Today’s Goal
• Equip and inspire you to participate more fully in the Investment Club
• Evaluate companies for Stock Reports
– Post reports on the website
• Valuation practice for you
• Something tangible to show for your work
• Good exposure for the club
Tulane’s Model
• BurkenRoad reports
– Short Report, Long Report
– Mutual Fund: HYBUX
• Make stock recommendations
– If you pick interesting stocks, recommendations are less important (market perform)
Interesting Stocks
• 3D Systems Corp: 3D printers
– TDSC
Interesting Stocks
• American Technology Corporation: Laser Sound
– ATCO
Interesting Stocks
• TurboChef Technologies: Superfast Toasters
– OVEN
Small Firms Have Little Coverage
Stock Reports
• The club should build a template that everyone should follow
– Looks professional
• Discussion of business, effects of current events, lists accounting information and forecasts
• Valuation and maybe a price target
• Recommendation
Sources of Information
• Company’s website: MD&A in 10K
• Goizueta Resources
– Business Insights: Industry level information
– Thomson One: good charts
– Hoovers: List of competitors
– Investext: Actual analyst reports
– Bloomberg: Beta
– S&P’s NetAdvantage: IDK
• http://business.library.emory.edu/eresources/title/index.php
Valuing Firms
• Simple method based on similar firms
– Easy to understand
• Can learn quickly
– Not emphasized much in class
• Based on rule of thumb rather than theory
Valuing Firms Using Comps
• A group of similar companies are identified for the basis of comparison with the company being valued.
• Key financial multiples are calculated for these companies and then used for valuing the company in question.
• Motivation
– Similar companies should have similar value.
• Benefit:
– Ease of use
• Drawback
– Values obtained are crude measures
P/E
• Price divided by earnings per share
– How much are investors willing to pay for each dollar of earnings?
• Measure of growth
How much is Google Worth
• Yahoo
– Price $27.36
– EPS 0.79
– P/E 34.68
P = (P/E) * E
– EPS 7.88
P = (P/E) * E P = (34.68) * 7.88 = $273.28
P = $479 P/E = 60.86
Key Valuation Multiples
• Price / Earnings
• Price / EBIT or EBITDA
• EV / EBITDA
– EBIT = Earnings Before Interest and Taxes,
• Income from operations before the effects of the financing and taxes
– income independent of capital structure
– EBIT is measure of Operating Income
– EBITDA = Also before Depreciation and Amortization
• Measure of Operating Cash Flow
– Enterprise Value = Stock Value + Net Debt + Pref. + Minority Interest
• Includes all forms of capital
What’s a Minority Interest
• Search “minority interest” in yahoo:
Steps for Comparable Analysis
• Determine the peer group (your comps universe)
• Gather the appropriate financial information
• Enter the financial information into your spreadsheet
– normalize for non-recurring items
• Calculate relevant historical or forward multiples (P/E; EV/EBITDA)
• Forecast your company’s future financial performance (EBITDA, EPS, Cash Flow, etc.)
• Apply appropriate multiples to your company’s financial stats and derive implied valuation range
Finding Comps
• “Comparable” or “similar” in terms of:
– Operations
• Products / services; distribution; costs structure; geography; interest exposure; customers, etc.
• Financial Aspects
– Size (sales, mkt cap); capital structure; margins / profitability; management experience, etc.
• You are probably better off to not exclude the comps that are different but use them to explain different relative valuation
– Use the average (or median) multiples as the benchmark
Issues
• Subjective nature and process
– How do you asses differences in the operations and financial aspects?
– Do you assess intangible differences such as brand equity, reputation or management expertise?
• What is the appropriate number of comps?
• Selection may be more art than science
– Use judgment
– Or Hoovers
Alternative Multiples
• Multiples will vary by industry
– Retail: EPS, PEG
– Industrials: EBITDA, EPS
– Internet: Revenues, Subscribers, Page views
– Banks/Financial institutions: EPS, Book Value
– REITS: Funds from operations, Net asset value
• Use forward multiples if possible
– Projected EBITDA, EPS
Spreadsheet
