The emails for this class will be collected in this file. Have fun with them!
|Date||Email sent out|
1. Preclass work: I know that some of you are worried about the class but relax! If you can add, subtract, divide and multiply, you are pretty much home free... If you want to get a jump on the class, you can go to the class web site
2. Syllabus & Calendar: The syllabus for the class is available on the website for the class and there is a google calendar for the class that you can get to by clicking on
3. Lecture notes: The first set of lecture notes for the class should be available in the bookstore by the start of next week. If you want to save some money, they can also be printed off online (if you want to save some paper, you can print two slides per page and double sided). To get to the lecture notes, you can try
4. Delivery choices: I hope to see you all in class for every session, but there are two supporting delivery mechanisms that I would like you to take advantage of:
5. Books for the class: The best book for the class is the Investment Valuation book - the third edition. (If you already have the second edition, don't waste your money. It should work...) You can get it at Amazon or wait and get it at the book store... If you are the law-abiding type, you can buy "Damodaran on Valuation" - make sure that you are getting the second edition. Or, as a third choice, you can try The Dark Side of Valuation, again the second edition, if you are interested in hard to value companies.. Or if you are budget and time constrained, try "The Little Book of Valuation". http://www.stern.nyu.edu/~adamodar/New_Home_Page/public.htm
6. Valuation apps: One final note. I worked with Anant Sundaram (at Dartmouth) isn developing a valuation app for the iPad or iPhone that you can download on the iTunes store: http://itunes.apple.com/us/app/uvalue/id440046276?mt=8
Until next time...
Just a couple of quick notes leading into next week's class. First, please do accept the invite to the class on Lore that I sent you on Sunday. If you have no idea what I am talking about, just email me and I will send you a private invitation. Second, please do print off the lecture note packet 1, when you get a chance. You can find it at:
Third, we don't have to wait until next week to start talking about valuation, right? So, let's get started, talking about Apple. I posted this on Apple, on my blog, day before yesterday.
When you get a chance, take a look at the blog post. Until next time!
A couple of final requests before class tomorrow. First, if you have ignored my repeated nagging and have still not added yourself to the class list on http://www.lore.com, please add yourself now (If you have issues, email me...). Second, I don't know whether you have name plates (you know what I am talking about.. those placards that you set in the table with your name on them....) but if you do, please bring them to class with you. The lecture note packet 1 will be necessary toward the end of the second session. So, please do buy it, print it or download it still).
Really looking forward to tomorrow! Until then!
With that out of the way, have you classified yourself yet? Are you a proud lemming, a "Yogi bear" lemming or a lemming with a life-vest? While you are pondering that life-changing question, I do have some points to make:
2. Once you pick a company, collect information on the company. I would start off on the company's own website and download the annual report for the most recent year (probably 2006) and then visit the SEC website (http://www.sec.gov) (for US listings) and download 10Q filings...
3. The web cast for the first class are up in all three forums (website, iTunes U and Lore). You can access it by going to:
4. Post class test: To review what we did in class today, I prepared a very simple post-class test. I have attached it, with the solution. Give it your best shot
If you did not get the syllabus, project description and the valuation intro in class this morning, they are all available to print off from this site.
Just to restate what I said in class this morning, you can pick any publicly traded company anywhere in the world to value. The non-US company that you value can have ADRs (but does not have to have ADRs) listed in the US but you still have to value it in the local currency and local market. You can even analyze a private company, if you can take responsibility for collecting the information.
When you are done, go into lore.com and submit your answer. I will give you mine on Sunday. Until next time!
Attachment: Weekly Challenge #1
On a different note, please do try the weekly challenge that I sent out in yesterday's email and submit the responses on Lore. I would love to see a healthy response rate to the first challenge, since it is often downhill from here... Premature graduation, as I noted, will rear its ugly head in late February and then I am sunk.
