Laurent Vasilescu Lvasilescu10@gsb.columbia.

edu

Professor Greenwald Legends of Value Investing

Blue Nile Inc. (NYSE: NILE)

Trading Data Latest Price P/E 52 Week Range Market Cap ($MM) Shares Outstanding (MM) Valuation $55.84 Recommended Price 66.4 RecommendedP/E $32.03-$67.16 Steady State Price $808.79 PVGO 14.481 Steady State+PVGO Operating Data $11.34 11.19 $10.78 $45.06 $55.84 Sales CAGR 5 Year Gross Margin 5 Year Operating Margin 5 Year ROIC 5 Year EPS 10.40% 20.90% 6.70% 23.80% $0.86

I. COMPANY DESCRIPTION Blue Nile, Inc. is an online retailer of diamonds and jewelry, with a particular focus on engagement diamonds and settings. The Company operates three Websites: www.bluenile.com, www.bluenile.ca and www.bluenile.co.uk. Blue Nile websites showcase diamonds and jewelry, including rings, wedding bands, earrings, necklaces, pendants, bracelets and watches. In addition to sales of diamonds, jewelry and watches, the company provides education, guidance and support to enable customers to learn about and purchase diamonds. The company offers products for sale to customers in over 40 countries and territories worldwide. The chart below shows the growth of Blue Nile stock relative to the S&P over the last twelve months.

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Laurent Vasilescu Lvasilescu10@gsb.columbia.edu

Professor Greenwald Legends of Value Investing

II. THESIS SUMMARY This summary recommends a strong SELL on Blue Nile, Inc. Blue Nile was around $32.00 a share as of a year ago and is currently trading at $55.84 with a P/E multiple of 66.4. This represents a 69 percent return while the S&P Index has risen by approximately 39 percent over the same time period. The investment thesis recommends a strong SELL on Blue Nile for the following reasons: Lack of a moat to sustain competitive advantage The strength of suppliers to determine pricing Risks associated with third party distribution Volatility of annual cash flows Risks of currency volatility Bricks and mortar competitors entering online space

Based on these factors detailed further below and the valuation model showcased as Exhibit 6 in the addendum, the company is valued at $11.34. This presents a real opportunity to short sell Blue Nile for a significant return. III. BUSINESS DESCRIPTION This section provides a detailed overview of the companys business operations without providing a biased judgment on the companys valuation. Product Offering: Blue Niles product offering consists of high quality diamonds and fine jewelry, with a particular focus on engagement diamonds and settings. The company maintains diamond supplier relationships which allow them to display suppliers diamond inventories on the Blue Nile websites for sale to consumers without holding the diamonds in inventory until the products are ordered by customers. The company purchases polished diamonds from several dozen suppliers. Blue Nile purchases diamonds on a just in time basis from suppliers when a customer places an order for a specific diamond. The company then assembles the diamond with a ring, pendant or earring setting from the inventory into customized diamond jewelry according to the customers specifications. The finished jewelry is delivered to the customer generally within three business days from the order date. The company offers diamonds with specified characteristics in the areas of shape, cut, color, clarity and carat weight. A snapshot of the companys key website is attached below. The site allows customers to scale key characteristics as they shop for a diamond in a certain price range. These sliding scale metrics

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Laurent Vasilescu Lvasilescu10@gsb.columbia.edu

Professor Greenwald Legends of Value Investing

utilize marketing conjoint analysis and allow for customers to place more importance on different metrics such as carat weight, clarity and color. The screen shot shows that 31,640 round diamonds were found at Blue Nile ranging in price from $293 to $1,245,387.

