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MathiasH Posted 14 years ago
Essay & Composition Writing
Please help me with my grammar in this investment analysis
Its kinda long so I divided the analysis up in 2 parts. Thanks in advance.
Part 1
Heineken is the 3rd largest brewery in the world. It has the leading position in Western Europe, and is followed by Carlsberg. which is the 4th largest brewery in a global basis. Since growth estimates are expected to be stagnant in Western Europe, both companies have been engaging in a lot of acquisitions to gain market share in emerging markets: Heineken has been expanding their operations in America and Africa/Middle East, while Carlsberg mainly has been focusing on Russia and Asia.
From the below stock chart it is clear that neither company has done too well (compared to the S&P increasing around 20%). Carlsberg did the worst with a slight loss over the last 2 year, while Heineken made returns below cost of equity with a 10 % increase in the stock price.
Why did both companies perform below expectations and what about future earnings?
The short answer to the former question is: The regions (which Carlsberg and Heineken were present) performed poorly.
From looking at the naked (EBIT) numbers for each region, one could at first think that both companies were doing very well with high EBIT growth rates, but these EBIT numbers do not account for the Capex investments related to acquisitions and other noncurrent assets. Hence they are in my opinion useless in establishing whether Heineken or Carlsberg (historically) has been profiting from their presence in these regions. But the reason why I have included the below numbers is to add further information in the proces of forecasting future results for both companies.
One thing that has a negative impact on both companies is the fact that a lot of the profits from both companies are related to regions which most likely will perform poorly in 2012. E.g. Heineken gets around 25% of their beers sold in Spain. While beer isn't the most elastic consumer good, I would still expect a decline in sales. One might even dare to compare Spain to Greece: The EBIT of the Greece region declined by 9% in 2010 and by double digits in 2011. I doubt the Spain region will do that bad in 2012, but what about 2013? 2014? There is definitely some uncertainty there. On the other hand Heineken is (unlike Carlsberg) getting a larger part of their EBIT from the African/Middle East region, where I expect double digit organic growth over the next years. The Americas division will probably be somewhat in the middle of Western Europe and Africa/Middle East with modest growth.
Part 2
Both Carlsberg and Heineken have suffered from the 200% duty increase on beer in 2010 in Russia. The operating profit of Carlsberg has declined each year from 2009 to 2011, and 2012 is most likely going to be a lot worse as Carlsberg in the 1st quarter of 2012 had a operating profit of close to 0 for eastern Europe. Heineken on the other hand went back to EBIT growth in Russia after a terrible 2010 results, and I expect a continuing modest growth in 2012 for Heineken in Russia (note - Eastern Europe will possibly still in contraction as Heineken includes Greece in Eastern Europe).
Both companies are trying to increase their market share in Asia through acquisitions (especially Carlsberg), as double digit growth rates are expected in that region. Most likely we will see a few smaller acquisitions over the next years made by Carlsberg, and I expect the Asia EBIT to make a larger contribution to the total EBIT of the company.
To get some average total growth numbers out of the above, I expect Heineken to accomplish a 2% average organically growth and around 7% on a consolidation basis. I expect Carlsberg to grow around 1% organically and 5% on a consolidation basis.
Valuation
On a free cash flow basis both companies has experienced a lot of ups and downs since 2006. Most of the variations are due to Capex and Working capital influencing the free cash flow.
In my opinion looking isolated at the historic FCF numbers doesn't make a lot of sense, and in estimating future cash flow I will mostly be relying on historical average values of Capex, Working Capital and depreciation numbers. Furthermore I use the following assumptions to estimate the fair price of Carlsberg:
In a vacuum this makes Carlsberg look somewhat fairly priced, but when using DCF a lot of assumptions have to be made, and the reason why I decided to include 2 companies in this analysis was to assure that my assumptions were somewhat realistic (if both companies turned out to be heavily undervalued I would probably be doing something completely wrong and vice versa.)
When using the same methodology for Heineken: (with the following assumptions: 1720 FCF in 2012 followed by 5% average growth rate, 1 % average growth in terminal period, 7.3% WACC) the fair price of the ADR Heineken is 21$ compared to the actual 24$.
This makes me to believe one of 2 things: 1) I am either very conservative regarding future earnings for both companies, or 2) Carlsberg is underrated relative to Heineken.
I think its possible that the latter could be correct, as some investors may focus too much on the (historical) ability of Heineken to create double digit ROI (while Carlsberg barely seem to be able to beat the cost of equity) instead of cash flow valuations (which I prefer). Hence the long Carlsberg/short Heineken option seems interesting for the long term investor.
