ValuationModelApplicatio課件(PPT 42頁)

1、The market uses a range of valuation techniques, both bottom-up and top-down.Bottom-up estimation toolsDiscounted cash flowReal optionsComparative ratio analysisPrice/addressable market (e.g., customers)Price/sales or price/revenuePrice/earningsTop-down estimation toolsCustomer lifetime valueOvervie

2、w of valuation techniques第1頁，共42頁。Each technique brings inherent strengths and weaknesses which are biased toward certain situations. Price/Addressable Market RatioPrice/Sales (Revenue) RatioPrice/Earnings RatioProsConsBasic ConceptWhen to usePro rata valuation based on value to market size for a co

3、mparable businessPro rata valuation based on value to sales/revenue for a comparable businessPro rata valuation based on value to earnings for a comparable businessBased on actual market dataAvailability of inputsBased on actual market dataCommonly used proxy for P/E ratiosBased on actual market dat

4、aMarket accepted ratioAppropriate comparable ventures requiredUncertain market sizesAppropriate comparable ventures requiredReliant on accurate forecasts /projectionsAppropriate comparable ventures requiredReliant on accurate forecasts /projectionsCustomer Lifetime ValueLifetime market value per cus

5、tomer times the number of customersBasic calculations, easy to understandData reasonably availableLow level of accuracy Relies on averages and assumptionsReality check alternative valuations, new business venture situations New product development, market entry assessments, start-up situationsHigh g

6、rowth start-ups, large initial outlays , delayed earningsDeveloped or maturing initiatives and ventures, established products & marketsDiscounted Cash FlowsReal OptionsSum of discounted future net cash flows generated by the businessOption pricing multiple of present value of future earningsGenerall

7、y accepted and well understoodLow margin of errorIncorporates value of uncertaintyMore accurateTime consuming cash estimation processStatic assumptionsMathematical complexityLimited usage, not well understoodIncremental growth or existing business improvement evaluationsHighly uncertain / volatile s

8、ituations, large number of possible outcomesValuation ModelOverview of valuation techniques第2頁，共42頁。Appendix: Internet company valuation techniquesOverview of valuation techniquesViewpoints of leading analystsQuantitative examples of valuation techniques第3頁，共42頁。The following approaches illustrate t

9、he different valuations of E*Trade.Bottom-up estimation toolsDiscounted cash flowReal optionsComparative ratio analysisPrice/addressable market (e.g., customers)Price/sales or price/revenuePrice/earningsTop-down estimation toolsCustomer lifetime valueQuantitative examples of valuation techniquesE*Tr

10、ade Valuation ($m)$1,127$12,794$4,446$804$4,088$5,059$4,9231Actual market value:Source: (1) /p/d/egrp.html as of June 6, 2000Note: TD Waterhouse used as a comparable firm when required.第4頁，共42頁。The traditional discounted cash flow (DCF) valuation relies on reasonably accurate forecasts.DCF Y1Estimat

11、ed market valueNet salesCosts of goods soldGross profitOperating expensesOperating incomeDiscount rateYear 1Year 2Year 3Year 4Year 5Discounted cash flowNPV (first 5 years) Terminal valueOther income (expense), netEBITProvision for taxesUnlevered net income(Depreciation and amortization - Capital exp

12、enditures - Incremental working capital)Unlevered free cash flowDCF Y2DCF Y3DCF Y4DCF Y5Quantitative examples of valuation techniques第5頁，共42頁。Example : DCF estimated market value for E*TradeNotes: Shaded highlights denote estimates found on SSB 4/20/00, Equity Research- Internet / Financial Services

13、; All other estimates were extrapolated using Andersen Consulting analysis. (1) Marketing expenses, one of the components of operating expenses, has been adjusted downward by 35.5% to reflect what % of operating expenses a more traditional brokerage house (e.g., Merrill Lynch) spends on advertising

14、(Merrill Lynch Annual Report, March 9, 2000). Sources:(2) E*Trade Annual Report, 10/22/99 from Statement of Cash Flows: Operating Activities, year 5. (3) E*Trade Annual Report, 10/22/99 SOCF: Investing Activities. (4) E*Trade Annual Report, 10/22/99 (Working Capital is current assets less current li

