Notes on Valuation Approaches. Summer 2009 Dr. Keith M. Howe Scholl Professor of Finance DePaul University. Valuation Approaches. Methodologies. Discounted Cash Flow Analysis. Comparable Companies Analysis. Discounted Cash Flows (DCF) . Pros Widely accepted
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Dr. Keith M. Howe
Scholl Professor of Finance
Discounted Cash Flow Analysis
Comparable Companies Analysis
A DCF model has three parts:
Here we develop a base case model from Wall Street Research and CSFB projections
(1) 2004E not included in calculating NPV of cash flows.
($ in millions)
While simple Price/Sales has numerous pitfalls users must be aware of.
Although widely accepted, P/E has serious drawbacks.
Through the 90’s – Autozone’s EPS grew at a 25% CAGR.
The EBITDA multiple is a “cleaner” multiple, however it still misses the hurdle rate and investment required into the business.
Important here is that Value/Book defines how much the market is paying
for past investments.
Value/Book accounts for the investments made into a business and its future value creation potential. Profitability however is now ignored.
One more thing…..
Why are you trying to determine value?
Defining why you are performing a valuation has a direct effect on choosing a firm’s peers.
From our analysis what can you tell me about our company?
P/E – 2003(1)
EV/EBITDA – 2004(2)
(1) Source: First Call
(2) Source: Wall Street Research
Errors to note here PE is 2003, EV/EBITDA is 2004 and Market to book is not label. Remember you MUST match time periods.
V/C for S&P 500 Companies mismatched time periods
Display Example: Relative Valuation - Correct Time Periods
EV / 2004E EBITDA
P/E - 2004E
Source: I/B/E/S Estimate.
Market/Book – Current
Note: Value-to-Cost defined as a “real” market-to-book ratio. A Value-to-Cost ratio >1.0x implies that the market is expecting future profitable growth from the Company. Current value-to-cost ratio for the S&P 500 = 1.85x.
PX’s trading multiples are consistent with the market’s expectations for future performance.