Church and Dwight (CHD)

A quick discussion of Church and Dwight.

Church and Dwight

Company’s business is in consumer products and competes with Colgate-Palmolive, Procter and Gamble, and Clorox, to name a few.

Company was founded in 1846 and develops, manufactures, and markets a broad range of household, personal care, and specialty products.

CHD focuses its marketing efforts on its 8 “power” brands:

These brands are as follows:

1. Arm & Hammer
2. Trojan Condoms
3. XTRA Laundry detergent
4. OXI Clean
5. NAIR
6. First Response pregnancy tests
7. ORAJEL
8. Spinbrush battery-operated toothbrushes

The company has 3 primary businesses:

1. Consumer Domestic
2. Consumer International
3. Specialty products

The consumer domestic business represents, as of 2009, 74% of company’s sales

This segment has the 8 “power” brands mentioned above.

The Consumer International business represents, 2009, 16% of company’s overall sales.

This segment sells internationally personal care products, some of the same as mentioned above.

The International mkts include Canada, 36% of segments sales, France, 20% of segments sales,

UK, 16% of segments sales, Mexico, Australia, Brazil, and China

The Specialty Products business sells inorganic chemicals for industrial, institutional, medical, and food applications. Sales also include animal nutrition and specialty cleaning products.

In 2009, household products were 64% of consumer domestic sales and 47% of cos. Total sales. Household products include Arm & Hammer baking soda, Arm & Hammer Carpet and Room Deodorizers, SNO BOL toilet bowl cleaner. Orange Glo and OXI Clean

In 2009, personal care constituted approx. 36% of consumer domestic sales and 27% of company’s total sales. Products in personal care include Arm & Hammer toothpastes, AIM toothpaste, Close-UP toothpaste, Spinbrush battery operated toothbrushes, Arm & Hammer deodorants, ARRID antiperspirants, TROJAN condoms, NATURAL LAMB condoms, and NAIR.

Somethings to like about this company:

The ARM & HAMMER name. This trademark was adopted in 1867 and this baking soda brand remains the leading brand of baking soda in terms of consumer recognition of the brand name and reputation for quality and value.

The ARM & HAMMER brand is very well known, and is a very strong brand. They market several products using this brand name.

In 2009, Spinbrush was the #1 brand of battery operated toothbrush.

In 2009, First Response was #1 in home pregnancy and ovulation test kits.

OXI-Clean is the #1 brand in the laundry pre-wash additives market in the U.S.

Many recognizable brand names in US and overseas, AIM, Close-UP, NAIR, ORAJEL, strong product recognition.

Company continues to increase sales revenue year over year:

2005-2006 increase 12.05%

2006-2007 increase 14.14%

2007-2008 increase 9.07%

2008-2009 increase 4.07%

Gross margin increasing year over year as well:

2007 gross margins: 39%

2008 gross margins: 40%

2009 gross margins: 43%

Company did a great job in weathering the storm of 2007-2008 and the recession fears.

They did this by efficient cost cutting.

The company’s brands are usually value brands and sell at a discount to other well-known brand names. Great in economic climate of today

Risks:

Because of the competitive environment facing retailers, The company faces pricing pressure from customers, particularly the high-volume retail store customer, who continue seeking to obtain pricing concessions or better trade terms. This could reduce the company’s margins.

The company competes in oral and personal care and in the deodorant market. These are highly competitive markets and highly innovative markets, with a continuous flow of new products. The company must continue to spend on R&D to develop new and innovative products.

The company’s value-priced products are always subject to fierce price competition. There may be times where the company has to reduce prices to remain competitive and retain market share. This can reduce margins.

The company’s sales are driven domestically. In fact, for the past 7 years, domestic sales have accounted for over 70% of the company’s revenues. The domestic market is heavily penetrated and highly competitive. I am nervous that the company is in such a heavily penetrated market especially in this economic environment. Heavy discounting from competitors or increased sales of private label brands could hurt revenue of CHD.

I would be happy to see the company develop strategy to increase international market share. Up to 2009, CHD international mkt share has never increased beyond 18%. The company should develop this market further as the domestic market continues to mature and become fully penetrated.