The TA for this class is Leonardo and his office hours are listed below:
On the lecture note front, I have some good news. It looks like the bookstore will get packet 1 finally in stock tomorrow. If they don't have it in, please let me know. I am sorry about the printing problems. I am inclined to blame Microsoft (and Powerpoint) for all my ills and this feeds into my conspiracy theory.
|2/8/13||I know that today was supposed to be your day of rest but I lied. Here are some quick notes for today:
1. Valuation of the week: The valuation of the week was posted on Tuesday and the Google shared spreadsheet is not showing much action yet. Please check out the valuation spreadsheet, make your changes and enter your value estimate, when you get a chance. You can find it on the webcast page for the class, Lore and on iTunes U.
2. Weekly challenge: The weekly challenge was posted on Wednesday afternoon in all the usual spots. Please give it a shot and submit your solution on Lore. The solution will be posted on Sunday.
3. Post class tests: I posted the pre-class and post class tests for Wednesday's sessions. If you have a chance, do take a look at them both. Should not take more than a couple of minutes and you can find it in all three forums.
4. Email chronicles: The emails for the class have now made their way into the email chronicles. If you want to review all the emails sent so far, please go to
I have to warn you that this is gripping reading... the suspense will keep you up all night...
5. Blog posts on Apple: I made a couple of posts on Apple, one yesterday (on the difference between valuing and pricing) and today (on Einhorn's value play for the company)
On price versus value: http://aswathdamodaran.blogspot.com/2013/02/apple-redux-thoughts-on-value-price-and.html
On Einhorn's proposal: http://aswathdamodaran.blogspot.com/2013/02/financial-alchemy-david-einhorns-value.html
I won't be giving away too many punchlines if I tell you that I little value added in Einhorn's play and I don't think much of the play to begin with. Surprising, given his history as an investor but he did also buy a share of the Mets. That might have messed with his mind.
Hope you are digging your way out of the snow! I had some dreaded shoveling to do but I wanted to send this email out, before I decompress. The newsletter for the week is ready to go and is attached to this email. Please take a look at it when you get a chance. On a different count, I don't know whether you have been tracking the Dell buyout but one of Dell's stockholders, Southeastern Asset Management, challenged the buyout price. I am attaching the letter that they sent to Dell. Not only is it a good read on valuation but it also hoists Michael Dell on his own petard, using the words he used to claim success on his acquisitions/investments against him. Hope you enjoy it. Until next time!
For those of you who were able to try the weekly challenge, thank you. There was a 25% response rate, but I am sure it will pick up in the coming weeks. I have attached the solution, posted it on my webcast page for the class as well as on Lore and on iTunes U. Next week, we will pick up the pace, starting with riskfree rates in tomorrow's class and equity risk premiums on Monday. I am sure that you cannot wait. Until next time!
Attachment: Weekly challenge #1 solution
Today's class started with a look at a major investment banking valuation of a target company in an acquisition and why having a big name on a valuation does not always mean that a valuation follows first principles. After setting the table for the key inputs that drive value - cash flows, growth, risk, we looked at the process for estimating the cost of equity in a valuation. The key concept is that of a "marginal" investor, who is diversified and looking at risk through that investor's eyes. We spent the rest of the session talking about what should be (but no longer is) the simplest input into the process: the risk free rate.
I have a paper on riskfree rates that elaborates on the discussion in class today. It is really not a painful read, if you can spare the time. You can get to it by going to:
The topic seems to have acquired some followers among appraisers/analysts. This article provides a reasonable synopsis of where they stand:
hope you had a chance to try to estimate the risk free rate in at least one challenging currency... Come on.. I am not asking for much, and you have the raw data. Anyway, moving right along, thank you for giving the Apple valuation your best shot. I think about half the class tried it and that is good. You can see the spread of valuations that people arrived at, by going to:
It is time to move on to the second valuation of the week. This week's company is also in the news right now: Dell. A management buyout exposes the soft underbelly of corporate governance and exposes all the potential conflicts of interest that one can think of. I have a post on this topic that you can read by going to:
I have also attached my valuation of Dell to this spreadsheet.
Once you have wrestled with the numbers, go to the shared Google spreadsheet and give me your estimates.
