20130915 第5回valuation勉強会

Valuation in FED

2013/9/15(Sun) 1

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•  名前

•  所属

•  勉強会に参加したきっかけ

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Contents

•  Part1 Foundations of Value

•  Part2 Core Valuation Techniques

•  Part3 Intrinsic Value and the Stock Market

•  Part4 Managing for Value

•  Part5 Advanced Valuations Issues

•  Part6 Special Situations

Review of previous studied contents

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5

Contents







What is value In the context of valua3on and

in your life ?

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What is Value?

•  Value is defining dimension of measurement in a market economy.

•  Value is a particularly helpful measure of performance because it takes into account the long-term interests of all the stakeholders in a company,not just shareholders.

•  Competition among value-focused companies also helps to ensure that capital,human capital,and natural resources are used efficiency across the economy,leading to higher living standards for everyone.

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(P3)

Fundamental principles of corporate finance

Companies create value by investing capital to generate future cash flow at rate of return that exceed their cost of capital. (P17)

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Two core principles of value creation

•  The combination of growth and return on invested capital(ROIC) relative to its cost is what drives value. –  Companies can sustain strong growth and high returns

on invested capital only if they have a well-defined competitive advantage.

•  Conservation of value –  Anything that doesn't increase cash flow doesn't create

value. –  M・M theory

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(P4)

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Growth and ROIC:Drives of Value

Return on investment capital

Revenue growth

Cash flow

Cost of of Capital

Value

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Contents







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Part2 Core Valuation Techniques

6. Framework for Valuation 7. Reorganizing the Financial Statements 8. Analysand Performance and Competitive Position 9. Forecasting Performance 10. Estimating Continuing Value 11. Estimating the Cost of Capital 12. Moving from Enterprise Value to per Share 13. Calculating and Interpreting Results 14. Using Multiple

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Framework for DCF-Based Valuation

EXHIBIT 6.1 Model Measure Discount factor Assessment

Enterprise discounted cash flow Free cash flow Weighted average

cost of capital Works best for projects, business units, and companies that manage their capital structure to a target level.

Discounted economic profit Economic profit Weighted average

cost of capital Explicity highlights when a company creates value.

Adjusted present value Free cash flow Unlevered cost of equity Highlights changing capital structure more

easily than WACC-based models.

Capital cash flow Capital cash flow Unlevered cost of equity

Compresses free cash flow correctly because capital structure is embedded within the cash flow.Best used when valuing financial institutions.

Equity cash flow Cash flow to equity Levered cost of

equity Difficult to implement correctly because capital structure is embedded within the cash flow. Best used when valuing financial institutions.

(P104)

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Home Depot:Enterprise DCF

Forcaset year Free cash flow($ million)

Discount factor(@ 8.5%)

Present value of FCF

(& million)2009 5,909 0.922 5,448

2010 2,368 0.850 2,013

2011 1,921 0.784 1,506

2012 2,261 0.723 1,634

2013 2,854 0.666 1,9022014 3,074 0.614 1,889

2015 3,308 0.567 1,874

2016 3,544 0.522 1,852

2017 3,783 0.482 1,822

2018 4,022 0.444 1,787Continuing value 92,239 0.444 40,966Present value of cash flow 62,694

Midyear adjustment factor 1.041 Value of operations 65,291

Value of excess cash -Value of long-term investments 361Value of tax loss carry-forwards 112Enterprise value 65,764

Less:Value of debt (11,434)Less:Value of capitalized operating leases (8,298)Equity value 46,032

Number of shares outstanding(December 2008) 1.7 Equity value per share 27.1

Forecasting performance

Estimating Continuing Value

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Enterprise valuation of a multibusiness company

Unit A Unit B Unit C Corporate center

Value of operations

Nonoperating assets

Enterprise Value

Value of debt

Equity Value

Exhibit6.3 P106

Value of operating units

200

30

560

125

200

225

520

40

360

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Contents







Part3 Intrinsic Value and the Stock Market

15 Market value tracks return on invested capital and growth 16 Markets value substance, not form 17 Emotions and mispricing in the markets 18 Investors and managers in efficient markets

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Research Findings

•  Valuation levels for the stock market as a whole clearly reflect the underlying fundamental performance of companies in the real economy.

