Equity valuation: Aplications and processes Flashcards
(21 cards)
Intrinsic value
Valuation of an asset with complete understanding of the asset’s characteristics
Mispricing percieved by analyst
IV(analyst)-Price=(IV actual-Price)+(IVanalyst-IVactual)
Fair market value
Price at which a hypotheticall, able and willing seller would trade an asset with a hypothetical, able and willing buyer
Investment value
Value of a stock to a particular buyer
Most relevant valuation metric for an analyst
For investment decision - Intrinsic value
For acquisition decision - Investment value
Applications of equity valuation
- Valuation
- Stock selection
- Reading the market
- Projecting the value of corporate actions
- Fairness opinion
- Planning and consulting
- Communication with analysts and investors
- Valuation of privated business
- Portfolio management
Equity valuation process
- Understand the business
- Forecast company performance
- Select appropriate valuation model
- Convert forecast into valuation
- Apply valuation conclusions
Stock Selection
By comparing the intrinsic value of the stock with its market price and comparing the price with comparable stocks
Reading the market
Current market prices include future market expectations of the variables that influence the stock market
Estimate the variables by comparing the intrinsic value to the stock market
Proyecting the value of a corporate action
Determine the value of a proposed corporate merger, acquisition, divestiture, management buyout…
Fairness opinion
Support professional opinion about the fairness of a price to be recieved by a minority in a merger of acquisition
Planning and consulting
Evaluate effects of proposed corporate strategies on firm’s stock price
Communicating with analysts and investors
Common basis to discuss and evaluate company’s performance, current state and future plans
Valuation of private business
Determine the valua of a firm’s holdings in a non publicly traded company (determine the value of their position or proposed position)
Portfolio management and steps
Determine the value and risk of a portfolio of investments
Steps: planning, execution and evaluation of results
Planning: defining investment objectives and constraints and articulating investment strategy
Executing: valuation of potential investment
Porter’s five forces
- Threat of new entrants in the industry
- Threat of substitutes
- Bargaining power of buyers
- Bargaining power of suppliers
- Rivalry among existing competitors
Profit generating strategies
- Cost leadership: lowest-cost producer of the good
- Product differentiation: adding new featues or services to make the product more attractive and charge a premium for it
- Focus: applying either strategy to a specifi segment of the industry
Quality of earnings issues
- Accelerating or premature recognition of income: obscures declines in operating performance or boosts recorded revenue
- Reclassifying gains and nonoperating income as operating income: hides underperformance or declining sales
- Delaying recognition of expenses, capitalising expenses or classifying operating expenses as non operating expenses: increases operating income
- Amortization, depreciation and discount rates: reduce current recognition of expenses, deferring recognition to later periods
- Off-blance sheet issues: SPEs obscuring nature of assets and libilities or structuring operating leases as financial leases reducing total liabilities reported in BS
Absolute vs relative valuation models
Absolut valuation model: estimates asset’s intrinsic value (ex: discounted cash flow)
Relative valuation: estimates an asset’s investment characteristics compared to the value of other firms (ex: ratios)
Sum of the parts valuation
Valuing the individual components of a company and adding them all together to obtain the value of the whole company
Broad criteria of choosing appropriate approach
- If model fits the characteristics of the company
- If appropriate based on quality and availability of data
- Suitable given the purpose of the analysis