While diamond engagement rings constitute the majority of sales for Blue Nile, the company also offers a broad range of other fine jewelry products and watches. The fine jewelry selection includes diamond, gemstone, platinum, gold, pearl and sterling silver jewelry and accessories as well as settings, wedding bands, earrings, necklaces, pendants and bracelets. In the case of fine jewelry, unlike most diamonds that Blue Nile sells, the company takes products into inventory before they are ordered by customers. The fine jewelry and watches are purchased from over 40 manufacturers. Suppliers: The company typically enters into multi-year agreements with diamond suppliers that provide for certain diamonds to be offered online to consumers exclusively through the Blue Nile websites. The diamond supply agreements have expiration dates ranging from 2010 to 2014. The diamond suppliers purchase rough and polished diamonds from sources throughout the world. Their ability to supply Blue Nile with diamonds is dependent upon their ability to procure these diamonds.

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Laurent Vasilescu Lvasilescu10@gsb.columbia.edu

Professor Greenwald Legends of Value Investing

Customer Service and Support: Blue Nile provides a high level of customer service and support. The company augments the online retail experience by providing a knowledgeable, highly trained support staff through call centers to give customers confidence in their purchases. The call center consultants are trained to provide guidance on all steps in the process of buying diamonds and fine jewelry. The company prominently displays all of its guarantees and policies on the websites to create an environment of trust. These include policies relating to privacy, security, product availability, pricing, shipping, refunds, exchanges and special orders. Blue Nile typically offers a return policy of 30 days. They generally do not extend credit to customers except through third-party credit cards, although they maintain a relationship with a consumer financing company that offers financing to customers. Seasonality: As with many retailers, Blue Nile generally experiences seasonal fluctuations in demand for its products. Quarterly sales are impacted by various gift giving holidays including Valentines Day (first quarter), Mothers Day (second quarter) and Christmas (fourth quarter). As a result, the companys quarterly revenues are generally the lowest in the third quarter (as a result of the lack of recognized gift giving holidays) and highest in the fourth quarter. The fourth quarter accounted for approximately 34%, 29% and 35% of net sales in fiscal years 2009, 2008 and 2007, respectively. Competition: The diamond and fine jewelry retail market is intensely competitive and highly fragmented. Competition comes from a wide array of different avenues from online and offline retailers. Current or potential competitors include the following: Jewelry stores which are owned by individuals Retail jewelry store chains such as Tiffany & Co. and Zales Online retailers that sell jewelry such as Amazon Online auction sites such as EBay Catalog and television shopping retailers, such as Home Shopping Network and QVC Discount superstores and wholesale clubs, such as Wal-Mart and Costco Wholesale Internet shopping clubs, such as Gilt Groupe and Rue La La

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Laurent Vasilescu Lvasilescu10@gsb.columbia.edu

Professor Greenwald Legends of Value Investing

IV. RISKS Porters Five Forces Applied to Blue Nile: This section argues that Blue Nile cannot maintain a competitive advantage over the long run. The argument is not because Blue Nile is an internet site. In fact, there are plenty of internet sites like EBay that take advantage of network effects to retain customers and prevent new competitors from stealing customers. Unfortunately, Blue Nile does not operate a network effect. It is simply a middleman between the diamond dealers and the customers. Porters five forces will argue further that Blue Nile is under numerous constraints, not just from competitors.

Lack of network effect over internet and relative ease of existing and new competitors to create analytics tool for customers Threat of New Entry

Limited suppliers have created an established oligopoly over the last 100 years . Prices are set by diamond exchange in London and Blue Nile has no bargaining power

Supplier Power

Competitive Rivalry Independent Jewelers, Retail Jewelry Chains, Internet Shopping Clubs EBay, QVC, Amazon

Buyer Power

Customers have no bargaining power. However, they are aware of price controls by suppliers and the ability to shop through different retail avenues

Threat of Substitute Threat of artificially produced diamonds was real in the 1970s. However, DeBeers has folded this threat into its umbrella organization.

