VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... ·...
Transcript of VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... ·...
![Page 1: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/1.jpg)
VALUATION:CLOSINGTHOUGHTSSpring2017“Itain’t overtillitsover”
![Page 2: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/2.jpg)
2
Backtotheverybeginning:ApproachestoValuation
¨ DiscountedCashflowValuation,wherewetry(sometimesdesperately)toestimatetheintrinsicvalueofanassetbyusingamixoftheory,guessworkandprayer.
¨ Relativevaluation,wherewepickagroupofassets,attachthename“comparable” tothemandtellastory.
¨ Contingentclaimvaluation,wherewetakethevaluationthatwedidintheDCFvaluationanddivvyitupbetweenthepotentialthieves(equity)andthevictimsofthiscrime(lenders)
![Page 3: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/3.jpg)
3
IntrinsicValuation:Thesetup
![Page 4: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/4.jpg)
4
DantemeetsDCF:Ninelayersofvaluationhell..Andabonuslayer..
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
![Page 5: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/5.jpg)
5
Layer1:BaseYearfixation….
¨ YouarevaluingExxonMobil,usingthefinancialstatementsofthefirmfrom2008.Thefollowingprovidesthekeynumbers:Revenues $477billionEBIT(1-t) $58billionNetCapEx $3billionChg WC $1billionFCFF $54billion
¨ Thecostofcapitalforthefirmis8%andyouuseaveryconservativestablegrowthrateof2%tovaluethefirm.Themarketcapforthefirmis$373billionandithas$10billionindebtoutstanding.a.Howunderorovervaluedistheequityinthefirm?b.Wouldyoubuythestockbasedonthisvaluation?Whyorwhynot?
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
![Page 6: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/6.jpg)
6
Layer2:TaxesandValue
¨ Assumethatyouhavebeenaskedtovalueacompanyandhavebeenprovidedwiththemostrecentyear’sfinancialstatements:
¨ EBITDA 140¨ - DA 40¨ EBIT 100¨ Interestexp 20¨ Taxableincome 80¨ Taxes 32¨ NetIncome 48¨ Assumealsothatcashflowswillbeconstantandthatthereisnogrowthinperpetuity.Whatisthe
freecashflowtothefirm?a. 88million(Netincome+Depreciation)b. 108million(EBIT– taxes+Depreciation)c. 100million(EBIT(1-taxrate)+Depreciation)d. 60million(EBIT(1- taxrate))e. 48million(NetIncome)f. 68million(EBIT– Taxes)
Free Cash flow to firmEBIT (1- tax rate)-(Cap Ex – Depreciation)- Change in non-cash WC=FCFF
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
![Page 7: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/7.jpg)
7
Layer3:HighGrowthforhowlong…
¨ Assumethatyouarevaluingayoung,highgrowthfirmwithgreatpotential,justafteritsinitialpublicoffering.Howlongwouldyousetyourhighgrowthperiod?
¨ <5years¨ 5years¨ 10years¨ >10years
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
![Page 8: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/8.jpg)
8
Layer4:TheCostofCapital
¨ ThecostofcapitalforChippewaTechnologies,aUStechnologyfirmwith20%ofitsrevenuesfromBrazil,hasbeencomputedusingthefollowinginputs:
Cost of equity = Riskfree Rate + Beta (ERP) + Small firm premium = 5% + 1.20 (5%) + 3% = 14%
Replaced current T.Bond rate of 3% with normalized rate of 5%
“Adjusted” Beta from Bloomberg
Both from Ibbotson data base, derived from 1926-2008 dataERP: Stocks - T.Bonds (Arithmetic average)Small firm: Smal stocks - Overall market
Cost of capital = Cost of equity (Equity/ (Debt + Equity)) + Cost of debt (1- tax rate) (Debt/ (Debt + Equity)= 14% (1000/2000) + 3% (1-.30) (1000/2000) = 8.05%
From above
Used market value of equity
Company is not rated and has no bonds. Used book interest rate = Int exp/ BV of debt
Used effective tax rate of 30%
To be conservative, counted all liabilities, other than equity, as debt and used book value.
