Valuation Advanced Flashcards
How do you value banks and financial institutions differently from other companies?
Relative valuation company to company relative valuation, methodologies public comparables, and precedents are the same but the metrics and multiples are different
You screen based on assets or deposits, in addition to the normal criteria
Banks ability to generate profits and value of bank assets
Look at metrics like return on equity ROE return on assets, ROA and book value and tangible book value rather than revenue EBITDA and so on
Use multiples such as priced to earnings P/E price to book value P/BV price to tangible book value P/TBV rather than EV/EBITDA
How much investors are willing to pay?
Rather than a traditional DCF, you use two different methodologies for intrinsic valuation or the own financial performance and condition
Dividend discount model DDM if you see this run for the hills
Sum up the present value of a Banks dividends in future years and then add it to the present value of the banks terminal value, which is the value of the bank assets at the end of the forecasted. Basing that on a P/BV P/TBV multiple
Value of business beyond forecast. When FCF can be estimated NPV of all dividends holding.
In a residual income model excess return model, take the banks current book value and simply add the present value of the excess returns to that book value to value it
Return each year is
(ROE x book value) - (cost of equity x book value)
Basically, how much the returns exceeded your expectations
You need to use these methodologies and multiples because interest is a critical component of a banks revenue and because debt is a raw material rather than just a financing source
Also, banks book values are usually very close to their market caps
Raw Material meaning they use funds to create loans and other assets to generate income
BV balance sheet asset value
TBV balance sheet asset value minus intangibles and Goodwill
Walk me through an IPO valuation for a company that’s about to go public
Unlike normal valuations in an IPO valuation we only care about public company comparables
Step 2 After picking public company comparables, we decide on the most relevant multiple to use, and then estimate our companies enterprise value based on that
Step 3 Once we have enterprise value, we work backward to get to equity value and also subtract the IPO proceeds because this is new cash
This cash is generated from capital markets not operations
Step 4 Then we divide by the total number of shares old and newly created to get its per share price this is what the IPO is priced at
If we are using price to earnings or any other equity value based multiple in step two, then get to equity value instead and subtract IPO proceeds from there
I’m looking at financial data for a public company comparable and it’s April quarter2 right now walk me through how you would calendarize this company‘s financial statements to show the trailing 12 months TTM as opposed to just the last fiscal year?
So calendarization is the process of adjusting a companies, financial data and operating performance to align with the calendar year end date
Especially important for comparable company analysis when you want to compare financial data among different companies this method will ensure that the financial data from different companies can be analyzed on an apples to apples basis even if they have different fiscal year end dates
Formula to calendarize financial statements
TTM = most recent fiscal year + new partial period - old partial period
So take companies, Q1 numbers add the most recent fiscal years numbers and then subtract Q1 numbers from most recent fiscal year
So, if you’re looking at a company’s Q1 numbers, you would:
Take the most recent fiscal year’s financials.
Add the financials of the new partial period (e.g., the first quarter of the new fiscal year).
Subtract the financials of the old partial period (e.g., the first quarter of the most recent fiscal year).
This method ensures that you’re looking at a full year’s worth of data (12 months), which is helpful for making year-over-year comparisons without seasonal fluctuations or other short-term anomalies. It’s a common practice in financial analysis to get a clearer picture of a company’s ongoing performance. Remember to ensure that the data is aligned in terms of the accounting standards and practices used in the financial statements for consistency.
Imagine a company, Widget Inc., has a fiscal year that ends on September 30th. We want to calculate the TTM as of December 31st. Here’s the financial data we have:
Fiscal Year 2023 (ending September 30, 2023): $100 million in revenue.
Q1 Fiscal Year 2024 (October to December 2023): $30 million in revenue.
To calculate the TTM revenue as of December 31, 2023, we would:
Start with the full-year revenue for Fiscal Year 2023: $100 million.
Add the revenue for Q1 of Fiscal Year 2024: $30 million.
Subtract the revenue for Q1 of Fiscal Year 2023 (since it’s included in the full-year figure and we want the latest 12 months). Let’s say Q1 of Fiscal Year 2023 was $25 million.
US companies use quarterly numbers in the 10 Q international use interim reports
Walk me through M&A premiums analysis ?
Purpose of this analysis is to look at similar transactions and see the premiums that buyers have paid the sellers share prices when acquiring them
Example say a company is trading at $10 per share in the buyer acquires it for $15 per share. That’s a 50% premium.
First select precedent transactions based on industry date say past 2 to 3 years and size example over $1 billion in market cap
Second for each transaction get the sellers share price one day 20 days and 60 days before the transaction was announced. You can also look at even longer intervals or 30, 45 days
Third then calculate the one day premium 20 day, premium, etc. by dividing the per share price by the appropriate share prices on each day
Fourth get the medians for each set and then apply them to your companies‘s current share price share price 20 days ago, etc. to estimate how much of a premium a buyer might pay for it
Note only uses analysis when valuing public public companies because private companies don’t have share prices
Sometimes set of companies here is exactly the same as your set of precedent transactions, but typically it’s broader
Walk me through a future share price analysis?