Wal-Mart accounts for 22% of net sales. If the company were to lose a large number of sales to Wal-Mart their sales revenue and profitability would be adversely affected.

Ratios and numbers:

2009 Return on Invested Capital: 11.87%

2008 Return on Invested capital: 11.16%

2009 Return on Equity: 16.08%

2008 Return on Equity: 15.53%

2009 Profit Margin: 10.85%

2008 Profit Margin: 9.62%

Research and Development spending:

2009: $55.1 million

2008: $51.2 million

2007: $49.8 million

2009 Total Debt: $816 million

Interest expense

2009: $35.568 million

2008: $46.945 million

Times interest earned (EBIT/Interest Expense)

2009: 13.78

2008: 9.01

2007: 6.28

More than enough earning before interest and taxes to cover interest

Current ratio (Current assets/current liabilities):

2009: 1.6371

2008: 1.7181

My calculated Free Cash Flow:

2009: 18.686 million*

2008: 319.34 million

2007: 115.363 million

*due to a huge increase in operating cash

Weighted Average Cost of Capital:

My calculation gives WACC of 4%

From above, Return on Invested Capital is 11.87%

Company is returning 7.87% above it’s cost of capital

This is very appealing to me. If the company can maintain this spread, or even increase it by repaying debt, then I think the company can continue to increase shareholder value.

I have valued this company using historical data currently available.

I have model the cash flows into the future using a conservative growth rate of 3.5%.

I have used 2 different discount rates to discount the cash flows.

Using my model I have determined the stock has a fair value price of between $63.66 and $70.

The current price of CHD stock is $69.88

The stock appears to be fully valued according to my model.

I do like this stock and the prospects. Strong brand name and brand recognition go a long way. I think they do need to execute an international strategy to begin stronger penetration into that market.

The company also pays an annual dividend of $.68, a 1% yield.

I would look to buy this stock between $52.5-$55 per share

EMS Technologies

EMS Technologies (ELMG)

Recent Price: $27.56 Market Capitalization: $427.18 million


EMS Technologies is a leader in the design, manufacture, and marketing of wireless communication solutions addressing the enterprise mobility, communications-on-the-move and in-flight connectivity markets for both commercial and government users. EMS focuses on the needs of the mobile information user and the increasing demand for wireless broadband communications. The company continues to be an innovative leader in the development and commercialization of wireless communication technologies.
For the first time, year 2007 saw EMS ship antennas and avionics to enable cell phone use for commercial airplanes in Europe. Air France was the first to test in-flight text messaging and e-mail service in December 2007.
In 2007, EMS was awarded a multi-year contract on the F-22. This three-year buy is a contract for the company’s Defense & Space System divisions F-22 Intra-Flight Data Link.
Inmarsat’s selection of EMS as prime contractor to design its 2nd generation satellite and GSM mobile phone expands the company’s proven satellite technology into a substantial new market. The Inmarsat High-Speed Data Terminal provides worldwide access to corporate networks and the Internet using the Inmarsat satellite system. Such systems are used in military transport and customers include The U.S. Army and the Canadian Department of National Defense.
EMS is equipping the B-2 Stealth bomber with a high performance, secure communications system, enabling improved situational awareness and national security.

Company Overview

EMS operates in three segments: Defense & Space Systems (DSS), SATCOM, and LXE, each of which is focused on a different application of wireless communications. These three segments share a common foundation in broadband and other advanced wireless technologies, which provides technical synergies and allows the company to continually develop and commercialize new products for use in wide array of mobile communications.
DS&S (20.5% of 2007 total sales) supplies highly engineered subsystems for defense electronics and sophisticated satellite applications – from military communications, radar, surveillance and countermeasures, to commercial high-definition television, satellite radio, and direct broadcast TV for airlines.
SATCOM (48.2% of 2007 total sales) supplies terminals and antennas that enable end-users in aircraft and other mobile platforms, such as military command, service vehicles and transport trucks, to communicate via satellite networks at a variety of data speeds. SATCOM has 90% market penetration for high-speed data in the military/defense market.
LXE (31.3% of 2007 total sales) is a leading provider of rugged computers and wireless data networks used for logistics applications such as distribution centers, warehouses and container ports. These products allow for effective and efficient inventory control and management, in any climate. Products include wearable and vehicle mounted computers.

