Slide 1Slide 2Earnings PersistenceSlide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Earnings Based Equity ValuationSlide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Earning Power and Forecasting for ValuationSlide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.Financial Statement AnalysisK R SubramanyamJohn J Wild11-211CHAPTE REquity Analysis and Valuation11-3Earnings Persistence•Earnings persistence is a key to effective equity analysis and valuation•Analyzing earnings persistence is a main analysis objective•Attributes of earnings persistence include:–Stability–Predictability–Variability–Trend–Earnings management–Accounting methodsAnalyze11-4Earnings Persistence•Two common methods to help assess earnings persistence:–Recasting of income statement–Adjusting of income statement•Recasting and adjusting earnings aids in determining the earning power.Recasting and Adjusting11-5Earnings Persistence•Information for Recasting and Adjusting–Income statement, including its subdivisions:•Income from continuing operations•Income from discontinued operations•Extraordinary gains and losses•Cumulative effect of changes in accounting principles–Other financial statements and notes–Management’s Discussion and Analysis–Others: product-mix changes, technological innovations, work stoppages, and raw material constraintsRecasting and Adjusting11-6Earnings Persistence•Aims at rearranging earnings components to provide a meaningful classification and relevant format for analysis.–Components can be rearranged, subdivided, or tax effected, but the total must reconcile to net income of each period. –Discretionary expenses, components like equity in income (loss) of unconsolidated subsidiaries or affiliates should be segregated. –Components reported pretax must be removed along with their tax effects if reclassified apart from income from continuing operations.Recasting Earnings and Earnings Components11-7Earnings Persistence–Income tax disclosures enable one to separate factors that either reduce or increase taxes such as:•Deductions—tax credits, capital gains rates, tax-free income, lower foreign tax rates•Additions—additional foreign taxes, nontax-deductible expenses, and state and local taxes (net of federal tax benefit)–Immaterial items can be considered in a lump sum labeled other.Recasting Earnings and Earnings Components11-8Earnings PersistenceRecasting Earnings and Earnings ComponentsCampbell Soup CompanyRecast Income Statements ($ mil.) Item Year 11 Year 10 Year 9 Year 8 Year 7 Year 613 Net sales $ 6,204.1 $ 6,205.8 $ 5,672.1 $ 4,868.9 $ 4,490.4 $ 4,286.819 Interest income 26.0 17.6 38.3 33.2 29.5 27.4Total revenue $ 6,230.1 $ 6,223.4 $ 5,710.4 $ 4,902.1 $ 4,519.9 $ 4,314.2Costs and expenses:Cost of products sold (see Note 1 below) $ 3,727.1 $ 3,893.5 $ 3,651.8 $ 3,077.8 $ 2,897.8 $ 2,820.5 Marketing and selling expenses (see Note 2 below) 760.8 760.1 605.9 514.2 422.7 363.0145 Advertising (see Note 2 below) 195.4 220.4 212.9 219.1 203.5 181.4144 Repairs and maintenance (see Note 1 below) 173.9 180.6 173.9 155.6 148.8 144.016 Administrative expenses 306.7 290.7 252.1 232.6 213.9 195.917 Research and development expenses 56.3 53.7 47.7 46.9 44.8 42.2102 Stock pricerelated incentive programs (see Note 3 below)15.4 (0.1) 17.4 (2.7) — 8.520 Foreign exchange adjustment 0.8 3.3 19.3 16.6 4.8 0.7104 Other, net (see Note 3 below) (3.3) (2.0) (1.4) (4.7) (0.4) (9.0)162A Depreciation (see Note 1 below) 194.5 184.1 175.9 162.0 139.0 120.8103 Amortization of intangible and other assets (see Note 3 below)14.1 16.8 16.4 8.9 5.6 6.018 Interest expense 116.2 111.6 94.1 53.9 51.7 56.0 Total costs and expenses $ 5,557.9 $ 5,712.7 $ 5,266.0 $ 4,480.2 $ 4,132.2 $ 3,930.023 Earnings before equity in earnings of affiliates & min. interests$ 672.2 $ 510.7 $ 444.4 $ 421.9 $ 387.7 $ 384.224 Equity in earnings of affiliates 2.4 13.5 10.4 6.3 15.1 4.325 Minority interests (7.2) (5.7) (5.3) (6.3) (4.7) (3.9)26 Income before taxes $ 667.4 $ 518.5 $ 449.5 $ 421.9 $ 398.1 $ 384.6Income taxes at statutory rate* (226.9) (176.3) (152.8) (143.5) (179.1) (176.9)Income from continuing operations $ 440.5 $ 342.2 $ 296.7 $ 278.4 $ 219.0 $ 207.7135 State taxes (net of federal tax benefit) (20.0) (6.6) (3.8) (11.8) (8.6) (8.0)Investment tax credit — — — — 4.4 11.6137 Nondeductible amortization of intangibles (4.0) (1.6) (1.2) (2.6) (1.4) —138 Foreign earnings not taxed or taxed at other than statutory rate2.0 (2.2) (0.2) 3.2 11.1 15.2139 Other: Tax effects (17.0) (2.2) (0.1) (3.7) 7.5 (4.7)Alaska Native Corporation transaction — — — — 4.5 —22 Divestitures, restructuring and unusual charges — (339.1) (343.0) (40.6) — —Tax effect of divest., restructuring & unusual charges (Note 4)— 13.9 64.7 13.9 — —(Continued on next slide)11-9Earnings PersistenceRecasting Earnings and Earnings ComponentsCampbell Soup CompanyRecast Income Statements ($ mil.) Item Year 11 Year 10 Year 9 Year 8 Year 7 Year 6Gain on sale of businesses in (Yr 8) and sub. in Yr 7 — — — 3.1 9.7 —Loss on sale of exercise equipment subsidiary, net of tax — — — — (1.7) —LIFO liquidation gain (see Note 1 below) — — — 1.7 2.8 1.4Income before cumulative effect of accounting change$ 401.5 $ 4.4 $ 13.1 $ 241.6 $ 247.3 $ 223.2153A Cumulative effect of accounting change for income taxes — — — 32.5 — —28 Net income as reported $ 401.5 $ 4.4 $ 13.1 $ 274.1 $ 247.3 $ 223.214 (Note 1) Cost of products sold $ 4,095.5 $ 4,258.2 $ 4,001.6 $ 3,392.8 $ 3,180.5 $ 3,082.8144 Less: Repair and maintenance expenses (173.9) (180.6) (173.9) (155.6) (148.8) (144.0)162A Less: Depreciation(a)(194.5) (184.1) (175.9) (162.0) (139.0) (120.0)153A Plus: LIFO liquidation gain(b)— — — 2.6 5.1 2.6$ 3,727.1 $ 3,893.5 $ 3,651.8 $ 3,077.8 $ 2,897.8 $ 2,821.415 (Note 2) Marketing and selling expenses $ 956.2 $ 980.5 $ 818.8 $ 733.3 $ 626.2 $ 544.4145 Less: Advertising (195.4) (20.4) (212.9) (219.1) (203.5) (181.4)$ 760.8 $ 960.1 $ 605.9 $ 514.2 $ 422.7 $ 363.021 (Note 3) Other expenses (income) $ 26.2 $ 14.7 $ 32.4 $ (3.2) $ (9.5) $ 5.5102 Less: Stock price–related incentive programs (15.4) 0.1 (17.4) 2.7 — (8.5)103