Purpose of this analysis is to project what a companies share price might be one or two years from now and the discount it back to its present value
Step one get the median historical usually TTM P/E of your public company comparables
Step two apply this P/E multiple to your companies one year forward or two year forward projected EPS to get implied future share price
Step three then discount this back to its present value by using a discount rate in line with the companies cost of equity figures
You normally look at a range of P/E multiples as well as a range of discount rates for this type of analysis and make a sensitivity table with these as inputs
Both M&A premiums analysis and precedent transactions involve looking at previous M&A transactions. What’s the difference in how we select them?
All the sellers in the M&A premiums analysis must be public
Use broader set of transactions for M&A premiums might use fewer than 10 precedent transactions, but might have dozens of M&A premiums
Industry and financial screens are usually less stringent M&A premiums
Other criteria is similar financial industry, geography, and date
Walk me through a sum of the parts analysis?
Value each division of a company using separate comparables and transactions get to separate multiples and then add up each divisions value to get the total for the company
For example, manufacturing division with $100 million EBITDA an entertainment division with 50, million EBITDA and a consumer good division with 75 million EBITDA we’ve selected comparable companies and transactions for each division and the median multiples come out to 5X EBITDA, 8X for entertainment, 4 X for consumer goods
Calculation…
100 x 5X + $50 x 8X + $75 x 4X = 1.2
so 1.2 billion for companies total value
How do you value net operating losses NOL’s and take them into account in valuation ?
You value NOL’s based on how much they’ll save the company in taxes in future years deferred tax asset, (DTA) NOL times tax rate
Then take the present value of the sum of tax savings in future years two ways to assess
1 assume that a company can use its NOL’s to completely offset it’s taxable income until the NOLs run out so no taxes until NOL’s run out
2 acquisition scenario section 382 internal revenue code, multiply the adjusted long-term tax exempt rate by the equity purchase price of the seller to determine the Max allowed NOL usage in each year
Use that to figure out the effect to taxable income
Might look at NOL’s in a valuation, but you rarely add them in if you did, they would be similar to cash and you would subtract NOL’s to go from equity value to enterprise value and vice versa
Treated similar to cash due to their future, cash savings by reducing tax payments
I have a set of public company comparables and need to get the projections from equity research how do I select which report to use?
Varies by bank and Group
Report with most information
Reports with numbers in middle range
Not from own bank objective not subjective
I have a set of precedent transactions, but I’m missing information like EBITDA for a lot of companies. How can I find it if it’s not available via public sources?
Search online press releases articles
Equity research buyer around time of transaction for estimates around sellers numbers
CapiQ, fact set, disclosed numbers or estimates
How far back and forward do you usually go for public company comparable and precedent transactions multiples?
Trailing 12 months or last 12 months TTMLTM both sets
Look forward one or two years
Backward one or more years
Comps go forward more than two years
Precedents odd to go forward more than one year limited information
I have one company with a 40% EBITDA margin trading at 8XEBITDA and another company with a 10% EBITDA margin trading at 16 XEBITDA what’s the problem with comparing these two valuations?
No rule but misleading
Dramatically different margins
You will need more information
Screen based on margins remove outliers
Never try to normalize EBITDA multiples based on margins
EBITDA margin is the companies profitability as a percentage of total revenue higher EBITDA margin means more profitable
EBITDA/total revenue
EBITDA multiple is a valuation ratio lower EBITDA multiple could indicate a company is undervalued higher EBITDA multiple high expectations
EV/EBITDA
Screening means to filter or sort through a large amount of information
Walk me through how we might value an oil and gas company and how it’s different from a standard company?
My screen based based on metrics like proved reserves or daily production
R/P reserves/last year’s production
EBITDAX
Industry specific metrics use matching multiples
You could use unlevered DCF or net asset value model NAV
Take companies proved reserves assume they produce revenue until depletion, assign a cost to the production in each year and take the present value of those to value the company
Other complications
Oil and gas very cyclical
No control over the prices they receive
Companies use either full cost accounting or successful efforts accounting
Exploration expenses, treated differently
NAV Model value of entity assets
Value of assets - value of liabilities/number of outstanding shares
Walk me through how we would value a REIT real estate investment trust and how it differs from a normal company?
Similar to energy real estate is asset intensive and a companies value depends on how much cash flow specific properties generate
Look at price/FFO and price/AFFO per share
NAV model most common intrinsic valuation methodology
Assign a cap rate to the companies forward NOI and multiply to get value of its real estate
Adjust and add other assets
Subtract liabilities
Divide by share count
Get NAV per share
Compare to share price
Value properties by dividing net operating income NOI by the capitalization rate based on market data
Net operating income
Properties, gross income, - operating expenses, and property taxes
Replacement valuation is more common because you can actually estimate the cost of buying new land and building new properties
A DCF is a DCF might be useless, depending on what kind of company