There is enormous competitive rivalry in the diamond retail space. Until recently, this space was operated by independent jewelers and retail jewelry chains like Zales and Tiffany & Co. New competitors have entered this space recently such as QVC, EBay, internet shopping clubs such as the Gilt Groupe. With the advent of new forms of communication and social

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Laurent Vasilescu Lvasilescu10@gsb.columbia.edu

Professor Greenwald Legends of Value Investing

interaction, new methods of exchanging goods will continue to put pressure on competing retailers. Alchemists have tried for centuries to recreate diamonds through artificial means. With the introduction of true science during the 20th century, man finally found a way to apply natures forces in a laboratory and recreate diamonds through artificially means. According to the book, The Rise and Fall of Diamonds by Edward Jay Epstein, General Electric invented artificial diamond production in 1954 at a laboratory located in Schenectady, New York. The first artificial diamonds were small and industrial grade. However, over the decades, methods have improved and now many industrial diamonds are identical to true diamonds. De Beers which maintains a virtual monopoly on the supply of diamonds around the world has purchased virtually all artificial means of creating diamonds and limited their supply. Market Insight Information: Since Blue Nile is an online retailer, this report attempts to use the market insight tools available on the internet to gauge Blue Niles popularity on the internet. Google Insight is a remarkable online tool that allows anyone to search the frequency of a word search over a period of time. The snapshot below shows the frequency of the world search Blue Nile Diamond over the last five years. The snapshot clearly shows that peak searches for the words Blue Nile Diamond occurs every year during the fourth quarter prior to the Holiday Season. The graph below also shows that the frequency has not increased or waned over the last five years. In fact, the graph indicates that the search has remained extremely constant overtime. This indication was factored into the valuation model with regards to the increase in sales over the long run. The long run sales growth is estimated at 3 percent in the valuation model.

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Laurent Vasilescu Lvasilescu10@gsb.columbia.edu

Professor Greenwald Legends of Value Investing

In addition to the frequency of the word search over the last five years, the screenshot provided below shows where these word searches originate. While Blue Nile boasts about the fact that it can ship products to over 40 countries worldwide, the screenshot below is stark realization that the majority of customers are domiciled in the United States and Canada. Blue Nile will need to strongly reevaluate its international marketing efforts if it banks on strong sales growth coming from abroad.

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Laurent Vasilescu Lvasilescu10@gsb.columbia.edu

Professor Greenwald Legends of Value Investing

Competition Learning from Blue Niles Advantage The business description showcased that Blue Niles website allows customers to place different values on different attributes of a diamond. This is the true value added component to Blue Nile that entices customers to shop there. Unfortunately for Blue Nile, existing competitors are quickly learning from the companys abilities. For example, Zales has incorporated the same conjoint marketing tool recently for customers on its website. The screenshot below looks remarkably similar to Blue Niles and allows for customers to place different values on attributes such as clarity or carat weight.

More importantly, this research report attempted to determine the price differentials between Zales and Blue Nile based on the following diamond attributes. This was done to assess if there are differences in prices between the competitors: Shape: Round Carat Size: 2.0 Color Code: H Cut: Very Good Clarity:VS2 By defining these identical attributes to Blue Nile and Zales, the report determines that the price for these diamond attributes were relatively identical. A diamond with the characteristics described above is priced at approximately $20K on both websites. This demonstrates that the

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Laurent Vasilescu Lvasilescu10@gsb.columbia.edu

Professor Greenwald Legends of Value Investing

retailers prices are possibly determined by the oligopoly of suppliers that furnish the diamonds to the retailers.

