Part 1 Valuations Course Overview JMP Nov 11 2013(4).doc

8/13/2019 Part 1 Valuations Course Overview JMP Nov 11 2013(4).doc

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Valuation-Part 1 (JMP as of Nov 11, 2013)

WHAT IS THE SINGLE WORD THAT BEST DESCRIBESTHE ONE AND ONLY REASON TO PURCHASESHARES OF STOC!

E"PECTATIONS

#VISION i$ t%& art o' $&&in( )%at i$ in*i$i+l& to

ot%&r$,

T%u$ to +& $u..&$$'ul in Fin/in(Valu&

0ou not onl0 %a*& to $&& t%& +i(i.tur&+ut

0ou al$o %a*& to 'o.u$ on t%& /&tail$t%at ot%&r$ 2a0 2i$$3

D&'inition o' an In*&$t2&nt! A commitment of funds for a period of time

to derive a rate of return that would compensate the investor for the ti2&

durin which the funds are invested, the &4&.t&/ rat& o' in'lation

durin this time and the un.&rtaint0 5ri$6$7involved!

1


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#no)in( )%at an a$$&t i$ )ort% an/ )%at /&t&r2in&$ t%at *alu& i$

t%& +a$i$ an/ r&r&8ui$it& 'or int&lli(&nt in*&$t2&nt /&.i$ion

2a6in(3,

A$)at% Da2o/aran Damodaran on Valuation

2


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APPROACHES TO E9UITY VALUATIONStr&n(t%$:W&a6n&$$&$ o' Valuation Aroa.%&$

E$ti2atin( Intrin$i. or #Tru&, Valu& o' a .o22on $to.6

*&r$u$ t%& 2ar6&t ri.&

Fair ;ar6&t Valu& *&r$u$ Curr&nt ;ar6&t Valu&

Co2ara+l&$

Fun/a2&ntal Anal0$i$Pr&$&nt Valu&$ o' Ca$% Flo)$ 5PVCF7 Intrin$i. < R&lati*&ValuationDi$.ount&/ Ca$% Flo) T&.%ni8u&$5p3"#7 R&lati*& Valu&T&.%ni8u&$ 5p3$$7Pri.&:Earnin($ Ratio 5P:E7

Pr&$&nt Valu& o' Di*i/&n/$ 5DD;7 Pri.&:Ca$% Flo)Ratio 5P:CF7

Pr&$&nt Valu& o' O&ratin( Fr&& Ca$% Flo) Fir2 Pri.&:Boo6 Valu&

Ratio 5P:BV7 5FCFF7

Pr&$&nt Valu& o' Fr&& Ca$% Flo) to E8uit0 5FCFE7 Pri.&:Sal&$

Ratio 5P:S7 Ot%&r Ratio$

I2ortant INPUTS! Pro'ita+ilit0 Ratio$!

INVESTOR=S RE9UIRED RATE OF RETURN ROE

ESTI;ATED GROWTH RATE o' ROA

-O&ratin( Earnin($ O&ratin(Pro'it ;ar(in- Di*i/&n/$ Finan.ialRi$6 Ratio$-Ca$% Flo) Curr&ntRatio-Sal&$ R&*&nu& D&+t to

E8uit0 Ratio-Boo6 Valu&

CO;PARABLES> *$ Di$.ount&/ Ca$% Flo)

Fr&& Ca$% Flo) Fir2 5FCFF7 *&r$u$ Fr&& Ca$% Flo) E8uit05FCFE7

N&t In.o2& *&r$u$ Ca$% Flo)

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O&ratin( In.o2& *&r$u$ Ca$% Flo)O&ration$

*&r$u$EBIT EBITDA

>Co2ara+l&$! La) o' On& Pri.& 5LOOP7 'or i/&nti.al a$$&t$

Pri2ar0 $our.&$ o' Cour$& ;at&rial!