15、abilities).234Quantitative examples of valuation techniquesWe can use the example of E*Trade to illustrate how a DCF works.1第6頁，共42頁。=$ 703 m$ 424 mExample : DCF estimated market value for E*TradeQuantitative examples of valuation techniquesNote: For the purposes of this analysis, E*Trades discount

16、rate = 25% based on assumptions from a Lehman Brothers, equity research report, 5/13/99.FCF Year 1 (1+ r*)1FCF Year 2 (1+ r) 2FCF Year 3 (1+ r) 3FCF Year 4 (1+ r) 4FCF Year 5 (1+ r) 5 $174.6 (1+.25)1 $269.1 (1+.25)2 $277.1 (1+.25)3 $316.1 (1+.25)4 $364.7 (1+.25)5Discounted free cash flow (Years 1-5)

17、 Terminal value (Year 6+) FCF Year 5 (1 + growth) (r - growth) (1+ r)6 $364.7 (1 + .02) (.25 - .02) (1 + .25)6=$ 1,127 mEstimated market value$ 703 m$ 424 mTerminal value (Perpetual year 6 on)DCF (Years 1-5)The discounted cash flow comprises of discounting the free cash flow (FCF) in high growth yea

18、rs and calculating a terminal value (TV) based on a lower constant growth rate for subsequent years. 第7頁，共42頁。The real options valuation model is relatively new and used to incorporate the benefit and uncertainty of future business opportunities into the overall valuation.Notes:(1) The Black-Scholes

19、 option multiplier is based on European call options and is derived from NPVq and a stocks volatility, Andersen Consulting analysis.Source:Harvard Business Review Investment Opportunities as Real Options: Getting Started on the Numbers, Real options modelPV projected earningsPV investmentNPVqVolatil

20、ityOverall risk (Std deviation)Time to expiration in yearsBlack-Scholes option multiplier (look up on chart based on NPVq and Volatility)1PV projected earningsEstimated market valueQuantitative examples of valuation techniques第8頁，共42頁。E*Trades valuation is particularly high using this technique due

21、to its volatile estimated future cash flows.Sources:(1) Present value of EBIT forecasts (in DCF), discounted at 25%. (2) SSB Equity Research, Feb 8th, 2000, Investments FY01 Estimate.” (3) Standard deviation of unlevered FCF from year 3 through 10 (6) Present value of EBIT calculations (in DCF calcu

22、lation 25%).Notes:(4) Since our earnings and investment estimates are for year 1, our expiration must be as well. (5) Based on European call options and is derived from NPVq and volatility. Example : Real options estimated market value$ 502m$ 528 m.9570701.0 year26$ 502M$12,794 mPV projected earning

23、s1PV investment2NPVqVolatilityOverall risk ()3Time to expire4Black-Scholes option multiplier5PV projected earnings6Estimated market valueQuantitative examples of valuation techniques第9頁，共42頁。The market value / addressable market multiple estimates market value in comparison with a similar company.Ma

24、rket value / addressable market multipleShare price for comparable companyTotal addressable market for comparableNumber of shares outstanding for comparableMarket factorCompany factorValue/ addressable market multipleEstimated market valueMarket value of comparable companyAddressable market for E*Tr

25、adeNotes:The market and company factors are adjustments to better reflect the value; Andersen Consulting analysis.Quantitative examples of valuation techniques第10頁，共42頁。Source:(1) /p/d/twe.html as of May 25, 2000Notes: (2) Merrill Lynch Estimates, AC Analysis. Note in this case the addressable marke

26、t for E*Trade is the same as that of the comparable company, TD Waterhouse.(3) The market factor is 100% throughout the examples because TD Waterhouse and E*Trade are going after the same market. If they were not, and the market of the comparable company was more attractive, the market factor would

27、be larger than 100%. (4) The company factor takes into account the relative differences between both companies such as size, stage of development, customer base, brand and eCommerce experience (will always be 75% throughout the examples).Example : Market value / addressable market estimated market v

28、alueTD Waterhouse $15.75$ 78,240 m376,400,000100 %75 %0.1%$ 4,446 m$ 5,928 m$ 78,240 mShare price for comparable company1Total market for comparable2Number of shares outstanding for comparable1Market factor3Company factor4Market value / addressable market multipleEstimated market valueMarket value o

29、f comparable companyAddressable market for E*Trade2We can compare E*Trade with TD Waterhouse to illustrate this valuation technique.Quantitative examples of valuation techniques第11頁，共42頁。The Market value / sales (revenues) ratios are the most widely used valuation tool for eCommerce and Internet opp