Competitive Strengths

EMS prides itself in its technological leadership. The company has developed technology that they believe were the first such developments in their respected markets. These include: airborne terminals for high speed, two-way data transmission via satellite for the communication of voice and data in military, business and air transportation markets, as well as antenna systems allowing commercial airlines to provide satellite TV to passengers.
EMS is committed to research and development. By devoting significant resources to R&D, EMS is able to enhance and maintain their technological advantages.
Although EMS operates in three segments, their shared knowledge base and core expertise in wireless technology creates synergies among their various businesses. These synergies provide the company advantages in R&D, manufacturing, and sales and marketing.
Throughout the company’s existence, they have developed and maintained important ongoing relationships with both commercial and government customers. By anticipating and recognizing customers’ needs, EMS has been able to continuously build and strengthen customer relationships.
A diverse global customer base will provide the company ample opportunity to grow the business and dampen the effects of a downturn in any one of the company’s markets.

Financial Overview

Growth: For the year ending 2007, total sales were $287.9 million compared to $261.1 million for the year ending 2006, an increase of 10.3%.
The majority of this revenue increase came from the SATCOM division, which posted a 27.2% growth in revenue from 2006-2007. This is on top of the 37.7% revenue growth from 2005 -2006. In 2001, SATCOM recorded revenues of $15.224 million and in 2007 SATCOM had revenues of $89.968 million, an increase of 490%. This impressive growth shows the strength of the company’s R&D and the ability of the company to obtain long-term customers who are committed to having the best technology possible. Year-over-year revenue growth was also impressive in the DS&S division. In 2007, revenue grew 12.7% over 2006, and this after a small revenue growth of 1.99% from 2005-2006. Sales were relatively flat in the LXE division, growing a mere .6% in 2007. However, from 2001 to 2007, revenues in this division have grown over 89%. Next generation handhelds with Bluetooth technology and the ability to wirelessly print, as well as purchases from such new customers as Circuit City, GAP, Food Lion, and Adidas should help to increase revenues in the LXE division in the future.
It is worth noting that 2007 International revenues topped $100 million for the first time.


Profitability:
EMS has been able to increase its Return on Net Operating Assets (RNOA) from 4.2% in 2001 to 7.5% in 2007. Year 2006 showed a RNOA of 18.3%, the highest of the historical years analyzed. A lower 2007 Net Operating Profit After-Tax (NOPAT) caused the decrease from 2006 to 2007. Both Return on Invested Capital (ROIC) and Return on Equity (ROE) has increased historically. From 2001 to 2007, ROIC has increased from 4.2% to 7.5%, and ROE has increased over the same period from 3.7% to 7.5%. The company’s profit margin has also increased over the years 2001 – 2007 starting at 2.5% and increasing to 6.5%. Sales growth has been strong historically for EMS Technologies. 2007 saw a 10.2% rise on revenue over 2006.

Risks:
A continued weakening in the global economy could lead to continued weakness in the airline industry, especially in profitability. This weakness could dampen the demand for continued spending on in-flight entertainment, which could adversely affect the revenues of the DS&S division.
Although Air France has been testing in-flight text messaging, e-mail, and cell phone use, demand for such service may not warrant the spending by airlines. Also, government regulation domestically may keep such service grounded, thus destroying another source of revenue for the company.
Sales to various customers for U.S. government end use accounted for 24.6% of the company’s net sales in 2007. Therefore, many of the government contracts are subject to funding review. If there are any cutbacks in defense spending or other government cutbacks, the company could see revenues decline.

Competitors:
EMS Technologies competes with many larger and better-known companies. I have chosen two of its closet competitors as comparables for this analysis. As a comparison for the Defense & Space Systems division, the closet competitor is L-3 Communications, a much larger company than EMS Technologies. As a comparison for the LXE division, the closet competitor is Intermec. Both companies are compared to EMS Technologies below.
The company also competes with Boeing, Lockheed Martin, Motorola, Raytheon, and Harris Corporation.

Customers:

It is interesting to note that some of EMS Technologies competitors are also the company’s customers. In the SATCOM division, both Boeing and L-3 Communications are customers for the company’s Aeronautical Terminals which provide aircraft operators with two-way high-speed data capability.
Other customers include such companies as Gulfstream, Bombardier, Honeywell, U.S. Department of Defense and NATO, not mention over 18 governments worldwide.