CFA Equity Asset Valuation

Damodaran on Valuation: Security Analysis for Investment &

Corporate Finance, by Asat! Damodaran, "e #or$ %niversityStern Sc!ool of usiness

http%&&paes!stern!n'u!edu&adamodar&

'rincipals of Corporate Finance: realey & (yers)Investment Analysis 'ortfolio (ana*ement: +eilly & ron

C!apters -, .Security Valuation & /.Company Analysis & Stoc$ Valuation

Investments: odie, 0ane, (arcus C!apter 1 Equity Valuation(odelsOt%&r $our.& 2at&rial!

A Ran/o2 Wal6 Do)n Wall Str&&t Burton G3 ;al6&il Pro'&$$or o'

E.ono2i.$ at Prin.&ton Uni*&r$it0

5T%&7 Bla.6 S)an T%& I2a.t o' t%& Hi(%l0 I2ro+a+l& Na$$i2 Ni.%ola$

Tal&+ Di$tin(ui$%&/ Pro'&$$or o' Ri$6 En(in&&rin( at N&) Yor6

Uni*&r$it0?$ Pol0t&.%ni. In$titut&

Cororat& Finan.& < ;o/&rn Finan.ial ;an(&2&nt! Ro$$ W&$t&r'i&l/@

St&%&n Ro$$ Fran.o ;o/i(liani Pro'&$$or o' Finan.ial E.ono2i.$ an/

a Pro'&$$or o' Finan.& at t%& M*Sloan S.%ool o' ;ana(&2&nt

CFA L&*&l I E8uit0 Can/i/at& Bo/0 o' no)l&/(&@

1 I++ot$on Ri$6 Pr&2ia O*&r Ti2& R&ort 1-1 I++ot$on

A$$o.iat&$ ;ornin($tar In. Ro(&r I++ot$on Pro'&$$or Yal& S.%ool o'

;ana(&2&nt3

Finan.ial Ti2&$ Wall Str&&t ournal Glo+al N&) Yor6 Ti2&$

+
http://pages.stern.nyu.edu/~adamodar/http://www.amazon.com/Nassim-Nicholas-Taleb/e/B000APVZ7W/ref=ntt_athr_dp_pel_1http://www.amazon.com/Nassim-Nicholas-Taleb/e/B000APVZ7W/ref=ntt_athr_dp_pel_1http://pages.stern.nyu.edu/~adamodar/http://www.amazon.com/Nassim-Nicholas-Taleb/e/B000APVZ7W/ref=ntt_athr_dp_pel_1http://www.amazon.com/Nassim-Nicholas-Taleb/e/B000APVZ7W/ref=ntt_athr_dp_pel_1


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DISCOUNTED CASH FLOW !

PV Ca$% Ca$% Ca$% Ca$% Ca$%

51J71 51J7 51J7 51J7K 51

J7

01 0 0 0K 0

Ca$% Flo)

Di$.ount

MMM

J 51371

5137

5137

5137K

5137

5137 51317 51317 51317 5137

PV o' Ca$% Flo)!

-


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J K3 K3 K31 K311K 31

PV 13K

"


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Anal0Qin( C%an(& Gro)t% Rat&$ < Ti2& Valu& o' ;on&0Using the following financial information, please prepare your analysis of the CAGR for Net Revenuesfrom 2005 to 2009,

using bothmathematical formulas

$

0&ar

CAGR

MMMMMMM

K


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#


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Anal0Qin( C%an(& Gro)t% Rat&$ For&.a$tin( < Ti2& Valu& o';on&0

Using the following financial information, please prepare your analysis of the CAGR

for Net Revenuesfrom 2005 to 2009, using bothmathematical formulas that were

presented in class, and prepare both your Net Revenue and Net Earningsorecasts

for 2010

!et "argin# 7.87% Avg of + + + +

$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

CAGR Calulation# !0"#8$ 1! &1% 1.2#20$'1! & 1 % (.#(('% CAGR Co)*ound Average Groth Rate$$$$$$$$$$$$$$$$$ #2"77'$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