30、ortunities because the data is usually available and reasonably accurate.Notes:(1) The calculation is usually done for sales in current year (CY) + 1 and (CY) + 2 which provides a range for the share price.(2) The market and company factors are adjustments to better reflect the value.Andersen Consul

31、ting analysis.Market value / sales (revenue) multiplesShare price for comparable companyTotal sales for comparable companyNumber of shares outstanding for comparableMarket factorSales forecast for E*Trade1Estimated market valueMarket value of comparable companyMarket value / sales (revenue) multiple

32、Quantitative examples of valuation techniquesCompany factor第12頁，共42頁。Sources:(1) /p/d/twe.html as of May 25, 2000.(2) Bloomberg Note:(3) Average of Sales in Current Year (CY) + 1 and (CY) + 2; from SSB 4/20/00, Equity Research.Example : Market value / Sales (revenue) estimated market valueTD Waterho

33、use $15.75$ 1,315 m376,400,000100 %75 %$ 1,496 m$ 5,059 m$ 5,928 mShare price for comparable company1Total sales for comparable2Number of shares outstanding for comparable1Market factorCompany factorSales forecast for E*Trade3Estimated market valueMarket value of comparable company4.5Market value /

34、sales (revenue) multipleWe can compare E*Trade with TD Waterhouse to illustrate this valuation technique.Quantitative examples of valuation techniques第13頁，共42頁。The price / earnings ratio is the most widely accepted tool for valuing companies, however the difficulty with most eCommerce ventures is th

35、at they do not generate earnings during startup.Price / earnings ratioShare price for comparable companyEarnings (EBIT) of comparable companyNumber of shares outstanding for comparableMarket factorCompany factorEBIT forecast for E*TradeEstimated market valueMarket value of comparable companyPrice /

36、earnings ratioNotes:The Market and Company factors are adjustments to better reflect the value; Andersen Consulting analysis.Quantitative examples of valuation techniques第14頁，共42頁。Sources:(1) /p/d/twe.htm as of May 25, 2000.(2) /p/d/twe.htm for TD Waterhouse FY00 EBITDA minus depreciation and amorti

37、zation.Note:(3) From DCF calculation, FY00 estimate, adjusted to reflect what percentage of operating expenses “older” brokerage firms typically spend on advertising. Example : Price / Earnings estimated market valueTD Waterhouse $15.75 $ 232 m376,400,000100%75% $ 42.0 m$ 804 m$ 5,928 mShare price f

38、or comparable company1Earnings (EBIT) of comparable company2Number of shares outstanding for comparable1Market factorCompany factorEBIT forecast for E*Trade3Estimated market valueMarket value of comparable company25.5Price / Earnings multipleWe can compare E*Trade with TD Waterhouse to illustrate th

39、is valuation technique.Quantitative examples of valuation techniques第15頁，共42頁。Market analysts often use a high level estimate based on customer lifetime value to sanity check more rigorous calculations and test if current share prices are justifiable.Notes:(1) The number of customers is typically es

40、timated as a market share projection of the total estimated market.Andersen Consulting analysis.Discounted annual revenue / customerAverage contribution margin (%)Customer lifetime contributionCost of acquisitionLifetime customer valueChurn rate (%)Number of customers1Estimated market valueSimplifie

41、d customer lifetime value equationQuantitative examples of valuation techniques第16頁，共42頁。We can use the example of E*trade to illustrate how this valuation approach works.Sources:(1) SSB 4/20/00, Equity Research- Internet / Financial Services analysis.(2) SSB 4/20/00, Equity Research Gross Margin FY

42、00 used as proxy.(3) Lehman Brothers Estimates, May 13, 1999, based on (1-retention ratio) for the industry.Example : Customer lifetime value / estimated market value1Annual revenue per customer 1Average contribution margin (%)2Customer lifetime contributionCost of acquisition1Lifetime customer valu

43、eChurn rate (%)3Number of customers1Estimated market value$15.6/trade x20.1 trades/ customer = $31362%10%$1,932$256$1,6762,400,000$ 4,088 mQuantitative examples of valuation techniques第17頁，共42頁。Appendix: Internet company valuation techniquesOverview of valuation techniquesViewpoints of leading analy

