Module 5: Valuation Using Forecasts of Cash Flows Mairin Talerico
Snapshot of Toyota Limited liability, joint-stock company incorporated under Commercial Code of Japan; started in 1930s Primarily in automotive industry, but also financial services and others Sold 9.98 million vehicles in fiscal 2013 Sell in 170 different countries and regions Primary markets: Japan, North America, Europe and Asia
Return on Enterprise Operations Use average NEA for current and prior year since we do not know actual timing of investments *Note: Forecasting discussed later will use ending NEA
Breaking Apart RNEA Could be one-time items skewing comparison differences EPM indicates profit generated by each dollar of sales (profitability) EATO indicates the sales generated by each dollar of NEA (efficiency)
Breaking Apart RNEA EPM is changing significantly year to year, and EATO is relatively stable due to one-time items.
Competitors’ RNEA Break-down Toyota 2013 EPM = 5.80%, EATO = 1.36 EPM of Toyota is toward the upper spectrum of the range, and EATO of Toyota is within the range as well. GM seems to be outlier for EATO.
Parsimonious – Revenues Assume 3.68% ***Predicted industry growth = 2.4% Avg(Toyota average + prediction) = 3.68%
Parsimonious – EPM (from Sales) Assume 1.58% Toyota average = 1.58%
Parsimonious – EATO Assume 1.40 Toyota average = 1.35, heading upward so,
Parsimonious Assumptions Sales growth rate 3.68% Enterprise profit margin (EPM) 1.58% Enterprise asset turnover (EATO) 1.40
Industry Analysis • GM, Ford, and Honda were not sufficient to gather appropriate info in each category consistently on Toyota • Revenue is unique makeup for each firm of both car revenue and financing revenue • Hard to predict future of sales due to macro effects on economy • Consumer disposable income, price of gasoline, future of “green” cars and energy
Assumptions for Toyota Sales growth rate 3.68% Enterprise profit margin (EPM) 1.58% Enterprise asset turnover (EATO) 1.40
Valuing Toyota Forecasts of FCF for 2014-2018 Negative FCF due to EPAT increasing at a slower rate than NEA is increasing
Changing Assumptions for Positive FCF Fairy easy to do… shows the sensitivity of the analysis of FCF Forecasting • Sales growth rate 3.25% • Enterprise profit margin (EPM) 2.50% • Enterprise asset turnover (EATO) 1.40
Changing EATO • Sales growth rate 3.68% • Enterprise profit margin (EPM) 1.58% • Enterprise asset turnover (EATO) 2.25