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Valuation Science
 

Valuation Science

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Part of a three part series for the Student Investment Club at the University of Florida entitled: Valuation - Art, Science and Voodoo....

Part of a three part series for the Student Investment Club at the University of Florida entitled: Valuation - Art, Science and Voodoo.

This part deals with the hard science and finance of valuations.

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  • Make money from Source A look like it came from Source B
  • This is a huge problem for the honors college as these students are pursuing these high end jobs and need to get these skills EARLY
  • The same way you would value a company: by looking at what comparable apple trees are worth (relative valuation) and the value of the apple tree’s cash flows (intrinsic valuation). Yes, you could do a DCF for anything – even an apple tree.
  • This is a huge problem for the honors college as these students are pursuing these high end jobs and need to get these skills EARLY
  • NOPLAT = EBIT(1 – T)We will assume EBIT = EBITA, NOPAT = NOPLATNet Capital Expenditures = CAPEX – Depreciation + NOWCNOWC = OCA – OCLOCA = operating current assets (all current assets excluding excess cash)OCL = NIBCL = non-interest bearing current liabilities (current liabilities less short term interest-bearing debt)
  • This is a huge problem for the honors college as these students are pursuing these high end jobs and need to get these skills EARLY
  • Relative to recent, related deals/valuations…
  • From the legitimate bank account – Kenny will use various transfer types such bank to bank transfers, wire transfers between different accounts with different names in different countries, constantly changing the amounts of money in each account through different deposit and withdrawal amounts. Changing the monies currency and buying lavish gifts for himself.So as you can see – Kenny has bought himself a boat. And he is on a boat. With T-Pain
  • From the legitimate bank account – Kenny will use various transfer types such bank to bank transfers, wire transfers between different accounts with different names in different countries, constantly changing the amounts of money in each account through different deposit and withdrawal amounts. Changing the monies currency and buying lavish gifts for himself.So as you can see – Kenny has bought himself a boat. And he is on a boat. With T-Pain

