20130915 第5回valuation勉強会

Valuation in FED
2013/9/15(Sun)
1

自己紹介
•  名前

•  所属
•  勉強会に参加したきっかけ

2

3
Contents
•  Part1 Foundations of Value
•  Part2 Core Valuation Techniques
•  Part3 Intrinsic Value and the Stock Market
•  Part4 Managing for Value
•  Part5 Advanced Valuations Issues
•  Part6 Special Situations

Review of previous studied contents
4

5
Contents

What
is
value

In
the
context
of
valua3on
and

in
your
life
?
6

What is Value?
•  Value is defining dimension of measurement in a market
economy.
•  Value is a particularly helpful measure of performance because
it takes into account the long-term interests of all the
stakeholders in a company,not just shareholders.
•  Competition among value-focused companies also helps to
ensure that capital,human capital,and natural resources are
used efficiency across the economy,leading to higher living
standards for everyone.
7
(P3)

Fundamental principles of corporate finance
Companies create value by investing capital to
generate future cash flow at rate of return that
exceed their cost of capital. (P17)
8

Two core principles of value creation
•  The combination of growth and return on invested
capital(ROIC) relative to its cost is what drives
value.
–  Companies can sustain strong growth and high returns
on invested capital only if they have a well-defined
competitive advantage.
•  Conservation of value
–  Anything that doesn't increase cash flow doesn't create
value.

–  M・M
theory
9
(P4)

10
Growth and ROIC:Drives of Value
Return on
investment capital
Revenue growth
Cash flow
Cost of of Capital
Value

11
Contents

12
Part2 Core Valuation Techniques
6. Framework for Valuation
7. Reorganizing the Financial Statements
8. Analysand Performance and Competitive Position
9. Forecasting Performance
10. Estimating Continuing Value
11. Estimating the Cost of Capital
12. Moving from Enterprise Value to per Share
13. Calculating and Interpreting Results
14. Using Multiple

13
Framework for DCF-Based Valuation
EXHIBIT 6.1
Model Measure Discount factor Assessment
Enterprise discounted
cash flow
Free cash flow
Weighted average
cost of capital
Works best for projects, business units, and
companies that manage their capital
structure to a target level.
Discounted economic
profit
Economic profit
Weighted average
cost of capital
Explicity highlights when a company creates
value.
Adjusted present value Free cash flow
Unlevered cost of
equity
Highlights changing capital structure more
easily than WACC-based models.
Capital cash flow Capital cash flow
Unlevered cost of
equity
Compresses free cash flow correctly
because capital structure is embedded
within the cash flow.Best used when valuing
financial institutions.
Equity cash flow
Cash flow to
equity
Levered cost of
equity
Difficult to implement correctly because
capital structure is embedded within the
cash flow. Best used when valuing financial
institutions.
(P104)

14
Home Depot: 
Enterprise DCF
Forcaset year
Free cash flow
($ million)
Discount factor
(@ 8.5%)
Present value of
FCF
(& million)
2009 5,909 0.922 5,448
2010 2,368 0.850 2,013
2011 1,921 0.784 1,506
2012 2,261 0.723 1,634
2013 2,854 0.666 1,902
2014 3,074 0.614 1,889
2015 3,308 0.567 1,874
2016 3,544 0.522 1,852
2017 3,783 0.482 1,822
2018 4,022 0.444 1,787
Continuing value 92,239 0.444 40,966
Present value of cash flow 62,694
Midyear adjustment factor 1.041
Value of operations 65,291
Value of excess cash -
Value of long-term investments 361
Value of tax loss carry-forwards 112
Enterprise value 65,764
Less:Value of debt (11,434)
Less:Value of capitalized operating leases (8,298)
Equity value 46,032
Number of shares outstanding(December 2008) 1.7
Equity value per share 27.1
Forecasting performance
Estimating Continuing Value

15
Enterprise valuation of  
a multibusiness company
Unit A Unit B Unit C Corporate
center
Value of
operations
Nonoperating
assets
Enterprise
Value
Value
of debt

Equity
Value

Exhibit6.3 P106
Value of operating units
200
30
560
125
200
225
520
40
360

16
Contents

Part3 Intrinsic Value and the Stock Market
15 Market value tracks return on invested capital and growth
16 Markets value substance, not form
17 Emotions and mispricing in the markets
18 Investors and managers in efficient markets
17

