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1、Kimberly-Clark Corporation (KMB)Solution to Continuing Case, Chapter 5CONVERTING ANALYSTS FORECASTS TO A VALUATIONFrom Chapter 1, the analyst consensus eps forecasts for KMB for 2011 and 2012, made at March 31, 2011, are:2011 2012Earnings per share4.98 5.35 Indicated dividend per share2.80The indica
2、ted dps is the dividend that analysts are expecting for the forward year (2011).The traded P/BKMBs market (traded) P/B in March 2011 was calculated in Chapter 3: 4.49. To remind you, this is the market price of $65.24 divided by the book value per share of $14.54. It is this P/B ratio that we wish t
3、o challenge. Should we pay 4.49 times book value for KMB?The valuationThere are two valuations below. The required return for equity in both cases is the 8% we calculated using the CAPM in the Case for Chapter 3. 1. First we calculate the value based on only two years of analysts forecasts and then
4、apply a growth rate of 4% after 2012.Required Return8.0%201020112012Eps4.985.35Dps2.803.00Bps14.5416.7219.07ROCE34.3%32.0%RE 3.8174.012 Discount factor 1.08 1.166 PV of RE3.534 3.441 Total PV of RE6.98 RE growth rate (g)4.0%Continuing value104.312 PV of CV89.46Value per share110.98 Continuing value
5、(CV) = =104.312(The dps for 2012 is calcualted by applying the payout ratio for 2001 to 2012 eps:Dps = 5.35 0.56 = 3.00)Note that RE is growing in 2012 at 5.1% over 2011. We have no information about the long-term growth rate for the continuing value (and analysts do not supply it), so we apply the
6、average GDP growth rate of 4% - the average we would expect for all firms. (Dont confuse analysts 3-5 year growth rate with the long term growth rate. The latter applies to a growth rate in perpetuity.)By these calculations, KMB is reasonably well underpriced at $65.24 and a “buy” is recommended. Th
7、is differs from analysts recommendations: If you look back to Chapter 1, analysts average recommendation (on a scale of 1-5) was 2.6 at the time, indicating a “hold”. But remember, we have a growth rate that has not been subject to analysis: Can KMB maintain a growth rate at the same rate for the ec
8、onomy as a whole, or would we expect a lower growth rate for KMB? Given the analysts forecasts for two years ahead (and a required return of 8%), it is clear that the market is forecasting a growth rate considerably below the 4% rate used here. 2. Now we incorporate analysts five-year growth rate of
9、 9.1% and apply a growth rate of 4% for years thereafter. We do this with some trepidation: Analysts growth rates for five years are notoriously inaccurate. The eps forecasts for 2013-2015 below are growing at 9.1% per year, the consensus growth estimate at the end of Exhibit 1.1 in Chapter 1. The d
10、ps are forecasted to grow at 9.1% per year to maintain the same payout ratio. Required Return8.0%201020112012 201320142015Eps4.985.355.846.376.95Dps2.803.003.273.573.90Bps14.5416.7219.0721.6424.4427.49ROCE34.3%32.0%30.6%29.4%28.4%RE 3.8174.012 4.3144.6384.995Discount factor 1.080 1.166 1.2601.3601.4
11、69PV of RE3.534 3.441 3.4243.4103.400Total PV of RE17.21 RE growth rate (g)4.0%Continuing value 129.84PV of CV88.39 Value per share120.14The continuing value (CV) = = $129.84Intrinsic P/B = 8.26V/P = 120.14/65.24 = 1.84This valuation also is above the market price. Either (1) The analysts forecasts
12、are optimistic that those implicit in the market price(2) The long-term growth rate of 4% is too high(3) The required return should be higher than 8%(4) The market is mispricing these expectations.One can repeat the analysis with a higher required return: Does the stock still look overpriced if the
13、required return in 10%? Use the engine at the end of this solution to test that.One can also see if the price is better approximated with a lower long-term growth rate. If one forecasts the growth rate as zero (no-growth) for the valuation with two years of forecasts, the continuing value is $50.15
14、and the value is $64.53, almost the market price. For the 5-year forecast with a zero growth rate, the continuing value is $62.44 and the value is $74.25. Now we are getting a handle on things: Given the analysts forecasts are unbiased, the market is pricing this stock as if there is no growth, or even negative growth, expected. Yet we can see from the pro forma that residual income is growing. Perhaps this stock in un
