Lecture Note
Techniques in Finance and Valuation Part 2
-
University:
Boston University -
Course:
QST MO 221 | The Dynamics of Leading Organizations Academic year:
2024
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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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