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
![Page 9: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/9.jpg)
9
TheCorrectCostofCapitalforChippewa
![Page 10: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/10.jpg)
10
Layer5:Thepriceofgrowth..
¨ Youarelookingattheprojectedcashflowsprovidedbythemanagementofthefirm,foruseinvaluation
¨ Whatquestionswouldyouraiseabouttheforecasts?
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
![Page 11: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/11.jpg)
11
Layer6:The“fixeddebtratio” assumption
¨ YouhavebeenaskedtovalueHormelFoods,afirmwhichcurrentlyhasthefollowingcostofcapital:¤ Costofcapital=7.31%(.9)+2.36%(.1)=6.8%
¨ Youbelievethatthetargetdebtratioforthisfirmshouldbe30%.Whatwillthecostofcapitalbeatthetargetdebtratio?
¨ Whichdebtratio(andcostofcapital)shouldyouuseinvaluingthiscompany?
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
![Page 12: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/12.jpg)
12
Layer7:TheTerminalValue
¨ Thebestwaytocomputeterminalvalueistoa. Useastablegrowthmodelandassumecashflowsgrowatafixed
rateforeverb. UseamultipleofEBITDAorrevenuesintheterminalyearc. Usetheestimatedliquidationvalueoftheassets¨ Youhavebeenaskedtovalueabusiness.Thebusinessexpectsto$
120millioninafter-taxearnings(andcashflow)nextyearandtocontinuegeneratingtheseearningsinperpetuity.Thefirmisallequityfundedandthecostofequityis10%;theriskfreerateis3%andtheERPis7%.Whatisthevalueofthebusiness?
¨ Assumenowthatyouweretoldthatthefirmcangrowearningsat2%ayearforever.Estimatethevalueofthebusiness.
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
![Page 13: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/13.jpg)
13
Layer8.Fromfirmvaluetoequityvalue:TheGarnishingEffect…
¨ Forafirmwithconsolidatedfinancialstatements,youhavediscountedfreecashflows tothefirmatthecostofcapitaltoarriveatafirmvalueof$100million.Thefirmhas¤ Acashbalanceof$15million¤ Debtoutstandingof$20million¤ A5%holdinginanothercompany:thebookvalueofthisholdingis$5
million.(Marketvalueofequityinthiscompanyis$200million)¤ Minorityinterestsof$10milliononthebalancesheet
¨ Whatisthevalueofequityinthisfirm?
¨ Howwouldyouranswerchangeifyouknewthatthefirmwasthetargetofalawsuititislikelytowinbutwherethepotentialpayoutcouldbe$100millionifitloses?
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
![Page 14: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/14.jpg)
14
Layer9.Fromequityvaluetoequityvaluepershare
¨ Youhavevaluedtheequityinafirmat$200million.Estimatethevalueofequitypershareifthereare10millionsharesoutstanding..
¨ Howwouldyouranswerchangeifyouweretoldthatthereare2millionemployeeoptionsoutstanding,withastrikepriceof$20ashareand5yearslefttoexpiration?
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
![Page 15: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/15.jpg)
15
Layer10.Thefinalcircleofhell…
Cost of Equity Cost of Capital
Kennecott Corp (Acquirer) 13.0% 10.5%
Carborandum (Target) 16.5% 12.5%
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
![Page 16: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/16.jpg)
YOURNUMBERS/FINDINGS
“Thetruthshallsetyoufree”.
![Page 17: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/17.jpg)
17
TheModelsYouUsedinDCFValuation
DividendDiscount5% FCFE
5%
FCFF
90%
Modelused
![Page 18: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/18.jpg)
18
TheMostValuedCompany(Companies)..
1. Twitter(4)2. Square(5)3. UnderArmour (7)4. Yelp(9)5. Tesla(9)
![Page 19: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/19.jpg)
19
Andhereiswhyyoudoit..
