20130721 第4回valuation勉強会

Valuation in FED
2013/7/21(Sun)
1

自己紹介
•  名前

•  所属
•  勉強会に参加したきっかけ

2

3
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
4

5
Contents

What
is
value

In
the
context
of
valua3on
and

in
your
life
?
6

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.
7
(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)
8

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
9
(P4)

10
Growth and ROIC:Drives of Value
Return on
investment capital
Revenue growth
Cash flow
Cost of of Capital
Value

11
Contents

12
Part2
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

13
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)

14
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 1,902
2014 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 1,787
Continuing value 92,239 0.444 40,966
Present 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 361
Value of tax loss carry-forwards 112
Enterprise 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

16
Part2

17
Part2

18
Growth and ROIC:Drives of Value
Return on
investment capital
Revenue growth
Cash flow
Cost of of Capital
Value

What is・・・
•  Enterprise Value?
•  Equity Value?
•  Value per share?
19

Moving from Enterprise Value to per Share
•  To determine enterprise value, add to the value of core operations
the value of nonoperating assets, such as excess cash and
nonconsolidated subsidiaries.
•  To convert enterprise value to equity value, subtract short-term and
long term debt, debt equivalent(such as unfunded pension
liabilities), and hybrid securities(such as employee stock options).
•  Finally, to estimate value per share, divide the resulting equity value
by the most recent number of undiluted shares outstanding.
20

21
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

When converting core operations to
enterprise value
•  Avoid double-counting
•  Evaluate interdependencies between the value of core
operations and the value of noncore operations assets.
22

Sample Comprehensive Valuation
23
P274 Exhibit12.1

Valuing non-operating assets
•  Although not included in operations, nonoperating assets
still represent value to the shareholder.
•  We must estimate the market value of each non
operating asset separately and add the resulting value to
the DCF value of operations to arrive at enterprise value.
24
Asset
debt
equity
Nonoperati
ng asset

•  Excess cash and marketable securities
•  Nonconsolidated subsidiaries and equity investments
–  For equity stakes between 20% and 50%, the equity holding in
the subsidiary is reported in the parent B/S at the investment’s
historical cost plus any reinvested income.
–  For equity stakes below 20%, the equity holding are shown at
historical cost on the parent’s B/S.
25
Asset
debt
equity
Nonoperati
ng asset

•  Publicly traded subsidiaries
–  If the subsidiary is publicly listed, use the market value for the
company’s equity stake.
•  Privately held subsidiaries
–  Simplified cash flow to equity valuation
–  Multiple valuation
–  Tracking portfolio
•  If you know when the stake was aquired, you can
approximate its current market value by applying the relative
price change for a portfolio of comparable stocks over the
same holding period.
26
Asset
debt
equity
Nonoperati
ng asset

Exhibit12.2
Philips Enterprise Value,October2008
27

•  Loans to other companies
•  Finance subsidiaries
•  Discontinued operations
•  Excess real estate
•  Tax loss carry-forwards
•  Excess pension assets
28
Asset
debt
equity
Nonoperati
ng asset

Valuing debt and debt equivalents
•  Remember, deduct only those financial claims
that are not incorporated as part of free cash
flow.
•  Be aware that not all financial claims have to be
reported on the B/S, so make sure to search the
footnotes carefully for undisclosed liabilities.
29

•  Debt
•  Highly levered companies
–  For distressed companies, the value of the debt
requires will be at a significant discount to its book
value and will fluctuate with value of the enterprise
•  Operating leases
•  Securitized receivables
•  Unfunded pension and other postretirement
liabilities
30
Asset
Debt

equity
Debt and
Debt
equivalents

•  Provisions
–  Ongoing operating provisions
–  Long-term operating provisions
–  Nonoperating provisions
–  Income-smoothing provisions don’t represent actual
future cash outlays
•  Contingent liabilities
31
Asset
Debt

equity
Debt and
Debt
equivalents

Valuation of equity using scenario analysis
32
P283 Exhibit12.5

Valuing hybrid securities and
minority interests
•  Convertible Debt and convertible preferred stock
–  Market value
–  Black-Scholes value
–  Conversion value
•  Employee stock options
–  The estimated market value from optional models
–  The exercise value approach
•  Minority interest
33
Asset
Debt

equity
Valuing hybrid
securities and
minority
interests

34
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

Estimating value per share
•  Assuming that you have used an option-based valuation
approach for convertible bonds and employee options,
divide the total equity value by the number of undiluted
shares outstanding.
35

36
Part2

Calculating and Interpreting Results
•  Even a carefully planned model can have
mechanical errors or errors in economic logic.
–  Learn the ins and outs of your valuation by changing
each forecast input one at a time.
–  Use scenario analysis.
–  A major caveat
37