Valuation

I have calculated a fair value price of EMS Technologies of $32 per share using the Adjusted Present Value (APV) DCF model. Using historical growth rates for each segment, managements estimates going forward, and continued strong growth in international markets, I have modeled sales growth at 13% for 2008, 14% for 2009, 15% for 2010-2011, 6% in 2012 and 5% for 2013 through the Terminal year of 2014. The growth rate in the SATCOM division has been historically high, averaging around 30%, but to be conservative, I have this division’s growth rate a bit lower. In my opinion, I believe that my own valuation for EMS is low given the fundamentals and direction of the company. I have modeled sales growth conservatively, and costs aggressively. I believe that with the product line the company has, as well as continued spending to be at the forefront of technology, they will differentiate themselves from competitors and be able to increase their margins.
I have calculated EMS’s Weighted Average Cost of Capital (WACC) at 8.3%. However, since I have used the APV method to value this firm, I used the Unlevered Cost of Equity (Rue) to discount the future free cash flows. This has been calculated at 8.68%.
The firm’s 2007 Return on Invested Capital (ROIC) stood at 7.2% and its Return on Equity (ROE) was 7.9%.
I am not impressed by the fact that both of these ratios are below the firms Cost of Capital, but I am more impressed by the future prospects and growth ability of EMS. With the contracts they have signed, and the global movement towards allowing e-mail and instant messaging on commercial airlines, as well as the possibility of cell phone use, I am excited about the future profitability of EMS Technologies. A strong product line, a strong and intelligent management team, and impressive Research and Development spending will turn this company into one of the top firms in wireless communications.

Industry Peers

Market Cap 2007 Revenues ’07 RNOA ’07 ROE
EMS Tech $427.18 million $287.9 million 7.5% 7.5%
L-3 Comm. $13.19 billion $3.800 billion 10.1% 13.7%
Intermec $1.31 billion $253.4 million 4.5% 5.05%

If this company is as exciting to you as it is to me, please check out the company’s web site for further education of the company’s product line and customers. I would also suggest you read the company’s 2007 Annual Report.

www.ems-t.com

PolyOne Update

Yesterday, PolyOne Corp. (POL) reported 2008 1st quarter earnings. EPS came in at 7 cents per share vs. 8 cents per share for the same quarter last year. The hit, if you want to call it that, came from the company's GEON Performance Polymers segment, which is the vinyl business. The company has been warning of the drop in the vinyl business due to housing and automotive slowdown since last year, and I have reported it here as well. It should be no surprise to the street that PolyOne would experience a drop in revenue and operating income in this segment. Here is the breakdown: GEON revenue down 4.3% while Operating Income fell 65.2% from the year ago period. The hit comes with the fact the GEON is PolyOne's largest reportable segment, accounting for 35.3% of total sales in 2007. Another factor besides the housing slowdown was an increase in raw material prices, specifically ethylene, so the continued rise in energy prices is not helping this situation. The bad news is the housing sector. There seems to be no end to the downturn. As much as you hear in the news about the end drawing near, it is yet to be seen. Although GEON took a hit, let us look at the other reportable segments, which I basically believe the street has overlooked.
International Color and Engineered Materials: Revenue up 14.7% and Operating Income up 30%.
PolyOne Distribution: Revenue up 9.1% and Operating Income up 19.6%.
Specialty Engineered Materials: Revenue up 102% and Operating Income up 400%.
All Other segment: Revenue down 5.2% but Operating Income up 167%.
These are all in comparison to 2007 1st quarter.
After looking through the press release and reviewing the numbers, I was actually impressed with the way the 4 other reportable segments turned out this quarter. The company is sticking to its strategy and turning itself away from a commodity business into a specialty business. I think the biggest plus here is the fact that they were only down 1 cent from 2007 1st quarter when there was a $13.3 million drop in Operating Income in the vinyl business from 1st quarter 2007. This, to me, is a real coup for the company.
I went back and reviewed my DCF model for PolyOne believing that I would need to revamp it to come closer in line to the company's earnings report yesterday, and to rework revenue figures in the Pro Forma years using management's new estimates. At the end of fiscal 2007, management believed that going forward, revenue would grow at a rate between 8% and 12%. Yesterday, they brought that figure a little lower to a range of 7% to 10%. My model has revenue growing at a conservative 6% through 2011, and then an extremely conservative 3% in the Terminal Year 2012. I also was very aggressive in the modeling of input costs, probably more than necessary. Therefore, my valuation of PolyOne still stands at $13.46 per share. The stock closed today down 43 cents to $6.79. This is almost a 50% discount from my fair value estimate. I still think this stock is a great value play. Eventually, the street will wake up and see how this company's management has differentiated this company from its competitors and decide to unlock the true value of the stock.
I am posting the link to the transcript of PolyOne's conference call today. It is worth your time to read through it.