Attachment: Dell MBO valuation
We are little more than halfway through the discussion of equity risk premiums but the contours of the discussion should be clear.
b. Country risk premium: The last few months should be a reminder of why country risk is not diversifiable. As you see markets are volatile around the world, I think you have a rationale for a country risk premium. You can get default spreads for country bonds on my site under updated data. If you are interested in assessing and measuring country risk, to get from default spreads to equity risk premiums, you need two more numbers. The first is the standard deviation for the equity market in the country that you are trying to estimate the premium for. Try the Bloomberg terminal. Find the equity index for the country in question (Bovespa for Brazil, Merval for Argentina etc.) and type in HVT. This should give you the annualized standard deviation in the index - change the default to weekly and use the 100-week standard deviation. Do the same for the country bond in question. The two standard deviations should yield the relative volatility. If you have trouble finding either number, just multiply the default spread by 1.5 to get a rough measure of the country risk premium.
c. Company risk exposure to country risk: My concept of lambdas for countries is a work in progress. I have a paper on the topic that you can read, if you are so inclined:
d. Implied equity risk premiums: I am attaching the excel spreadsheet that will allow you to compute implied equity risk premiums. I am using the numbers that I used at the start of February to come up with an equity risk premium of 5.46%.
Please try to update the implied premium, using today's numbers for the S&P 500 (easy) and the 10-year T.Bond rate (easy). Leave everything else untouched including growth rate in earnings for next five years & updated dividends and buybacks from the spreadsheet (since these were updated a month ago). Follow the instructions to get the updated equity risk premium. We will explore it further in class on Wednesday.
Remember, no class on Monday. Until next time!
Attachment: Implied ERP for February 2013
I hope the week was a good (and productive one). Next week is a short week, since we have no class on Monday. Just to prod you (and harass you), I want to check on where you are on the project. Assuming that you have picked a company, joined a group and downloaded the financials, I had suggested after Monday's class that you estimate a riskfree rate in the currency that you will be doing the valuation in. If you have doubts about how to do this, the weekly challenge for this week will be a good way to test your understanding. It is online in the usual spots (webcast page, Lore and iTunes U) and is attached to this email.
By the way, if you do have a chance, give the Dell valuation a few minutes of your time as well....
Once you have a risk free rate, here are your next few steps:
Finally, I hope you have had a chance of updating the implied equity risk premium spreadsheet that I sent you with Wednesday's email. All you have to do is update the S&P 500 and the US treasury bond rate and use the goal seek (instructions on spreadsheet). Until next time!
Attachment: Weekly Challenge #2
|2/15/13||Another promised day of rest is ruined... Sorry... In case, you have a chance to try out the implied ERP spreadsheet (attached again to this email), I put together a short webcast (20 minutes) on both the mechanics of the implied ERP and how I get the numbers for the spreadsheet. I hope you get a chance to look at the webcast (and any feedback on making these webcasts more useful will be appreciated):
I have also put the links up on my webcast page(and Lore & iTunes U) for the data on buybacks and earnings growth.
Hope you are having fun this weekend... Just a quick note. The weekly newsletter is attached.
Attachment: Newsletter #2
|2/17/13||I have attached the weekly challenge solution for this week, and unlike last week, I think that this one was easy. In the meantime, though, I thought it would make sense to do stop and look back, even though it has been only two weeks in the class. Here is what we have done:
Lectures: We are four sessions into the class, about 15% of the overall class. I know that most of you have been in class, but just in case, you have missed a session, please do try to watch the webcast of the session. You can get them in one of three places: (a) the webcast page for the class ( http://www.stern.nyu.edu/~adamodar/New_Home_Page/webcasteqspr13.htm ), (b) the Lore page for the class, if you are enrolled in the class and (c) iTunes U (if you have the app and added the class). We have covered the Introduction to valuation lecture note packet and Lecture note packet 1 (Pages 1-59).