V. VALUATION

The valuation exercise employs the Discount Cash Flow approach detailed in the exhibits attached this report. The DCF valuation comes to a price of $11.34 per share for Blue Nile. As a result, Blue Nile is significantly overvalued with the current price of $55.84 as the market believes that there is significant growth and Blue Nile will remain the dominant internet player in diamond retailing. The section below outlines the individual exhibits attached to the valuation and the assumptions made that derive a value of $11.34 per share. Exhibits 1, 2 and 3: These exhibits provide a historical overview of Blue Niles Income Statement, Balance Sheet, and Cash Flow Statement for the last six years since 2004. While there was significant growth from 2004 to 2007, sales growth has declined and rebounded modestly since the financial crisis. More importantly, while sales have increased, operating margins have decreased significantly from 8.8% to 6.4% over the last five years. This represents a 27% decrease in overall operating margin. The balance sheet shows that Blue Nile held significant cash until the financial crisis and it now employs debt in the capital structure. The Cash Flow Statement shows extreme volatility in the increases and decreases in cash from year to year. Exhibits 4, 5 and 6: Exhibit 4 uses both the financing and operating approaches to demonstrate that free cash flow oscillates significantly on an annual basis. One year, Free Cash Flow amounts to $12 million and other years amount to $68 million and -$24 million. Exhibits 5 and 6 create predictability and stability in sales, margins and cash flows for valuation purposes. Blue Nile has very little debt but the WACC assumes an optimal debt to capital ratio of 25 percent as the company matures and takes advantage of future tax shields through debt financing. The assumed WACC amounts to 9.345 percent. Exhibit 6 which details the valuation model assumes that sales will rebound quickly to historical levels over the next two years. However, from 2012 onwards, sales growth will mature from 5 percent to a terminal rate of 3 percent. EBITA margins will continue to erode from 6.5 percent to 3 percent as new entrants begin competing with Blue Nile on the internet. Working and Fixed Capital changes amount to 7 percent and 1 percent, respectively. Fixed capital changes are minimal after reviewing the annual reports and determining that relatively little fixed capital is needed to increase scale for Blue Nile.

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Laurent Vasilescu Lvasilescu10@gsb.columbia.edu

Professor Greenwald Legends of Value Investing

A breakdown of the current share price is also provided in Exhibit 6. Based on the current price of $55.84, the steady state assumes only $10.78 of the value while the remaining value of $45.06 is attributed to present value of growth opportunity or PVGO.

VI. Conclusion: There is clearly a mismatch in the value of Blue Nile and the current price for its shares. Blue Niles website is sleek and provides a useful analytical tool for men to purchase engagement rings for their fiances. However, the vast majority of Blue Nile customers are not repeat customers since most men hopefully only get married once. Blue Nile needs to capture new customers through word of mouth from past customers. More importantly, competitors such as Zales and Tiffany & Co. are adapting their websites to provide the same metric tools for their customers. This added functionality will allow them to steal customers from Blue Nile. The application of Porters Five forces show the intense competitive landscape and the power of suppliers in the diamond market. The application of these forces were considered in the valuation model which shows Blue Nile maturing very quickly over the next two years while the market currently places a significant premium on potential growth.

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Laurent Vasilescu Lvasilescu10@gsb.columbia.edu

Professor Greenwald Legends of Value Investing

EXHIBIT 1: HISTORICAL INCOME STATEMENT

2004 169,242.0 131,658.0 37,584.0 22.2% 22,727.0 14,857.0 8.8% chg. 2005 #DIV/0! 203,169.0 #DIV/0! 158,127.0 #DIV/0! 45,042.0 -22.2% #DIV/0! 26,993.0 chg. 2006 20.0% 251,587.0 20.1% 200,734.0 19.8% 50,853.0 -20.2% chg. 2007 23.8% 319,264.0 26.9% 254,060.0 12.9% 65,204.0 -20.4% chg. 2008 26.9% 295,329.0 26.6% 235,333.0 28.2% 59,996.0 -20.3% chg. 2009 -7.5% 302,134.0 -7.4% 236,790.0 -8.0% 65,344.0 -21.6% chg. 2.3% 0.6% 8.9% --

(1) Net sales (2) Cost of sales (3) Gross income Gross margin (4) S, G & A (5) Amortization (6) Operating income (EBIT) Operating margin (7) Interest expense (8) Other (net) (9) Pretax income (10) Income tax (11) Net income (12) Earnings per share (13) Shares outstanding (14) Tax rate

