EQUITY INSTRUMENTS AND MARKETSFINAL VALUATION PROJECTAnalyst Company Price Model Value Multiple Value RecommendationDomingo Alonso Brinker Intl. $33.80 FCFF Gen $44.13 PS $45.65 BuySteve Vasquez Millennium Pharmaceuticals $8.70 FCFF Gen $6.42 VS $30.74 SellRafael Arteaga Publicis Groupe $28.50 FCFF Gen $29.99 VS $27.84 HoldMalcolm Bosse Taser Intl. $8.64 FCFF Gen $10.97 PEG $9.47 Moderate Buy/HoldDCF Valuation Relative ValuationMay 2, 2005Domingo Alonso Rafael Arteaga Malcolm Scott Bosse Steve Vazquez 2 INDEXEQUITY INSTRUMENTS AND MARKETS..1BRINKER INTERNATIONAL..3MILLENNIUM PHARMACEUTICALS6PUBLICIS GROUPE12TASER INTERNATIONAL.17VALUE OF CONTROL.22Domingo Alonso Rafael Arteaga Malcolm Scott Bosse Steve Vazquez 3 BRINKER INTERNATIONAL1. Company OverviewBrinker International, Inc, (EAT) is a company engaged in the ownership, operation, developmentand franchising of restaurant concepts. The Companys restaurant concepts includes Chilis Bar& Grill, which features Tex-Mex cuisine, Romanos Macaroni Grill, Maggianis Little Italy, Onthe Border Mexican Grill & Cantina, Corner Bakery Caf, Big Bowl and Rockfish Seafood Grill.EAT employs 96,600 people and has a market capitalization of $3.13 billion. As of June 30,2004, the Company owned, operated, franchised or was involved in the ownership of 1,476restaurants.Services Company2. DCF ValuationI implemented a one stage stable growth discount model since the firm is in a highly competitiveand mature industry. Moreover, the firm has been growing at a rate close to that of the economy.The assumptions used to build the DCF model are: Stable GrowthLength of Growth Period ForeverGrowth Rate 3%Debt Ratio 10%Beta 0.8Riskfree Rate 4.25%Risk Premium 4.00%Cost of Debt 5.10%Tax Rate 35.20%Return on Capital 16.74%Reinvestment Rate 17.92%Cost of Equity 7.25%Cost of Capital 11.71% Domingo Alonso Rafael Arteaga Malcolm Scott Bosse Steve Vazquez 4 Based on these inputs the valuation was as follows: EBIT $733.598 millionEquity Value $9,103.648 millionFirm Value $10,425.169Value/Share $44.13Current market Price $33.80 Sensitivity AnalysisThe key drivers for EAT are the stable growth rate.3. Relative Valuation21 companies were used as comparables. Since EAT derives a majority of its revenue from theUS, the comparables were all firms from the US deriving most of their income form the US.Additionally, I also selected firms with similar business plans, size and growth to best reflectEATs value. As such, my comparables included such firms as Outback Steakhouse, Applebees,Darden Restaurants, Cracker Barrel and Ruby Tuesday.The regression was completed on a Price-to-Sales ratio. I selected this ratio since EAT is therestaurant business and a PS multiple is suitable for such firms.Regression Analysis:PSThe regression equation isPS=-1.08 +0.776*Payout+9.89*Growth-0.096*Beta+16.2*Net Margin Predictor Constant Payout Growth Beta Net Margin Coef -1.0842 0.7759 9.888 -0.0958 16.205 SE Coef 0.5702 0.7723 3.151 0.3717 5.497 T -1.9 1.0 3.14 -0.26 2.95 P0.0740.3290.0060.8000.009 S=0.540421 R-Sq=55.5% R-Sq(adj)=45.0%Domingo Alonso Rafael Arteaga Malcolm Scott Bosse Steve Vazquez 5 Based on this regression, EATs predicted PS ratio is 1.10 resulting in a predicted stock price of$45.65. This is similar to the discounted cash flow model price. Moreover, as we can see the maindriver of the regression is Net Margin. The higher the net margin the higher the PS ratio will be.The average PS for the comparables was 1.34, lower than EATs PS ratio.4. Market ValuationThe market regression equation isPS=0.0516*Growth-0.0069*Payout-0.0705*Beta+0.2198*Net Margin (R2=61.3%)Based on this equation the predicted PS is 1.24, resulting in a stock price of $51.60.5. Final Analysis Current Price $33.80DCF Price $44.13Average PS of comparables 1.34Average PS regression 1.10Market PS regression 1.24 I would place most of my valuation weight on the DCF valuation since I believe given where themarket currently prices EAT that the DCF most truly reflects EATs value. As such, I wouldrecommend EAT as a strong buy given that it is undervalued in both the intrinsic and relativevaluation analysis.
EQUITY INSTRUMENTS AND MARKETS
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