Presentation Transcript

1. Module 3: Market Multiple Valuation Using JOY

   Thomas Maguire 1/24/2014
2. Intro to Market Multiple Valuation VERY rough estimate of value Stock screening or summary metrics Though, not subjective input as in other value indicators SFAS 142 recognizes market multiple valuation
3. Intro to Market Multiple Valuation (Cont.) Basic Equation Value= Summary Performance Measure X Market Multiple What value is being produced? Enterprise Value or Equity Value Depends on summary performance measure Additional step if we have estimated enterprise value Equity Value Multiples More Commonly Used Investors interested in equity Not familiar with enterprise operations Flaws in using direct equity value estimators
4. 5 Steps to Using Market Multiples Select summary performance measure for abasis of valuation EPAT, NEA, Earnings, Book Value Current or Forecasted Select comparable companies Compute market multiple from the comparable companies' market values and performance measures Combine these into a single market multiple Simple Average, weighted average, value weighted average Compute the target company’s value by using its performance measure and the calculated market multiple If using an enterprise performance measure have to bring computed enterprise value to equity value…
5. Transitioning from Enterprise to Equity Value From Enterprise Value, we must: Subtract the value owed to the debt holders Book value of debt is a good proxy, often similar to fair value Divide by shares outstanding to obtain equity value per share If we had used an equity performance measure: We simply divide by shares outstanding to get equity value per share If we used a per share performance measure, no division needed
6. Market Multiple Valuation Using JOY Comparable companies chosen Komatsu John Deere Caterpillar Concerns- Komatsu- Foreign currency Acceptable to use because this is a ratio based analysis and will still hold true John Deere- Farming business Though they have a different product mix, companies track nicely and have many of the same drivers Differing year ends Lack of comparability VS. Complication of process
7. Valuation Using Balance Sheet Multiples
8. Net Enterprise Asset Multiple Computed as Enterprise Value Divided by NEA Take competitor average and multiply by JOY NEA to get estimated Enterprise Value Then take Amount owed to debt holders (NFL) from estimated Enterprise Value to get Equity Value Divide by shares outstanding to get the per share value of common equity based on NEA multiple
9. Net Enterprise Asset Multiple
10. Net Enterprise Asset Multiple Implied Equity Value of $51.50/ share Current Market Price of $55.03 Suggests Overvaluation
11. Book Value of Equity Multiple Commonly cited as price to book ratio Computed as Market Value of Equity divided by the Book Value of Equity Take competitor average and then multiply by the book value of equity Gives us an estimate of equity value so no further adjustment needed
12. Book Value of Equity Multiple
13. Book Value of Equity Multiple Implied Equity Value of $59.48 Current Market Price of $55.03 Suggest undervaluation
14. NEA VS. BV of Equity Multiples The NEA and BV of Equity Multiple methods provide strikingly different results Choice of comparable More to come later NEA Market Multiple (Suggesting Over-Valuation) is likely more reliable Financial risk (Capital Structure) not reflected More to come later
15. Valuation Using Income Statement Multiples
16. Enterprise Profit After Tax Multiple Computed as Enterprise Value Divided by EPAT Take competitor average of the multiple and then multiply by EPAT Yields Enterprise Value so we must back out Value owed to debt holders (NFL) to get equity value
17. Enterprise Profit After Tax Multiple
18. Enterprise Profit After Tax Multiple Implied Equity Value of $46.42 Current Market Price of $55.03 Suggest Major Over-Valuation Alternative EPAT from sales Omits Special charges- Joys case, Asset Impairments, loss from discontinued operations
19. Net Income Multiple Computed as Equity Value Divided by Net Income Take competitor average of the multiple and then multiply by net income Yields an Equity Value so no further adjustment needed
20. Net Income Multiple
21. Net Income Multiple Implied Equity Value of $46.79 Current Market Price of $55.03 As with EPAT Multiple, suggests major over-valuation