Research Findings
•  Valuation levels for the stock market as a whole clearly reflect the
underlying fundamental performance of companies in the real
economy.
•  Companies with higher ROIC and those with higher growth are
valued more highly in the stock market.
•  Over the long term(10 years and more), higher ROIC and growth
also lead to higher total returns to shareholders(TSR) in the stock
market.
•  Whether increasing revenue growth or return on capital will create
more value depends on the company’s performance.
18

Explaining markets returns over two
centuries
19
U.S equities over the past 200 years have on average achieved total
returns to shareholders of about 6 ½ % annually, adjusted for
inflation.
P339 exhibit 15.1

Understanding recent market movements
•  Identifying five more recent eras, each distinguished by different
fundamental forces shaping the U.S. economy and stock markets.
20
P341 Exhibit 15.2

Understanding recent market movements
21
The carefree sixties:
1960 to 1969
Real GDP grew at a health and stable 2.7% per year.
・Inflation was the driving force in the economy and the markets.
The great inflation:
1968 to 1982
Return to normalcy:
1982 to 1996
。・Interest rates and inflation fell dramatically.
・As P/Es recovered, the S&P 500 index generated exceptional annual
TRS of 16 % in nominal terms and 12% in real terms, more than
double the 6 ½ % stock market return over the 200 years.
The technology bubble
and burst
1996 to 2004
The S&P500 went from 741 in 1996 to 1527 in 2000 before falling back
to 1112 in 2003.
Leveraging and credit
crisis:
2004 to 2008
In mid 2007, a financial crisis started to unfold that would drive the
world’s economy into its steepest downturn since the 1930s.

Value, ROIC and growth:
Theoretical relationship
•  The relative market value of a company is determined by the company’s
growth and its spread of ROIC over the WACC.
•  When rates of ROIC fall below the cost of capital, higher growth leads to
lower valuations.
•  evidence of how ROIC and growth drive intrinsic company valuations can
be derived from capital multiples than from earnings multiples.
22
P346 exhibit 15.4

Value, ROIC and growth:
Evidence of actual relationship
•  Noting that industries with higher ratios of market value to capital
have higher growth and/or higher ROIC driven by better margins
and capital turnover.
•  Demonstrating that for any level of growth, higher rates of ROIC
lead to higher market values, and above a given level of ROIC,
higher growth leads to higher value.
23
P348 exhibit 15.5

Total Returns to Shareholders track
performance against expectations
•  TRS are determined by performance against expectations, not
absolute levels of performance.
•  Reported sales and margins were below the market’s expectations,
prompting investors to anticipate lower returns in future.
24

TRS, expectations, ROIC and growth:
Theoretical relationship
•  By definition, the expected TRS always equals the company’s cost
of capital, as shown in Chap3.
•  Realized TRS has the following key drivers.
–  Initial expectations
–  Realized return on capital and growth
–  Changes in expectation
•  Over longer periods, TRS is not as strongly influenced by changes
in expectations and more clearly linked to realized return on
invested capital and growth relative to expectations at the start of
the 10-year period.
25

•  Because of the interaction of performance and expectations, the fit
between patterns of ROIC , growth, and TRS for different industries
is not as close as the fit between those key value drivers and the
ratios of market value to capital or market value to earnings.
26
P352 exhibit 15.8

•  Over the long term, company’s with higher ROIC and growth do tend
to deliver stronger returns to shareholders, although the role of
investor expectations should not be underestimated.
•  Over the short term, the influence of expectations on shareholder
returns is even greater and more likely to dominate ROIC and
growth in influencing TRS for specific companies or sectors.
27

28

Markets value substance, not form
•  Managers can go to great lengths to achieve analysts’ expectations
of EPS or to smooth earnings from quarter to quarter.
•  Stock markets are perfectly capable of seeing the economic reality
behind different forms of accounting information.
•  Since investors value substance over form, managers need not
worry about whether their share are spilt into smaller shares, traded
in one or many developed stock markets, or included in a large
stock market index.
29

