DCF Project 3_Patel

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Montgomery College *

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340

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Finance

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Feb 20, 2024

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Saloni Patel 1 340 Project 3 Despite Tapestry's stock price of $43.53 on the last date of the annual report (07/01/2022) being slightly higher than the calculated average share price of $38.58 from the discounted cash flow (DCF) schedule, I concluded that the market price is slightly high. The extensive evidence gathered through the DCF analysis and research supports the view that the market has appropriately valued Tapestry. The DCF model enabled a systematic evaluation of the company's future cash flows, leading to a justifiable intrinsic value. This provides a solid basis for asserting that, despite the numerical disparity, the market has accurately assessed Tapestry 's stock. Throughout the project, my goal was to understand the factors influencing the true value of the share price. To do this, I focused on forecasting future net working capital from sales and averaged ratios. Constructing a free cash flow model enabled me to calculate my price per share for Tapestry. Adjusting ratios allowed me to identify variables impacting stock prices and assess whether the market value is justified. My analysis involved collecting data from balance sheets, income statements, cash flows, sales forecasts, and ratios. The DCF and free cash flow models provided insights into Tapestry ’s share price. The company's net sales growth over the past five years suggested a growing stock value, but the DCF breakdown supported my view of a potentially overvalued market price. I made three assumptions based off my research and applied them to the ratios. First, I changed the tax rate to 28% due to President Biden's FY 2024 budget proposing an increase in taxes for corporations from 21% to 28%. Second, Tapestry now operates under three segments comprising Coach brand, Kate Spade & Company and Stuart Weitzman. Additionally, Tapestry long-term plan is to expand and capture all the market size. I changed the PPE/Sales to average the highest three ratios out of the five years to reflect the expansion, facelifts, partnerships of

Saloni Patel 2 new companies. Looking more closely at their partnerships, Tapestry now owns Kate Spade and Stuart Weitzman as well. Its market capital is expected to be 7.050B and Revenue is expected to be around 6.661B. There was an average 10% operating income/sales increase from 2019 to 2023, so I averaged the three highest OI/sales to reflect this initiative. Strategic partnerships, like collaborations with major retailers, can positively impact a company's intrinsic share price, potentially leading to significant increases. Conversely, factors such as changes in tax rates, shifts in working capital/sales, and alterations in financial ratios may contribute to fluctuations, causing share prices to rise or fall. A notable increase in tax rates, for instance, could result in a substantial decline in share value. The acquisition with Kate Spade and Stuart Weitzman had the most significant impact on the intrinsic share price, increasing it by +$7.01. Conversely, changes to higher tax rates, working capital/sales, and PPE/sales ratios caused the share price to fall from $39.58. The decrease in operating income/sales of 6.67% had the most significant share value decrease of ($22.62). It's crucial to acknowledge uncertainties in the assumption process. Tapestry’s stock price could be affected by the substantial investment in store expansion. The assumed PPE/Sales ratio may be higher than 35.20%, not considering expected growth. Stability in PPE/sales ratios over the past five years might not fully align with the effect that future expansion plans have on the business. In conclusion, despite existing uncertainties, the analysis indicates that Tapestry's market valuation appears to be relatively elevated. This underscores the necessity for continuous evaluation and the incorporation of potential growth factors in future assessments. The inherent growth potential of the company justifies a market price surpassing the discounted cash flow (DCF) share price, suggesting optimism about Tapestry's prospects.

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