Alternative Geo)etri ,ean Calulation-&1 +&0.0#87// 1+0.1$'#'/ 1+0.08$0/ 1+ 0.0072'1/1!&1

0.'$#1/1.1$'#'/ 1.08$0/ 1.0072'1/1!&1% 1.2#201!/1!&1%1.0(#(( &1% (.#((% Co)*ound Groth$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

200(- #2"77' rofit ,argin oreast

' 5()55*$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$3sing Avg rofit ,argin

)+,5)+

$$$$$$ ' 5()55*$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$Revenue-!2"((0 7.87 Avg 4 #"#!8 Net

),)-)

$$$$$$ ' 5()55*$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

)-,))2

$$$$$ ' 5()55*$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

200'- !0"#8( 10(.#$% 4 !2"((0 Revenue oreast for 2010

$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

As instruted above" 5ou needed to sho both CAGR short for)ula/ and Geo)etri ,ean

for Revenue (.#$%/" 5ou then need to alulate % of Net EarningsRevenue for eah of the

6ears and alulate the Arith)eti Average of the Net Earnings ,argin 7.87%/

10

1 F

F K

31J3J13J-3J

3J3J3J3J3J

CAGR

3J

% Change from Year to Year Current Year-Prior Year Prior Year


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11


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E"PECTED RETURNS < ;ARET RETURNS

E"PECTED ;ARET RETURN Curr&nt-Pr&*iou$SA;PLE E"PECTED;ARET RETURN Pr&*iou$

Date S & P Close*S & P Returns(The Market)

3-Dec 2003 1,111.92

3-Nov 2003 1,05.20 0.050!!3-"ct 2003 1,050.!1 0.00!133-#e$ 2003 995.9! 0.059&3-'ug 2003 1,00.01 -0.01193-(u) 2003 990.31 0.01!!

3-(un 2003 9!.5 0.01&223-a+ 2003 9&3.59 0.011323-'$r 2003 91&.92 0.0509

3-ar 2003 .1 0.0103-e 2003 1.15 0.003&3-(an 2003 55.! -0.01!

SU; 3< ARITH;ETIC AVG o' O+$&r*ation$

3 11 3K 3KJ A*( E4&.t&/ R&turn

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In E8uili+riu2! E4&.t&/ R&turnR&8uir&/R&turn

COST OF E9UITY

CAP;Co2an0 E4&.t&/ R&turn ;ar6&t Ri$6 Pr&2iu2

Ri$6'r&& rat& 5E4&.t&/26t r&turn Ri$6 'r&& rat&7------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

COST OF CAPITAL! W&i(%t&/ A*&ra(& Co$t o' Caital WACC

WACC CAP;E8uit0 ;ar6&t Valu& 4 5E4&.t&/.o2an0 r&turn7

Total ;ar6&t Valu& Co2an0

Curr&nt ;ar6&t Valu& o' D&+t 4 5 W&i(%t&/ A*( Co$t o'

D&+t 4 1-T47Total ;ar6&t Valu& o' Co2an0

E8uit0 ;ar6&t Valu& Curr&nt ;ar6&t Valu& o' D&+t

;ar6&t CaitaliQation

13


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;ar6&t Pri.& o' Sto.6 4 S%ar&$ Out$tan/in(

1+


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Fundamentals of Corporate Finance: Ross Westerfield Jordan

I++ot$on Ri$6 Pr&2ia O*&r Ti2& R&ort I++ot$on A$$o.iat&$Ro(&r I++ot$on Pro'&$$or Yal& S.%ool o' ;ana(&2&nt3

1

;ARET RIS PRE;IU;! 5E4&.t&/ 26t r&turnRi$6 'r&&7


16/31

Li'& i$ 'ull o' $urri$&$ an/ t%& un&4&.t&/

2!at t!e (ar$et 3ivet!45!e (ar$et can ta$et! Aay

Co2ari$on o' T&.%ni8u&$ an/ ;o/&l$!