•  Companies with higher ROIC and those with higher growth are valued more highly in the stock market.

•  Over the long term(10 years and more), higher ROIC and growth also lead to higher total returns to shareholders(TSR) in the stock market.

•  Whether increasing revenue growth or return on capital will create more value depends on the company’s performance.

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Explaining markets returns over two centuries

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U.S equities over the past 200 years have on average achieved total returns to shareholders of about 6 ½ % annually, adjusted for inflation.

P339 exhibit 15.1

Understanding recent market movements

•  Identifying five more recent eras, each distinguished by different fundamental forces shaping the U.S. economy and stock markets.

20 P341 Exhibit 15.2

Understanding recent market movements

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The carefree sixties: 1960 to 1969

Real GDP grew at a health and stable 2.7% per year.

・Inflation was the driving force in the economy and the markets. The great inflation: 1968 to 1982

Return to normalcy: 1982 to 1996

。・Interest rates and inflation fell dramatically. ・As P/Es recovered, the S&P 500 index generated exceptional annual TRS of 16 % in nominal terms and 12% in real terms, more than double the 6 ½ % stock market return over the 200 years.

The technology bubble and burst 1996 to 2004

The S&P500 went from 741 in 1996 to 1527 in 2000 before falling back to 1112 in 2003.

Leveraging and credit crisis: 2004 to 2008

In mid 2007, a financial crisis started to unfold that would drive the world’s economy into its steepest downturn since the 1930s.

Value, ROIC and growth: Theoretical relationship

•  The relative market value of a company is determined by the company’s growth and its spread of ROIC over the WACC.

•  When rates of ROIC fall below the cost of capital, higher growth leads to lower valuations.

•  evidence of how ROIC and growth drive intrinsic company valuations can be derived from capital multiples than from earnings multiples.

22 P346 exhibit 15.4

Value, ROIC and growth: Evidence of actual relationship

•  Noting that industries with higher ratios of market value to capital have higher growth and/or higher ROIC driven by better margins and capital turnover.

•  Demonstrating that for any level of growth, higher rates of ROIC lead to higher market values, and above a given level of ROIC, higher growth leads to higher value.


Total Returns to Shareholders track performance against expectations

•  TRS are determined by performance against expectations, not absolute levels of performance.

•  Reported sales and margins were below the market’s expectations, prompting investors to anticipate lower returns in future.

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TRS, expectations, ROIC and growth: Theoretical relationship

•  By definition, the expected TRS always equals the company’s cost of capital, as shown in Chap3.

•  Realized TRS has the following key drivers. –  Initial expectations –  Realized return on capital and growth –  Changes in expectation

•  Over longer periods, TRS is not as strongly influenced by changes in expectations and more clearly linked to realized return on invested capital and growth relative to expectations at the start of the 10-year period.

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TRS, expectations, ROIC and growth: Evidence of actual relationship

•  Because of the interaction of performance and expectations, the fit between patterns of ROIC , growth, and TRS for different industries is not as close as the fit between those key value drivers and the ratios of market value to capital or market value to earnings.


TRS, expectations, ROIC and growth: Evidence of actual relationship

•  Over the long term, company’s with higher ROIC and growth do tend to deliver stronger returns to shareholders, although the role of investor expectations should not be underestimated.

•  Over the short term, the influence of expectations on shareholder returns is even greater and more likely to dominate ROIC and growth in influencing TRS for specific companies or sectors.

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Markets value substance, not form

•  Managers can go to great lengths to achieve analysts’ expectations of EPS or to smooth earnings from quarter to quarter.

•  Stock markets are perfectly capable of seeing the economic reality behind different forms of accounting information.