http://seekingalpha.com/article/76128-polyone-corporation-q1-2008-earnings-call-transcript?source=yahoo

Tootsie Roll Update

Yesterday, Tootsie Roll reported first quarter net income of $6.45 million, down from $9.81 million a year earlier. Sales declined 3% to $90.3 million from $92.9 million a year earlier. The company sights lower sales volume and higher input costs. This is what I had discussed in the earlier write up. Tootsie Roll will suffer from higher commodity costs in the short-term.
I have re-worked my DCF valuation assuming that 2008 and 2009 North American sales are flat, and that International sales are the same as previously modeled with an increase in Cost of Goods Sold, which will take into account the higher input costs.
Using these new assumptions, I have calculated a fair value of $30.79 for Tootsie Roll, which is only about 56 cents less than my previous valuation. Tootsie Roll closed yesterday at $24.41, which is about 21% less than my calculated fair value. I would still look to buy this stock on any $2 pullback, which would put the stock about 27% under my valuation.
I still believe in the strong management team, and I still enjoy the stock and cash dividends that Tootsie Roll pays out.

PolyOne Corp.

I have been enjoying the recent price rise in PolyOne Corporation. I have recently completed an equity valuation and analysis of this company. Below are my thoughts.

PolyOne Corporation (POL)

Recent Price: $7.70 Market Capitalization: $718.002 million

PolyOne is the leader in North America and Europe for polymer compounds and polymer coating systems. The company has set forth four strategic goals that they are looking to reach by 2010. The first, consistent, double-digit income in their core business, second, gross margins of 25-35% for specialty businesses, third, 30% of revenue from outside North America, and fourth, a vitality index of 25%, the percentage of total sales attributable to new products, services or markets developed in the last five years. In my opinion, I believe that PolyOne will accomplish these goals due to a strong management team whose focus is on the customer. By becoming a truly customer centric company, Polyone will become a “one stop” shop that can provide vinyl compounds, color technology, engineering materials, and polymer coatings along with distribution services that will serve the entire needs of its customers. Currently, no competitor can offer this solution.
2006 saw PolyOne generate over $100 million in cash from operations for the first time since its inception. This milestone was achieved by generating strong earnings, as well as a disciplined management of working capital. However, in 2007 cash from operations was $67.2 million, down $44.5 million from 2006. This decrease was caused by lower operating earnings, as well as lower earnings and distributions from affiliates. From 2003 to 2007, PolyOne has increased its working capital by 35%. This cash was used to pay down a significant portion of the company’s high cost debt. Consequently, the current ratio of PolyOne has increased from .97 in 2001 to 1.83 in 2007, which is higher than its two closest competitors, Ferro Corp, and Georgia Gulf. PolyOne achieved a 2007 ROIC of 3.9% and in 2006 a Return on Invested Capital (ROIC) of 15.4%, which was 4.3 % higher than its Cost of Capital. The 2007 ROIC decrease can be accounted for by the decrease in Long-term debt, which the company paid down during 2007. PolyOne has also managed to increase its free cash flow to sales ratio over the past 5 years, while both Ferro Corp. and Georgia Gulf have seen a decrease in free cash flow to sales ratio over the same period. As of 2007, PolyOne’s free cash flow to sales ratio was 2% versus 6% for Ferro Corp. and 3% for Georgia Gulf.
However, investors must be made aware that this industry is treated as a commodity business and therefore, fiercely competitive. Raw material prices play a significant role in the profitability of the company and thus far they have been able to pass along input price increases to the customer. This can be seen in the sales volume decrease in 2006 although revenues were higher in that year. If PolyOne can no longer pass through these higher costs to the customer, I see harm to their long-term profitability.