18.8% 34,296.0 27.1% 42,792.0 24.8% 44,005.0 2.8% 45,997.0 4.5% #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! 18,049.0 21.5% 16,557.0 -8.3% 22,412.0 35.4% 15,991.0 -28.6% 19,347.0 21.0% -8.9% -6.6% -7.0% -5.4% -6.4% -(2,504.0) 224.4% #DIV/0! 20,553.0 7,400.0 13,153.0 $0.75 31.5% 19,980.0 31.2% 6,916.0 (3,423.0) 36.7% #DIV/0! -2.8% 26,587.0 -6.5% 9,128.0 (4,175.0) 22.0% #DIV/0! 33.1% 17,856.0 32.0% 6,226.0 (1,865.0) -55.3% #DIV/0! -32.8% 19,678.0 -31.8% 6,878.0 (331.0) -82.3% #DIV/0! 10.2% 10.5% 10.1% 13.4% -3.0% --

(772.0) #DIV/0! #DIV/0! 15,629.0 5,642.0 9,987.0 $0.60 16,563.0 36.1% #DIV/0! #DIV/0! #DIV/0! #DIV/0!

31.7% 13,064.0 24.3% $0.79

-0.7% 17,459.0 5.2% $1.10

33.6% 11,630.0 39.0% $0.78

-33.4% 12,800.0 -29.0% $0.88

#DIV/0! 17,550.0 -36.0%

6.0% 16,563.0 -34.6%

-5.6% 15,919.0 -34.3%

-3.9% 14,925.0 -34.9%

-6.2% 14,480.0 -35.0%

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Laurent Vasilescu Lvasilescu10@gsb.columbia.edu

Professor Greenwald Legends of Value Investing

EXHIBIT 2: Balance Sheet Historicals

2004 2005 2006 2007 101,367.0 114,788.0 98,433.0 122,793.0 1,028.0 1,877.0 1,640.0 3,576.0 9,914.0 11,764.0 14,616.0 20,906.0 9,220.0 4,067.0 1,338.0 1,871.0 121,529.0 132,496.0 116,027.0 149,146.0 3,916.0 2,937.0 3,261.0 2,248.0 3,391.0 2,697.0 7,601.0 3,839.0 2008 2009 54,451.0 93,149.0 1,709.0 1,835.0 18,834.0 19,434.0 1,739.0 1,426.0 76,733.0 115,844.0 7,558.0 5,374.0 7,332.0 7,239.0

(15) (16) (17) (18) (19)

Cash and equivalents Accounts receivable Inventories Other current assets Current assets

(20) Net PP&E (21) Other assets Total assets (22) (23) (24) (25) (26) S-T debt Accounts payable Accrued expenses Income taxes Current liabilities

128,382.0 138,005.0 122,115.0 160,586.0 203.0 37,775.0 5,713.0 43,691.0 0.0 1,071.0 208.0 50,157.0 5,262.0 55,627.0 0.0 863.0 197.0 66,625.0 7,315.0 74,137.0 0.0 666.0 276.0 85,866.0 9,549.0 95,691.0 880.0 538.0

89,665.0 130,415.0 246.0 62,291.0 6,607.0 69,144.0 839.0 374.0 249.0 76,128.0 9,805.0 86,182.0 796.0 168.0

(27) Long-term debt (28) Other liabilities (29) Deferred taxes (30) (31) (32) (33) (34)

Common stock/paid in 104,684.0 106,341.0 115,751.0 134,207.0 144,913.0 156,030.0 Retained earnings (19,515.0) (6,362.0) 7,110.0 24,569.0 36,199.0 48,999.0 Treasury stock 636.0 18,008.0 75,395.0 95,391.0 161,841.0 161,841.0 Cummulative translation adjustment 913.0 456.0 163.0 (92.0) (37.0) (81.0) Equity 83,620.0 81,515.0 47,303.0 63,477.0 19,308.0 43,269.0 Total liabilities/equity 128,382.0 138,005.0 122,106.0 160,586.0 89,665.0 130,415.0

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Laurent Vasilescu Lvasilescu10@gsb.columbia.edu

