Equity Valuation Bodie, Kane and Marcus Essentials of Investments 9 th Global Edition 13.
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Transcript of Equity Valuation Bodie, Kane and Marcus Essentials of Investments 9 th Global Edition 13.
Equity Valuation
Bodie, Kane and MarcusEssentials of Investments 9th Global Edition
13
13.1 EQUITY VALUATION
Book ValueNet worth of common equity
according to a firm’s balance sheetLimitations of Book Value
Liquidation value: Net amount realized by selling assets of firm and paying off debt
Replacement cost: Cost to replace firm’s assets
Tobin’s q: Ratio of firm’s market value to replacement cost
TABLE 13.1 MICROSOFT FINANCIAL HIGHLIGHTS, JAN 2012
Price per share $28.25Common shares outstanding (billion) 8.41Market capitalization ($ billion) 237.6
Latest 12 MonthsSales ($ billion) 71.12EBITDA ($ billion) 30.15Net income ($ billion) 23.48Earnings per share $2.75
Valuation MicrosoftIndustry
AvgP/E ratio 10.3 17.5Price/Book 4.0 10.5Price/Sales 3.3 2.7Price/Cash flow 13.9 20.5PEG 1.1 1.2
ProfitabilityROE (%) 44.16 24.9ROA (%) 17.33Operating profit margin (%) 38.78 8.58Net profit margin (%) 33.01 23.2
13.2 INTRINSIC VALUE VERSUS MARKET PRICE
= expected dividend per share = current share price = expected end-of-year price
13.2 INTRINSIC VALUE VERSUS MARKET PRICE
Intrinsic Value Present value of firm’s expected future net cash flows
discounted by required RoR Market Capitalization Rate
Market-consensus estimate of appropriate discount rate for firm’s cash flows
13.2 INTRINSIC VALUE VERSUS MARKET PRICE
•
13.3 DIVIDEND DISCOUNT MODELS•
13.3 DIVIDEND DISCOUNT MODELS
•
13.3 DIVIDEND DISCOUNT MODELS•
13.3 DIVIDEND DISCOUNT MODELS
13.3 DIVIDEND DISCOUNT MODELS Life Cycles and Multistage Growth Models
Two-stage DDM
DDM in which dividend growth assumed to level off only at future date
Multistage Growth Models Allow dividends per share to grow at several different
rates as firm matures
13.4 PRICE-EARNINGS RATIOS
•
13.4 PRICE-EARNINGS RATIOS
1999200020012002200320042005200620070
5
10
15
20
25
P/E Ratios
NBKKFHZain
13.4 PRICE-EARNINGS RATIOS
2000 2001 2002 2003 2004 2005 2006 2007
-20%
-10%
0%
10%
20%
30%
40%
Growth Rate
NBKKFHZain
13.4 PRICE-EARNINGS RATIOS•
TABLE 13.3 EFFECT OF ROE AND PLOWBACK ON GROWTH AND P/E RATIO
13.4 PRICE-EARNINGS RATIOS
The P/E ratio of any company that’s fairly priced will equal its growth rate. I’m talking here about growth rate of earnings…if the the P/E ratio of Coca-Cola is 15, you’d expect the company to be growing at about 15% per year, etc. But if the P/E ratio is less than the growth rate, you may have found yourself a bargain.
13.4 PRICE-EARNINGS RATIOS
•
FIGURE 13.3 P/E RATIO OF S&P 500 AND INFLATION
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100
10
20
30
40
50
60
P/E ratio
Inflation rate
13.4 PRICE-EARNINGS RATIOS Pitfalls in P/E Analysis
Earnings Management
Practice of using flexibility in accounting rules to improve apparent profitability of firm
Large amount of discretion in managing earnings
FIGURE 13.6 P/E RATIOS
BiotechBusiness software
Heavy constructionTrucking
Auto manufacturersRestaurants
Food productsAsset management
Application softwareChemical products
PharmaceuticalsHome improvement
Electric utilitiesIndustrial metalsTelecom services
Computer systemsHealth care plans
Money center banksIntegrated oil & gasAerospace/defense
0 10 20 30 40 50 60
57.8
34.7
32.4
28.0
25.3
21.4
21.1
17.5
17.5
17.4
17.2
16.5
15.6
14.9
14.7
13.2
11.8
11.0
10.2
8.5
P/E ratio
KSE
Oil
& G
as
Basic M
ater
ials
Indu
stria
ls
Cons
umer
Goo
ds
Hea
lth C
are
Cons
umer
Ser
vice
s
Tele
com
mun
icat
ions
Banks
Insu
ranc
e
Real E
stat
e
Fina
ncia
l Ser
vice
s
Tech
nolo
gy
Para
llel
0
5
10
15
20
25
30
P/E as of end of 2012
13.4 PRICE-EARNINGS RATIOS Combining P/E Analysis and the DDM
Estimates stock price at horizon date Other Comparative Valuation Ratios
Price-to-book: Indicates how aggressively market values firm
Price-to-cash-flow: Cash flow less affected by accounting decisions than earnings
Price-to-sales: For start-ups with no earnings Creative ratios
FIGURE 13.7 VALUATION RATIOS FOR S&P 500
13.5 FREE CASH FLOW VALUATION APPROACHES
•
13.5 FREE CASH FLOW VALUATION APPROACHES
•
13.5 FREE CASH FLOW VALUATION APPROACHES
•
13.5 FREE CASH FLOW VALUATION APPROACHES
•
13.5 FREE CASH FLOW VALUATION APPROACHES
Comparing Valuation Models Model values differ in practice Differences stem from simplifying assumptions
Problems with DCF Models DCF estimates are always somewhat imprecise Investors employ hierarchy of valuation
Real estate, plant, equipmentEconomic profit on assets in placeGrowth opportunities
13.6 THE AGGREGATE STOCK MARKET
Forecasting Aggregate Stock Market Earnings multiplier applied at aggregate level
Forecast corporate profits for periodDerive estimate of aggregate P/E ratio based on long-term interest rates
Some analysts use aggregate DDM
FIGURE 13.8 EARNINGS YIELD OF S&P 500 VERSUS 10-YEAR TREASURY BOND YIELD
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100%
2%
4%
6%
8%
10%
12%
14%
16%Treasury yield
Earnings yield
TABLE 13.4 S&P 500 FORECASTS
Pessimistic Scenario
Most Likely Scenario
Optimistic Scenario
Treasury bond yield 3.6% 3.1% 2.6%
Earnings yield 6.5% 6.0% 5.5%
Resulting P/E ratio 15.4 16.7 18.2
EPS forecast 93 93 93
Forecast for S&P 500 1431 1550 1691