Valuation Flashcards
What are the 3 major valuation methodologies?
- Comparable companies
- Precedent Transactions
- DCF
Rank the 3 valuation methods from highest to lowest expected value.
Tricky. Generally:
- M&A Comps > Public Comps b/c of control premium
- DCF can go either way, depending on assumptions.
When would you not use a DCF?
- Unstable / unpredictable cash flows (startup)
- If debt / WC serve different purposes (i.e., banks don’t reinvest debt and have huge WC)
What other methods exist?
- Liquidation Valuation
- Replacement Value
- LBO Analysis
- SOTP
- M&A Premiums Analysis
- Future Share price Analysis
When would you use a Liquidation Valuation?
A bankruptcy scenario - see if equity will get anything. Also used to advise struggling businesses on whether it’s better to sell assets piecemeal or entirely.
When would you use SOTP?
When advising firms with multiple, disparate businesses - conglomerates like GE. Can’t use same set of comps for the whole company.
When do you use an LBO Analysis as part of your Valuation?
When contemplating an LBO, or establishing what a PE sponsor could pay, which tends to be lower than waht companies will pay.
VALUATION FLOOR.
What are the most common Valuation multiples?
EV /
- Revenue
- EBITDA
- EBIT
P/
- EPS
- BV per share
When using an industry-specific multiple, why do you use EV rather than Equity Value?
Because those resources (i.e., scientists) are available to all investors.
Would an LBO or a DCF give a higher valuation?
LBO, because it generally sets the floor.
How would you present the various Valuation methods to a company / investors?
“Football field” chart displaying the valuation range implied by each method.
How would you value an apple tree?
Same as a company:
- Look at comps (relative valuation)
- Value of its cash flows (e.g., apple sales)
Why can’t you use Equity Value / EBITDA?
Consistency - numerator is going to equity but denominator to equity and debt.
When would a Liquidation Valuation produce the highest value?
Company has lots of hard assets that are severely undervalued by the market. Very rare.
How would you value pre-profit, pre-sales Facebook?
A tech multiple, such as EV / Scientists or page views, derived from comps.
What would you use in conjunction with FCF multiples - Equity Value or EV?
DEPENDS:
- Unlevered FCF: EV
- Levered FCF: Equity Value
Would you ever use Equity Value / Revenue?
Very rarely, if looking at large financial institutions with lots of cash and negative EV. Would probably be using P/E or P/BV instead.
How do you pick comps?
Similar: - Industry - Size, growth, risk, amrgins - Geography For M&A, consider time frame.
How do you apply the 3 valuation methods to actually get a value?
Take the median multiple of a set and multiply by the relevant metric from the company. To make a football field, use the min, median and max (maybe 25th/75th).
What do you actually use a valuation for?
in pitches and client presentations to inform the client of what they should expect.
Also used in Fairness Opinions.
Uses - defense analyses, merger models, LBO models, DCFs.
Why would a company with similar growth and profitability to its Comps be valued at a premium?
Could be less risky, could be much larger.
Canned answers:
- Recently beat earnings exp. and stock popped
- Non-financial competitive advantage (IP)
- Won a big lawsuit
- Market leader and has more market share
What flaws are there with public company comps?
- no company is 100% comparable to another
- Stock market is emotional
- Stock prices for small, illiquid companies may be inaccurate
How do you account for a company’s competitive advantage in a valuation?
- Use 75% multiple instead of median
- Add a premium to multiple
- Use more aggressive projections
When might M&A Comps produce a lower multiple than Public Company Comps?
Mismatch between M&A market and public market - only small, private companies have been acquired with low valuations.
What are some flaws with M&A comps?
- Not 100% comparable
- Data is harder to get
Two companies have the exact same financial profile and are bought by the same buyer, but the EBITDA multiple for one is twice the other - how?
- One process was more competitive - more bids
- One company was acquired at a discount - recent bad news, depressed stock
- Industries with different median multiples
Why does Warren Buffett prefer EBIT multiples to EBITDA?