Sta(& Di*i/&n/ Di$.ount ;o/&lDD; )it% &arnin($ 2ultil& t&r2inal *alu&

Sta(& DD;

Fr&& Ca$% Flo) to Fir2

Fr&& Ca$% Flo) to E8uit0

Curr&nt 2ar6&t ri.&

I;PLIED E9UITY PRE;IU;

For)ar/ Loo6in( *&r$u$ HISTORICAL ANALYSIS

1-

As the Fr&& Ca$% Flo)approach is

similar in concept to the Di*i/&n/Di$.ount ;o/&l, it should provide asimilar estimate of Intrin$i. Valu&,if it is possi.le to forecast to theperiod of constant rowindividends% ;o/i(liani < ;ill&r/

owever, in practice values ma'differ considera.l' as assumptions

for time to dividends, etc aredifficult!All in All, these are all *MA*


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Ent&rri$& Valu&!;ar6&t CaitaliQation lu$ /&+t 2inorit0 int&r&$t an/ r&'&rr&/

$%ar&$ 2inu$ total .a$% an/ .a$% &8ui*al&nt$3

;VIC 5;6t Valu& In*&$t&/ Caital7!Co2+ination o' $%ar&%ol/&r=$ &8uit0 an/ int&r&$t-+&arin( /&+t at

Curr&nt ;ar6&t *&r$u$ Boo6 Valu&3

Di*i/&n/$ *&r$u$ GROWTH5B; ( 7

RATE OF RETURN < E"PECTED or RE9UIRED RETURN

CAP; Co$t o' E8uit0 < t%& ;ARET CAPITALIATION

RATE! $At E8uili+riu2 t%& Rat& o' R&turn in*&$tor$ .an &4&.t to&arn i$ /&'in&/ +0 R'r&& X 5E4 26t r&turn - R'r&& 7

E4&.t&/ R&turn R&8uir&/ R&turn

T%i$ i$ t%& Rat& o' R&turn an in*&$tor .an &4&.t to &arn

(i*&n it$RIS a$ 2&a$ur&/ +0 X&ta

T%& R&8uir&/ R&turn o' an0 (i*&n in*&$t2&nt )it%E9UIVALENT RIS

E8uili+riu2 < #Fair, Pri.in( Corr&.t Pri.& < Fair R&turn

E4&.t&/ R&turn R&8uir&/ R&turn

E4&.t&/ Hol/in( P&rio/ R&turn 5EHPR7 *&r$u$ CAP;

EHPR E4&.t&/R&turn E4 Di*1 E4 Pri.&1 Curr&nt

Pri.&ZCurr&nt Pri.&

I' EHPR CAP; # $ 6 t%&n BUY 2or& S%ar&$ Ri$6 ;&a$ur&/

1"


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R&8uir&/ R&turn

INTRINSIC Valu& ! V T%& a.tual valueo' a .o2an0 or ana$$&t +a$&/ on an un/&rl0in( &r.&tion o' it$ tru& valuein.lu/in( all a$&.t$ o' t%& +u$in&$$3

V Pr&$&nt Valu& PV o' all .a$% a02&nt$ to in*&$tor$in.lu/in(

Di*i/&n/$ an/ FINAL $al& o' $to.6 Di$.ount&/ at RISA/[u$t&/

CAP; $

V E4Di*1 E4 Pri.&1 51 $7

51 CAP;7

I' V i$ l&$$ t%an t%& Curr&nt ;ar6&t SELL5B; (7

;ARET CONSENSUS VALUE

In ;ar6&t E8uili+riu2 t%& Curr&nt ;ar6&t Pri.& r&'l&.t$ t%&Intrin$i. Valu& an/ .o2ut&/ V r&'l&.t$ t%& E$ti2at& o'All ;ar6&t Parti.iant$T%u$ t%& ;ar6&t Con$&n$u$ Valu& i$ t%& ;ar6&tCaitaliQation Rat& $

