Assumptions
The estimated value of Teleflex’s stock is in the range of $60 to $70, hence the estimated total value of Teleflex ranges between $2395.8 million to 2795.1 million. The estimated total value represents the value for the number of share outstanding of 39.93 million. For the valuation of Teleflex three types of scenarios are consider, pessimistic, moderate and optimistic. The projections are based on the following assumptions:
Valuation of Teleflex with Sensitivity Analysis
Financials:
· The beginning stock price for this valuation model is $55.75. During the 52 week period the price of Teleflex stock range from 66.07 to 47.92.
Sensitivity Analysis: Therefore different begging stock prices from the range of 52 weeks are used to see the effect on ending stock price.
| If the beginning stock price is: | The ending stock price is: |
| $55.75 | $70.14 |
| $66.07 | $69.28 |
| $50.00 | $70.35 |
| $46.00 | $70.92 |
The above table shows that a $10 variation in prices only has a low effect on ending stock price.
· Revenues: According to the annual report 2009, the management of Teleflex expects the revenues to grow up to 10%. The estimations are based on within 10% growth rate.
Sensitivity Analysis:
| If the revenue growth estimate is: | The stock price is: |
| Pessimistic (4%) for 2011-2015 | $68.71 |
| Moderate (5-8%) for 2011-2015 | $70.43 |
| Optimistic (10%) for 2011-2015 | $72.73 |
· COGS/Revenues: – In the past cost of goods sold has fluctuated around 62% to 56%. For the valuation, the cost of goods sold will be kept 55%.
· SG&A/Revenue: In the past Sales, general, and administrative expenses were in the range of 25% to 27.5%. SG&A will remain 28% for the following years.
· Effective tax rate – Based on Teleflex’s effective tax rate in last three years, it is assumed that tax rate will fluctuate in the range of 26% to 25% going forward. For the coming five years, effective tax rate will be 25%.
Sensitivity Analysis for effective tax rate:
| If the effective tax rate is: | Stock price is: |
| 25% | $70.14 |
| 28% | $68.03 |
· Weighted average shares outstanding: For the company’s valuation 39.993 million is used as current number of share outstanding. Teleflex’s weighted shares outstanding were 39,359, 39,584, and 39,718 for years 2006, 2007, and 2008, respectively. For the valuation, increase in weighted average share outstanding until FY2014 are 230,000 per year, following historical precedent.
· Capital expenditures: Capital expenditures are $25,000 for the 5 years.
Cost of Capital and Terminal Value Assumptions:
· Risk free rate – Risk free rate is the 10 year Treasury rate. The risk free interest rate referenced in the 2009 Teleflex Annual Report was 2.6%. However, according to www.treasury.gov website, the rate on 10 year treasuries is 2.5% as of 10.26.10.
Sensitivity Analysis:
| If the risk free rate is: | The stock price is: |
| 2.5% | $70.14 |
| 2.6% | $69.91 |
· Risk Premium = expected market return-risk free rate; analysts say 5.1%, companies in the US say 5.3%, and companies in the EU say 5.7%. According to an Internet article by Aswarth Damo Daran entitled “Reversal on Market Risk Premiums: the 2010 story”
Risk premiums skyrocketed (into the 8% range) during the height of the economic downturn. This would be expected since the market risk premium has been described as “hazard pay” for holding a risky investment or any investments in risky times. However, since that time, market risk premiums have reversed the upward trend, and at the beginning of 2010, they were in the 4.37% range. Market risk premium of 4.3% is used in this valuation.
Sensitivity analysis:
| If the market risk premium rate is: | Stock price is: |
| 8.0% (at the height of the downturn) | $61.86 |
| 5.7% | $66.89 |
| 5.0% | $68.50 |
| 4.73% | $69.13 |
| 4.3% | $70.14 |
· Beta – according to www.zacks.com, Teleflex’s beta ratio is 0.84, indicating that Teleflex’ stock is 16% less volatile that other stocks in the market.
Sensitivity analysis: if the beta is similar to market in the future, it will have the following effect on the stock price:
| If the beta is: | The stock price is: |
| 0.84 | $70.14 |
| 1.00 | $68.46 |
· Inflation rate: According to the US Inflation Calculator
The inflation rate in the US as of 9.10.10 is 1.14%. According to the QE2 plan of government, inflation rate is supposed to go.
| If inflation rate is: | The stock price is: |
| 1.14% | $70.14 |
| 2% | $71.31 |
· Perpetuity Growth Rate – original calculation of WACC:
(.57*5.5+.43*5.1)=5.25%
Sensitivity Analysis: the perpetuity growth rate can change based on changes to components of its formula that include:
| K of e is: | The perpetuity growth rate is: | The stock price is: | |
| Risk free rate becomes 2.6% as it was in the beginning of 2010 | 5.2% | Stays at 5.33% | $64.59 |
| Risk premium rises to 5%, due to fears of a further economic downturn, or double dip recession | 5.5% | 5.5% | $69.74 |
| Unlevered beta goes to .71 since beta goes to 1.00 due to more volatility in the stock price | 5.61% | 5.56% | $69.45 |
In conclusion, there are numerous factors that can change in this model which the effects the perpetuity growth rate and the stock price.
· Cost synergy assumptions:
o Perpetuity Growth Rate: is the same rate of 5.2% as the valuation.
o Discount rate: 12% based on Airgas’s annual report.
o Ongoing Investment/Saving(year 3+): the range for ongoing investment / saving is from 6% - 10%
o Investment necessary to realize the savings: Airgas estimate the necessary investment will be in the range of $5 million to $8 million.
· Revenue synergy assumptions:
o Perpetuity Growth Rate: is the same rate of 5.2% as the valuation.
o Discount rate: 12% based on Airgas’s annual report.
o Ongoing Investment/saving (year 1+): the range of 6% - 10%
o Operating cost/Revenue: We assume Operating cost/Revenue account for 55% of revenues as it was the case last year.
o Investment necessary to realize the added revenue: Airgas estimate the necessary investment will be in the range of $8 million to $10 million.
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