SIF ValuationSIF Valuation

Jason TuroJason Turo

Spring 2009Spring 2009

BA 455BA 455

Weekly GraphLong Horizon

American Science

Monro Muffler

Applied Signal

Daily Graph Mid Horizon

60 Minute GraphShort Horizon

American Science

Applied Signal Technology APSG

Competition:

L-3 Communications, BAE Systems, Boeing, Raytheon Corporation, General Dynamics, Harris Corporation, Lockheed Martin

Monro Muffler & Brake MNRO

Automotive car repair- Consumer Services

• Relies wholly on Consumer Spending

American Science & Engineering ASEI

X-Ray Security Products for Homeland Security Microelectronics Industry

• MKT CAP: $681M, LT DEBT: $9.0M, TD/Assets: $10.1/$263.3 = 3.84%

• 346 Employees• Massachusetts

NYT.COM

What they do

• Cargo Search Inspection Systems:

• High/Medium Energy non-intrusive inspection and screening devices

• For: Vehicles, pallets, air/land cargo, baggage, mail, personnel

• Used against: Drug trafficking, trade fraud, and terrorism

vs. SPY, INDEX & COMPETITORS

What happened in October?

• Received order from US government for multiple backscatter vans

• December received order from Abu Dhabi government

How: TechnologyZ Backscatter™ Technology: Photo-like images that reveal organic threats and contraband, including explosives, plastic weapons and drugs.

Transmission X-rays, a traditional detection technology

Dual-energy transmission

Radioactive Threat Detection technology helps locate dirty bombs and nuclear devices, in addition to conventional threats during X-ray screening.

Who ? 10-K

Industry use: Mainly Governments

• Homeland Security and Counterterrorism Solutions

• Military Solutions • Port and Border Solutions • Facility and Event Solutions • High Threat and Critical Infrastructure • Aviation Solutions

Why?

• Beginning with the terrorist attacks on September 11, 2001, and continuing with the proliferation of global terrorism, homeland security and force protection concerns have become of paramount importance in the United States and around the world.

Why?

Market Diversification

Customer Service Packages

• Platinum Service Package• Semi-annual and annual PMs

• All parts and labor

• All consumables

• Disposal of the X-ray tube

• All travel expenses

• 4-hour response time

• Gold Service Package• Semi-annual and annual PMs

• All parts and labor

• All consumables

• Disposal of the X-ray tube

• All travel expenses

• 24-hour response time

• Silver Service Package• Semi-annual and annual PMs

• All parts and labor are included (except the X-ray tube)

• All consumables

• Disposal of the X-ray tube

• All travel expenses

• 24 hour response time

• Bronze Service Package• Semi-annual and annual PMs

• Emergency repair labor billed at Prevailing Time & Materials rates (portal-to-portal)

• Travel expenses are billed at cost

• This margin is due primarily to improved system performance under service contracts as compared to the prior year.

$1.74

Revenue per $1 spent on service contracts

$1.96 $1.77

Service Contracts

Management Discussion 10-K•Net Sales increased 9%•CargoSearch System revenues increased 2yrs - higher order volume•ZBackscatter sales shift to other products with greater percentage of revenues.•Service revenues increase 22%- Large service contracts.

New Contracts

Ziri Analysts ReportsMorgan Keegan 2/10/09

2/4/09- Stifel Nicolaus

Where are sales?

R&D

Year Sales Spent R&D Revenue from R&D Non-R&D Revenue2008 $166,733,000 $12,306,000 $13,978,000 $152,755,0002007 $153,186,000 $7,184,000 $6,597,000 $146,589,0002006 $163,604,000 $9,601,000 $2,804,000 $160,800,000

The fiscal 2008 R&D efforts were focused on design modifications and enhancements to existing products, the development of new applications and the development of new products.

R&D spent/Sales R&D earned/Sales Non R&D / Sales7.38% 8.38% 91.62%4.69% 4.31% 95.69%5.87% 1.71% 98.29%

1. Burden of Tax (tax bracket)

2. Burden of Interest (how much is financed at what rate)

3. Revenue that is left over after paying variable costs, used for fixed (interest on debt). How much a company makes (before interest and taxes) on each dollar of sales WANT HIGH

4. Determines how efficient company uses assets to make

sales/cash WANT HIGH

5. How much growth in roe is financed GREATER POWER TO GENERATE ROE

ROE= Net Income Pretax profit EBIT Sales AssetsPretax Income EBIT Sales Assets Equity

Operating Assets EquityMargin Turnover Leverage

Tax Burden Interest Burden

Operating Assets EquityMargin Turnover Leverage

2008 $17,478 $27,485 $27,643 $166,763 $235,534 10.524%$27,485 $27,643 $166,763 $235,534 $166,072