Professor Greenwald Legends of Value Investing

EXHIBIT 3: STATEMENT OF CASH FLOWS

2004 9,987.0 1,510.0 12,496.0 5,758.0 29,751.0 (1,826.0) (41,470.0) (43,296.0) 2005 13,153.0 1,717.0 7,415.0 8,987.0 31,272.0 (1,064.0) (989.0) (2,053.0) 2006 13,064.0 1,868.0 15,926.0 9,660.0 40,518.0 (1,907.0) 22,972.0 21,065.0 2007 17,459.0 1,772.0 12,806.0 9,418.0 41,455.0 (4,874.0) 19,890.0 15,016.0 2008 11,630.0 2,110.0 (22,773.0) 6,106.0 (2,927.0) (2,000.0) 2009 12,800.0 2,593.0 16,096.0 7,529.0 39,018.0 (2,345.0)

Net earnings (35)Depreciation (36)Intangible amortization (37)Changes in operating working capital (38)Gains on divestitures, pension funding and other (39)Net cash provided by operating activities (40)Capital expenditures (41)Purchases of businesses (42)Divestitures and other (43)Net cash used in investing activities (44)Net increase in short-term debt (45)Proceeds from long-term debt (46)Principle payments on long-term debt (47)Net purchases of treasury stock (48)Dividends paid (49)Other (50)Net cash provided (used) in financing (51)Currency Increase (decrease) in cash

0.0 (15,000.0) (2,000.0) (17,345.0)

42,516.0 145.0 42,661.0 0.0 29,116.0

(17,372.0) (57,387.0) (19,996.0) (66,450.0) 575.0 2,423.0 7,700.0 3,093.0 (16,797.0) (54,964.0) (12,296.0) (63,357.0) 0.0 12,422.0 0.0 6,619.0 78.0 44,253.0 (58.0) (68,342.0)

0.0 1,981.0 1,981.0 44.0 23,698.0

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Laurent Vasilescu Lvasilescu10@gsb.columbia.edu

Professor Greenwald Legends of Value Investing

EXHIBIT 4: Historical Cash Flow Analysis Operating approach Description Net sales - Cost of goods sold Gross income - R&D - SG&A - Amortization EBIT + Amortization EBITA EBITA / Sales - Income tax provision - Tax shield NOPAT Tax Rate
Change in working capital Capital spending (net of depreciation) Acquisitions (net of divestitures)

2005 203,169 158,127 45,042 0 26,993 0 18,049 0 18,049 8.9% 7,400 (902) 11,551
36%

2006 2007 251,587 319,264 200,734 254,060 50,853 65,204 0 34,296 0 16,557 0 16,557 6.6% 6,916 (1,185) 10,826
35%

2008 295,329 235,333 59,996 0 44,005 0 15,991 0 15,991 5.4% 6,226 (650) 10,415
35%

2009 302,134 236,790 65,344

Reference line 1 line 2 line 3

0 42,792 0 22,412 0 22,412 7.0% 9,128 (1,433) 14,717

34%

0 N/A 45,997 line 4 0 line 5 19,347 0 line 5 19,347 6.4% 6,878 line 10 (116) (-line 7 - line 8)*line 14 12,585
35%

(964) (653) 989 (628)

(34,990) 11,644 39 3,102 (22,972) (19,890) (57,923) (5,144)

(45,896) (110) 0 (46,006)

22,076 This Year - Last Year (248) (line 40 * -1) - line 35 15,000 (line 41 + line 42) * -1 36,828

Total Investments

Free Cash Flow

12,179

68,749

19,861

56,421

(24,243)

Financing approach Description Net income + Amortization Adjusted income for common - Other income, net - Tax shield

2005 13,153 0 13,153 2,504 (902)

2006 13,064 0 13,064 3,423 (1,185)

2007 17,459 0 17,459 4,175 (1,433)

2008 11,630 0 11,630 1,865 (650)

2009 Reference 12,800 line 11 0 line 5 12,800 331 - line 7 - line 8 (116) (-line 7 - line 8)*line 14

NOPAT
Change in working capital Capital spending (net of depreciation) Acquisitions (net of divestitures)

