Introduction to valuation Fundamental Analysis

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Introduction to valuation Fundamental Analysis Powered By Docstoc
					         VALUATION PROCESS


 Introduction to valuation
 Estimating firm value with DCF model

 Value drivers in a DCF model

 Links between DCF model and the
market


April, 27 2006   Fideuram Investimenti SGR   1
                 Introduction to valuation
                      Valuation process


                       Analyzing links
                          between
                      VALUE and PRICE
                         of an asset


April, 27 2006            Fideuram Investimenti SGR   2
                  Introduction to valuation
   Misunderstanding about valuation:

 Valuation is useful                           Valuation models are
because markets are                              QUANTITATIVE so
     inefficient                              valuation is OBJECTIVE

            FALSE                                      FALSE
Valuation allows us to                            Valuation models
    use the market                              depend on the bias we
efficiency theory with                           put in the valuation
       skepticism                                      process
 April, 27 2006            Fideuram Investimenti SGR                3
                 Introduction to valuation
   Misunderstanding about valuation:
  Valuation provides a                       What matters is the
TIMELESS and PRECISE                        PRODUCT of valuation
   estimate of value                          NOT the PROCESS

                 FALSE                                FALSE
  Valuation models                        Valuation process help us
    imply making                          selecting right inputs and
 assumptions on the                          understanding value
       future.                                      drivers
April, 27 2006            Fideuram Investimenti SGR                4
                  Introduction to valuation
Links between fundamental analysis
and valuation process:


The relationship         This relationship              Deviations from
 between value                   is                     this relationship
 and underlying                                             MUST BE
                          STABLE OVER
financial factors                                         CORRECTED
                             TIME
    CAN BE
                                                        In a reasonable
   MEASURED
                                                           timeframe
 April, 27 2006             Fideuram Investimenti SGR                  5
  Estimating firm value with DCF
                  Two different options:


DCF valuation                                        Relative valuation


Relates the value                                     Relates the value of
of an asset to the                                    an asset looking at
 NPV of expected                                         the pricing of
 future cash flow                                     comparable assets

 April, 27 2006          Fideuram Investimenti SGR                           6
    Estimating firm value with DCF
DCF models: equity or firm valuation?

       Equity Value                                             Firm Value

 ∑t=1- n           =    CFe
                           t
                                                      ∑t=1- n       =      CFf
                                                                                    t


                       (1+ke)t                                          (1+wacc)
                                                                                 t


With                                                         With
Ke= Cost of Equity                                           WACC= Weighed Average Cost
                                                             of Capital
n= life of the asset
                                                             n= life of the asset
CFe= Cash flow to Equity
(ie. dividend)                                               CFf= Cash flow to Firm (prior
                                                             payments to debt-holder or
  April, 27 2006                 Fideuram Investimenti SGR   equity-holder)             7
 Estimating firm value with DCF
Value drivers in a DCF model:

•Sales growth

     •Profitability: EBITDA & EBIT margins

            •Cash flow generation: CAPEX
            spending
                  •Closing the DCF: WACC and
                  Terminal Value
 April, 27 2006         Fideuram Investimenti SGR   8
     Value drivers in a DCF model
Estimating Sales Growth:

Compare growth
 estimates with
 historical data   Make assumptions
                   on market growth
                   and market share
                     expectations

                                                Compare growth
                                                 estimates with
                                                analyst estimates
 April, 27 2006     Fideuram Investimenti SGR                   9
     Value drivers in a DCF model
Estimating Profitability:
                  EBITDA Margin

  Compare            Compare                       Compare
  estimates          estimates                    estimates
with historical         with                     with analysts
     data           competitors                  assumptions




 April, 27 2006      Fideuram Investimenti SGR              10
     Value drivers in a DCF model
Estimating cash flow: Capex spending
                  Capex Spending consist of

     Net CAPEX                          Non Cash Working Capital


CAPEX - Depreciation                                 investments in


“real” drain from                       inventories             Accounts
    cash flow                                                 receivables/
                                                                payables
 April, 27 2006          Fideuram Investimenti SGR                     11
     Value drivers in a DCF model
            Closing DCF: estimating WACC



 Cost of Equity                       +                   Cost of Debt


Ke= Rf+(Rp        x   Beta)      Credit profile LT Debt LT credit
                                (spread vs risk issued    line
                                     free)

 April, 27 2006               Fideuram Investimenti SGR                  12
    Value drivers in a DCF model
Closing DCF: estimating Terminal Value
                 Liquidation                                Stable growth
                    value                                     approach