CompanyName Price DCFModel DCFValue Multipleused RelativeValue Recommendation
Yelp $32.48 FCFF $43.52 EV/S $59.28 Buy
Yelp $35.68 FCFF $44.93 EV/Sales $58.98 Buy
Yelp $35.30 FCFF $50.77 EV/Sales $44.30 Buy
Yelp $35.68 FCFF $30.09 EV/Sales $47.54 Sell
Yelp $35.68 FCFF $39.95 EV/Sales $43.52 Buy
Yelp $35.68 FCFF2-stage $32.55 EV/Sales $35.45 Sell
YelpInc $35.37 FCFF $36.73 EV/Sales $55.13 Buy
YelpInc. $35.68 FCFF $37.39 ForwardPE $40.50 Buy
Yelp,Inc $35.50 FCFF $44.55 PEG $55.32 Buy
![Page 20: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/20.jpg)
20
Whatyoufound…
0.
10.
20.
30.
40.
50.
60.
70.
Undervaluedmorethan50%
Undervalued33-50%
Undervalued10-33%
Undervalued0-10%
Overvalued0-10%
Overvalued10-50%
Overvalued50-100%
Overvaluedmorethan100%
AxisTitle
AxisTitle
DCFValuevsMarketPrice
![Page 21: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/21.jpg)
21
Themostundervaluedstocks…
CompanyName Price DCFModel DCFValue Recommendation %UnderoroverPetrobras $9.32 FCFF $28.67 BUY -67.49% ThomasCook $0.93 FCFF £2.08 Buy -55.22% CEMEXS.A.B.deC.V.(BMV) $8.83 FCFF 16.44 Buy -46.29% AllyFinancial $19.71 Dividends $36.69 Buy -46.28% JetBlue $21.58 FCFF 39.57 Buy -45.46% SpiritAIrlines $59.19 FCFF2-Stage 104.88 BUY -43.56% AmericanAirlines $44.51 FCFF 78.12 Buy -43.02% FiatChrysler $10.28 FCFF €17.48 Buy -41.19% GrupoBimbo $44.85 FCFF $75.76 Buy -40.80% Geely $10.26 FCFF 17.14 Buy -40.14% MeetMe,Inc. $6.09 FCFF $10.00 Buy -39.10% PT.AdiSaranaArmadaTbk $260.00 FCFF 419.27 BUY -37.99% SKHynix 55,900.00 FCFF 86,534.32 Buy -35.40% SanchezOilCorporation $7.38 FCFF $11.35 Buy -34.98% Angie'sList $10.71 FCFF $16.42 Buy -34.77% CVSHealth $82.59 FCFF 124.47 Buy -33.65% SnapInc. $23.19 FCFF $34.88 Buy -33.51%
![Page 22: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/22.jpg)
22
TheMostOvervaluedstocksare...
CompanyName Price DCFModel DCFValue Recommendation %UnderoroverTwitter $18.69 FCFF $1.87 Sell 901.71% AMD $10.19 FCFF $1.73 Sell 489.02%Twitter $15.08 FCFF $2.92 Sell 416.44% CaesarsEntertainmentGroup $11.05 FCFF $2.21 Sell 400.00% Twitter $18.65 FCFF3-Stage $4.49 SELL 315.37% Schlumberger $71.97 FCFF $22.81 Hold 215.52%GrubHub(GRUB) $45.72 FCFF $14.93 Sell 206.23%JetAirways $529.00 FCFF $175.37 Sell 201.65%Trupanion $17.40 FCFF $5.88 Sell 195.92% BoingoWireless,Inc. $12.40 FCFF $4.25 Sell 191.76% AdvancedMicroDevices $10.19 FCFF $3.78 Sell 169.58% RedLionHotelsCorporation $6.40 FCFF $2.52 Sell 153.97% ShakeShack $34.03 FCFF $16.20 Sell 110.06% NintendoCo $28,355.00 FCFF $13,521.91 Sell 109.70% Meitu,Inc. $9.76 FCFF $4.92 Sell 98.37% BuffaloWildWings $160.35 FCFF $81.07 Sell 97.79% Tiffany&Co. $92.40 FCFF $47.08 Buy 96.26%
![Page 23: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/23.jpg)
23
Theultimatetest…Didundervaluedstocksmakemoney?