•  Since investors value substance over form, managers need not worry about whether their share are spilt into smaller shares, traded in one or many developed stock markets, or included in a large stock market index.

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The market does not care about earnings volatility

•  Recent research shows that ratios of market value to capital certainly are diminished by cash flow volatility, but not by earnings volatility.

•  Several years of steady growth interrupted by a sudden decline in earnings, For 460 of the companies, earnings fell in at least one year of the period studied.

30 P362 exhibit16.2

Markets dig beneath earnings announcements

•  Price falls occurred only when such failures stemmed form real changes in long term fundamental prospect.

•  Share prices do not rise if the market believes a positive earnings surprise is simply the result of some imaginative accounting.


Market reaction to Pharmaceutical product announcement

•  In the pharmaceutical industry, announcements about products under development can affect share prices far more than quarterly earnings announcement.

•  The academic literature offers evidence that firms consistently meet or exceed earnings expectations are more highly valued by the stock market and generate higher returns to shareholders.


Economics of accounting information: No mystery to the market

•  Share prices will move if information in the accounts reflects unexpected changes in underlying cash flows. –  Goodwill impairment –  Changing from LIFO to FIFO –  Option expensing

•  All managers should understand that markets can be mistaken or fooled for only so long.

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Different accounting standards do not lead to different values

•  The differences between net income and equity under U.S and local accounting standards were often quite large.

–  In more than half the cases, the gap was more than 30%.

•  As shown in exhibit16.5, even though 2/3 if the companies in our sample reported lower earnings following U.S. disclosure, the stock market reaction to their disclosure was positive.


Treatment of goodwill does not affect share price

•  The market realized that the accounting treatment of goodwill amortization does not affect cash flows.

•  In exhibit 16.7, we did not find a statistically significant drop in share prices on the day a write off was announced.

–  The markets had already anticipated the lower benefits from past acquisitions and had reduced the stock price by an average 35% in the six months preceding the write-off announcement.


Accounting for employee and management stock options is irrelevant to market value

•  As long as investors have sufficient information on the amount, terms, and conditions of the options granted, new expensing, rules will not drive down shares prices.


LIFO versus FIFO affects market values but not because of earning impact

•  Research shows that, as the DCF model would predict, switching from FIFO to LIFO in fact lift share prices because it increases cash flow.


Technical trading factors are irrelevant for value

•  This section provides examples of the negligible effects on value of three changes in form rather than substance. –  Stock splits –  Index inclusion –  Cross listing

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True impact of stock spilt

•  Rising share prices around the time of a stock split have nothing to do with the spilt.

•  The stock market reacts positively to stock spilt announcements because they signal higher future cash flows.

–  That is the substance that the market values.

39 P373 exhibit 16.10

Index membership does not matter to value

•  Our evidence showed, as fundamental valuation theory would predict, that in most cases, new entrants to the S&P 500 did not enjoy permanent price premiums, and the prices of companies excluded did not suffer over the long term.

40 P375 exhibit 16.11

Cross listing does not affect market value

•  For many years, many academic, executives, and analysts believed companies cross listing their shares on exchanges in the United States, London, and Tokyo, could realize a higher share price and lower cost of capital.

•  Such benefits may well have existed in the past before capital markets become more liquid and integrated, and investors more global.

41 P379 exhibit 16.13



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Why falling asset prices are problems?

Price

time

・Aが金融資産を100で購入。

・金融資産がバブルにより150まで上昇。・Aはもうあがらないと思い、B

に売却。 Bはまだあがると思い150で購

入。

・その後、バブルが崩壊し、資産価格が下落。・BはCに100で売却。

・Bは50の損。

A 100で取得 150で売却

B 150で取得 100で売却

C 100で取得

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Thinking time 1分その後、Discussion time　5分