The market does not care about
earnings volatility
•  Recent research shows that ratios of market value to capital
certainly are diminished by cash flow volatility, but not by earnings
volatility.
•  Several years of steady growth interrupted by a sudden decline in
earnings, For 460 of the companies, earnings fell in at least one
year of the period studied.
30
P362 exhibit16.2

Markets dig beneath earnings
announcements
•  Price falls occurred only when such failures stemmed form real
changes in long term fundamental prospect.
•  Share prices do not rise if the market believes a positive earnings
surprise is simply the result of some imaginative accounting.
31
P363 exhibit 16.3

Market reaction to Pharmaceutical product
announcement
•  In the pharmaceutical industry, announcements about products under
development can affect share prices far more than quarterly earnings
announcement.
•  The academic literature offers evidence that firms consistently meet or
exceed earnings expectations are more highly valued by the stock market
and generate higher returns to shareholders.
32
P364 exhibit 16.4

Economics of accounting information:
No mystery to the market
•  Share prices will move if information in the accounts
reflects unexpected changes in underlying cash flows.
–  Goodwill impairment
–  Changing from LIFO to FIFO
–  Option expensing
•  All managers should understand that markets can be
mistaken or fooled for only so long.
33

Different accounting standards do not lead
to different values
•  The differences between net income and equity under U.S and local
accounting standards were often quite large.
–  In more than half the cases, the gap was more than 30%.
•  As shown in exhibit16.5, even though 2/3 if the companies in our
sample reported lower earnings following U.S. disclosure, the stock
market reaction to their disclosure was positive.
34P367 exhibit 16.5

Treatment of goodwill does not
affect share price
•  The market realized that the accounting treatment of goodwill
amortization does not affect cash flows.
•  In exhibit 16.7, we did not find a statistically significant drop in share
prices on the day a write off was announced.
–  The markets had already anticipated the lower benefits from past acquisitions
and had reduced the stock price by an average 35% in the six months preceding
the write-off announcement.
35P369 exhibit 16.7

Accounting for employee and management
stock options is irrelevant to market value
•  As long as investors have sufficient information on the amount,
terms, and conditions of the options granted, new expensing, rules
will not drive down shares prices.
36
P371 exhibit 16.8

LIFO versus FIFO affects market values
but not because of earning impact
•  Research shows that, as the DCF model would predict,
switching from FIFO to LIFO in fact lift share prices
because it increases cash flow.
37
P372 exhibit 16.9

Technical trading factors are
irrelevant for value
•  This section provides examples of the negligible
effects on value of three changes in form rather
than substance.
–  Stock splits
–  Index inclusion
–  Cross listing
38

True impact of stock spilt
•  Rising share prices around the time of a stock split have nothing to
do with the spilt.
•  The stock market reacts positively to stock spilt announcements
because they signal higher future cash flows.
–  That is the substance that the market values.
39
P373 exhibit 16.10

Index membership does not matter to value
•  Our evidence showed, as fundamental valuation theory would
predict, that in most cases, new entrants to the S&P 500 did not
enjoy permanent price premiums, and the prices of companies
excluded did not suffer over the long term.
40P375 exhibit 16.11

Cross listing does not affect market value
•  For many years, many academic, executives, and analysts believed
companies cross listing their shares on exchanges in the United
States, London, and Tokyo, could realize a higher share price and
lower cost of capital.
•  Such benefits may well have existed in the past before capital
markets become more liquid and integrated, and investors more
global.
41
P379 exhibit 16.13

42

43
Why falling asset prices are problems?
Price
time
・Aが金融資産を100
で購入。

・金融資産がバブルにより150
まで上昇。
・Aはもうあがらないと思い、B
に売却。
Bはまだあがると思い150で購
入。
・その後、バブルが崩壊
し、資産価格が下落。
・BはCに100で売却。
・Bは50の損。
A
100で取得
150で売却
B
150で取得
100で売却
C
100で取得

44
Thinking time 1分 
その後、Discussion time　5分

45
基本的には影響はない。 
ただのゼロサムゲーム。 
 

購入価格
売却価格
損益
A
100
150
50
B
150
100
-50
C
100
0

46
80年代後半のバブルの時代に、日本全体で借入を
100兆円拡大して、20兆円の価値しかない土地を100
兆円で買ったとしよう。・・・・・20兆円の価値しかないも
のを100兆円で買った人は大損だが、それを100兆円
で売った人は大儲けである。日本全体では、バブルに
よって損も得もしていない(原田[2002])。
竹森俊平(2007)『経済論戦は甦る』日経ビジネス人文庫　P128より