Is the model technically Robust?
•  In the unadjusted financial statements, the balance sheet
should balance every year, both historically and in
forecast years.
•  In the rearranged financial statements, check that the
sum of invested capital plus nonoperating assets equals
the cumulative sources of financing.
•  Does the change in excess cash and debt line up with
the cash flow statement?
38

Is the Model economically consistent?
•  Are the patterns intended?
•  Are the patterns reasonable?
•  Are the patterns consistent with industry dynamics?
•  Is a steady state reached for the company’s economics by the end
of the explicit forecasting period?
39
(P298 Exhibit13.1)

Are the results plausible?
•  Once the model is technically sound and
economically consistent, test whether its
valuation results are plausible.
–  Compare your results with the market value.
–  Perform a sound multiple analysis
•  Chapter14 describes how to do a proper multiples
analysis.
40

Sensitivity Analysis
•  Assessing the impact of individual drivers
•  Analyzing trade-offs
–  Raising prices leads to fewer purchases, lowering inventory
results in more missed sales, and entering new markets often
affects both growth and margin.

41
(P299 Exhibit13.2)

Valuations Isocurves by growth and margin
42
(P300 Exhibit13.3)

Creating scenarios
43
Broad economics
conditions
Competitive
structure of the
industry
Financing
capabilities of the
company
Internal capabilities
of the company
How critical are these forecasts to the result?
Some industries are more dependent on
basic economic conditions than others are.
A scenario that assumes substantial increases in market
share is less likely in a highly competitive and
concentrated market than in an industry with fragmented
and inefficient competition.
Should the company raise equity if too much
debt is projected?
Necessary to achieve the business results
predicted in scenario

経営戦略全史
44
「この数十年間の経営戦略史をもっとも簡潔に語れば、『60年代に始まったポジショ
ング派が80年代までは圧倒的で、それ以降はケイパビリティ派が優勢』となりま
す。」
「『やってみなくちゃわからない、どんなポジションニングでどのケイパビリティで戦う
べきなのか、ちゃちゃっと試行錯誤して決めよう』というやり方です。」

Five
forces
45
Threat of
new entry
Bargaining
power of
suppliers
The degree of
rivalry among
existing
competitors
Pressure
from
substitute
products
Bargaining
power of
buyers
Because the five forces differ by industry and because companies within the
same industry can pursue different strategies, there can be significant
variation in ROIC across and within industries.

Can
companies
keep
their

compe33ve
advantages
over
3me?

46
The image of traditional sustainable competitive advantage
The image of a succession of temporal competitive advantage
入山章栄(2012)『世界の経営学者はいま何を考えているのか』英治出版 P71

Whether are the markets your company
belongs to competitive or not ?
How is your company’s positioning?
47

Key value drivers by scenario
48
Scenario1:If the new product is a top seller, revenue growth will
more than than double over the next few years.
Scenario2:If the product launch fails, however growth will
continue to erode as the company’s current products become
obsolete.

Example of a Scenario Approach to
DCF Valuation
49

Valuation by parts
•  Many companies have multiple business business units, each
comparing in segments.
–  Branded consumer products
–  Private-labeled production
–  Organic products
50

Consumer　Co: Valuation by segment
51

Creating business unit
Financial Statement
•  Corporate cost
–  The aggregate cost of human resource services provided by the corporate parent
can be allocated by the number of employees in each business unit.
–  Keeping the corporate center as a separate unit reveals how much of a drag it
creates on the company’s value.
•  Intercompany sales
–  To arrive at consolidated corporate results, accountants eliminate the internal
revenues, costs and profits to prevent double counting.
•  Reorganizing the financial statements with incomplete information
–  NOPLAT
–  Invested capital
•  Cost of Capital
–  To determine a business unit’s cost of capital, you need the unit’s target capital
structure, its cost of equity.
52

53
Part2

Using Multiple
•  A careful multiple analsis can be useful in making such forecasts
and the DCF valuations they generate more accurate.
•  Home depot’s higher multiple are due to unusually low current
earnings relative to expected long-term performance.
54

Three requirements
•  Using the right multiple
–  For most analyses, enterprise value to EBITA is the
best multiple for comparing valuations across
company.
•  Calculate the multiple in a consistent manner
–  Base the numerator and denominator on the same
underlying assets.
•  Use the right peer group
–  A set of industry peers is a good place to start.
55

Cash-flow based valuation formula
56
Value=
NOPLATt=1 1−
g
ROIC
"
#
$
%
&
'
WACC− g
Value=
EBITA(1−T) 1−
g
ROIC
"
#
$
%
&
'
WACC− g
Value
EBITA
=
(1−T) 1−
g
ROIC
"
#
$
%
&
'
WACC− g
From the equation, we can
see that four factors drive
the EV to EBITA multiple:
Ø  the company’s growth rate,
Ø  its return on invested capital,
Ø  the operating tax rate,
Ø  and the cost of capital.