INTRINSIC Di*i/&n/ Pri.& Di*Pri.& in on& 0&ar in on& 0&ar 0&ar 0&ar

V Di*1 P1 V1 Di* P

To/a0 5 1 $7 In Y&ar 5 1 $7

1$


19/31

In t%& DD; Di*i/&n/ Di$.ount ;o/&l Sto.6 Pri.& to/a0 i$t%&Pr&$&nt Valu& o' All E4&.t&/ Futur& Di*i/&n/$ intoP&r&tuit05B; ( 17

Con$tant Gro)t% DD; W%&n * i$ \ $ 5 $ . *7*(ro)t% $ CAP; or

CaitaliQation Rat&

In a 2ar6&t )%&r& V ;ar6&t Pri.& To/a0To/a0=$ P

5B; (7 Intrin$i.

Valu&V D51(7 D51(7 D51(7 ]]33 5167 5167 5167

Or

V D51(7 D1 5 6 ( 7 5 6 ( 7

DD;For Con$tant Gro)t% Di* Rat& o' Sto.6 Pri.&Ar&.iation 5in.7

In an0 0&ar )ill &8ual t%at .on$tant (ro)t% rat& (

T%& HPR Hol/in( P&rio/ R&turn

E4&.t&/r&turn Di*i/&n/ Yi&l/ Caital Gain$

E4&.t&/r&turn D1 P1 P D1 ( P P P

T%u$ ;ar6&t CaitaliQation o' $to.6 $

5B; (K7 5$to.6 ri.& at Intrin$i. Vri.&7t%&n E4&.t&/ R&turn

E4&.t&/ Hol/in( P&rio/ R&turn $ t%u$ $ Di*1 (P

1#


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T%u$ )%at i$ t%& in*&$tor=$!

R&8uir&/ or E4&.t&/ Rat& o' R&turn 5CAP; 'or

&4a2l&7

To Do)n- St& Aroa.% versusBotto2 U In/i*i/ual Sto.6 Valuation

Aroa.%

Fo.u$ on E.ono20 < In/u$tr0 Fo.u$ on 'in/in( Un/&r*alu&

*&r$u$ t%& ;ar6&t

THE ONLY THING CERTAIN IS CHANGE

T%&r& i$ No On& ;a(i. Bull&t No On& ;a(i. For2ula

R&turn$ .o2& 'ro2 Ent&rri$& Earnin($ Ca$% Flo)$ Di*i/&n/$ Int&r&$t

Pa02&nt$ Caital Gain$

Valuation$ in.lu/& ;ultili&r o' Ent&rri$& Earnin($ Pr&$&nt Valu& o'

Ca$% Flo)$ Pr&$&nt Valu& o' Di*i/&n/ Pa02&nt$

R&8uir&/ Rat& o' R&turn in.lu/&$ R&al Ri$6 Fr&& Rat& PLUS E4&.t&/

Rat& o' In'lation PLUS Ri$6 Pr&2iu2 'ro2 un.&rtaint0 o' r&turn$ 'orri$60 a$$&t$3

Valu& *$ Gro)t%! 5p +37

IDENTIFICATION OF VALUE STOC CO;PANIES! .o2ani&$ t%at

a&ar to +& un/&r*alu&/ 'or r&a$on$ ot%&r t%an &arnin($ (ro)t%

ot&ntial t%&0 (&n&ral %a*& lo) P:E or P:Boo6 ratio$

IDENTIFICATION OF GROWTH STOC CO;PANIES! .o2ani&$ t%at ar&

&4&ri&n.in( rai/ (ro)t% o' $al&$ < &arnin($ t%&0 %a*& o$iti*&

&arnin($ $urri$&$ an/ a+o*& a*&ra(& ri$6 a/[u$t&/ rat&$ o' r&turn$

+&.au$& t%& $to.6$ ar& un/&r*alu&/

Curr&nt ;ar6&t S%ar& Pri.&

Or E4&.t&/ Di*i/&n/ N&4t P&rio/ D1Co2ut&/ VALUE R&8uir&/ or E4&.t&/ Rat& o' R&turn $ E4&.t&/Di* (ro)t%*