Valuation Science Valuation Science Presentation Transcript

  • Valuation
    The Science
  • Valuation
    Art
    Intangibles that make give the investment value
    Science
    Determining the correct number by using math
    Voodoo
    Making it fit in your portfolio
  • The Art of Valuation (7 M’s)
    Market
    Management
    Momentum
    Model
    Money
    Magic
    Match
    What’d We Learn Last Time
  • So Now What?
    Now that we understand the company, we need to develop some tangible estimates of the actual intrinsic value of the business
  • Where to Start
    How do we value an apple tree?
  • What are our options?
    Main Methods
    Discounted Cash Flow Analysis
    Multiples Method
    Precedent Transactions
    Trading Comps
    Tons of Others
    Liquidation Value
    Replacement Value
    LBO Model
    Sum of Parts
  • DCF Model
    A DCF values a company based on the Present Value of its Cash Flows and the Present Value of its Terminal Value.
  • FREE CASH FLOW SUMMARY
    $ Million
    Home depot
    Lowe’s
    2003
    2001
    2002
    2003
    2001
    2002
    NOPLAT
    Depreciation
    Gross cash flow
    Investment in operating working capital
    Net capital expenditures
    Investment in capitalized operating leases
    Investments in intangibles and goodwill
    Decrease (increase) in other operating assets
    Increase (decrease) in accumulated other
    comprehensive income
    Gross investment
    Free cash flow
    3,208
    756
    3,964
    834
    (3,063)
    (775)
    (113)
    105
    (153)
    (3,165)
    799
    3,981
    895
    4,876
    (194)
    (2,688)
    (430)
    (164)
    31
    138
    (3,307)
    1,569
    5,083
    1,075
    6,157
    72
    (3,970)
    (664)
    (259)
    277
    172
    (4,372)
    1,785
    5,185
    1,193
    6,378
    (294)
    (3,399)
    (721)
    (92)
    58
    0
    (4,448)
    1,930
    5,741
    1,321
    7,062
    (318)
    (3,708)
    (780)
    (99)
    62
    0
    (4,843)
    2,219
    6,342
    1,459
    7,801
    (344)
    (4,036)
    (842)
    (107)
    67
    0
    (5,261)
    2,539
  • LAN-ZWB887-20050620-13749-ZWB
    EXHIBIT 5.9 HOME DEPOT: CONTINUING VALUE
    NOPLAT2014
    Return on incremental invested capital (RONIC)
    NOPLAT growth rate in perpetuity (g)
    Weighted average cost of capital (WACC)
    12,415
    9.3%
    4.0%
    9.3%
    g
    RONIC
    1 -
    NOPLATt + 1
    Continuing valuet
    =
    WACC - g
    =
    133,360
    $ Million
  • ENTERPRISE DCF VALUATION
    Free cash flow (FCF)
    $ Million
    Discount factor
    @ 9.3%
    Present value of FCF
    $ Million
    Year
    2004
    2005
    2006
    2007
    2008
    2009
    2010
    2011
    2012
    2013
    Continuing value
    1,930
    2,219
    2,539
    2,893
    3,283
    3,711
    4,180
    4,691
    5,246
    5,849
    133,360
    0.915
    0.837
    0.766
    0.700
    0.641
    0.586
    0.536
    0.491
    0.449
    0.411
    0.411
    1,766
    1,857
    1,944
    2,026
    2,104
    2,175
    2,241
    2,301
    2,355
    2,402
    54,757
    Present value of cash flow
    75,928
    Mid-year adjustment factor
    1,046
    Value of operations
    79,384
    Value of excess cash
    Value of other nonoperating assets
    1,609
    84
    Enterprise value
    81,077
    (1,365)
    (6,554)
    Value of debt
    Value of capitalized operating leases
    73,158
    Equity value
    Number of shares (at fiscal year-end 2003, million)
    2,257
    Estimated share value (Dollars)
    32.41
  • Summary
    Step 1
    Forecast Future Cash Flows and a Terminal Value
    Step 2
    Discount back at the appropriate WACC
    Step 3
    Divide by the number of outstanding shares to find the intrinsic value of the share prices
  • Using Market Multiples to Determine Relative Valuation
    Ratios that are commonly used to determine relative valuation:
    EV/Revenue
    EV/EBITDA
    EV/EBIT
    P/E (Share Price / Earnings per Share)
    P/BV (Share Price / Book Value).
  • Some other Multiples ….
    Technology (Internet):
    EV / Unique Visitors, EV / Pageviews
    Retail / Airlines:
    EV / EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortization & Rent)
    Energy:
    P / MCFE, P / MCFE / D (MCFE = 1 Million Cubic Foot Equivalent, MCFE/D = MCFE per Day), P / NAV (Share Price / Net Asset Value)
    Real Estate Investment Trusts (REITs):
    Price / FFO, Price / AFFO (Funds From Operations, Adjusted Funds From Operations
  • Market Multiples
  • Market Multiples
    Determining the Appropriate Multiple
    Finding Comparable Firms
    Adjustments within the Sample
    Growth Rate
    Risk
    “Quality of Earnings”
  • LAN-ZWB887-20050624-13827-ZWB
    Home Depot
    Lowe’s
    ADJUSTED TO ENTERPRISE VALUE MULTIPLES
    $ Million
    3,755
    1,365
    Outstanding debt
    39,075
    74,250
    Market value of equity
    42,830
    75,615
    Enterprise value
    2,762
    6,554
    Capitalized operating leases
    (1,033)
    (1,609)
    Excess cash
    44,559
    80,560
    Adjusted enterprise value
    4,589
    8,691
    2005 EBITA
    154
    340
    Implied interest from leases
    4,743
    9,031
    Adjusted 2005 EBITA
    Lowe’s
    Home Depot
    Difference
    Raw enterprise value multiple
    8.7
    9.3
    (6.6%)
    Adjusted enterprise value multiple
    8.9
    9.4
    (5.1%)
  • LAN-ZWB887-20050624-13827-ZWB
    COMPARING EBITA AND EBITDA MULTIPLES
    $ Million
    Company B
    Company A
    100
    100
    Revenues
    (35)
    (10)
    Raw materials
    (40)
    (40)
    Operating costs
    Company B
    outsources
    manufacturing to
    another company
    25
    50
    EBITDA
    Depreciation
    (5)
    (30)
    EBITA
    20
    20
    Company B
    Company A
    Multiples
    Enterprise value ($ Million)
    150.0
    150.0
    Enterprise value/EBITDA
    6.0
    3.0
    Enterprise value/EBITA
    7.5
    7.5
  • Final Notes
    Everything is:
    Personal
    Relative
    And the true price of something is only as much as something is willing to pay for it!
  • The End
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