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基本的には影響はない。ただのゼロサムゲーム。

購入価格売却価格損益

A 100 150 50

B 150 100 -50

C 100 0

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80年代後半のバブルの時代に、日本全体で借入を100兆円拡大して、20兆円の価値しかない土地を100兆円で買ったとしよう。・・・・・20兆円の価値しかないものを100兆円で買った人は大損だが、それを100兆円で売った人は大儲けである。日本全体では、バブルによって損も得もしていない(原田[2002])。

竹森俊平(2007)『経済論戦は甦る』日経ビジネス人文庫　P128より

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ただし、銀行がお金を貸し出し

ていなければの話だが・・・

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銀行が貸出をしているケース

Price

time

・Bが金融資産を150で取得するために、120の貸出を実施。・資産価格が下落したため、100のみ回収。

D銀行貸出120 回収100

A 100で取得 150で売却

B 150で取得

(30手金、120借入) 100で売却

C 100で取得

銀行貸出120

・金融資産を150で取得するため、120銀行から借入、30は手金を出す。

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銀行貸出がある場合のP/L

購入価格売却価格損益

A 100 150 50

B 150(手金30) 100 -30

C 100 0

貸出金額回収金額損益

D 120 100 -20

・銀行が損失を被る。・D銀行が似たようなローンを100本出している場合には、銀行の損失は20×100=2,000となってしまう。・レバレッジ比率が高い程(債務者の借入が多い程)、資産価格の下落時には銀行はより多くの損失を被る。

Patterns in mispricing

•  Individual company share price deviate significantly from the company’s fundamentals value only in rare circumstances.

•  Market wide price deviations from fundamental valuations are even less frequent, although they may appear to be becoming more so.

•  Price deviation from fundamentals are temporary(typically three years).

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Emotions rarely drive stock market values

•  When individual investors behave irrationally.

•  When systematic patterns of irrational behavior emerge among investors. –  overconfidence, overreaction, and overpresentation

•  When there are limits to arbitrage in financial markets. –  Transaction costs and risk

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Company mispricing: curve-outs

•  The price differential that appeared between 3Com and Palm shares after Palm was carved out of 3Com in March 2000.

•  Immediately after the Palm carve-out, the market capitalization of Palm was higher than the entire market value of 3Com, implying that 3Com’s other business had negative value.

•  Investors could not go short position in Palm and long in 3Com shares because the free float of Palm share was too small after the carve out to accommodate such arbitrage.


Company mispricing: dual listing

•  The shares of Royal Dutch Petroleum and Shell Transport & Trading(T&T) were traded separately on the Amsterdam and London stock markets respectively until 2005 although the two companies together formed a single group.

•  There have been prolonged periods of mispricing. •  LTMC was the victim of just such an occurrence.


Company mispricing: overreaction and underreaction

reversal and momentum

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Long-term reversal

Short-term momentum

The high performing stocks of the past few years typically become the low performing over the next few years.

When positive returns for stocks over the past several months are typically followed by several months of continued positive returns.

・Behavioral finance cannot explain why investors overreact and under come conditions and under react in others. ・The consideration of Fama would imply that managers should still make their decisions based on traditional DCF analyses and efficient market assumption.

Market mispricing: bubbles and bursts

•  Broader deviation are rare and short-lived, and the market usually corrects itself within a few years.

•  The high-tech and credit-fueled bubbles had similar impacts on key market indexes in both the United States and Europe.

•  The high tech bubbles was a valuation bubble, in which stocks are priced at earnings multiples that underlying fundamentals cannot justify. The credit bubble was not a valuation bubble but an earnings bubble.


High-tech bubble driving up market expectations

•  In 1999, the average top 30 company had a P/E of times, compared with an average of 23 times for the other 470 companies.

•  For every solid, innovative new business idea, there were dozen of companies that forgot or purposely threw out fundamental rules of economics.

•  The concept of network effects a variant of increasing returns to scale was a good example.


Credit bubble driving up corporate earnings

•  The 2007 market P/E was about 40% lower than in 2000 and broadly in line with the P/Es of the 1960s, when inflation and interest rates were at similar levels.