20


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;ar6&t CaitaliQation Rat& At E8uili+riu2 E4&.t&/ R&turn R&8uir&/R&turn5B; ( 7 $ CAP; At ;ar6&t E8uili+riu2 t%& Rat&o' R&turn In*&$tor$ .aital .an &4&.t&/ to &arn i$!

Ri$6'r&& X 5E4&.t&/2ar6&t r&turn -

Ri$6'r&&7

T%& R&8uir&/ Rat& o' R&turn an in*&$tor .an &4&.t to &arn (i*&n it$ RIS a$2&a$ur&/B0 X&ta@

T%& R&8uir&/ Rat& o' R&turn o' an0 in*&$t2&nt )it% E8ui*al&nt Ri$6

E8uili+riu2 5Corr&.t ;ar6&t Pri.&7 < #Fair, Pri.in( 5Fair R&turn .o22&n$urat&

)it% Ri$67 E"PECTED RIS $ CAP; RE9UIRED R&turn ;ARET CAPITALIATION

E4&.t&/ Hol/in( P&rio/ R&turn E4 Di* &n/ o' &rio/ E4 Pri.& &n/ o'P&rio/ E H P R E4 Di*1 E4 P1 -Curr&nt ;6t Pri.&Z Curr&nt ;ar6&t Pri.&

T%u$ i' E4 Hol/in( P&rio/ R&turn CAP; $ t%&n BUY 2or& $%ar&$ Ri$6 2&a$ur&/ R&8uir&/ R&turn

i' E4 Hol/in( P&rio/ R&turn \ CAP; $ $&ll

b Earnin($ R&t&ntion Rat& 5Ratio7 or Plo)+a.6 N&t In.o2&-Di*i/&n/$5B; ( 7N&t In.o2&-Di*i/&n/$ R&in*&$t2&nt N&t In.o2&

Total A$$&t$ Total Lia+iliti&$ S%ar&%ol/&r E8uit0 Boo6 Valu&

R&turn on E8uit0 ROE N&t In.o2& S%ar&%ol/&r E8uit0

Gro)t% ( R&turn on E8uit0 4 lo)+a.6

Plo)+a.6 or R&in*&$t2&nt b* R&turn on E8uit0 4 lo)+a.6

* ROE 4 b

lo)+a.6

21


22/31

* R&in*&$t&/ Earnin($ R&in*&$t&/ Earnin($ 4 N&t In.o2& ROE 4 b

Boo6 Valu& N&t In.o2& Boo6 Valu&

S%ar&%ol/&r E8uit0 S%ar&%ol/&r E8uit0

Pri.& To/a0 Di*i/&n/ En/ 1 0r E4 Earnin($ lo)+a.6

P D1MMMM D1 E1 4 51 - +7

5 $ - (7r&in*&$t2&nt E4&.t&/ (ro)t%

or R&8uir&/ R&turn

* ROE 4 b

P E1 4 51 - +7 5 $ - ROE 4 b7

*

Pri.& to Earnin($ Ratio! Pri.& to/a0 1 4 1 Pr&$&nt Valu&Gro)t%5B; ( 7 E4&.t&/ EPS 6 &4 r&turn EPS:6 &4

r&turnPri.& To/a0 (p -0+4M nvestments)

P E1 4 51 - +7

5 $ - ROE 4 b7

P 51 - +7 P:E ratio in.r&a$&$ )it% In.r&a$&/ ROE

E1 5 $ - ROE 4 b7 Hi(%&r ROE (i*&$ (oo/ ro$&.t$

Documents

Part 1 Valuations Course Overview JMP Nov 11 2013(4).doc