63.591% 99.428% 16.576% 70.802% 141.826%

2007 $24,610 $40,016 $40,369 $153,186 $221,725 14.675%$40,016 $40,369 $153,186 $221,725 $167,698

61.500% 99.126% 26.353% 69.088% 132.217%

2006 $29,786 $45,769 $45,793 $163,604 $173,389 22.877%$45,769 $45,793 $163,604 $173,389 $130,198

65.079% 99.948% 27.990% 94.357% 133.173%

2005 $11,185 $11,267 $11,267 $88,310 $98,290 18.166%$11,267 $11,267 $88,310 $98,290 $61,570

99.272% 100.000% 12.758% 89.846% 159.639%

2004 $1,911 $1,820 $1,820 $76,340 $55,800 4.973%$1,820 $1,820 $76,340 $55,800 $38,430

105.000% 100.000% 2.384% 136.810% 145.199%

Tax Burden Interest Burden

ROE= Net Income Pretax profit EBIT Sales AssetsPretax Income EBIT Sales Assets Equity

Operating Assets EquityMargin Turnover Leverage

Tax Burden Interest Burden

Shares outst. 9,110 Current Price $74.58

2008 2007 2006 2005 2004Net Income $17,478 $24,610 $29,786 $11,185 $1,911Inc. Btax $27,485 $40,016 $45,769 $11,267 $1,820EBIT $27,643 $40,369 $45,793 $11,267 $1,820Sales $166,763 $153,186 $163,604 $88,310 $76,340Assets $235,534 $221,725 $173,389 $98,290 $55,800Equity $166,072 $167,698 $130,198 $61,570 $38,430

ROE 10.524% 14.675% 22.877% 18.166% 4.973%ROA = NI/TA 7.42% 11.10% 17.18% 11.38% 3.42%

Price $74.58 Price $74.58Equity/Shares 18.23 Sales/Shares 18.31P/BV 4.09 P/sales 4.07

Earnings $1.87 $2.38 $3.27 $1.31 $0.26Dividend $0.80 $0.60 $0.00 $0.00 $0.00

Growth:b = e-d/e 57.219% 74.790% 100.000% 100.000% 100.000%g = ROE x b 6.02% 10.98% 22.88% 18.17% 4.97%Last earnings x growth $1.98

Last 3 quarters= $2.26Compared to previous 4 Q 20.856%Leverage RatiosLT Debt $10,100.00 $9,500.00 $10,400.00 $9,600.00 $0.00LT Debt/ Assets 4.29% 4.28% 6.00% 9.77% 0.00%LT Debt/ Equity 6.08% 5.66% 7.99% 15.59% 0.00%

COGS or sales $166,763 $153,186 $163,604 $88,310 $76,340Inventory $40,107 $20,140 $16,886 24940 $11,390Inventory Turnover = 4.16 7.61 9.69 3.54 6.70

∆ Sales 8.86% -6.37% 85.26% 15.68%

Decrease in Profit margin of product sales• Higher technology costs more• Overseas sales costs to establish• Competitive industry?

48.9%31.7%

2006 85% increase in sales???

• Results of Operations 10-K

• Primarily increased revenue from Z backscatter system $52.4M and $8.4M cargo system search

• From US Gov’t and International sales

Competitors Decrease OperatingMargin as well

Management Compensation

Management Structure

Realized Risks 10-K

Sales in foreign countriesCurrency riskSmall # of customers for large portion of revenue

•·             longer payment cycles by foreign customers;•    •·             difficulties in staffing and managing foreign operations;• •·             geopolitical instability;• •·             political and economic changes and disruptions;• •·             favoritism towards local suppliers;• •·             governmental currency controls;• •·             interruption to transportation flow for delivery of parts to us and  •·             currency exchange rate fluctuations; and• •·             tariff regulations.

Growth Drivers 10-K

• International sales, primarily to foreign governments, accounted for approximately 36%, 27%, and 14% (2008, 2007, 2006).

• Additional growth in the seaports and borders, federal and military facilities, and corporate security markets.

Patents

The Company believes that its patents, proprietary technology, know-how, and trademarks provide substantial protection for the Company’s competitive position

Insider Trades Options Express

Institutional Holdings

Calls or Puts

• What Does Put-Call Ratio Mean?A ratio of the trading volume of put options to call options.