!5.00%&
0.00%&
5.00%&
10.00%&
15.00%&
20.00%&
Spring&1995& Spring&1997& Spring&1999& Spring&2001& Spring&2003& Spring&2005&
Performance*of**Recommenda-ons*
Buy&&
S&P&500&
Sell&
![Page 24: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/24.jpg)
24
Moreonthewinners...
¨ Onaverage,right:About60%ofallbuyrecommendationsmakemoney;about45%ofsellrecommendationsbeatthemarket.Theaveragereturnonbuyrecommendationswasabout4%higher,onanannualizedbasis,thantheaveragereturnonsellrecommendations.
¨ Moresoonsome:Theexcessreturnsonbuyrecommendationsonsmallcapandemergingmarketcompaniesishigherthantheexcessreturnsonlargemarketcapcompanies,withhighermistakesinbothdirectionsontheformer.
¨ Skewedpayoffs:Therearetwoorthreebigwinnersineachperiod,butthepayoffwasnotalwaysimmediate.BuyingApplein1999wouldhaveledtonegativereturnsforayearormore,beforetheturnaroundoccurred.
¨ Doublewhammy:StocksthatareundervaluedonbothaDCFandrelativevaluationbasisdobetterthanstocksthatareundervaluedononlyoneapproach.
![Page 25: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/25.jpg)
25
RelativeValuation:TheFourStepstoUnderstandingMultiples
¨ AnnaKournikovaknowsPE….Ordoesshe?¤ Inuse,thesamemultiplecanbedefinedindifferentwaysbydifferent
users.Whencomparingandusingmultiples,estimatedbysomeoneelse,itiscriticalthatweunderstandhowthemultipleshavebeenestimated
¨ 8timesEBITDAisnotalwayscheap…¤ Toomanypeoplewhouseamultiplehavenoideawhatitscrosssectional
distributionis.Ifyoudonotknowwhatthecrosssectionaldistributionofamultipleis,itisdifficulttolookatanumberandpassjudgmentonwhetheritistoohighorlow.
¨ Youcannotgetawaywithoutmakingassumptions¤ Itiscriticalthatweunderstandthefundamentalsthatdriveeachmultiple,
andthenatureoftherelationshipbetweenthemultipleandeachvariable.¨ Therearenoperfectcomparables
¤ Definingthecomparableuniverseandcontrollingfordifferencesisfarmoredifficultinpracticethanitisintheory.
![Page 26: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/26.jpg)
Value of Stock = DPS 1/(ke - g)
PE=Payout Ratio (1+g)/(r-g)
PEG=Payout ratio (1+g)/g(r-g)
PBV=ROE (Payout ratio) (1+g)/(r-g)
PS= Net Margin (Payout ratio)(1+g)/(r-g)
Value of Firm = FCFF 1/(WACC -g)
Value/FCFF=(1+g)/(WACC-g)
Value/EBIT(1-t) = (1+g) (1- RIR)/(WACC-g)
Value/EBIT=(1+g)(1-RiR)/(1-t)(WACC-g)
VS= Oper Margin (1-RIR) (1+g)/(WACC-g)
Equity Multiples
Firm Multiples
PE=f(g, payout, risk) PEG=f(g, payout, risk) PBV=f(ROE,payout, g, risk) PS=f(Net Mgn, payout, g, risk)
V/FCFF=f(g, WACC) V/EBIT(1-t)=f(g, RIR, WACC) V/EBIT=f(g, RIR, WACC, t) VS=f(Oper Mgn, RIR, g, WACC)
![Page 27: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/27.jpg)
27
TheMultiplesyouusedwere...
![Page 28: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/28.jpg)
28
DCFvsRelativeValuation
0.
10.
20.
30.
40.
50.
60.
70.