22. Comprehensive Income Multiple Not often done in practice Comprehensive income includes additional factors that reflect economic activities of the firm Go directly into equity rather than on income statement under accounting standards Could introduce volatility to income Computed As Equity Value Divided by Comprehensive Income Take competitor average of the multiple and then multiply by JOY Comprehensive Net Income Yields an Equity Value so no further adjustment needed
23. Comprehensive Income Multiple
24. Comprehensive Income Multiple Implied Equity Value of $38.54 Current Market Price of $55.03 Again, major over-valuation Though, this large difference from estimates based on EPAT and NI shows why CI multiple is not often used Huge differences across effect of CI at different firms
25. Price-to-Sales Multiple Often used multiple Computed as Enterprise Value Divided by Sales Take competitor average of the multiple and then multiply by JOY sales number Yields Enterprise Value so we must back out Value owed to debt holders (NFL) to get equity value Used as a measure of enterprise value because sales is the driver of value available to both debt and equity holders
26. Price-to-Sales Multiple
27. Price-to-Sales Multiple Implied Equity Value of $52.98 Current Market Price of $55.03 Suggests moderate over-valuation of the stock at current pricing levels Must use caution with Sales Multiple Companies may have different cost structures with competitors Often used instead of income based multiples Company being valued is negative income stage and multiple of a loss does not help identify value Why are we evaluating a loss company?
28. Industry Based Multiple Some industries have specific performance measures related to characteristics of the industry that are closely watched by investors and analysts Retail Industry: Sales per Square foot Airline Industry: Rev, Exp, Profit per available seat mile Technology: R&D Multiple With our Farm and Construction Machinery industry we think: Enterprise Value divided by PP&E expenditure per year is a good metric PP&E expenditure is biggest item on statement of cash flows
29. PP&E Multiple Computed as Enterprise Value Divided by PP&E Take competitor average and multiply by Joy PP&E to arrive at estimated enterprise value Then take Amount owed to debt holders (NFL) from estimated Enterprise Value to get Equity Value Divide by shares outstanding to get the per share value of common equity based on NEA multiple
30. PP&E Multiple
31. PP&E Multiple Implied Equity Value of $29.07 Current market Price of $55.03 Suggests severe over-valuation of the stock at current pricing levels
32. Average of Multiple Implied Values Net Enterprise Asset Multiple Value- $51.50 Book Value of Equity Multiple Value- $59.48 Enterprise Profit After Tax Multiple Value- $46.42 Net Income Multiple Value- $46.79 Comprehensive Income Multiple Value- $38.54 Price-to-Sales Multiple Value- $52.98 Industry- PP&E Multiple Value- $29.07 Average of Measured Multiples- $46.40
33. Stock Recommendation With an average of measured multiples of $46.40 and a current market price of $55.03, a ratio analysis would seem to suggest that shares of JOY are severely overvalued At this point I recommend a SELL based on the multiple analysis We do need to keep in mind the weaknesses with these as discussed on the next slides and I look forward to a more in depth valuation in future weeks to determine true value
34. Discussion on Confidence in and Legitimacy of Multiples Method Confidence…. Very Low! Reasons: Method lacks in theoretical foundation Selection of comparable may be inaccurate Joy Global is much smaller than many of its competitors Different product mix Different geographic locations Performance measures chosen as basis for ratios may be unstable over time Market may be inefficient and not pricing the comparable correctly, would lead to faulty valuation using these incorrect assumptions If we believe the market is efficient why are we undertaking this analysis
35. Discussion on Confidence in and Legitimacy of Multiples Method Enterprise vs. Equity Multiples When possible always use enterprise multiples Eliminates noise and incomparability created by different leverage structures (debt to equity mix) across firms Three steps when implementing multiple method Use forward looking performance measure to come up with multiples Select companies with care Want to have as close as possible comparisons Use both Income Statement and Balance Sheet based valuation multiples