Part 1
Heineken is the 3rd largest brewery in the world. It has the leading position in Western Europe, and is followed by Carlsberg. which is the 4th largest brewery in a global basis. Since growth estimates are expected to be stagnant in Western Europe, both companies have been engaging in a lot of acquisitions to gain market share in emerging markets: Heineken has been expanding their operations in America and Africa/Middle East, while Carlsberg mainly has been focusing on Russia and Asia.
From the below stock chart it is clear that neither company has done too well (compared to the S&P increasing around 20%). Carlsberg did the worst with a slight loss over the last 2 year, while Heineken made returns below cost of equity with a 10 % increase in the stock price.
Why did both companies perform below expectations and what about future earnings?
The short answer to the former question is: The regions (which Carlsberg and Heineken were present) performed poorly.
From looking at the naked (EBIT) numbers for each region, one could at first think that both companies were doing very well with high EBIT growth rates, but these EBIT numbers do not account for the Capex investments related to acquisitions and other noncurrent assets. Hence they are in my opinion useless in establishing whether Heineken or Carlsberg (historically) has been profiting from their presence in these regions. But the reason why I have included the below numbers is to add further information in the proces of forecasting future results for both companies.
One thing that has a negative impact on both companies is the fact that a lot of the profits from both companies are related to regions which most likely will perform poorly in 2012. E.g. Heineken gets around 25% of their beers sold in Spain. While beer isn't the most elastic consumer good, I would still expect a decline in sales. One might even dare to compare Spain to Greece: The EBIT of the Greece region declined by 9% in 2010 and by double digits in 2011. I doubt the Spain region will do that bad in 2012, but what about 2013? 2014? There is definitely some uncertainty there. On the other hand Heineken is (unlike Carlsberg) getting a larger part of their EBIT from the African/Middle East region, where I expect double digit organic growth over the next years. The Americas division will probably be somewhat in the middle of Western Europe and Africa/Middle East with modest growth.
Part 2
Both Carlsberg and Heineken have suffered from the 200% duty increase on beer in 2010 in Russia. The operating profit of Carlsberg has declined each year from 2009 to 2011, and 2012 is most likely going to be a lot worse as Carlsberg in the 1st quarter of 2012 had a operating profit of close to 0 for eastern Europe. Heineken on the other hand went back to EBIT growth in Russia after a terrible 2010 results, and I expect a continuing modest growth in 2012 for Heineken in Russia (note - Eastern Europe will possibly still in contraction as Heineken includes Greece in Eastern Europe).
Both companies are trying to increase their market share in Asia through acquisitions (especially Carlsberg), as double digit growth rates are expected in that region. Most likely we will see a few smaller acquisitions over the next years made by Carlsberg, and I expect the Asia EBIT to make a larger contribution to the total EBIT of the company.
To get some average total growth numbers out of the above, I expect Heineken to accomplish a 2% average organically growth and around 7% on a consolidation basis. I expect Carlsberg to grow around 1% organically and 5% on a consolidation basis.
Valuation
On a free cash flow basis both companies has experienced a lot of ups and downs since 2006. Most of the variations are due to Capex and Working capital influencing the free cash flow.
In my opinion looking isolated at the historic FCF numbers doesn't make a lot of sense, and in estimating future cash flow I will mostly be relying on historical average values of Capex, Working Capital and depreciation numbers. Furthermore I use the following assumptions to estimate the fair price of Carlsberg:
- FCF in 2012 to be1040 euro (millions) with an average growth of in the budget period of 3%
- WACC equal to 8%.
- Average growth in terminal period = 0%
- Budget period of 8 years.
- Marketvalue of debt = Book value of debt.
In a vacuum this makes Carlsberg look somewhat fairly priced, but when using DCF a lot of assumptions have to be made, and the reason why I decided to include 2 companies in this analysis was to assure that my assumptions were somewhat realistic (if both companies turned out to be heavily undervalued I would probably be doing something completely wrong and vice versa.)
When using the same methodology for Heineken: (with the following assumptions: 1720 FCF in 2012 followed by 5% average growth rate, 1 % average growth in terminal period, 7.3% WACC) the fair price of the ADR Heineken is 21$ compared to the actual 24$.
This makes me to believe one of 2 things: 1) I am either very conservative regarding future earnings for both companies, or 2) Carlsberg is underrated relative to Heineken.
I think its possible that the latter could be correct, as some investors may focus too much on the (historical) ability of Heineken to create double digit ROI (while Carlsberg barely seem to be able to beat the cost of equity) instead of cash flow valuations (which I prefer). Hence the long Carlsberg/short Heineken option seems interesting for the long term investor.
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