<50% 50-67% 67-90% 90%-100% 100-110% 110%-150% 150-200% >200% DCFasfractionofRelativeValue
DCFas%ofRelativeValue
![Page 29: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/29.jpg)
29
Mostunderpricedonarelativebasis…
CompanyName Price Multipleused RelativeValueRecommendation%UnderorOver:
RelativeVince $1.00 EV/S $9.07 Sell -88.97% Tesla $308.35 EV/Sales $1,622.99 Sell -81.00% SearsHoldingCorporation $10.76 VS $52.58 Sell -79.54% InsysTherapeutics $10.77 EV/Sales $49.04 BUY -78.04% Avon $3.69 EV/Sales $15.47 SELL -76.15% PT.AdiSaranaArmadaTbk $260.00 EV/EBIDTA $951.24 BUY -72.67% SquareEnixHoldings $3,345.00 EV/Sales $11,599.96 BUY -71.16% SKHynix $55,900 EV/EBITDA $172,783.82 Buy -67.65% VipshopHoldingsLimited $13.78 P/E $40.40 BUY -65.89% Barnes&Noble,Inc.(NYSE:BKS) $8.50 EV/EBITDA $23.33 Sell -63.57% ThomasCook $0.93 EV/EBITDA $2.55 Buy -63.47% GrupoBimbo $44.85 VS $105.40 Buy -57.45% FiatChrysler $10.28 P/E $23.19 Buy -55.68% MeetMe,Inc. $6.09 EV/Sales $12.90 Buy -52.79% ARCELIKAS $23.16 EV/EBITDA $46.50 Buy -50.19% AllyFinancial $19.71 P/TBV $39.51 Buy -50.12% Daimler $68.88 PBV $132.27 Buy -47.92%
![Page 30: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/30.jpg)
30
Mostoverpricedonarelativebasis…
CompanyName Price MultipleusedRelativeValueRecommendation%UnderorOver:
RelativeTwitter $18.69 EV/Sales $1.03 Sell 1708.96% ChinaMedicalSystem $13.33 EV/Sales $1.40 Sell 852.14% SouthwestAirlines(LUV) $58.40 P/E $8.12 Sell 619.21% Valeant $10.07 EV/EBITDA $2.16 SELL 366.20% Square,Inc.(NYSE:SQ) $19.78 EV/Sales $4.45 Sell 344.49%
AdvancedMicroDevices $10.19 EV/Inv Capital $2.78 Sell 266.55%MGMResortsInternational $30.85 VEBITDA $9.30 Sell 231.72% Tesla,Inc. $308.35 PBV $100.52 Sell 206.75%CableOne $676.00 EV/EBITDA $221.66 Sell 204.97%S.M.ENTERTAINMENT $27,000 PE $8,889.00 SELL 203.75% Exelixis $21.69 EV/Sales $7.25 SELL 199.17% Ctrip.com $52.68 Ev/Sales $17.72 Sell 197.29% SNAPInc. $23.19 PBV $7.95 Sell 191.70% Twitter $15.08 EV/S $5.20 Sell 190.00% OccidentalPetroleumCorp. $60.19 VEBITDA $22.25 Sell 170.52% PaneraBread $274.00 EV/S $105.96 Sell 158.59% UnderArmour,Inc. $20.59 PE $8.24 Sell 150.00%
![Page 31: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/31.jpg)
31
ContingentClaim(Option)Valuation
¨ Optionshaveseveralfeatures¤ Theyderivetheirvaluefromanunderlyingasset,whichhasvalue¤ Thepayoffonacall(put)optionoccursonlyifthevalueofthe
underlyingassetisgreater(lesser)thananexercisepricethatisspecifiedatthetimetheoptioniscreated.Ifthiscontingencydoesnotoccur,theoptionisworthless.
¤ Theyhaveafixedlife¨ Anysecuritythatsharesthesefeaturescanbevaluedasan
option.
¨ Numberoffirmsvaluedusingoptionmodels=12¨ MedianPercentincreaseinvalueoverDCFvalue=117.38%
![Page 32: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/32.jpg)
32
ValueEnhancement…Youtoocandoit!
