Comparable Companies Analysis

Transcription

1 Comparable Companies Analysis Educational TMT Group with Assistance from the FIG Group Mario Campea, Michael Liu, Steve Lo, Kevin Gryp & Vinayak Modi 06-Nov-13

2 Disclaimer The analyses and conclusions of the Western Investment Club ( WIC") contained in this presentation are based on publicly available information. WIC recognizes that there may be confidential information in the possession of the companies discussed in the presentation that could lead these companies to disagree with WIC s conclusions. This presentation and the information contained herein is not a recommendation or solicitation to buy or sell any securities. The analyses provided may include certain statements, estimates and projections prepared with respect to, among other things, the historical and anticipated operating performance of the companies, access to capital markets and the values of assets and liabilities. Such statements, estimates, and projections reflect various assumptions by WIC concerning anticipated results that are inherently subject to significant economic, competitive, and other uncertainties and contingencies and have been included solely for illustrative purposes. No representations, express or implied, are made as to the accuracy or completeness of such statements, estimates or projections or with respect to any other materials herein. Actual results may vary materially from the estimates and projected results contained herein. The sole responsibility for the content of this publication lies with the authors. Its contents do not reflect the opinion of the University Students Council of the University of Western Ontario ( USC ). The USC assumes no responsibility or liability for any error, inaccuracy, omission or comment contained in this publication or for any use that may be made of such information by the reader.

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4 Valuation Overview Why do we value companies? Valuation has a broad range of applications: M&A situations What price should Blackberry be sold at? Initial Public Offerings (IPOs) How much is Twitter worth? Restructuring How would a change in capital structure impact the value of the firm? Investment decisions Should I buy/hold/sell the stock given its current price? Is the company overvalued or undervalued at the moment?

5 Valuation Methodologies How do we value companies? Value Type Theoretical Basis Practical Application Market Intrinsic Comparable Companies Analysis (Trading Comps) Precedent Transactions Analysis Discounted Cash Flow (DCF) Analysis

6 Valuation Methodologies Value an apple tree Find a pre-existing market Compare to the price of other apple trees being sold Count the apples and estimate their value

7 Overview Why use comparable companies in valuation? Similar companies provide a highly relevant reference point for valuing a given target due to the fact that they share key business and financial characteristics, performance drivers, and risks. Trying to answer What is the value of my company compared to other similar companies in the market? Target can be public or private, but comparables will only be public companies Implied valuation does not reflect any premium for control Often difficult to identify relevant comparable companies

8 Selection Criteria for Comparable Companies Basis of Comparison Business Profile Sector Products and Services Customers and End Markets Distribution Channels Geography Financial Profile Size Profitability Growth Profile Return on Investment Credit

9 P/E Valuation Multiple Price to Earnings (P/E) Multiple Price to earnings (P/E) is a common multiple: Also known as price multiple or earnings multiple Price per Share Earnings per Share Example: Share price of $12 Earnings per share of $2 Market capitalization of $12,000,000 Net income of $2,000,000 OR Market Capitalization Net Income

10 P/E Valuation Multiple Price to Earnings (P/E) Multiple P/E multiples represent the price an investor is willing to pay for each dollar of earning: $12 $12,000,000 OR $2 $2,000,000 Price / Earnings = 6.0x

11 EV/EBITDA EV / EBITDA Multiple Another common multiple is EV/EBITDA: Enterprise Value Earnings Before Interest, Taxes, Depreciation & Amortization Using EV / EBITDA vs. P / E Neutralizes the effect of capital structure: EV represents all claims on the business (Common Equity + Net Debt + Preferred + Minority Interest) EBITDA accrues to both debt and equity holders since it is before interest In practice, EBITDA multiples are more useful as a basis of comparison

12 EV/EBITDA Other Hints & Tips Investors prefer forward-looking metrics as opposed to trailing metrics Use today s price or enterprise value divided by projected future EPS or EBITDA Operating metrics must reflect the performance of the ongoing business Comps must be normalized for one-time expenses to value companies Moving up the income statement provides less opportunity for distortion Valuation and operating metrics may vary by industry Investors can use any multiple as long as the numerator relates to the denominator Would you ever see a P / EBITDA multiple? What about P / Sales? In some cases, the denominator can be a non-financial metric This is useful when trying to find a basis of comparison between companies at different stages of growth or when financial metrics are unavailable Example: EV / Monthly Active Users, EV / Page Views

13 Trailing vs. Forward Trailing multiples us the current price (or EV) and compare it to historical measure TTM = Trailing Twelve Months i.e. Trailing P/E = Current Share Price / EPS from last 12 months Forward multiples use the current price (or EV) and compare it to future estimates Forward P/E = Current Share Price / Estimated EPS for the next 12 months Could also be projected earnings for the next full-year fiscal period Usually use consensus earnings pulled from Bloomberg or Thomson ONE Which is better for valuing a stock? What does a lower Forward P/E when compared with the Trailing P/E mean?