• 23% = 4.3 Calls to 1 Put

• Investor sentiment of increase in future price

Forward PE80/4= 20

Morningstar

Ziri

P/E Model

Company………………………… ASEI

Current price 74.58

Current EPS (Last 4 Qtrs) 2.56

Current P/E 29.13

Most Recent Dividend (Qtr) 0.2000

Current yield 1.07%

Current market P/E 11.70

Current relative P/E 2.49

High Most Likely Low

EPS - Forecast 1-Year out 4.05 3.90 3.65

Market P/E - Forecast 12.30 11.70 11.20

Rel. P/E - Forecast 2.30 1.90 1.70

Estimated price 114.57 86.70 69.50

Expected Return w ithout Dividends 53.63% 16.25% -6.82%

Dividend yield 1.07% 1.07% 1.07%

State Based Expected Return (P/E Model) 54.70% 17.32% -5.74%

Probability of state 25% 50% 25%

P/E Model - Expected Future Value 89.37$

P/E Model - Expected upside 20.90%

State Based Estimated Price FCFE 90.60 78.44 62.28

State Based Expected Return (P/E Model) 21.48% 5.18% -16.49%

FCFE Model - Expected Future Value 77.44$

FCFE Model - Expected upside 3.84%

P/E-model FCFE-model Total

Model weight 60% 40% 100%

Estimated value of security 84.60$

Expected return on security 14.07%

Free Cash Flow to Equity Valuation (Most Likely):

Cap Exp. Growth % Relative to EPS Growth % 90.0%Depreciation Growth % Relative to EPS Growth % 70.0%Working Capital Growth % Relative to EPS Growth % 50.0%

Estimates (per share)2010 2011 2012 2013 2014 2015 2016 2017

EPS Growth Rates (%) 12.50% 9.25% 7.50% 7.00% 6.50% 6.00% 5.50%Earnings 3.90 4.39 4.79 5.15 5.51 5.87 6.22 6.57Debt Ratio (%) 36% 36% 36% 40% 43% 46% 49% 52% T. liabilities / T. assetsCapital Expenditures 0.60 0.67 0.72 0.77 0.82 0.87 0.92 0.96 ppeDepreciation 0.52 0.57 0.60 0.63 0.66 0.70 0.72 0.75∆ Working Capital 2.20 1.50 1.57 1.63 1.69 1.74 1.79 1.84

Risk Free Rate (10-Yr. US Bond) 2.550% 2.800% 3.000% 3.300% 3.500% 4.000% 4.250% 4.500%Beta 0.95 0.95 0.95 0.95 0.95 0.95 0.95 1.00Equity Market Risk Premium 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%Cost of Equity 8.25% 8.50% 8.70% 9.00% 9.20% 9.70% 9.95% 10.50%

Earnings 3.90 4.39 4.79 5.15 5.51 5.87 6.22 6.57 -(CapEx-Depr)*(1-debt ratio) 0.05 0.07 0.08 0.08 0.09 0.09 0.10 0.10 -∆wc*(1-debt ratio) 1.41 0.96 1.01 0.98 0.96 0.94 0.91 0.88 FCFE 2.44 3.36 3.71 4.09 4.46 4.84 5.21 5.58 Present value 2.25 2.85 2.89 2.90 2.87 2.78 2.68

Total PV………… 19.23 Terminal Price……………… 111.65

Estimated Value of Stock:

Total PV (2008-2014)………… 19.23 PV of Terminal Price………… 59.22 Estimated Value of Stock…… 78.44

Expected return…………………. 5.18%

Cost of Equity (CAPM)

FCFE Calculations

Free Cash Flow to Equity Valuation (Best Case):

Cap Exp. Growth % Relative to EPS Growth % 100.0%Depreciation Growth % Relative to EPS Growth % 80.0%Working Capital Growth % Relative to EPS Growth % 60.0%EPS Growth Rates Relative to Most Likely Scenario 110.00%

Estimates (per share)2009 2010 2011 2012 2013 2014 2015 2016

EPS Growth Rates (%) 13.75% 10.18% 8.25% 7.70% 7.15% 6.60% 6.05%Earnings 4.05 4.61 5.08 5.49 5.92 6.34 6.76 7.17Debt Ratio (%) 36% 36% 36% 40% 43% 46% 49% 52%Capital Expenditures 0.50 0.57 0.63 0.68 0.73 0.78 0.83 0.88Depreciation 0.62 0.69 0.74 0.79 0.84 0.89 0.94 0.98∆ Working Capital 2.10 2.27 2.41 2.53 2.64 2.76 2.87 2.97

Risk Free Rate (10-Yr. US Bond) 2.550% 2.800% 3.000% 3.300% 3.500% 4.000% 4.250% 4.500%Beta 0.95 0.95 0.95 0.95 0.95 0.95 0.95 1.00Equity Market Risk Premium 5.90% 5.90% 5.90% 5.90% 5.90% 5.90% 5.90% 5.90%Cost of Equity 8.16% 8.41% 8.61% 8.91% 9.11% 9.61% 9.86% 10.40%

