University:
Boston University
Course:
QST MO 221 | The Dynamics of Leading Organizations
Academic year:

2024
Views:

98

Pages:

16
Author:

gildnar99xu

Techniques in Finance & Valuation 1 What is Valuation? Valuation: Methods of quantifying how much money something should be exchanged for today, considering future benefits. We will teach 4 valuation methods Trading Comparables Transaction Comparables Sum-of-the-Parts Valuation Discounted Cash Flow Analysis (DCF) $ 2 Why is Valuation important? Acquisitions: How much should we pay for the company? Divestitures: How much should we sell our company for? Sell-side Research: Should our clients buy, sell or hold a given stock (fixed income security, option etc.,)? Valuation Initial Public Offering (IPO): Hostile defense: How much is the company worth? (price per share ) Is our company undervalued/vulnerable to a hostile bidder? Debt offerings: What is the value of the company against which debt is being issued? (collateral) 3 Trading Comparables Relative Valuation Technique 4 Agenda Multiples: Comparables Trading (transaction comparables will be covered by Mike) Theory: Similar companies (all else equal) should have similar valuations Defining a Peer Group (“similar companies”) Picking the right multiples Calculating CLX’s multiples Spreading Peer Group multiples Calculating CLX’s implied value First day on the job… (potential interview question) Your boss thinks shares of Clorox Co. (“CLX”) might be a good investment: She asks you: “How much do you think they are worth?” One common approach is Multiples Based Valuation Technique 6 What are multiples? “CLX” $67 a share Examples: Price / Earnings (P/E) Firm Value / Revenues Firm Value / EBITDA ? “ENR” $67 a share Earnings per share $4.24 $67 / $4.20 ≈ 15.8x Earnings per share $2.90 $67 / $3.00 ≈ 23.1x 7 Trading Comparables: The Theory Basic Assumption: Similar companies should have similar valuations Employing multiples is a relative valuation technique 17x Price / Earnings ( “Price to Earnings”) 17.0x 16x 16.0x 15x 14x 14.4x 14.0x 13.0x 13x 12x 11x 11.0x 11.5x 14.0x 13.2x 13.0x 14.4x 14.2x 14.0x 14.4x 14.0x 14.0x 13.2x 13.6x 13.1x 12.0x 12.8x 12.8x 12.1x 12.0x 12.0x 13.5x 13.0x 13.0x 12.0x 12.0x 12.0x 11.0x 11.0x 11.0x 11.0x 11.0x 10.0x 10.9x 10.0x 8.6x 8.5x 7.8x 7x 6.6x 7.0x 6x 8.0x 8.1x 7.0x 7.5x 7.2x 6.5x 6.0x 10.0x 9.0x 9.0x 8.8x 9.2x 8.8x 9.5x 8.2x 9.0x 8.5x 8.0x 8.1x 11.1x 12.0x 11.1x 11.0x 10.0x 10.5x 11.0x 10.1x 10.0x 10.0x 10.0x 9x 8x 14.2x 13.0x 12.0x13.0x12.0x 11.7x 10x 15.4x 14.7x 15.0x 9.0x 8.1x 8.0x 9.5x 9.6x 10.0x 8.8x 9.0x 7.8x 7.4x 8.0x 7.2x 7.0x 5.7x 6.3x 6.0x 5.0x 5x 2005 Q3 2005 Q4 2006 Q1 2006 Q2 2006 Q3 2006 Q4 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 8 Trading Comparables – Selecting the right peer group It is important to select the best peer group possible (“similar companies”) How? Operational Filters Financial Filters Industry / Sub-Sectors Size (e.g. Market Capitalization, Revenue etc.,) Product Profit Margins Markets Leverage (e.g. Debt / Capital) Customers Shareholder base (influence of a large shareholder) Seasonality Cyclicality Clorox Peer Group Kraft – “KFT” Church & Dwight - "CHD" Procter & Gamble – “PG” Energizer Holdings – “ENR” Colgate – “CL” Kimberly-Clark – “KMB” Clorox Corporation – “CLX” 9 Next Step: Choosing the right multiples It is important to chose the RIGHT multiples Examples: Multiples Price/earnings Firm value/EBITDA P/E to growth Price/cash flow Generally, it is appropriate to use the multiples which are being used in the market. Check sell-side research reports It is also important to understand WHY the market is using certain multiples Multiple Pros Cons Firm value/subscribers • • Important telecom ratio Good for more mature situations • • Assumes same profitability for all comps Difficult to use in high growth situations Price/book value • • • Distorted by accounting differences Need profitability cross-check Firm value/sales • • Useful for capital intensive industries and financial institutions Reflects long-term profitability outlook Most often used with high growth companies that do not have earnings • Need profitability cross-check Price / click rate (?) • Useful for companies without revenues or earnings (?) • Is not a good predictor of long-term return to shareholders 10 Our multiples Price / Earnings Per Share (EPS) Companies have earnings (relatively stable vs -> e.g. tech.) Widely Used (illustration power) Illustrates need for earnings forecasts Firm Value / EBIT Impact of Leverage (debt + interest expense) Debt can be good and bad (efficiently used?) Important Distinction: Firm Value vs. Equity Value Firm Value / Revenue High fixed costs + economies of scale Small change in sales = Large Change in Earnings Illustrates need for revenue forecasts 1) Calculate CLX’s Price to Earnings Per Share 2) Calculate CLX’s Firm Value to EBIT 3) Calculate CLX’s Firm Value to Revenue 11 Our multiples Price / Earnings Per Share (EPS) The companies have earnings (stable but cyclical) Widely Used Illustrates need for earnings forecasts 1) Calculate CLX’s Price to Earnings (aggregates) Price -> Market Capitalization (price x shares) Yahoo Finance: $9.5 billion USD Earnings -> Consensus (average) sell-side estimates – Bloomberg Machine – Year-End 2010E: $600m Price to Earnings: $9500m/$600m = 15.8x Which is the same as earlier example: $67 / $4.24 ≈ 15.8X 12 Our multiples Firm Value / EBIT Impact of Leverage (debt + interest expense) Debt can be good and bad Important Distinction: Firm Value vs. Equity Value 1) Calculate CLX’s Firm Value Liabilities and Shareholders’ Equity Assets Equity Value Firm value Firm Value (Common Stock) Debt (Net Debt) 13 Net Debt . . . Debt Long Term Debt -> $2,151m Current Portion of Long Term Debt -> $577m Short Term Debt -> $421m (-) Cash & Cash Equivalents -> $206m Cash Net Debt -> $2,943 14 Our multiples Firm Value / EBIT Impact of Leverage (debt + interest expense) Debt can be good or bad Important Distinction: Firm Value vs. Equity Value 1) Calculate CLX’s Firm Value Liabilities and Shareholders’ Equity Assets Equity Value Firm value $12,443 Firm Value $9,500m Debt (net debt) $2,943m 1) Calculate CLX’s Firm Value to EBIT EBIT YE2010E -> Consensus sell-side $1,305 FV / EBIT = 9.5x 15 Our multiples Firm Value / Revenue High fixed costs + economies of scales Small change in sales = Large Change in Earnings Illustrates need for revenue forecasts 1) Calculate CLX’s Firm Value to Revenues Why is a revenue multiple a Firm Value Multiple? Firm Value -> $12,443 Revenues -> Consensus sell-side Year-End 2010E: $5,579 Firm Value to Revenue: $12,443m/ $5,579m = 2.2x 16