443_7 - Applied Equity Analysis and Por3olio ...

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Unformatted text preview: Applied Equity Analysis and Por3olio Management Lecture 7 Valua;on 101 •  A company is worth the sum of the future cash flows that it is able to generate •  Investors will adjust the value or “discount” these cash flows based on risk PV of Cashflow from Opera;ons PV of Cashflow from Non Opera;ng Ac;vi;es = Enterprise Value Cash Available to Debt Equivalents Cash Available to Equity Equivalents Steps in a Valua;on •  Analyze historical performance •  Forecast short- term performance •  Value cash flows beyond short term horizon using con;nuing value formula •  Es;mate cost of capital •  Calculate and interpret results Comparables / Mul;ples Analysis •  Comparables look at market prices for similar assets to provide a benchmark for valua;on •  Useful for valuing private companies and providing price ranges for similar assets with similar risks •  Key issue is to select a range of similar companies •  Comparables help set a trading range based on current sen;ment and current market prices Challenges with Mul;ples •  Rela;ve valua;on models measure a company’s valua;on rela;ve to another company normalized by some measure of size •  Industry- average mul;ples overlook the fact that companies can have dras;cally different expected growth rates, ROIC, and capital structures Steps in Performing a Comparable Analysis •  Select a range of companies of similar opera;ng and financial risk profiles •  Gather data from financial statements and market prices using systems such as Bloomberg, Thomson One Banker, First Call, I/B/E/S, EDGAR, company reports, etc. •  Calculate the market mul;ples for the selected companies •  Benchmark the companies against key financial ra;os to test for appropriateness and differences in mul;ples •  Use the calculated mul;ples to determine valua;on ranges for companies in the peer group Four Best Prac;ces for Mul;ples 1.  Choose comparable companies with similar prospects for ROIC and growth. 2.  Use mul;ples based on forward- looking es;mates. 3.  Use enterprise- value mul;ples based on EBITDA to mi;gate problems with capital structure and one- ;me gains and losses. 4.  Adjust the enterprise- value mul;ple for non- opera;ng items, such as excess cash, opera;ng leases, employee stock op;ons, and pension Key Value Drivers •  As long as the spread between ROIC and WACC is posi;ve, new growth creates value. •  The value of a company, with $100 of NOPAT and 10% cost of capital, is as follows: Enterprise Values calculated using Key Value Drivers formula ROIC and Growth Drive Mul;ples Assumes EBIT of $154, Tax Rate of 35% and NOPAT of $100 Mul;ples Precedent Transac;ons •  Examine mul;ples paid for similar companies in recent transac;ons •  Useful in determining values paid in M&A deals and to value private companies that do not have trading mul;ples •  Use recent transac;on data to establish prices for comparable ra;os •  Use pricing data to calculate mul;ples similar to a comparables analysis Challenges with Precedent Transac;ons •  Lack of informa;on availability •  Timing of historical acquisi;ons versus current market condi;ons •  Finding true comparable companies •  Pricing may include buyer synergies that are not replicable 6 Key Mul;ples •  •  •  •  •  •  P/E (Price Per Share / EPS) PEG (P/E / Earnings Growth Rate) EV / Sales EV / EBITDA EV / EBIT Price / Book Comparables Source: First Call, Bloomberg Comps for Ingersoll Rand EV / Sales