47
ただし、銀行がお金を貸し出し
ていなければの話だが・・・

48
銀行が貸出をしているケース
Price
time
・Bが金融資産を150で取得するた
めに、120の貸出を実施。
・資産価格が下落したため、100の
み回収。
D銀行
貸出120
回収100
A
100で取得
150で売却
B
150で取得
(30手金、120借入)
100で売却
C
100で取得
銀行貸出120
・金融資産を150で取得するため、
120銀行から借入、30は手金を出す。

49
銀行貸出がある場合のP/L
購入価格
売却価格
損益
A
100
150
50
B
150(手金30)
100
-30
C
100
0
貸出金額
回収金額
損益
D
120
100
-20
・銀行が損失を被る。
・D銀行が似たようなローンを100本出している場合には、銀行
の損失は20×100=2,000となってしまう。
・レバレッジ比率が高い程(債務者の借入が多い程)、資産価格
の下落時には銀行はより多くの損失を被る。

Patterns in mispricing
•  Individual company share price deviate significantly from
the company’s fundamentals value only in rare
circumstances.
•  Market wide price deviations from fundamental
valuations are even less frequent, although they may
appear to be becoming more so.
•  Price deviation from fundamentals are
temporary(typically three years).
50

Emotions rarely drive stock market values
•  When individual investors behave irrationally.
•  When systematic patterns of irrational behavior
emerge among investors.
–  overconfidence, overreaction, and overpresentation
•  When there are limits to arbitrage in financial
markets.
–  Transaction costs and risk
51

Company mispricing:
curve-outs
•  The price differential that appeared between 3Com and Palm shares after
Palm was carved out of 3Com in March 2000.
•  Immediately after the Palm carve-out, the market capitalization of Palm was
higher than the entire market value of 3Com, implying that 3Com’s other
business had negative value.
•  Investors could not go short position in Palm and long in 3Com shares
because the free float of Palm share was too small after the carve out to
accommodate such arbitrage.
52P385 exhibit 17.1

Company mispricing:
dual listing
•  The shares of Royal Dutch Petroleum and Shell Transport &
Trading(T&T) were traded separately on the Amsterdam and
London stock markets respectively until 2005 although the two
companies together formed a single group.
•  There have been prolonged periods of mispricing.
•  LTMC was the victim of just such an occurrence.
53
P386 exhibit 17.2

Company mispricing:
overreaction and underreaction
reversal and momentum
54
Long-term reversal
Short-term momentum
The high performing stocks of the past few
years typically become the low performing over
the next few years.
When positive returns for stocks over the past
several months are typically followed by
several months of continued positive returns.
・Behavioral finance cannot explain why investors overreact and under come
conditions and under react in others.
・The consideration of Fama would imply that managers should still make their
decisions based on traditional DCF analyses and efficient market assumption.

Market mispricing:
bubbles and bursts
•  Broader deviation are rare and short-lived, and the market usually corrects
itself within a few years.
•  The high-tech and credit-fueled bubbles had similar impacts on key market
indexes in both the United States and Europe.
•  The high tech bubbles was a valuation bubble, in which stocks are priced at
earnings multiples that underlying fundamentals cannot justify. The credit
bubble was not a valuation bubble but an earnings bubble.
55
P389 exhibit 17.3

High-tech bubble driving up market
expectations
•  In 1999, the average top 30 company had a P/E of times, compared
with an average of 23 times for the other 470 companies.
•  For every solid, innovative new business idea, there were dozen of
companies that forgot or purposely threw out fundamental rules of
economics.
•  The concept of network effects a variant of increasing returns to
scale was a good example.
56
P390 exhibit 17.4

Credit bubble driving up corporate earnings
•  The 2007 market P/E was about 40% lower than in 2000 and
broadly in line with the P/Es of the 1960s, when inflation and interest
rates were at similar levels.
•  The extent of the bubble is best illustrated not by the price-earnings
ratio but by the maket-to-capital ratio, which soared from a long term
average of around 11/2 to 2 to well over 3.5 by 2007.
57
P392 exhibit 17.5