11,551 (964) (653) 989 (628) 12,179

10,826

14,717

10,415 (45,896) (110) 0 (46,006) 56,421

12,585 22,076 This Year - Last Year (248) (line 40 * -1) - line 35 15,000 (line 41 + line 42) * -1 36,828 (24,243)

(34,990) 11,644 39 3,102 (22,972) (19,890) (57,923) 68,749 (5,144) 19,861

Total Investments Free Cash Flow

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Professor Greenwald Legends of Value Investing

EXHIBIT 5: Weighted Cost of Capital 1. K equity = risk-free rate + (beta * equity risk premium) Risk-free (10-year Treasury) = Beta = Equity risk premium = Ke = 3.87% 1.66 4.50% 11.34% 2. K debt = YTM on L-T debt * (1 - cash tax rate) Risk-free (10-year Treasury) = Spread = Tax rate = Kd = 3.87% 1.30% 35.0% 3.36%

3. Debt to total capital (market values) Total debt = Shares outstanding = Stock price = Current Debt/total capital = Target debt/total capital = 1,045.0 14,480 $55.84 0.13% 25.00%

4. Weighted average cost of capital Target weights Kd= 3.4% 25.0% 0.8% Ke= 11.3% 75.0% 8.5%

WACC =

9.345%

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Laurent Vasilescu Lvasilescu10@gsb.columbia.edu

Professor Greenwald Legends of Value Investing

EXHIBIT 6: Valuation
Operating approach Description Cash Accounts receivable Inventories Deferred tax assets Other Total current assets - NIBCLs Net working capital 2004 101,367 1,028 9,914 0 9,220 121,529 43,488 78,041 2005 114,788 1,877 11,764 0 4,067 132,496 55,419 77,077 2006 98,433 1,640 14,616 0 1,338 116,027 73,940 42,087 2007 122,793 3,576 20,906 0 1,871 149,146 95,415 53,731 2008 54,451 1,709 18,834 0 1,739 76,733 68,898 7,835 2009 Reference 93,149 line 15 1,835 line 16 19,434 line 17 0 N/A 1,426 line 18 115,844 85,933 line 23 + line 24 + line 25 29,911

+Net PP&E +Goodwill + Intangibles +Other assets Invested capital (*) cash = 4 percent of sales. Financing approach Description Current portion LT debt Long Term debt Deferred Taxes +Other +Minority interest Shareholders' equity Invested capital

3,916

3,261

3,391

7,601

7,558

7,332 line 20 N/A N/A

2,937 84,894

2,248 82,586

2,697 48,175

3,839 65,171

5,374 20,767

7,239 line 21 44,482

2004 203 0 0 1,071

2005 208 0 0 863

2006 197 0 0 666

2007 276 880 0 538

2008 246 839 0 374

2009 Reference 249 line 22 796 line 27 0 line 29 168 line 28 N/A

83,620 84,894

81,515 82,586

47,303 48,166

63,477 65,171

19,308 20,767

43,269 line 34 - line 15 + (line 1 * 4%) 44,482

Investment in future growth (I) Description Change in working capital Capital spending (net of depreciation) Acquisitions (net of divestitures) Investment in future growth 2005 (964) (653) 989 (628) 2006 (34,990) 39 (22,972) (57,923) 2007 11,644 3,102 (19,890) (5,144) 2008 (45,896) (110) 0 (46,006) 2009 Reference 22,076 TY - LY (248) (line 40 * -1) - line 35 15,000 (line 41 + line 42) * -1 36,828

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Professor Greenwald Legends of Value Investing