Company Overview

Polyone Corporation is a leading global provider of specialized polymer materials, services and solutions that serve industrial, commercial and consumer markets. PolyOne operates in four reportable segments: Vinyl Business (33.6% of total 2007 sales), International Color and Engineered Materials Business (22.01% of total 2007 sales), PolyOne Distribution (26.81% of total 2007 sales), and All Other (17.58% of total 2007 sales), which includes North American Color and Additives, North American Engineered Materials, Producer Services, and Polymer Coating Systems. End use markets include automotive, building materials, consumer durables, electrical/electronic, industrial, medical, nondurable goods, and wire and cable. In the automotive space, Polyone manufactures color additives for interior and exterior automotive trim, polymer coating systems for armrests and headrests, and engineered materials for interior and exterior structural applications. The building materials business manufactures vinyl compounds for windows, pipe fittings, decking and fencing. In the nondurable goods business, Polyone manufactures vinyl compounds and color additives for packaging applications such as cosmetic, beverage and food bottles and caps.

Strategy: I believe that PolyOne can build a sustainable competitive advantage by working together as one corporate entity to capture value through innovative business solutions. This involves integrating all businesses in the company; working together as one instead of many. By doing so, PolyOne will take advantage of its entire product line to serve all the needs of each individual customer. A strong management team has committed itself to being customer centric. By building a Key Account team consisting of Strategic Account Managers (SAM) and Business Development Managers (BDM), I believe that PolyOne will be able to strategically align itself with its customer’s goals. The SAM’s will be responsible for driving revenue growth through PolyOne’s largest strategic customers. The BDM’s will work with OEM’s to develop new market penetration through application engineering and cross-selling market development.

Financial Overview

Growth: For the year ending 2007, total sales were $2.642 billion compared to $2.622 billion for the year ending 2006, a .76% increase. The nearly unchanged growth was due to weaker automotive and construction demand in North America. However, prior sales growth has been strong averaging 8.0% from 2004-2007. 2007 Sales in the United States declined 4% over the year, caused by a decline in housing and automotive. However, international growth rates continue to be strong. Sales in Asia were 12.4% higher over 2006 and sales in Canada were 1.4% higher over 2006. European sales also showed improvement with sales in that geographic area increasing by 16.1% over 2006. In December 2007, PolyOne completed the acquisition of the assets of a Chinese plastics company. This is PolyOne’s fourth China-based manufacturing site and will provide PolyOne with a vinyl compounding facility in China. In 2007, the company also added its third specialized color design center in China. PolyOne’s dedication to its global customers, and international growth markets should help the company fuel continued growth.

Profitability:

PolyOne has been able to increase its Return on Net Operating Assets (RNOA) from 7.5% in 2004, 9.4% in 2005 to 15.5% in 2006. However, PolyOne’s RNOA in 2007 stood at 3.9%. De-leveraging caused this decrease, as PolyOne paid down its long-term debt. PolyOne’s 2007 RNOA is higher than its two closest competitors RNOA. Return on Equity (ROE) has also increased historically, but fell off dramatically in 2007. However, between it and its 2 competitors, PolyOne is the only company whose ROE was positive in 2007, standing at 1.9%. PolyOne’s Profit Margin in 2007 was 1.6%, which was higher than its two closest competitors, whose profit margins were negative in 2007.


Risks:

Execution of long-term strategy is key. It is my belief that they must be able to sell its customers on the concept of the Key Account team, and by doing so, add value if the team can create new market penetration and work with its strategic customer accounts to sell everything from the design to the finished product, as well as the final distribution. However, it is my opinion that if PolyOne cannot achieve the goals set out by the Key Account team, then each customer will ultimately deal with the company that can offer it the best price, thus turning PolyOne into a commodity supplier.

Raw materials such as ethylene and benzene are primary chemicals used in the manufacture of vinyl and engineered resins. Therefore, rising energy prices have an adverse effect on the company’s bottom line.