•  The extent of the bubble is best illustrated not by the price-earnings ratio but by the maket-to-capital ratio, which soared from a long term average of around 11/2 to 2 to well over 3.5 by 2007.


Financial and commodity sectors out of balance.


Underlying economic trends that contributed to accelerated earnings growth

•  Growth of Asian economies –  Large emerging economies had boosted global demand and

prices for oil, gas and other commodities.

•  Expansion of credit markets –  The global saving surplus and other factors such as innovative

financial instruments and loose monetary policy were pushing credit growth in developed economy.

•  Rise in housing prices –  Property prices soared, inflated by readily available credit.

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The implication of market efficiency for managers

•  Managers should focus on driving return on ROIC and growth to create maximum value for shareholders.

•  Managers need to understand their investor base, so they can communicate their company’s strategy for value creation effectively to different investor segments.

•  Managers should not be distracted from their efforts to drive ROIC and growth by any short-term price volatility.

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A model of the market

•  A simple model can illustrate how the interaction between investors with different strategies can result in the combination of volatile prices. –  Informed investors develop a point of view about the intrinsic

value of the company’s shares based on its underlying fundamentals, such as ROIC and growth, and then make rational buy and sell decision.

–  Noise traders do not care about intrinsic value and trade on any small event that may not constitute material new information.

–  Both type of investors invest in either the stock or the risk-free asset.

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Model of the stock market

•  Informed investors start buying shares because they believe the shares should be worth $40 to $60.

•  If the noise traders act not only on price movements but also on random, insignificant events, there will also be price oscillations within the band.

•  The trading range depends on informed trader’s transaction costs and their confidence in the reliability of their valuations.


Model of the stock market

•  Suppose that at time T the stock trades at $42, and the company announces the launch of a new product that no investors anticipated.

•  Two things change –  The informed investors revise their estimates of the company’s value to the

range of $60 to $80. –  They increase their individual trading ranges from 10 to 20 percent either side of

their intrinsic valuation because of their uncertainty about the prospects for the new products.


Some important aspect from the model

•  Share prices are roughly in line with intrinsic values, because informed investors ultimately set the price boundaries in the market.

•  The boundaries for share prices either side of intrinsic value are wider when there is more uncertainty about a stock’s valuation.

•  Share prices can be significantly volatile within the bounds set by informed investors even at times when no new information about a company has been revealed.

•  Price deviations beyond the boundaries set by information investors using intrinsic valuation occur only under rare conditions.

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Classification of investors

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The type of stock or indexes

Growth

Value

Investment strategy

Intrinsic investors

Traders

Mechanical investors

Classification by investment starategy

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Intrinsic investors

Traders

・taking positions in companies only after undertaking rigorous due diligence of their inherent ability to create long term value. ・holding 20 to 25% of institutional U.S equity.

・seeking profits by betting on short term movements in share prices, typically based on announcements about the company or technical factors. ・holding 30 to 35% of institutional U.S equity.

Mechanical investors

・Making decisions based on strict criteria or rules. ・controlling 35 to 40% of institutional U.S equity.

Intrinsic investors drive valuation levels

•  When intrinsic investors trade, they buy or sell in much larger quantities than traders or mechanical investors.

•  Intrinsic investors are the most important investor group for setting prices in the market.

•  Focusing on underlying fundamentals and driving the long-term share price toward intrinsic value.


Managerial implications

•  Focus on intrinsic value

•  Understand your shareholder to tailor investor communications

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Be cautious about deviations

•  Issuing additional share capital at times when the stock market is attaching too high a value to the company’s shares relative to intrinsic value.

•  Repurchasing company shares when the stock market underprices them relative to the intrinsic value.

•  Paying for acquisitions with shares instead of cash when the stock market overprices the shares relative to intrinsic value.

•  Divesting particular business at times when trading and transaction multiples in those sectors are higher than can be justified by underlying fundamentals.

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20130915 第5回valuation勉強会

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