2009 Sales Sales growth EBITA EBITA margin Tax rate NOPAT 302,134 2.3% 19,347 6.4% 35.0% 12,585

2010 347,454 15.0% 22,585 6.5% 35.0% 14,680

2011 375,250 8.0% 24,391 6.5% 35.0% 15,854

2012 397,765 6.0% 23,866 6.0% 35.0% 15,513

2013 417,654 5.0% 20,883 5.0% 35.0% 13,574

2014 438,536 5.0% 21,927 5.0% 35.0% 14,252

2015 460,463 5.0% 18,419 4.0% 35.0% 11,972

2016 478,882 4.0% 19,155 4.0% 35.0% 12,451

2017 493,248 3.0% 14,797 3.0% 35.0% 9,618

2018 508,046 3.0% 15,241 3.0% 35.0% 9,907

2019 523,287 3.0% 15,699 3.0% 35.0% 10,204

2020 538,986 3.0% 16,170 3.0% 35.0% 10,510

2021 555,155 3.0% 16,655 3.0% 35.0% 10,826

2022 571,810 3.0% 17,154 3.0% 35.0% 11,150

2023 588,964 3.0%

Reference

17,669 EBITA Margin x Sales 3.0% Decrease to stable rate of 3% 35.0% 11,485 EBITA * (1- Tax Rate)

Working capital (chg) Fixed Capital (chg) Investment in future

22,076 14,752 36,828

3,172 453 3,626

1,946 278 2,224

1,576 225 1,801

1,392 199 1,591

1,462 209 1,671

1,535 219 1,754

1,289 184 1,473

1,006 144 1,149

1,036 148 1,184

1,067 152 1,219

1,099 157 1,256

1,132 162 1,294

1,166 (TY Sales - LY Sales) * Working Cap Change 167 (TY Sales - LY Sales) * Fixed Cap Change 1,332 Sum

Free Cash Flow

(24,243)

11,054

13,631

13,712

11,983

12,582

10,218

10,977

8,469

8,723

8,985

9,254

9,532

9,818 NOPAT - Investment in Future

PV of FCF Cumulative PV of FCF

10,110 10,110

11,400 21,510

10,488 31,998

8,382 40,380

8,049 48,429

5,978 54,407

5,874 60,281

4,144 64,425

3,904 68,329

3,677 72,006

3,464 75,470

3,263 78,732

3,073 Discounted FCF 81,806 Sum

Residual Value PV of Residual Value 157,087

169,653 155,154

165,999 138,838

145,249 111,101

152,512 106,686

128,110 81,957

133,234 77,951

102,924 55,071

106,011 51,875

109,192 48,865

112,467 46,029

115,841 43,358

119,317 40,842

122,896 Discounted NOPAT 38,472 Residual Value of NOPAT

Corporate Value Cash Debt ESO liability Shareholder value Shares outstanding 14,480 0 1,045

165,264 0 1,045 0 164,219 14,480

160,348 0 1,045 0 159,303 14,480

143,098 0 1,045 0 142,053 14,480

147,066 0 1,045 0 146,021 14,480

130,386 0 1,045 0 129,341 14,480

132,358 0 1,045 0 131,313 14,480

115,351 0 1,045 0 114,306 14,480

116,300 0 1,045 0 115,255 14,480

117,193 0 1,045 0 116,148 14,480

118,035 0 1,045 0 116,990 14,480

118,828 0 1,045 0 117,783 14,480

119,575 0 1,045 0 118,530 14,480

120,278 Sum 0 Cash Assumed 1,045 Debt From B.S. 0 119,233 Sum 14,480 Shares Outstanding

Shareholder value per share

$11.34

$11.00

$9.81

$10.08

$8.93

$9.07

$7.89

$7.96

$8.02

$8.08

$8.13

$8.19

$8.23 Shareholder Val/ Shares Outstanding

Year

10

11

12

13 Period

Invested capital Return on invested capital (avg)

20,767 71.5%

24,393 65.0%

26,616 62.2%

28,418 56.4%

30,009 46.5%

31,679 46.2%

33,433 36.8%

34,907 36.4%

36,056 27.1%

37,240 27.0%

38,459 27.0%

39,715 26.9%

41,009 26.8%

42,341 Investments 26.8% NOPA/ Average 2 Yr Invested Cap

Assumptions

Breakdown of Value Total /share $10.78 $45.06 $55.84

Working capital change Fixed capital change Cost of Capital

7.00% 1.00% 9.345%

Steady state PVGO Total

156,042 652,522 808,563

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