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

• Google

– 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