¨ Consequently, it makes more sense to price those assets (i.e., do relative valuation) than it is to value them (do intrinsic valuation). For assets that are separable and traded (example: real estate), pricing is easy to do. For assets that are not, you often see book value used either as a proxy for liquidation value or as a basis for estimating liquidation value. ¨ To the extent that the liquidation is urgent, you may attach a discount to the estimated value. Aswath Damodaran 112
113 II. Accounting Valuation: Glimmers from FAS 157 ¨ The ubiquitous “ market participant ” : Through FAS 157, accountants are asked to attach values to assets/liabilities that market participants would have been willing to pay/ receive. ¨ Tilt towards relative value: “ The definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). ” The hierarchy puts “ market prices ” , if available for an asset, at the top with intrinsic value being accepted only if market prices are not accessible. ¨ Split mission: While accounting fair value is titled towards relative valuation, accountants are also required to back their relative valuations with intrinsic valuations. Often, this leads to reverse engineering, where accountants arrive at values first and develop valuations later. Aswath Damodaran 113
114 III. Sum of the parts valuation ¨ You can value a company in pieces, using either relative or intrinsic valuation. Which one you use will depend on who you are and your motives for doing the sum of the parts valuation. ¨ If you are long term, passive investor in the company, your intent may be to find market mistakes that you hope will get corrected over time. If that is the case, you should do an intrinsic valuation of the individual assets. ¨ If you are an activist investor that plans to acquire the company or push for change, you should be more focused on relative valuation, since your intent is to get the company to split up and gain the increase in value. Aswath Damodaran 114
115 Let’s try this United Technologies: Raw Data - 2009 Aswath Damodaran 115 Division Business Revenues EBITDA Pre-tax Operating Income Capital Expenditures Depreciation Total Assets Carrier Refrigeration systems $14,944 $1,510 $1,316 $191 $194 $10,810 Pratt & Whitney Defense $12,965 $2,490 $2,122 $412 $368 $9,650 Otis Construction $12,949 $2,680 $2,477 $150 $203 $7,731 UTC Fire & Security Security $6,462 $780 $542 $95 $238 $10,022 Hamilton Sundstrand Manufacturing $6,207 $1,277 $1,099 $141 $178 $8,648 Sikorsky Aircraft $5,368 $540 $478 $165 $62 $3,985 The company also had corporate expenses, unallocated to the divisions of $408 million in the most recent year.
116 United Technologies: Relative Valuation Median Multiples Aswath Damodaran 116 Division Business EBITDA EV/EBITDA for sector Value of Business Carrier Refrigeration systems $1,510 5.25 $7,928 Pratt & Whitney Defense $2,490 8.00 $19,920 Otis Construction $2,680 6.00 $16,080 UTC Fire & Security Security $780 7.50 $5,850 Hamilton Sundstrand Industrial Products $1,277 5.50 $7,024 Sikorsky Aircraft $540 9.00 $4,860 Sum of the parts value for business = $61,661
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