![Page 33: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/33.jpg)
33
EconomicValueAdded(EVA)andCFROI
Aswath Damodaran
33
¨ TheEconomicValueAdded(EVA)isameasureofsurplusvaluecreatedonaninvestment.¤ Definethereturnoncapital(ROC)tobethe“true” cashflowreturnoncapitalearnedonaninvestment.
¤ Definethecostofcapitalastheweightedaverageofthecostsofthedifferentfinancinginstrumentsusedtofinancetheinvestment.
¤ EVA=(ReturnonCapital- CostofCapital)(CapitalInvestedinProject)
¨ TheCFROIisameasureofthecashflowreturnmadeoncapital¤ ItiscomputedasanIRR,baseduponabasevalueofcapitalinvestedandthecashflowonthatcapital.
![Page 34: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/34.jpg)
34
Thebottomline…
Aswath Damodaran
34
¨ Thevalueofafirmisnotgoingtochangejustbecauseyouuseadifferentmetricforvalue.Allapproachesthatarediscountedcashflowapproachesshouldyieldthesamevalueforabusiness,iftheymakeconsistentassumptions.
¨ Iftherearedifferencesinvaluefromusingdifferentapproaches,theymustbeattributabletodifferencesinassumptions,eitherexplicitorimplicit,behindthevaluation.
![Page 35: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/35.jpg)
35
FirmValueusingEVAApproach
Aswath Damodaran
35
CapitalInvestedinAssetsinPlace = $100EVAfromAssetsinPlace=(.15– .10)(100)/.10 = $50+PVofEVAfromNewInvestmentsinYear1=[(.15-– .10)(10)/.10] = $5+PVofEVAfromNewInvestmentsinYear2=[(.15-– .10)(10)/.10]/1.1= $4.55+PVofEVAfromNewInvestmentsinYear3=[(.15-– .10)(10)/.10]/1.12= $4.13+PVofEVAfromNewInvestmentsinYear4=[(.15-– .10)(10)/.10]/1.13= $3.76+PVofEVAfromNewInvestmentsinYear5=[(.15-– .10)(10)/.10]/1.14= $3.42ValueofFirm = $170.85
![Page 36: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/36.jpg)
36
FirmValueusingDCFValuation:EstimatingFCFF
Aswath Damodaran
36
BaseY ear
1 2 3 4 5 Term.Y ear
EBIT (1-t) : Assets in Place $ 15.00 $ 15.00 $ 15.00 $ 15.00 $ 15.00 $ 15.00
EBIT(1-t) :Investments- Yr 1 $ 1.50 $ 1.50 $ 1.50 $ 1.50 $ 1.50
EBIT(1-t) :Investments- Yr 2 $ 1.50 $ 1.50 $ 1.50 $ 1.50
EBIT(1-t): Investments -Yr 3 $ 1.50 $ 1.50 $ 1.50
EBIT(1-t): Investments -Yr 4 $ 1.50 $ 1.50
EBIT(1-t): Investments- Yr 5 $ 1.50
Total EBIT(1-t) $ 16.50 $ 18.00 $ 19.50 $ 21.00 $ 22.50 $ 23.63
- Net Capital Expenditures $10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 11.25 $ 11.81
FCFF $ 6.50 $ 8.00 $ 9.50 $ 11.00 $ 11.25 $ 11.81
After year 5, the reinvestment rate is 50% = g/ ROC
![Page 37: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/37.jpg)
37
FirmValue:PresentValueofFCFF
Aswath Damodaran
37
Year 0 1 2 3 4 5 Term Year
FCFF $ 6.50 $ 8.00 $ 9.50 $ 11.00 $ 11.25 $ 11.81
PV of FCFF ($10) $ 5.91 $ 6.61 $ 7.14 $ 7.51 $ 6.99
Terminal Value $ 236.25
PV of Terminal Value $ 146.69
Value of Firm $170.85
![Page 38: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/38.jpg)
38
Gamingthesystem:DeliveringhighcurrentEVAwhiledestroyingvalue…
Aswath Damodaran
38
¨ TheGrowthtradeoffgame:ManagersmaygiveupvaluablegrowthopportunitiesinthefuturetodeliverhigherEVAinthecurrentyear.
