close
Graham & Dodd stipulated that the most important factor in determining a security's intrinsic value is a forcast of "earning power".
JB Willians proposed discounted dividents model.
Valuation Process
>Understanding the business
>Forecasting company performance
>Selecting valuation model
>Recommendation
Equity value = Max[ Liquidation value , Going-concern value ]
Business Cycle
>Initial Recovery
Stock ↗ Bond yield ↗ Confidence↗ S-T rate, inflation Low
>Early Expansion
Stock↗ Bond yield ↗ Confidence↗ S-T rate↗, inflation↗
>Late Expansion
Stock→ Bond yield↑ Confidence↑ S-T rate↑, inflation↑
>Slow Down
Stock↘ Bond yield→ Confidence↘ S-T rate↘, inflation↗
>Recession
Stock →↑ Bond yield↓ Confidence↓ S-T rate↓, inflation↘
。Business cycle turning points are so difficult to predict causing analyst to slightly adjust portfolio.
。Bond evaluation focus on inflation and downgrade risk; Equity evaluation focus on corporate earnings
。Infaltion may have different impact in each company, depending on the ability to full pass on price increases, so called demand elastic.
Taylor rule:
r[target]=r[neutral]+{ 0.5 x (GDP[expected]-GDP[trend]) +0.5 x (inflation[expected]-inflation[trend]) }
Industry Life cycle
>Pioneering development
growth ↗ profit→ ROE→
>Rapid accelerating growth
growth ↑ profit↗ ROE→
>Mature growth
growth ↑ profit↘ ROE↗
>Stabilization
growth ↗ profit↘ ROE↘
>Deceleration
growth ↘ profit↘ ROE↘
Industrial Analysis
> Industry classification: business cycle, life cycle position
> External factors: technology, government, social, demographic, foreign movement
> Demand analysis: end users, real and nominal growth, trends
> Supply analysis: degree of concentration, ease of entry, industry capacity
> Profitability analysis: supply/demand analysis, pricing & cost factors
>International competition analysis:
。supplier power, buyer power, barriers to entry, degree of rivalry, threat of substitutes
。cost leadership, differentiation, focus strategy
。value chain competition: the learning curve, economies of scale & scope, network externalities.
(1) Discounted Cash Flows (DDM)
Golden growth model: assume perpetual growth
Two-stage DDM: assumes that two different growth rates.
H model: assumes that growth begins at some super-normal rate, then the growth rate declines in a linear fashion until it reaches the normal rate.
Pros:
>suitable for stable growth and dividend policy companies.
>suitable for broad-based equity indexes
>the investors take a non-control perspective
Cons:
>values are very sensitive to g,r
>inapplicable to unstable growth & dividend policy stocks
>the accurate estimation of the terminal value of the stock is a key of DDMs.
Estimation of r
。CAPM r = rf + beta x (rm - rf) [risk premium]
。Bond approach r = L-T debt + risk premium
。Implied r estimated from PE, golden model
Suitable Growth Rate(SGR)
g = b x ROE = ( 1 - dividend payout rate) x ROE
assumption:
。sustain a target capital structure
。sales growth positive proportion to assets growth
。stable dividend payout rate, i.e. b=constant
(2) Free Cash Flow
Free Cash Flow of the Firm: Firm capital perspective
FCFF = NI + NCC + Int(1-Tax) - FCInv - △WC
= CFO + Int(1-Tax) - CFI
= EBIT(1-Tax) + Dep - FCInv - △WC
= EBITDA(1-Tax) + Dep(Tax) - FCInv - △WC
Free Cash Flow of the equity: shareholder perspective
FCFE = FCFF - Int(1-Tax) +CFF
,where CFO: Operating CFs, NCC: Non-CF items(depreciation, amortization, ), CFI: Investment CFs, CFF: Financing CFs
Valuation of Equity = Discounted FCFE(r) = Discounted FCFF(wacc) - Debt
。Cash dividends, share repurchase, cs issuance do NOT affect FCFF & FCFE
。Focusing on operating items, △WC excludes cash, S-T debt(notes payable, the current portion of the long-term debt).
。Int(1-Tax) belongs to FCFF, NOT FCFE.
Pros:
>pay no or low cash dividends
>discretionary dividend policy
>假設投資者將永續擁有企業股權，當企業無法創造自由現金流量的淨增加、企業價值將持續走低，股票每股價值亦將下降。
>CF available to shareholder's if they controlled the company
>FCFE for stable capital structure; FCFF for volatile capital structure & significant debt outstanding
(3) Price Multiples
PE ratio
。Remve cyclical influences(normalized eps), nonrecurring components
Pros:
>earning power is a chief driver
>L-R average return
Cons:
>EPS can be negative
>EPS may be volatile and manipulated
>EPS can be negative
PB ratio
Pros:
>stable & general positive
>mainly liquid assets(i.e. banking investments)
Cons:
>accounting effects
>historical purchase costs
>ignoring other critical operating factors
PCF ratio
Pros:
>stable & less manipulated
>accounting conservatism
Cons:
>P/FCFF is more volatile
PSales ratio
Pros:
>less distortion
>focus on cyclical, mature, zero-income companies
Cons:
>NO cost structure
>revenue recognition policy
Dividend yield
Pros:
>less risky than capital appreciation
Cons:
>NOT using all information(risk, expected growth, financial strength)
>trade off future growth and dividend
JB Willians proposed discounted dividents model.