14 Key Factors What drives multiples? Growth Risk Margins

15 Live Walkthrough Example of Valuation Metrics Comparable Companies Analysis '09A-'11E Market EPS Price / EPS EPS Price Capitalization 2009A 2010E 2011E 2009A 2010E 2011E Growth Frog Productions $30.38 $45,570 $3.21 $3.44 $ x 8.8x 8.5x 3.6% Ceep Apples $15.12 $13,608 $1.28 $1.38 $ x 11.0x 10.3x 4.7% Jim BR LPC $25.01 $12,505 $2.03 $2.17 $ x 11.5x 10.6x 5.3% Jack's Barn $50.23 $10,046 $4.75 $5.04 $ x 10.0x 9.4x 4.2% London Juicehouse $80.12 $8,012 $5.34 $5.87 $ x 13.6x 12.2x 7.1% Average 11.8x 11.0x 10.2x 5.0% Median 11.8x 11.0x 10.3x 4.7% AppleCo $12.34 $6,787 $1.06 $1.14 $ x 10.8x 9.8x 5.9%

16 Equity Value v. Enterprise Value Multiples Equity Value Multiples (Price/metric) Enterprise Value Multiples (EV/ metric)

17 Industry Specific Multiples Common EV Multiples: Enterprise Value / Access Lines/Fiber Miles/Route Miles EBITDAX EBITDAR Reserves Square Footage Sector Telecommunications Natural Resources, Oil & Gas Casinos, Restaurants and Retail Metals & Mining, Natural Resources, Oil & Gas Real Estate and Retail

18 Industry Specific Multiples Common Equity Multiples: Equity Value (Price) / Book Value (per share) Tangible Book Value (per share) Funds from Operations FFO (per share) Net Asset Value (NAV) (per share) Discretionary Cash Flow (per share) Sector Financial Institutions, Homebuilders Financial Institutions, Biotechnology, Healthcare Real Estate Financial Institutions, Real Estate, Mining Natural Resources

19 TMT Specific Multiples Revenue and User Multiples Enterprise Value/ Revenue Serves as a proxy for the P/E ratio Compares the entire value of the firm to the revenues generated Inherent limitations: ignores profitability completely Important to look at the change in multiples over time Many TMT companies have little to no profits in the early stage Enterprise Value/Users For most such companies, users are the main driver behind revenue Google, Facebook, Twitter, Zynga, LinkedIn, etc. Forward multiples are very important Inherent limitation: ignores revenue generation completely Company may lack revenues, or it may not be a sound basis for comparison

20 TMT Specific Multiples Other Core Metrics Subscriber or user growth rate Since users drive revenues, user growth is critical to TMT Retention rate High retention rates indicate more stable revenues and cash flows Can indicate quality of product and distinguish fads Time on site More time means more potential exposure to advertisements and products Paying Users/ Users What percentage of users actually contribute to revenues Revenue per user Compliments above metrics, and the EV/U multiple

21 TMT Specific Multiples Case Study Twitter and Facebook Based on a $13.9B market cap, twitter has an EV of $14.61B Twitter Facebook EV/Revenue: 24.4x FY EV/Revenue: 14.6x EV/Users: 25.0x FY EV/Users: 18.75x Time on site: 1 hour / month Revenue per user: $0.55 EV/Revenue: 15.8x FY EV/Revenue: 14.3x EV/Users: 102.5x FY EV/Users: 82.0x Time on site: 6.5 hours / month Revenue per user: $1.41 No multiple is enough by itself, all factors must be taken into account

22 Precedent Transactions Overview Theory What is Precedent Transactions Analysis? Trying to answer: How much will my company sell for relative to other similar companies that have already been sold? Similar to trading comparables, we can look at the prices paid in previous acquisitions to determine to the value of a company Using the price paid in an acquisition, we can derive implied transaction multiples Precedent transactions usually lead to higher valuations than trading comparables: Control premium Financial vs. Strategic buyer? Application Screen for transactions in the same industry, similar size, etc. Timing with respect to market cycles is also important Generally less applicable than trading comparables due to insufficient data (timing, similarity of precedents, etc.)

23 Precedent Transaction Live Walkthrough Example Precedent Transactions Analysis Transaction Transaction Implied LTM P / E Acquirer / Target Value Net Debt Equity Value Net Income Multiple Fuji / McIntosh $10,500 $3,194 $7,306 $ x Discovery / Granny Smith $8,200 $4,872 $3,328 $ x Empire / Gala $7,540 $5,635 $1,905 $ x Red Delicious / Winesap $7,220 $4,197 $3,023 $ x Cortland / Northern Spy $5,050 $2,591 $2,459 $ x Average 16.9x Median 16.8x

24 Comparable Companies Analysis Educational TMT Group with Assistance from the FIG Group Mario Campea, Michael Liu, Steve Lo, Kevin Gryp & Vinayak Modi 06-Nov-13