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

2024
Views:

177

Pages:

17
Author:

GalacticGuru

Trading Comparables: Remember This is a Relative Valuation Method Now we know where CLX is trading TODAY - but our boss / interviewer asked what the VALUE is 17x 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 Spreading the Trading Comparables Company Comp Set Equity Value Multiples Firm Value Multiples Price / Earnings Per Share (EPS) Firm Value / Revenues Firm Value / EBIT Church & Dwight - "CHD" 17.55x 2.10x 11.36x Colgate-Palmolive - "CL" 18.23x 2.56x 10.77x Kimberly-Clark - "KMB" 21.00x 3.30x 9.74x Energizer Holdings - "ENR" 17.20x 3.80x 10.80x Kraft Foods - "KFT" 17.43x 1.80x 12.82x Procter & Gamble - "PG" 16.98x 2.52x 12.40x 15.8x 2.2x 9.5x 18.07x 2.68x 11.32x Company Name Clorox Corp - "CLX" Mean Trading Comparables – Current Price $67 / share “CLX” ($ in millions, USD) Peer Group Mean 18.1x Price / Earnings 2.7x FV / Revenue 11.3x FV / EBIT “CLX “ $600m $5,579 $1,305 Valuation $10,860 $15,063 $14,746 Equity Value Firm Value Firm Value $2,943 $2,943 Net Debt Equity Value $10,860 $12,120 $11,803 Shares Outstanding 140m 140M 140M Implied Value $77.60 $86.57 $84.31 ? ? ? Buy? Sell? Hold? Trading Comparables - Valuation Range: $77 - $87 per share The SCIENCE is performing the valuation, the ART is interpreting the results in order to arrive at the “right” price. TECHNOLOGY can help you do this more efficiently. Implied Price Per Share $20.00 $26.75 $15.00 $15.00 $9.75 $10.00 $10.25 $5.00 $5.00 $5.00 Implied offer = $8.50 $5.50 $6.00 $4.00 $4.94 $4.00 $3.75 $3.50 $3.00 $0.00 52-week high/low Price / Earnings Price / Earning Growth Price / Sales Price / LTM revenue Management Forecast Income 15% Discount Rate Public trading comparables Street Forecast Income 15% Discount Rate Transaction comparables DCF analysis Transaction Comparables Step 1: Locate Comparable Transactions Equity research reports Merger proxies for similar transactions Fairness opinions of financial advisors disclose the comparable transactions used in their valuations of the target Company press releases, shareholder presentations, conference call transcripts and SEC filings Bloomberg transaction description (TICKERCACS) – Click on deal Step 2: Select Comparable Transactions Remember that some transactions are more relevant than others when selecting a range of multiples for a valuation The situation surrounding the acquisition is crucial: Bankruptcy-related acquisition Televisa to Take Stake in Univision • “Servicing the company’s $10 billion debt load left Univsion reeling…” • Televisa is buying into the company at a valuation about 40% below its original takeover price…” Hostile transaction Recent deals are typically a more accurate reflection of value Let’s Pull Transaction Comparables for Clorox… ($ in Millions) Date 7/12/2010 1/14/2010 12/21/2009 12/14/2009 12/11/2009 5/11/2009 4/1/2008 1/25/2008 Target / Acquiror Silpada / Avon Bare Escentuals / Shiseido Chattem / Sanofi Aventis Simple skin care / Alberto Culver Ambi Pur (Sara Lee) / P&G Edge (SC Johnson) / Energizer Orajel / Church & Dwight Frederik Fekkai / P&G AVERAGE CLX Financials Implied Value Transaction Value EV / LTM Revenue EV / LTM EBITDA EV / LTM EBIT $650 2.8x 10.9x 11.8x $1,828 3.4x 11.1x 12.3x $2,156 4.5x 13.1x 13.5x $396 3.7x 11.0x 12.0x $470 2.6x 12.5x 13.5x $275 1.8x 9.2x 9.8x $380 3.8x 13.6x 15.8x $440 3.5x 16.0x 17.6x $824 3.9x $6,000 $23,200 11.7x $1,500 $17,600 12.6x $1,300 $16,380 Sum of the Parts Valuation Sum of The Parts Valuation Example: Time Warner, Inc. (TWX) Segment EBITDA Target EV/EBITDA Implied Value Movies $1,500 7.0x $10,500 Cable Networks $3,900 10.0x $39,000 Publishing $450 $5,850 5.0x $2,250 $51,750 Segment Total Implied EV/EBITDA: What is the “Conglomerate Discount”? Full value of TWX cannot be realized unless we unlock it Sometimes SOTP does not equal the value whole company $51,750 * (90%) = $46,675 (Implied Multiple: 8.0x) 8.8x Time Warner, Inc. (TWX) – Spin-offs Cable Spin “Simpler, Leaner, Better & More” • “The company will finally, fully separate its cable operations creating a near-pure content company enabling better investor focus.” AOL Spin “AOL Exit Clarified…” • “Cable networks eventually become the focus. Over the long-term, we think investors will appreciate Time Warner’s leading contentcentric assets and streamlined strategic approach focused on generating high-quality and popular programming.” Discounted Cash Flows – “DCF” DCF Analysis Discounted cash flow analysis is based upon the theory that the value of a business is the sum of its expected future free cash flows, discounted at an appropriate rate. Three key drivers: Free cash flow projections Terminal value at the end of the projection period Discount Rate (weighted average cost of capital or “WACC”) Free Cash Flow Levered Free Cash Flow EBITDA (-) Interest Expense (-) Capital Expenditures (-) Cash Taxes (-) Changes in Working Capital Levered Free Cash Flow Unlevered Free Cash Flow EBITDA (-) Capital Expenditures (-) Cash Taxes (-) Changes in Working Capital Unlevered Free Cash Flow Let’s setup a DCF Model…. Calculating WACC WACC = [(rd * (1 – T)) * (D / (D + E))] + [re * (E/ (D + E))] Let’s look at two capital structures: (1) 100% debt (2) 100% equity D / (D + E) = 100% vs. E / (D + E) = 100% There is a cost associated with debt and equity used to fund business initiatives There is a rate charged for debt issued There is a rate charged for equity issued [rd * (D / (D + E))] + [re * (E/ (D + E))] The rate used for debt should be reduced to account for the tax shield WACC = [(rd * (1 – T)) * (D / (D + E))] + [re * (E/ (D + E))] Cost of Equity – “CAPM” “CAPM” = Capital Asset Pricing Model Rf + β * ( rm – rf) “The $10 Question” As the perceived risk of a company increases, an equity investor will require a higher rate of return Risk free rate of return (“rf”) – the minimum return an investor should expect to receive Rf + (rm – rf) 10% + (1000% - 10%) = 1000% Treasury securities are a good proxy for rf 3% + (10% - 3%) = 10% Cost of Equity - Beta Question: If the stock market were to fall 50% next year, would you prefer to have been invested in a mature and stable company or an early stage technology software growth company? CAPM says an investor should be rewarded more for investing in a stock that fluctuates more with stock market performance Beta provides a method to estimate the riskiness of a stock with the overall stock market Beta of 1.0 is “as risky” as the overall stock market Beta of 2.0 should see returns on its equity rise or drop twice as fast as the overall market Rf + β * ( rm – rf) Question: What are the limitations of WACC?

Techniques in Finance and Valuation Part 2

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