Valuation Process
>Understanding the business
>Forecasting company performance
>Selecting valuation model
>Recommendation
Equity value = Max[ Liquidation value , Going-concern value ]
Business Cycle
>Initial Recovery
Stock ↗ Bond yield ↗ Confidence↗ S-T rate, inflation Low
>Early Expansion
Stock↗ Bond yield ↗ Confidence↗ S-T rate↗, inflation↗
>Late Expansion
Stock→ Bond yield↑ Confidence↑ S-T rate↑, inflation↑
>Slow Down
Stock↘ Bond yield→ Confidence↘ S-T rate↘, inflation↗
>Recession
Stock →↑ Bond yield↓ Confidence↓ S-T rate↓, inflation↘
。Business cycle turning points are so difficult to predict causing analyst to slightly adjust portfolio.
。Bond evaluation focus on inflation and downgrade risk; Equity evaluation focus on corporate earnings
。Infaltion may have different impact in each company, depending on the ability to full pass on price increases, so called demand elastic.
Taylor rule:
r[target]=r[neutral]+{ 0.5 x (GDP[expected]-GDP[trend]) +0.5 x (inflation[expected]-inflation[trend]) }
Industry Life cycle
>Pioneering development
growth ↗ profit→ ROE→
>Rapid accelerating growth
growth ↑ profit↗ ROE→
>Mature growth
growth ↑ profit↘ ROE↗
>Stabilization
growth ↗ profit↘ ROE↘
>Deceleration
growth ↘ profit↘ ROE↘
Industrial Analysis
> Industry classification: business cycle, life cycle position
> External factors: technology, government, social, demographic, foreign movement
> Demand analysis: end users, real and nominal growth, trends
> Supply analysis: degree of concentration, ease of entry, industry capacity
> Profitability analysis: supply/demand analysis, pricing & cost factors
>International competition analysis:
。supplier power, buyer power, barriers to entry, degree of rivalry, threat of substitutes
。cost leadership, differentiation, focus strategy
。value chain competition: the learning curve, economies of scale & scope, network externalities.
(1) Discounted Cash Flows (DDM)
Golden growth model: assume perpetual growth
Two-stage DDM: assumes that two different growth rates.
H model: assumes that growth begins at some super-normal rate, then the growth rate declines in a linear fashion until it reaches the normal rate.
Pros:
>suitable for stable growth and dividend policy companies.
>suitable for broad-based equity indexes
>the investors take a non-control perspective
Cons:
>values are very sensitive to g,r
>inapplicable to unstable growth & dividend policy stocks
>the accurate estimation of the terminal value of the stock is a key of DDMs.
Estimation of r
。CAPM r = rf + beta x (rm - rf) [risk premium]
。Bond approach r = L-T debt + risk premium
。Implied r estimated from PE, golden model
Suitable Growth Rate(SGR)
g = b x ROE = ( 1 - dividend payout rate) x ROE
assumption:
。sustain a target capital structure
。sales growth positive proportion to assets growth
。stable dividend payout rate, i.e. b=constant
(2) Free Cash Flow
Free Cash Flow of the Firm: Firm capital perspective
FCFF = NI + NCC + Int(1-Tax) - FCInv - △WC
= CFO + Int(1-Tax) - CFI
= EBIT(1-Tax) + Dep - FCInv - △WC
= EBITDA(1-Tax) + Dep(Tax) - FCInv - △WC
Free Cash Flow of the equity: shareholder perspective
FCFE = FCFF - Int(1-Tax) +CFF
,where CFO: Operating CFs, NCC: Non-CF items(depreciation, amortization, ), CFI: Investment CFs, CFF: Financing CFs
Valuation of Equity = Discounted FCFE(r) = Discounted FCFF(wacc) - Debt
。Cash dividends, share repurchase, cs issuance do NOT affect FCFF & FCFE
。Focusing on operating items, △WC excludes cash, S-T debt(notes payable, the current portion of the long-term debt).
。Int(1-Tax) belongs to FCFF, NOT FCFE.
Pros:
>pay no or low cash dividends
>discretionary dividend policy
>假設投資者將永續擁有企業股權，當企業無法創造自由現金流量的淨增加、企業價值將持續走低，股票每股價值亦將下降。
>CF available to shareholder's if they controlled the company
>FCFE for stable capital structure; FCFF for volatile capital structure & significant debt outstanding
(3) Price Multiples
PE ratio
。Remve cyclical influences(normalized eps), nonrecurring components
Pros:
>earning power is a chief driver
>L-R average return
Cons:
>EPS can be negative
>EPS may be volatile and manipulated
>EPS can be negative
PB ratio
Pros:
>stable & general positive
>mainly liquid assets(i.e. banking investments)
Cons:
>accounting effects
>historical purchase costs
>ignoring other critical operating factors
PCF ratio
Pros:
>stable & less manipulated
>accounting conservatism
Cons:
>P/FCFF is more volatile
PSales ratio
Pros:
>less distortion
>focus on cyclical, mature, zero-income companies
Cons:
>NO cost structure
>revenue recognition policy
Dividend yield
Pros:
>less risky than capital appreciation
Cons:
>NOT using all information(risk, expected growth, financial strength)
>trade off future growth and dividend
全站熱搜
留言列表
