minority Interest
-
Other Liabilities, Total
5.68
Total Liabilities
222.65
Redeemable Preferred Stock, Total
-
Preferred Stock - Non Redeemable, Net
-
Common Stock, Total
0.02
Additional Paid-In Capital
274.14
Retained Earnings (Accumulated Deficit)
67.81
Treasury Stock - Common
-52.52
Other Equity, Total
17.96
Total Equity
307.42
Total Liabilities & Shareholders' Equity
530.06
Shares Outs - Common Stock Primary Issue Total Common Shares Outstanding
22.45
38.62
2.37
40.99
49.20
49.20
66.03
5.82
2.13
164.16
522.84
-219.34
79.77
5.59
553.02
29.54
28.26
0.00
24.91
9.10
91.81
217.00
217.00
241.91
34.05
4.19
347.05
0.02
261.77
-20.48
-52.08
16.73
205.97
553.02
20.26
16.64
0.00
16.64
38.28
38.28
44.44
7.63
2.38
109.37
515.48
-199.37
83.28
19.20
527.96
19.20
31.52
0.00
1.96
1.18
53.86
240.00
240.00
241.96
35.29
26.90
356.05
0.02
247.49
-38.92
-52.03
15.35
171.92
527.96
18.67
22.80
22.80
32.71
32.71
40.64
6.39
1.16
103.69
501.25
-176.78
82.77
21.04
531.97
18.55
28.26
0.00
1.78
0.81
49.41
260.50
260.50
262.28
34.73
27.00
371.63
0.02
245.62
-44.27
-51.86
10.81
160.34
531.97
18.64
Resources
AIPC Annual Report Data
http://www.google.com/finance?q=NASDAQ:AIPC&fstype=ii
MSN Money
Yahoo Finance
Morningstar