  Assume the liquidation of                                Estimates the TV
  the firm at terminal year                                 as the PV of a
                                                           perpetual series
Find a reasonable multiple to
   apply at terminal year
(EV/Sales, EV/IC, EV/Ebitda)
April, 27 2006                 Fideuram Investimenti SGR                      13
International Business Machines Corp - DCF Valuation
                      2005         2006       2007       2008        2009       2010       2011       2012       2013       TV
Sales                    92,826     94,683     97,523    100,449     103,463    106,567    109,764    113,056    116,448 Cagr 02-05          2.7%
Sales Growth              -3.6%       2.0%       3.0%       3.0%        3.0%       3.0%       3.0%       3.0%       3.0%
Consensus                92,827     94,403        -          -                                                             I/B/E/S
Ebitda Margin             17.3%      17.7%      18.0%      18.0%      18.0%      18.0%      18.0%      18.0%       18.0%   Top Analyst
Consensus                 17.3%      17.7%       0.0%
Ebitda                   16,059     16,759     17,554     18,081      18,623     19,182     19,757     20,350     20,961 Cagr 02-05          4.0%
D&A                      (4,548)    (4,450)    (4,584)    (4,721)     (4,863)    (5,009)    (5,159)    (5,314)    (5,473)
D&A % of Sales            -4.9%      -4.7%      -4.7%      -4.7%       -4.7%      -4.7%      -4.7%      -4.7%      -4.7%
Consensus                  4.9%       4.7%
Ebit                     11,510     12,309     12,971     13,360      13,761     14,173     14,599     15,037     15,488 Cagr 02-05          5.1%
Ebit Margin               12.4%      13.0%      13.3%      13.3%       13.3%      13.3%      13.3%      13.3%      13.3%
Tax Rate                  36.0%      36.0%      36.0%      36.0%       36.0%      36.0%      36.0%      36.0%      36.0%
NOPAT                     7,367      7,878      8,301      8,550       8,807      9,071      9,343      9,623      9,912

Capex                    (4,767)    (5,701)    (6,635)     (6,834)    (7,039)    (7,250)    (7,468)    (7,692)    (7,923)
Capex/Sales                 5%         6%          7%          7%        7%          7%        7%          7%        7%
                                                                                                                            Capex/Sales
CTO                        1.30       1.30       1.30       1.30        1.30       1.30       1.30       1.30       1.30    Capital Turn
Invested Capital         67,132     68,383     70,434     72,547      74,724     76,966     79,275     81,653     84,102 Cagr 02-05          2.6%
Roic                      11.0%      11.5%      11.8%      11.8%       11.8%      11.8%      11.8%      11.8%      11.8%
UFCF                      7,149      6,627      6,250      6,437       6,630      6,829      7,034      7,245    175,667

WACC                       7.2%                                                                                         Terminal Value
Theor. WACC                7.2%                                                                                            EV/IC              2.00
                                                                                                                        Roic-Wacc              5%
                                                                                                                        EV/Ebitda             8.0
Target EV              $136,502                                                                                         EV/Sales             1.44
Target EV/Sales           1.47
Target EV/Ebitda          8.50                                                                                          FCF Perpetuity
Target EV/IC              2.03                                                                                                             177,679
Net Debt per Share
Per Share Value
                            $8
                           $78
                                                 Value                     drivers                                      EV/Ebitda
                                                                                                                        EV/IC
                                                                                                                                               8.5
                                                                                                                                              2.11
UP/Downside               0.7%                                                                                          Terminal g            3.0%




     April, 27 2006                                      Fideuram Investimenti SGR                                                    14
     Links between DCF and market
                  Focus on profitability

                 ROIC                                         ROE

         Ebit (1-tax rate)                                 Net Income
        Invested Capital                                  BV of Common
                                                             Equity

Efficiency in generating profits                         Profitability for an
      from invested capital                               equity investor

April, 27 2006               Fideuram Investimenti SGR                      15
      Links between DCF and market
Focus on profitability: decomposing ROE


ROE = Net Profit Margin x Leverage x Asset Turnover
                  shows the links with



Value Drivers in a DCF                              Market price
        model                                            via
                                                   P/Book multiple
 April, 27 2006        Fideuram Investimenti SGR                     16
Links between DCF and the market
   Linking ROE and P/Book starting from a DDM
          model (stable growth company)

   P0= DPS1                           and                     ROE=   EPS1
             Ke - gn                                              BV Equity0
                       Price/Book = (ROE – gn)
                                                                     For a complete
                                                                     calculation see:
                                               (Ke – gn)             A. Damodaran -
                                                                       Investment
                       gn= growth rate in dividends (perpetual)         valuation –
                                                                      WileyFinance
                                                                         (2002) –
                       Ke= Cost of Equity                               chapter 19


April, 27 2006                    Fideuram Investimenti SGR                      17
         VALUATION PROCESS
                   CONCLUSION
   Higher the discipline building a valuation process,
better the quality of results
   A DCF model give you a comprehensive picture of
firm value
   Focus the attention on few value drivers (sales
growth, margins and cash flow)

   Analyse profitability to find links between valuation
model and market price
April, 27 2006         Fideuram Investimenti SGR          18

				
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