By including D&A, EBIT accounts for capex.
EV / EBIT, EV / EBITDA and P / E multiples all measure a company’s profitability. What’s the difference between them, and when do you use each?
P/E - depends on capital structure, others are CAPITAL STRUCTURE-NEUTRAL. Use P / E for banks and other financials where interest PMTs are critical.
EV / EBIT - includes D&A, so better in industries with large/important capex. Reverse is true for EBITDA.
If you’re buying a vending machine business, would you pay a higher multiple if you (i) owned and depreciated the machines, or (ii) if you leased them? D&A = lease expense.
Leasing, because EBITDA would be lower due to inclusion of expense in SG&A.
How do you value a private company?
Same as a public company, but perhaps with an illiquidity discount.
Can you use private companies as part of your valuation?
Only for M&A comps. Can’t use for public comps.
How do you value banks and financial institutions?
Relative Valuation - same methods, different inputs:
- Screen based on assets/deposits
- Look at ROE, ROA, BV or Tangible BV
- Use P/E, P / BV and P / TBV
Intrinsic valuation:
- DDM
- Residual Income Model (BV + Excess Returns)
Walk me through an IPO valuation.
- Only care about public company comps
- Decide on multiple and estimate EV
- Reverse engineer Equity Value and subtract IPO proceeds (“new cash”)
- Divide by total number of shares (old and new) to calc. share price.
How would you calendarize a company’s F/S to show LTM numbers?
Add latest FY numbers to latest period (e.g., FQ) and subtract the relevant period from the prior FY.
Walk me through an M&A premiums analysis.
- Select precedent transactions
- For each, get seller’s share price 1 day, 20 days and 60 days before announcement.
- Calculate premiums for each period: divide purchase price per share by relevant share price.
- Get medians for each set and apply to my company’s share price (current, etc.) to estimate a plausible premium.
Walk me through a future share price analysis.
- Get median P/E of public comps
- Apply to copmany’s 1y/2y forward projected EPS to get implied future share price
- Discount back to PV using Ke
Both M&A premiums analysis and precedent transactions involve looking at previous M&A transactions. What’s the difference in how we select them?
- Sellers in M&A premiums must be public
- M&A premiums involves broader set of deals
- Otherwise, screening criteria are similar - financial, industry, geography and date
Walk me through an SOTP analysis.
Value each division of a company using separate comps and transactions, get to separate multiples and then sum of each divisional total for company.
How do you value NOLs and account for in a valuation?
As the PV of sum of future tax savings:
- Assume company can use NOLs to completely offset taxable income until NOLs expire
I have a set of public company comps and need to get the projections from equity research. How do I select which report to use?
Can either:
- Pick report w/ most detailed info, or
- Pick report w/ numbers in the middle of the range.
I have a set of M&A comps but I’m missing EBITDA for many - how can I find if not available via public sources?
- Search online - press releases or articles
- Look in equity research for the buyer around time of transaction and see if analysts estimate seller’s numbers
- Look at Cap IQ / FactSet
How far back and forward to we usually go for public company comps and M&A comps?
Check TTM for both and look forward 1y / 2y.
I have a company with a 40% EBITDA margin trading at 8x EBITDA and another with a 10% EBITDA margin trading at 16x. What’s the problem comparing these?
Can be misleading to compare cos. with widely differing margins. Consider screening based on margins.
Walk me through how we might value an O&G company and how it’s different from a standard company.
Comps (both) will be similar, but:
- May screeen on metrics like Proved Reserves or Daily Production
- Look at EBITDAX and other industry multiples
Walk me through how we would value a REIT and how it differs from a normal company.
Like energy, asset-intensive and company’s value depends on how much cash flow specific properties generate.
- Look at Price / FFO per share, Price / AFFO
- Value properties: NOI / Capitalization Rate
- Replacement Valuation is more common (easier)
- DCF could be useless.