¨ TheRiskgame:ManagersmaybeabletodeliverahigherdollarEVAbutinriskierbusinesses.ThevalueofthebusinessisthepresentvalueofEVAovertimeandtheriskeffectmaydominatetheincreasedEVA.
¨ TheCapitalInvestedgame:ThekeytodeliveringpositiveEVAistomakeinvestmentsthatdonotshowupaspartofcapitalinvested.Thatway,youroperatingincomewillincreasewhilecapitalinvestedwilldecrease.
![Page 39: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/39.jpg)
39
Actingonvaluation:Itisnotjustanacademicexercise
a. Iamnotsureyet:Uncertaintyisnotashieldagainstaction.Ifyouwaituntilyoufeel“certain”aboutyourvaluation,youwillneveract.
b. Allbelieversnow?Ultimately,youhavetobelieveinsomemodicumofmarketefficiency.Marketshavetocorrecttheirmistakesforyourvaluationstopayoff.
c. Thelawoflargenumbers:Assumingyourvaluationscarryheft,youarefarmorelikelytoberightacrossmanycompaniesthanonanyindividualone.
![Page 40: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/40.jpg)
40
Yourrecommendationswereto..
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
0
20
40
60
80
100
120
140
160
Sprin
g2017
Fall2016
Fall2015
Sprin
g2015
Fall2014
Sprin
g2014
Sprin
g2013
Sprin
g2012
Fall2011
Sprin
g2011
Fall2010
Sprin
g2010
Sprin
g2009
Sprin
g08
Sprin
g07
Sprin
g05
Sprin
g04
Sprin
g03
Sprin
g2002
Sprin
g2001
Sprin
g'00
Spr9
9(M
ay)
Buy
Sell
Hold
Buy/Sellratio
![Page 41: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/41.jpg)
41
Pickingyourvaluationapproach
¨ Assetcharacteristics¤ Marketability¤ Cashflowgeneratingcapacity¤ Uniqueness
¨ Yourcharacteristics¤ Timehorizon¤ Reasonsfordoingthevaluation¤ Beliefsaboutmarkets
![Page 42: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/42.jpg)
42
Whatapproachwouldworkforyou?
¨ Asaninvestor,givenyourinvestmentphilosophy,timehorizonandbeliefsaboutmarkets(thatyouwillbeinvestingin),whichofthetheapproachestovaluationwouldyouchoose?
a. DiscountedCashFlowValuationb. RelativeValuationc. Neither.Ibelievethatmarketsareefficient.
![Page 43: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/43.jpg)
43
StoryTellers?NumberCrunchers?
¨ Ifyouareastoryteller,Ihopethatyouhave¤ Moreconfidenceinyournumbercrunching¤ Moredisciplineinyourstories¤ Lessintimidation,whenconfrontedwithnumbercrunchers
¨ Ifyouareanumbercruncher,Ihopethatyouhave¤ Morewillingnesstoputstoriesbehindyournumbers¤ Moreimaginationinyournumbercrunching¤ Moreunderstanding,whenconfrontedwithstorytelling
![Page 44: VALUATION: CLOSING THOUGHTSpages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valcloses... · 2017-05-08 · ¨Relative valuation, where we pick a group of assets, attach the name “comparable”to](https://reader033.fdocuments.us/reader033/viewer/2022041915/5e692fa56bdbf31cb15f9ab4/html5/thumbnails/44.jpg)
44
SomeNotVeryProfoundAdvice
1. Itsallinthefundamentals.2. Focusonthebigpicture.Don’tsweatthesmall
stuffanddon’tgetdistracted.3. Anecdotesmeanlittleandexperiencedoesnot
equalknowledge.4. Keepyourperspective.Itisonlyavaluation.5. Ininvesting,luckdominatesskillandknowledge.DonotforgettodoyourCFEs.Yourabilitytocheckyourgrade
restsonit.