Financial and commodity sectors out of
balance.
58
P394 exhibit 17.6

Underlying economic trends that contributed
to accelerated earnings growth
•  Growth of Asian economies
–  Large emerging economies had boosted global demand and
prices for oil, gas and other commodities.
•  Expansion of credit markets
–  The global saving surplus and other factors such as innovative
financial instruments and loose monetary policy were pushing
credit growth in developed economy.
•  Rise in housing prices
–  Property prices soared, inflated by readily available credit.
59

60

The implication of market efficiency
for managers
•  Managers should focus on driving return on ROIC and
growth to create maximum value for shareholders.
•  Managers need to understand their investor base, so
they can communicate their company’s strategy for value
creation effectively to different investor segments.
•  Managers should not be distracted from their efforts to
drive ROIC and growth by any short-term price volatility.
61

A model of the market
•  A simple model can illustrate how the interaction
between investors with different strategies can result in
the combination of volatile prices.
–  Informed investors develop a point of view about the intrinsic
value of the company’s shares based on its underlying
fundamentals, such as ROIC and growth, and then make
rational buy and sell decision.
–  Noise traders do not care about intrinsic value and trade on any
small event that may not constitute material new information.
–  Both type of investors invest in either the stock or the risk-free
asset.
62

Model of the stock market
•  Informed investors start buying shares because they believe the
shares should be worth $40 to $60.
•  If the noise traders act not only on price movements but also on
random, insignificant events, there will also be price oscillations
within the band.
•  The trading range depends on informed trader’s transaction costs
and their confidence in the reliability of their valuations.
63P401 exhibit 18.1

Model of the stock market
•  Suppose that at time T the stock trades at $42, and the company
announces the launch of a new product that no investors
anticipated.
•  Two things change
–  The informed investors revise their estimates of the company’s value to the
range of $60 to $80.
–  They increase their individual trading ranges from 10 to 20 percent either side of
their intrinsic valuation because of their uncertainty about the prospects for the
new products.
64P401 exhibit 18.1

Some important aspect from the model
•  Share prices are roughly in line with intrinsic values, because
informed investors ultimately set the price boundaries in the market.
•  The boundaries for share prices either side of intrinsic value are
wider when there is more uncertainty about a stock’s valuation.
•  Share prices can be significantly volatile within the bounds set by
informed investors even at times when no new information about a
company has been revealed.
•  Price deviations beyond the boundaries set by information investors
using intrinsic valuation occur only under rare conditions.
65

Classification of investors
66
The type of
stock or
indexes
Growth
Value
Investment
strategy
Intrinsic
investors
Traders
Mechanical
investors

Classification by investment starategy
67
Intrinsic investors
Traders
・taking positions in companies only after undertaking
rigorous due diligence of their inherent ability to
create long term value.
・holding 20 to 25% of institutional U.S equity.
・seeking profits by betting on short term movements
in share prices, typically based on announcements
about the company or technical factors.
・holding 30 to 35% of institutional U.S equity.
Mechanical investors
・Making decisions based on strict criteria or
rules.
・controlling 35 to 40% of institutional U.S
equity.

Intrinsic investors drive valuation levels
•  When intrinsic investors trade, they buy or sell in much larger
quantities than traders or mechanical investors.
•  Intrinsic investors are the most important investor group for setting
prices in the market.
•  Focusing on underlying fundamentals and driving the long-term
share price toward intrinsic value.
68
P406 exhibit 18.3

Managerial implications
•  Focus on intrinsic value
•  Understand your shareholder to tailor investor
communications
69

Be cautious about deviations
•  Issuing additional share capital at times when the stock market is
attaching too high a value to the company’s shares relative to
intrinsic value.
•  Repurchasing company shares when the stock market underprices
them relative to the intrinsic value.
•  Paying for acquisitions with shares instead of cash when the stock
market overprices the shares relative to intrinsic value.
•  Divesting particular business at times when trading and transaction
multiples in those sectors are higher than can be justified by
underlying fundamentals.
70

20130915 第5回valuation勉強会

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20130915 第5回valuation勉強会