Stock Valuation Methodologies Essay

1175 words - 5 pages

Valuation methodologies overview
Advantages and disadvantages

Comparable company trading analysis
Description
• Compare the current trading level of a Company to its peers
• Specifically determine how the market has valued the earnings, cash flow, net asset value, assets or other characteristics of similar companies. Compare these ratios to the Company’s performance and/or use them to impute an aggregate market value of the Company
Advantages
• Market efficiency means that trading values in theory should reflect industry trends, business risk, market growth, etc.
• Values obtained can be a reliable indicator of the value of the Company for a minority investment (i.e., a non-control investment)
• Useful technique for assessing vulnerability: when fundamental vs. market value gap is large, vulnerability may be high
Disadvantages
• Always comparing apples to oranges. Truly comparable companies are rare and differences are hard to account for
• Thinly traded, small capitalization or poorly followed stocks may not reflect fundamental value
• Many people feel that the stock market is “emotional” and that it sometimes fluctuates irrationally (i.e., the market can be wrong)
• Current high level of M&A activity in certain sectors has introduced distortions in relative pricing benchmarks
Comments
• The unaffected trading level does not include a control premium or synergy value associated with strategic acquisitions
• Explaining value gaps between the Company and its comparables can involve extensive use of judgment

Comparable transactions and premium analysis
Description
• Determine the value offered in past acquisitions of similar companies
• Specifically, determine the pricing of past deals as compared to the target’s financial performance and unaffected (pre-announcement) market value
Advantages
• Recent comparable transactions can reflect supply and demand for salable assets
• Realistic in the sense that past transactions were successfully completed at certain multiples or premiums. Indicates a range of plausibility for premiums offered
• Trends, such as consolidating acquisitions, foreign purchasers, or financial purchasers may become clear
Disadvantages
• Past transactions are rarely directly comparable – always comparing apples to oranges
• Public data on past transactions can be scarce or misleading
• Public data seldom discusses deal protection put in place by acquiror and target
• Values obtained often vary over a wide range and thus can be of limited usefulness
• Prevailing market conditions can lead to significant distortions
Comments
• Interpretation of the data requires familiarity with the industry and the properties involved
• Premiums and appropriate multiples can (and often do) change over time

Discounted cash flow analysis
Description
• Discount unleveraged projected free cash flows (or in some cases dividendable income) at Company’s cost of capital to obtain an economic present value of...

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