Valuation Slides Week4 2 - Multiples MPA
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Transcript of Valuation Slides Week4 2 - Multiples MPA
7/24/2019 Valuation Slides Week4 2 - Multiples MPA
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Valuation
MPA FIN 286
Alessandro Previtero
Slide Pack Week 4 Part 2
Relative Valuation
7/24/2019 Valuation Slides Week4 2 - Multiples MPA
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Today’s Content
I. Announcements:
•
Review session tomorrow.• Airthread case due Monday
II.
Glossary:
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/
datafile/variable.htm
III. Relative Valuation Approach
IV.
Boston Beer Case
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• Introduction•
Discounted Cash Flow (DCF) Models – Discount Rate – No Friction Model –
WACC (Weighted Average Cost of Capital) –
APV (Adjusted Present Value)• Multiples
•
Other topics: LBO’s, M&A, etc.
I. Company Valuation
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Multiples Approach
• There is a significant philosophical difference between discounted
cash flow and relative valuation. ! In discounted cash flow valuation, we are attempting to
estimate the intrinsic value of an asset based upon its capacityto generate cash flows in the future.
! In relative valuation, we are making a judgment on how muchan asset is worth by looking at what the market is paying forsimilar assets.
• The multiples approach is a relative valuation that is based on theidea that similar companies should be equally priced1. Identify a set of comparable companies
2.
Calculate a valuation metric to value the asset3.
Calculate an initial estimate of value4. Adjust the value to the special characteristics of the company
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Multiples Approach
A B C D E115 $40 $50 $100 $15V
30 $10 $15 $20 $5EBITDA
3.83 4 3.3 5 3MULTIPLE
Comparables
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Valuation Ratios
• Several ratios are used to value assets ! Equity (Stock Price) Multiples
! P/E! PEG!
MVE/BVE ! Enterprise Value Multiples
! V/EBITDA!
V/FCF! V/Sales! V/EBIT
• The choice of which ratio to use depends on the type of firm that isvalued, and the choice of comparables ! For mature companies, I like to use the V/EBIT ratio. Why?
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Choice of Comparables
• Good comparables should match the investment to be valued on
the characteristics that determine its value. ! For companies, characteristics include industry, cost structure,
capital structure, growth potential, life-cycle, presence orabsence of strategic/growth options, and others
! For real estate, important comparable characteristics includelocation, age, condition, etc.
! For power plants, important characteristics are demand forpower, efficiency (heat rates, etc.), technology, etc.
• No two investments are identical
! In every comps valuation you must assess the extent to whichthe differences across assets are likely to have a material effecton the valuation multiples.
! Operating Leverage (fixed costs relative to revenue) increasesinvestment risk
! Investments with higher operating leverage will experiencemore volatility in operating income in response to changes inrevenues
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•
You want to know whether Amazon is over- or under-valued usinga simple PE ratio approach.
• Information on forward PE ratios:
An example of trading multiples (1/2)
Source: Capital IQ
PE Oct 16, 2012 Amazon (AMZN) 156.53
Barnes & Noble (BSK) NM
Expedia (EXPE) 17.05
Ebay (EBAY) 19.34
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• But Amazon exhibits much more growth than the other companies
–
Consensus of 27% for average EPS growth over next 5 years – We could use instead the so-called PEG ratio:
• Information on forward PEG ratios:
An example of trading multiples (2/2)
Source: Capital IQ
PEG Oct 16, 2012
Amazon (AMZN) 4.16
Barnes & Noble (BSK) NM
Expedia (EXPE) 1.27
Ebay (EBAY) 1.35
100!
=
growth EPS Annual
PE PEG
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Multiples Approach and DCF
• The Multiples approach is a very rough approximation of the DCF
• Example: From DCF to P/E
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Assumptions
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Earnings
g r
FFCF
r
FFCF V
t t
t
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FFCF growing perpetuity
2.
FFCF ~ Earnings
3.
Comparable leverage
4. Comparable Risk ( r )
5. Comparable growth rate (g) g r N E
N V
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"
1
/
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Multiples: Example
• Company A is trading at a P/E multiple of 20, and company B is
trading at a P/E multiple of 30. Are shares of company B overpricedrelative to shares of company A?
•
No! Company B could have:1. higher FCF in the future (terminal value)2. same E but higher FCF (higher DA, lower Capex, better NWC
management, ")3. Higher leverage4. Lower risk5.
Higher growth rate
• In order to correct for these approximations, you need to adjust theP/E ratio ! Adjust P/E ratios using regression analysis ! run a DCF!
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•
Consider you want to value a home with 3,581 sq.ft. – One year old – Oversized lot –
Has swimming pool
• Information about recent transactions in same area (comparables):
An example of transaction multiples (1/2)
Source: Titman and Martin 2007, chapter 6
Comp #1 Comp #2 Average
Sale price $330,000 $323,000 n.a.
Square footage 3,556 4,143 n.a.
Selling price/sq.ft. $92.80 $77.96 $85.38Estimated value $332,317 $279,175 $305,746
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•
We need to adjust our estimates for distinctive features:
•
Question: how would you value a house using a DCF approach?
An example of transaction multiples (2/2)
Source: Titman and Martin 2007, chapter 6
Comp #1 Comp #2 Average
Estimated value $332,317 $279,175 $305,746
Adjustments
Plus lot premium $20,000 $20,000 $20,000Plus pool $15,000 $15,000 $15,000
Estimated market value $367,317 $314,175 $340,746
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•
Using raw multiples provides only a rough approximation of the truevalue of a company
•
As we have seen, sales growth rate, leverage, betas and othercompany-specific characteristics affect multiple ratios.
•
Solution " adjust multiples using specific company characteristics
1. Identify key drivers that affect multiples2.
Run Market- or Industry- wide regressions between multiplesand key drivers
3. Find predicted value of multiples ratio for your company
Adjusting Multiples (1/2)
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HOG Multiples Valuation
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•
Step #1 : Find Comparable Companies
• Step #2 : Get Financial and Operating Statistics forComparable Companies
•
Step #3 : Compute Weights for ComparableCompanies
• Step #4 : Find Trading Multiples for ComparableCompanies
• Step #5 : Apply Trading Multiples to HOG
• Step #6 : Use Regression Approach
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Multiples: Pros and Cons
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Multiples Approach
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P R O S
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•
You might prefer using DCF over Multiples when: ! The firm is relatively unique in its industry and there’s no good
comps ! You suspect a bubble or a panic or some other type of market
irrationality ! The firm operates in an industry with very few public firms so
there’s just not much comp data ! You believe you have superior information (e.g. CFs forecast)
•
You might prefer using Multiples over DCF when: ! If you have really good comps and you believe the market is
operating rationally ! If you have very little confidence in projections of future
performance ! If you’re trying to solely determine market value, or the amount
you could get in a sale of the asset or the price you’ll have to payto buy the asset
Multiples Vs DCF (1/2)
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•
In practice, we almost always use both methods andconsider both values
! I recommend doing the DCF first so that you can getan understanding of the business which will allow youto discern better comps for the relative value work
! Both the DCF value and the Relative Value measuresprovide important clues and information about the
value of the asset you’re working with, and providesomewhat of a check on each other (very important)
Multiples Vs DCF (2/2)
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Next Wednesday – Boston Beer Co. Case
• Group Assignment: 3-4 people
• Answer questions posted on Canvas
• Print a copy of your report to hand it in at the beginning of the class
• Be ready to answer questions in class.
•
Please use only the information provided in the case
•
For your convenience, I posted on Canvas an excel file with the maintables in the exhibits.
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