Distribution of enterprise value to EBITA
57
The majority fall between 7 times and 11 times EBITA.
P316 exhibit 14.2

Why EV to EBITA,
not Price to Earnings?
58
(P317 Exhibit14.3)
How do you understand the following example?

Why EV to EBITA,
not Price to Earnings?
•  The P/E is affected by a company’s capital
structure, not just its operating performance.
•  Earnings include many non operating items,
such as restructuring charges and write-offs.
59

Why EV to EBITA,
not EV to EBIT
60
P318 exhibit14.4
•  Amortization is an accounting artifact that arises from
past acquisitions.
•  It is not tied to future cash flows, amortization will distort
an enterprise value multiple.

Why EV to EBITA,
not EV to EBITDA
•  Many practitioners use EBITDA multiples because depreciation is, strictly speaking, a noncash
expense, reflecting sunk costs, not future investment.
–  This logic does not apply uniformly.
•  For many industries, depreciation of existing assets is the accounting equivalent of setting aside
the future capital expenditure that will be required to replace the assets.
•  In certain situations, EBITDA scales a company’s valuation better than EBITA.
–  These occurs when current depreciation is not an accurate predictor of future capital
expenditures.
61
P320 exhibit14.5

Use forward-Looking Multiples
•  A company’s value equals the present value of future
cash flow, not sunk costs.
•  Empirical evidence shows that forward-looking multiples
are indeed more accurate predictors of value than
historical multiples are.
•  To build a forward-looking multiple, choose a forecast
year for EBITA that best represents the long term
prospects of the business.
62

Pharmaceuticals:
Backward and forward-looking multiples
63
P322 exhibit 14.6

Calculating the multiple in a consistent
manner
•  Enterprise value must include all investor capital but only
the portion of value attributable to assets that generate
EBITA.
–  As a general rule, any nonoperating asset that does not
contribute to EBITA should be removed from enterprise value.
•  Since excess cash and nonconsolidated subsidiaries do
not contribute to EBITA, they should not be included in
the numerator of an EV-to-EBITA multiple.
•  Since the minority stake’s value is supported by EBITA, it
must be included in the enterprise value calculation.

64

Enterprise Value multiples
and complex ownership
65P324 Exhibit14.7

Alternative Multiples
1.  Enterprise value to revenues
2.  PEG Ratios
3.  Multiple based on nonfinancial(Operational)
data
66

1. Enterprise value to Revenues
•  An enterprise-value-to-sales multiple imposes similar
growth rate, returns on incremental capital and operating
margins on the company’s existing business.
•  The EV-to-sales multiple is a function of ROIC and
growth as well as EBITA margin.

67
Value
Revenue
=
Value
EBITA
×
EBITA
Revenue

Revenue Multiple versus EBITA Margin
68
Enterprise Value/Sales
Every one-percentage-point increase in EBITA margin translates to
0.09 increase in the EV-to-sales multiple/

2. PEG Ratios
•  The enterprise-value-to-EBITA multiple will differ across companies
when projections of ROIC and growth differ.
•  To control for the variation in growth, analysts sometimes report a
price-to-earnings-growth(PEG) ratio.
69
Adjusted PEG Ratio=
Enterprise Value Multiple
100× Expected EBITA Growth rate

Specialty Retail:
Enterprise-Value-Based PEG Ratios.
70
•  Since the PEG ratio controls only for growth, companies with
higher ROICs should trade higher levels.
•  According to analyst estimate, Home Depot’s ROIC is expected
to exceed that of Lowe’s as the two companies recover from
the 2008 financial crisis.

PEG ratio estimation error
•  The PEG ratio has its own drawbacks that can leas to
valuation errors.
–  The PEG ration controls only for growth, not for ROIC.
–  There is no standard time frame for measuring expected growth.
–  PEG ration assume a liner relationship between multiples and
growth, such that no growth implies zero value.
71

3. Multiple Based on
Nonfinancial(Operational) data
•  In the late 1990s, numerous Internet companies went public with
merger sales and negative profits.
•  To overcome this shortcoming, academic and practitioners alike
relied on nonfinancial multiples, which compare enterprise value
with one or more non-operating financial statistics
–  Such as web site hits, unique visitors, or number of subscriber.
•  Two cautionary notes about using nonfinancial multiples
–  Nonfinancial multiple should be used only when they provide incremental
explanatory power above financial multiple.
–  Non financial multiples, like all multiples, are relative valuation tools.
72

20130721 第4回valuation勉強会

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20130721 第4回valuation勉強会