Earnings 4.05 4.61 5.08 5.49 5.92 6.34 6.76 7.17 -(CapEx-Depr)*(1-debt ratio) (0.08) (0.08) (0.08) (0.07) (0.06) (0.06) (0.05) (0.05) -∆wc*(1-debt ratio) 1.35 1.46 1.55 1.52 1.51 1.49 1.46 1.43 FCFE 2.78 3.23 3.61 4.05 4.47 4.91 5.35 5.79 Present value 2.57 2.75 2.82 2.88 2.89 2.83 2.77

Total PV (2008-2014)………… 19.51 Terminal Price……………… 133.10

Estimated Value of Stock:

Total PV………… 19.51 PV of Terminal Price………… 71.09 Estimated Value of Stock…… 90.60

Expected return…………………. 21.48%

Cost of Equity (CAPM)

FCFE Calculations

Free Cash Flow to Equity Valuation (Worst Case):

Cap Exp. Growth % Relative to EPS Growth % 80.0%Depreciation Growth % Relative to EPS Growth % 60.0%Working Capital Growth % Relative to EPS Growth % 40.0%EPS Growth Rates Relative to Most Likely Scenario 90.00%

Estimates (per share)2009 2010 2011 2012 2013 2014 2015 2016

EPS Growth Rates (%) 11.25% 8.33% 6.75% 6.30% 5.85% 5.40% 4.95%Earnings 3.65 4.06 4.40 4.70 4.99 5.28 5.57 5.84Debt Ratio (%) 36% 36% 36% 40% 43% 46% 49% 52%Capital Expenditures 0.50 0.55 0.58 0.61 0.64 0.67 0.70 0.73Depreciation 0.42 0.45 0.47 0.49 0.51 0.53 0.54 0.56∆ Working Capital 2.30 2.40 2.48 2.55 2.61 2.67 2.73 2.78

Risk Free Rate (10-Yr. US Bond) 2.600% 2.800% 3.000% 3.200% 3.500% 3.750% 3.900% 3.900%Beta 0.80 0.90 0.90 0.90 0.90 0.90 1.00 1.00Equity Market Risk Premium 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25%Cost of Equity 7.60% 8.43% 8.63% 8.83% 9.13% 9.38% 10.15% 10.15%

Earnings 3.65 4.06 4.40 4.70 4.99 5.28 5.57 5.84 -(CapEx-Depr)*(1-debt ratio) 0.05 0.06 0.07 0.07 0.08 0.08 0.08 0.08 -∆wc*(1-debt ratio) 1.47 1.54 1.59 1.53 1.49 1.44 1.39 1.34 FCFE 2.13 2.46 2.74 3.09 3.43 3.76 4.10 4.43 Present value 1.97 2.09 2.14 2.21 2.21 2.20 2.08

Total PV………… 14.90 Terminal Price……………… 85.13

Estimated Value of Stock:

Total PV (2008-2014)………… 14.90 PV of Terminal Price………… 47.38 Estimated Value of Stock…… 62.28

Expected return…………………. -16.49%

Cost of Equity (CAPM)

FCFE Calculations

Industrials Performance Daily

Industrials Performance 60 min

Industrials Performance 30 min

Industrials Performance 10 min

P/E Model

Company………………………… FLR MMM

Current price 36.98 47.25

Current EPS (Last 4 Qtrs) 3.37 5.16

Current P/E 10.97 9.16

Most Recent Dividend (Qtr) 0.13 0.50

Current yield 1.35% 4.23%

Current market P/E 11.70 11.70

Current relative P/E 0.94 0.78

EPS - Forecast 1-Year out 3.70 4.10

Market P/E - Forecast 11.70 11.70

Rel. P/E - Forecast 1.10 0.91

Estimated price 47.62 43.65

Expected Return without Dividends 28.77% -7.61%

Dividend yield 1.35% 4.23%

P/E Model - Future Price 47.62$ 43.65$

P/E Model - Expected upside 30.12% -3.38%

Portfolio Fit

• Buy 2.5% ASEI 8.31% + 2.5% = 10 .56% over

• Sell FLR 8.31% - 2.12% = 6.19% + 2.5% = 8.69% over

• Sell MMM 8.31% - 1.96%= 6.35% + 2.5% = 8.85% over

Sources• http://www.businessdiagnostics.com.au/

financial_analysis.asp• www.wisegeek.com

• NYT.COM• WSJ.COM• Q-CHARTS• MORNINGSTAR.COM• OptionsExpress.com• Finance.yahoo.com

• Message boards:• Ragingbull.quote.com• www.investmentnation.com/ • Msnmoney.com

• Standardandpoors.com• Finance.google.com• Bloomberg News• www.sec.gov• Cfraonline.com• Valueline• Smartmoney• Businessweek.com• Harald Aas