44、stsQuantitative examples of valuation techniques第18頁，共42頁。Although commonly used, price multiple valuations have been criticized as inaccurate valuation measures. CriticizerPrice/SalesMcKinseyValuation ModelPoint of ViewPrice-to-earnings and revenue multiples are meaningless when there are no earnin

45、gs and revenues are growing astronomicallyPrice multiples dont account for the uniqueness of a companyTraditional valuation metrics have offered little or no guidance to investors trying to value Internet stocksFor companies with no earnings, old valuation rules-of-thumb like to price-to-earnings ha

46、ve lost their relevanceCredit Suisse First BostonInternet models have typically been valued on revenues since revenues are a reflection of customer demand for the service and market positionWe do not believe that applying straightforward revenue multiples to a broad range of online business models i

47、s sustainable. At some point you have to grow revenues profitablyJeffriesViewpoints of leading analysts第19頁，共42頁。Two valuation approaches, discounted cash flow and real option analysis, have support for explaining high Internet valuations.SupporterDiscounted Cash Flow,Free Cash FlowMcKinseyA modifie

48、d DCF approach can help to value high-growth, high-uncertainty and high-loss firmsMcKinsey suggest three modifications to make DCF more relevant given uncertaintyStart with the future, instead of the present. In other words, what the industry and company could look like in a future steady stateCreat

49、e expected outcome scenarios for different sales, margins and DCF company valueWeigh and assign probabilities to each group of scenario outcomesValuation ModelPoint of ViewCredit Suisse First BostonLike all businesses, Internet companies are valued on their ability to generate cash. If Internet comp

50、anies have higher valuations than their offline counterparts, the market must believe that they have higher cash flowsCSFB analysis indicates that New Economy companies tend to have superior cash economics than their Old Economy counterpartsExemplifying this trend, the earnings of Internet companies

51、 such as Dell, Yahoo!, and Amazon dramatically understate their ability to generate cashThese higher cash flows offer one explanation for the highflying valuations in the Internet sectorReal OptionsMerrill LynchMorgan Stanley Dean WitterMSDW analyst Jeff Camp believes DCF provides the clearest insig

52、ht into the fundamental value of a companys equityMSDW DCF models incorporate assumptions reflecting their view of the short- and long-term prospects for the companies and the industryML analyst Henry Blodget insists that considering strategic real options is important. With regards to Amazon valuat

53、ion: “If you project that far out, you absolutely have to consider the value of what a company might do - music, videos, computers, toys, travelCredit Suisse First BostonReal options offer a great way to wed strategic intuition with analytical rigor-an increasingly important issue given the pace of

54、economic changeReal options are a complement to the standard discounted cash flow approach, but add a meaningful dimension of flexibilityViewpoints of leading analysts第20頁，共42頁。 Source:McKinsey Quarterly 2000 1, “Valuing dot-coms”A modified, scenario-based discounted cash flow analysis can help to a

55、ccommodate uncertainty for future cash flows.Three related factors make it hard to value Internet companies: they have small profits, they are growing quickly and they are very riskyShorthand valuation techniques are meaningless when there are no earnings and revenues are growing astronomically. Ana

56、lysts have suggested multiples of customers or multiple of revenues three years out. These approaches are fundamentally flawed: speculating about a future that is only three or even five years away isnt useful when high growth will continue for an additional 10 yearsThe best way of valuing Internet

57、companies is to return to economic fundamentals with the DCF approach, which makes the distinction between expensed and capitalized investment unimportant because accounting treatments dont affect cash flowsBy relying solely on forecasts of performance, the DCF approach can easily capture the worth

58、of value-creating businesses that lose money for their first few yearsThe DCF approach cant eliminate the need to make difficult forecasts, but it does address the problems of ultrahigh growth rates and uncertainty in a coherent wayDCF buttressed by microeconomic analysis and probability weighted sc

59、enarios works where other methods failViewpoints of leading analysts第21頁，共42頁。The three-step modified scenario DCF process can help bound and quantify uncertainty.Step #2:Repeat the process of estimating a future set of financials for a full range of financialssome more optimistic, some less.A: Vola

60、tility of Expected ValueLow probability of outcomeBase probability of outcomeHigh probability of outcomeScenario AScenario BScenario CScenario D4035250163225353555355010Discounted-cash-flow value, $billion231Books and music sold outside the United Sates as well as sales of videos, digital video disc