Due to the makeup of the Vinyl Business, I believe that any prolonged slowdown in the housing sector will have an adverse effect on sales, as was the case in the second half of 2006, and all of 2007. Slowing building and reconstruction proved to be difficult on this business as 2007 Vinyl sales fell 9% year over year.
So far, PolyOne has been able to increase its prices to offset costs and lower sales volume. It is my opinion that if PolyOne cannot continue to sell to its customers at higher prices to negate the increase in raw material prices, revenue figures will be adversely affected going forward.

Valuation

I have calculated a fair value price of PolyOne of $13.46 per share using a DCF model. Using historical growth rates, managements estimates going forward, and continued strong international sales, I have modeled sales growth at 6.0% from 2007 through 2012 while the company sets in motion its strategic plan. I have calculated PolyOne’s Weighted Average Cost of Capital (WACC) to be 9.79%. However I have used the Adjusted Present Value DCF method to value this firm, and therefore, I will use the company’s Unlevered cost of equity (Rue), which I have calculated to be 10.6%, to discount the future free cash flows. I believe that any global economic slowdown in automotive and housing will negatively affect PolyOne’s sales growth.

Industry Peers

Market Cap 2007 Revenues 2007 RNOA 2007 ROE

PolyOne $718.002M $2642.70M 3.9% 1.9%
Ferro Corp $648.91M $2204.76M -5.4% -18.7%
Georgia Gulf $236.62M $3157.274M -10.3% -89.4%

Tootsie Roll ready to rise

One stock that I have been following for a while now is Tootsie Roll Industries. Everyone knows this company. Who has not unwrapped the distinctive brown and white wrapper to unveil that nice chewy chocolate treat? Did you know that this company is also behind such favorites as Sugar Daddy, Sugar Babies, Tootsie Pops, Andes Mints (all of the above are Trademarked names), as well as many other treats? Tootsie Roll racked up sales of $493 million in 2007 selling these delicious, sugary treats. So, why the stagnation in the stock price? Most of the trouble comes from the quick rise in commodity prices over the past few years. The prices for refined corn products such as corn syrup have been higher as a large amount of corn and corn refining capacity has been redirected to ethanol production. Sugar, milk, and vegetable oil, all major inputs, have also seen prices rise. Although TR has been able to raise prices on their products when possible, they have not been in step with input costs and therefore, margins have suffered. Just a note, when advisable, TR does implement a hedging program to hedge their commodity input prices.
So, what do I like about Tootsie Roll? First of all, even though profit margins have decreased from 2005 through 2007, the company still enjoys double digit margins. In fact, profit margins for TR are higher than those of two of its closest competitors, Hershey (HSY) and Wm. Wrigley (WWY). Looking at the 5 year average ending 2007 profit margins, TR stands at 14.7%, HSY at 11%, and WWY at 13.2%. In fact, TR had nearly double the profit margin of HSY for year ending 2007.
Second, this company is virtually debt free. Beside $7.5 million in an Industrial Development Bond, this company has no LT debt. This puts TR in the position of being able to lever up its Balance Sheet and use the debt to invest in expanding operations overseas and growing its brand name.
Third, the company is still being run by Melvin and Ellen Gordon. Melvin has been Chairman since 1962. The company is run conservatively, consistently investing its capital and consistently paying both a cash and stock dividend. There is no excess with management and no frivolous use of shareholder money. Also, management owns 48% of the company so they have high level of vested interest in running a great company that looks to maximize shareholder value.
Having modeled a Discounted Cash Flow analysis of Tootsie Roll, I have calculated a fair value of $31.35 per share. This uses a conservative overall sales growth rate of 3.35%, and a Terminal growth rate of 3%. The cash flows are discounted by the firms weighted average cost of capital (WACC), which I have calculated to be 8.428%.
If corn, soybean oil, energy, and other input prices retreat in the near future, Tootsie Roll will be situated well in their industry.
Tootsie Roll currently trades at $26.25 per share, about 17% from my calculated fair value. I would look to buy this stock on any $2-$3 pull back and enjoy the cash and stock dividend and strong management team.

This week's Economic Calendar

This week's Economic Calendar courtesy of Bloomberg.com:

http://www.bloomberg.com/markets/ecalendar/index.html