Equity Valuation. Models from Leading Investment Banks. Jam VkMg Thorsf en Poddig. John Wiley & Sons, Ltd. Edited by

Transcription

1 Equity Valuation Models from Leading Investment Banks Edited by Jam VkMg Thorsf en Poddig John Wiley & Sons, Ltd

2 Contents Foreword Preface xiii xvii Acknowledgments - xxiii Abbreviations xxv Part I Discounted Cash Flow (DCF) Models 1 Jan Viebig and Thorsten Poddig 1 Introduction 3 2 The Fundamental Value of Stocks and Bonds 5 3 Discounted Cash Flow Models: The Main Input Factors Analytical balance sheets and free cash flow discount models The dividend discount model The free cash flow to the firm (FCFF) model Stirling Homex: why cash is king! FCFF during the competitive advantage period Weighted average cost of capital (WACC) Terminal value calculation 45 References 49 Part II Monte Carlo Free Cash Flow to the Firm (MC-FCFF) Models (Deutsche Bank/DWS) 53 Jan Viebig and Thorsten Poddig 4 Introduction 55 5 Standard FCFF Model Net revenues Cost structure and operating income 63

3 Equity Valuation 5.3 Reconciling operating income to FCFF The financial value driver approach Fundamental enterprise value and market value Baidu's share price performance Monte Carlo FCFF Models Monte Carlo simulation: the idea Monte Carlo simulation with Risk Monte Carlo simulation with one stochastic variable Monte Carlo simulation with several stochastic variables Disclaimer 103 References 105 Part ni Beyond Earnings: A User's Guide to Excess Return Models and the HOLT CFROI Framework 107 Tom Larsen and David Holland 7 Introduction From Accounting to Economics - Part I From Economics to Valuation - Part I Where Does Accounting Go Wrong? From Accounting to Economics: CFROI The basics Return on net assets (RONA) or return on invested capital (ROIC) Return on gross investment (ROGI) Cash flow return on investment (CFROI) CFROI adjustments using Vodafone's March 2005 annual report Gross investment Non-depreciating assets Project life Gross cash flow CFROI calculation for Vodafone A comment on goodwill 141 [ 12 From Accounting to Economics: Economic Profit The basics Caveats EP adjustments using Vodafone March 2005 annual report Balance Sheet Net operating profit after tax (NOPAT) Economic profit EP or CFROI? 154

4 Contents 13 From Economics to Valuation - Part II General rules 13.2 Market value added 13.3 CFROI 13.4 A word on debt 13.5 Valuation CFROI valuation: general framework Understanding project returns The residual period CFROI residual period approach Economic profit valuation: general framework Valuation of Vodafone EP or CFROI? A final word Appendix 1: Vodafone Financial Statements and Relevant Notes for CFROI f Calculation 175 Appendix 2: Additional Notes from Vodafone Annual Report for EP Calculation 185 References 191 Part IV Morgan Stanley ModelWare's Approach to Intrinsic Value: Focusing on Risk-Reward Trade-offs 193 Trevor S. Harris, Juliet Estridge and Doron Nissim 14 Introduction Linking Fundamental Analysis to the Inputs of the Valuation Model Our Valuation Framework Linking Business Activity to Intrinsic Value: The ModelWare Profitability Tree ModelWare's Intrinsic Value Approach Treatment of Key Inputs The Cost of Capital Risk-free rate Equity risk premium Beta-estimation Summary and Conclusions 237 Appendix 239 References 251

5 Equity Valuation Part V UBS VCAM and EGQ Regression-based Valuation 253 David Bianco 22 Introducing "EGQ" - Where Intrinsic Methods and Empirical Techniques Meet A Quick Guide to DCF and Economic Profit Analysis Powerful analytical frameworks, but not a complete solution Dynamics of economic profit analysis "Unadulterated EVA" Value dynamic 1: ROIC Value dynamic 2: invested capital Value dynamic 3: WACC Value dynamic 4: the value creation horizon Combining all four value dynamics: EGQ EGQ vs. PVGO The search for the ultimate valuation methodology Regression-based Valuation UBS Economic Growth Quotient The EGQ calculation EGQ special attributes A complete metric Not influenced by the current capital base Limited sensitivity to the assumed cost of capital Comparable across companies of different size Explains observed multiples on flows like earnings or cash flow UBS EGQ Regression Valuation Intrinsic meets relative valuation EGQ regressions: relative valuation theater EGQ regressions: a layered alpha framework ^-intercept indicates cost of capital Slope vs. y-intercept indicates style Emergent valuation Why regress EGQ vs. EV/NOPAT? Think opposite when under the X-axis Understanding Regressions Key takeaways The line - what is the relationship? 276, Slope (beta) y-intercept (alpha) The explanatory power or strength of the relationship Correlation coefficient (R) Coefficient of determination (^-squared) 277

6 Contents 27.4 Reliability or confidence in the quantified relationship Standard error (of beta) r-statistic Regression outliers Influence outliers Leverage outliers Beware of outliers in EGQ regressions Appendix Discussions EGQ's muted sensitivity to assumed WACC EV/IC vs. ROIC/WACC regressions PE vs. EPS growth regressions or PEG ratios Return metrics: ROIC vs. CFROI Accrual vs. cash flow return measures ROIC vs. CFROI Adjusting invested capital important, but not for EGQ 288 References '-' 291 Part VI Leverage Buyout (LBO) Models 293 Jan Viebig, Daniel Stillit and Thorsten Poddig 29 Introduction Leveraged Buyouts IRRs and the Structure of LBO Models Assumptions of LBO Models Example: Continental AG Background LBO modeling approach - appropriate level of detail Key LBO parameters Step-by-step walk through the model A Word of Caution 329 References 333 Part VII Valuation 101: Approaches and Alternatives 335 Aswath Damodaran 35 Introduction Overview of Valuation Discounted Cash Flow Valuation Essence of discounted cashflow valuation 341

7 Equity Valuation Discount rate adjustment models Equity DCF models Firm DCF models Certainty equivalent models Excess return models Adjusted present value models Value enhancement in the DCF world Determinants of value Ways of increasing value Liquidation and Accounting Valuation Book value-based valuation Book value Book value plus earnings Fair value accounting Liquidation valuation Value enhancement in the accounting world Relative Valuation Steps in relative valuation Basis for approach Standardized values and multiples Determinants of multiples Comparable firms Controlling for differences across firms Value enhancement in the relative valuation world Real Option Valuation Basis for approach The essence of real options Examples of real options Value enhancement in the real options world Closing Thoughts on Value Enhancement 375 References 377 Part VIII Final Thoughts on Valuation 379 Armin Varmaz, Thorsten Poddig and Jan Viebig 42 Introduction Valuation in Theory: The Valuation of a Single Asset Certain cash flows Uncertain cash flows Risk premia 386

8 Contents 43.4 Certainty equivalents and utility-based valuation Risk neutral probabilities Outlook: The Multi-asset Valuation and Allocation Case Summary 399 References 401 Index 403