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  • Principles of VI

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    kumarp13
    16 vizualizări17 pagini
    VI

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    VI

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    16 vizualizări17 pagini

    Principles of VI

    Încărcat de

    kumarp13
    VI

    Drepturi de autor:

    © All Rights Reserved
    Descărcați ca PDF sau citiți online pe Scribd
    Indicator pentru conținut neadecvat
    din 17
    COLUMBIA BUSINESS SCHOOL Value Investing Program Part 4 Value Investing JANUARY 14 - 15, 1999 COPYRIGHT © GREENWALD/VAN BIEMA. ALL RIGHTS RESERVED, 1999. asic Elements of Val Strategic Dimension Growth in Franchise Only "Franchise Value Current Competitive Advantage Free Entry No Competitive Advantage Asset Value Eamings Power ‘Total Value Value Reliability * Tangible + Current Eamings — = Includes Growth Dimension * Balance Sheet Based + Extrapolation + Extrapolation + No Extrapolation + No Forecast, + Forecast Part 4, Page 1 Total Value Including Growth + Least Reliable - Forecast Change not just Stability (Earnings Power) + Highly Sensitive to Assumptions * Data indicates that Investors Systematically Overpay for Growth * Strict Value Investors want Growth for “Free.” (Mkt Value < EP Value) Part 4, Page 2 Value of Growth Basic Forces at Work + Growing Stream of Cash Flows is more Valuable than a Constant Stream (relative to current Cash Flow). } vs. CF, = R EEE cr -( WACC Growth Rate * Growth Requires Investment which reduces current (distributable) Cash Flow CF, = “Earnings” - Investment Needed to Support Growth ee No Growth CF) (N.B. Do Not Discount Growing “Earnings” Streams) Part 4, Page 3 Valuing Growth Basic Algebra “Earnings” = Return on Capital * Capital (ROC) Beg Yr Necessary Investment to Support Growth at G% PA =G * Capitals.s y, Cash Flow of Growing Firm = “Earnings” - Necessary Investment (CF) = ROC * Capitalpes yr -G* Capital,,.. Yr = (ROC - G) * Capitalg., y, OC -G)* Capital Value of Growing Firm = CF, «1 - ROC-G)* Capitalegy. R-G R-G ROC-G ‘wace = (BS eonitaans R-G -G Critical Valuation Factor is ROS Part 4, Page 4 Valuing Gr Case 1: ROC =Retum on Capital = Cost of Capital = R 1 ROC-G_R-G_ 1 (For all Growth Rates) R-G R-G The e.g. (ROC = R =10%) ROC-G_ 10-0 R-G 10-0 G=0% ROC-G_10-2_ =——=1 R-G_ 10-2 G=2% G=8% ROCLGHOSS =| R-G_ 10-8 ROC = R When there are no Barriers-to-Entry (LE. No Competitive Advantages - Level Playing Field) then Growth has no Value. Past 4, Page 5 Valuing Growth Case 2: Competitive Disadvantage with Growth ++ ROC Less than Cost of Capital Then ROC-G < R-G - ROC-G ., R-G and —~ gets smaller with higher growth rates. eg. (ROC = 8%, R =10%) G=0% ROC-G_8-0_. R-G 10-0 G=2% ROC-G_8-2_., R-G 10-2 G=sy% ROC-G_8-8 _9 R-G 10-8 Higher Growth at a Competitive Disadvantage Destroys Value Part 4, Page 6 Valuing Growth Case 3: ROC is Greater than R - Firm Enjoys a Competitive Advantage (Franchise) ~ Shares are Stable + G = Industry Growth Rate Then ROC-G is greater than R-G ROC-G and is greater than 1 and increasing in G. e.g. (ROC =15%,R = 10%) ROC-G_15-0_, R-G_ 10-0 G=0% ROC-G_15-2 G=2% =—— R-G_ 10-2 =1.625 ROC-G_15-8_, G=8% = =3. R-G 10-8 Only within Franchise Growth creates Value Part 4, Page 7 Valuing Growth Basi + Growth at a Competitive Disadvantage Destroys Value (AT&T in Info Processing) * Growth on a Level Playing Field neither Creates nor Destroys Value (Wal-mart in NE) * Only Franchise Growth (at Industry Rate) Creates Value. Part 4, page 8 Valui Trowth How m it add? + Look at Value (with Growth) + EP Value *Depend on ROCYR - Franchise Strength and G/R - Growth Rate TABLE I iS Entries = Value (with Growth) + EPV It takes a lot to go from 16 PE to 48 PE Part 4, Page 9 Valuing Growth High (Unstable) Growth + Pick a Target Year - 5 years out (that you think you can predict) * Calculate EPV in Target Year (E.G. in 2004 Microsoft “Earnings” = $12B $12B _ sop 6% EPV = + Add Steady-State Growth Impact (TABLE I) Beyond that point. (e.g. 2*EPV = 400B) + Discount back at R (e.g. 5 yrs @ 14% = % * 400B) = 200B. Part 4, Page 10 Valuing Growth B ven Gr at (1) Calculate EPV today (e.g. $75B) and ROC/R today (assuming this is sustainable) (e.g. 2) (2) Calculate current market value (debt,equity) (e.g. 100B) (3) Select margin of safety that you want (e.g. 331/,%) (4) Calculate the value required to yield this margin of safety (e.g. value * ?/;= 100B or 150B) (5) This implies value with growth > 2 EPV at ROC/R=2 (6) From TABLE I, this implies growth > 60% cost of capital (7) Calculate cost of capital (e.g. 12%) > long term growth > 74% Part 4, Page 11 Valuing Growth in-Mi * Very Hard to Do * Very Hard to Determine Margin of Safety + Evidence is that Investors Systematically Overpay * Best Growth is Hidden (Zero Cost Growth) ¢ Unused Pricing Power * Temporary Problem * Underperforming Divisions Part 4, Page 12 ation Search Value ¥ Review i Manage Risk Part 4, Page 13, ummary of Valuati Strategic Dimension Growth in Franchise Only Franchise Value Current Competi ive Advantage Free Entry No Competitive Advantage Asset Value Eamings Power Total Value Value Reliability + Tangible * Current Earnings —* Includes Growth Dimension Balance Sheet Based * Extrapolation + Extrapolation *No Extrapolation *No Forecast +Forecast Part 4, Page 14 um Valuati Most Certain But Mgt? Med Certain} Growth |uncertain Sustainable?! Value Pesan AV,EPV

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