EV / EBITDA EV / EBIT P/E PEG EV Sales EBITDA EBIT Price EPS Growth IR 0.89 9.06 13.65 16.07 (2.68) UTX 1.14 8.10 9.46 13.84 2.04 CAT 1.55 19.48 44.03 32.63 4.83 DE 1.81 18.17 23.85 17.77 88.83 ITT 0.87 7.37 8.84 13.32 (8.32) $12,007 $13,556 $1,325 $880 $22.77 $1.42 (6.0) $61,744 $54,153 $7,619 $6,530 $56.49 $4.08 6.8 $55,150 $35,561 $2,831 $1,253 $38.57 $1.18 6.8 $40,159 $22,138 $2,210 $1,684 $45.80 $2.58 0.2 $9,406 $10,800 $1,276 $1,064 $45.82 $3.44 - 1.6 As of 6/8/2009 JCI Average 0.61 1.15 14.70 12.82 41.62 23.57 98.95 32.10 6.45 15.19 $17,616 $28,925 $1,198 $423 $22 $0.22 $15 P/E Ra;os •  Price- earnings mul;ples comingle expecta;ons about opera;ng performance, capital structure, and non- opera;ng items •  Problems with P/E –  P/E is not independent of capital structure –  Earnings include many non- opera;ng items, such as restructuring charges and write- offs that are one ;me events ROE and Growth Mul;ples Note: Equity value calculated using key value drivers equation Mul;ple Contrac;on Bloomberg, 6 September, 2 Price to Book •  Model assumes similar growth rates and returns on incremental capital •  Assumes similarity of opera;ng margins, accoun;ng treatment, and fixed asset produc;vity PEG Ra;o •  PEG ra;o lacks a standard ;me frame for measuring expected growth •  PEG ra;os assume a linear rela;on between mul;ples and growth, such that no growth implies zero value –  Since PEG is mul;plied by growth to approximate firm value, a company with constant profits would have an implied value of zero –  Industry PEG ra;os will systema;cally undervalue companies with low growth rates Drivers of Enterprise Value to EBIT •  •  •  •  Growth rate ROIC Cash tax rate Cost of capital HD Mul;ples Stock price Dollars July 23, 2004 Market capitalization $ Million Earnings per share (EPS) Dollars* Forward-looking multiples, 2004 2004 2005 EBITDA** P/E Hardline retailing Ticker Home improvement Home Depot Lowe’s HD LOW 33.00 48.39 74,250 39,075 2.18 2.86 2.48 3.36 7.1 7.3 13.3 14.4 Home improvement Bed Bath & Beyond Linens ’n Things BBBY LIN 34.89 25.86 10,697 1,152 1.58 1.86 1.83 2.13 9.9 5.1 19.1 12.1 Consumer electronics Best Buy Circuit City BBY CC 47.11 13.58 15,537 2,708 2.88 0.55 3.41 0.61 6.3 4.4 13.8 22.3 Benchmark index S&P 500 SPX 1,086.20 64.74 69.76 * Suisse First Boston (CSFB) analysts’ projections for EPS by calendar year ** EBITDA = earnings before interest, taxes, depreciation, and amortization; EBITDA and P/E are reported by calendar year Source: Hardlines Retailing: Weekly Review, CSFB, New York, July 26, 2004 15.6 Home Depot vs Peers Discount Percent Home Depot multiple Peer group multiple Using P/E based on historical earnings vs. all hardline retailers 17.3 21.3 Using P/E based on historical earnings versus Lowe’s 17.3 20.8 Using P/E based on forecasted earnings versus Lowe’s 13.3 14.4 Using enterprise-value multiple based on forecasted EBITA vs. Lowe’s Using adjusted enterprise-value multiple based on forecasted EBITA versus Lowe’s* 8.7 9.3 8.9 9.4 * Adjusted for operating leases and nonoperating items Leverage and P/E Price to earnings multiple* Price to earnings for an allequity company 10 15 14.6 20 20.0 25 25.7 40 45.0 20 8.9 14.1 20.0 26.7 53.3 30 8.2 13.5 20.0 28.0 70.0 40 7.5 12.9 20.0 30.0 120.0 50 Debt to value Percent 10 9.5 6.7 12.0 20.0 33.3 n/m * Assumes a cost of debt equal to 5% and no taxes HD and Lowes Enterprise Value Comparing EBITA and EBITDA Mul;ples Adjusted PEG Ra;o PEG Ra;o Es;ma;on Error ...
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