Pre-class and Post-class tests: As you probably know by now (unless you habitually come in five minutes after each class starts), we spend the first 5 minutes of each class on a start of the class test. At the end of each class, I also put up a post-class test and solution (which should take only a few minutes to work through) and relate back to the topics covered during class. If you have not tried these or were unaware that they existed, you can find them by going to:
Post class test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session1test.pdf
Post class test solution: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session1soln.pdf
Start of the class test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/tests/biastests.ppt
Post class test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session2test.pdf
Post class test solution: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session2soln.pdf
Start of the class test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/tests/kennecott.ppt
Post class test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session3test.pdf
Post class test solution: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session3soln.pdf
Start of the class test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/tests/risktest.ppt
Post class test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session4test.pdf
Post class test solution: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session4soln.pdf
Weekly Challenges: These are weekly exercises, ungraded and optional, designed to stretch what was learned during the week to the next level (sometimes, I succeed, sometimes, I do not). We have had two weekly challenges so far:
Weekly Challenge 1:
Weekly Challenge 2:
Valuation of the week: In keeping with my belief that you learn valuation by doing, not talking or reading, I will be putting up a valuation every week of the class. This too is optional and you are welcome to take my spreadsheet, change it to reflect your different assumptions and post it on a shared Google spreadsheet. We have had two so far:
Apple- Valuation on January 1, 2013: http://www.stern.nyu.edu/~adamodar/pc/blog/AppleDec2012.xls
Shared Google spreadsheet: https://docs.google.com/spreadsheet/ccc?key=0Alt0SdORYnWadDY5djhQZ0RvQWpPc2Zybl81QmR1SlE
Dell- A post-MBO valuation: http://www.stern.nyu.edu/~adamodar/pc/blog/Dellfeb13.xls
Shared Google spreadsheet: https://docs.google.com/spreadsheet/ccc?key=0Alt0SdORYnWadGg3SDUxQkdzWUt5SEduY3A2OGZpZHc&usp=sharing#gid=0
Group project: By now, you should be in a group and have picked a company. (If not, please let me know). Assuming that you have picked a company, you should also have pulled up the financials for the company. In fact, if you are really on top of things, you should also have a risk free rate in the local currency and an equity risk premium. One approach that we started on Wednesday was the implied ERP and I did post a webcast on how the model is constructed and can be used:
Valuation tools webcast #1: Estimating an implied ERP
Readings: With all this stuff to do, who has time to read? If you do, and have one of my books, you should be looking at the introductory chapters (on the philosophy and big picture of valuation) and on the mechanics of estimating the risk free rate and equity risk premium (chapters 7 &8 in investment valuation, for instance).
As you can see, it has been a busy two weeks, but if you can still catch up. Each week that you put if off will be a harder climb. Good news... there is no class tomorrow... Bad news... there will be a valuation of the week on Wednesday.
Until next time!
I realized right after I sent you the solution to the second weekly challenge that I have two versions of it floating around, one on the webcast page for the class and one for the lore/iTunes U/ email versions. One is for China and the other is for Peru. I am really, really sorry and have attached the weekly challenge/solution to the China challenge as well as the weekly challenge and solution for Peru. Until next time!
It must have been quite a relief not to get an email from me for a whole day... but it is back to the torture. I just put up the valuation for this week and it is Heinz. I am sure that you know that Berkshire Hathaway (Warren Buffet) and a Brazilian investor group have bought Heinz, owner of some of the most venerated brand names in condiments.... The spreadsheet that I have put reflects Heinz as it stands today, and my estimate of value is about $54/share, about where the stock was before the deal but well below the deal price of $72. It is possible that the Brazilian group (which will have operating control of the firm after the deal) can change the firm to deliver more than $72. As you change the inputs, here is the interesting question to ask yourself. Does the fact that Buffet is part of the deal "bias" your valuation? Put differently, are your inputs and value biased up because you think that Buffet does not overpay? Note that there is nothing wrong with it, but worth thinking about...
As always, there is a Google shared spreadsheet that you can enter your numbers in. Just one request. The shared spreadsheet is set up so that you can input and edit your line of number, but it is easy to mess up the spreadsheet either intentionally or accidentally. So, please don't rename the spreadsheet (someone renamed the Apple valuation spreadsheet as the IBM valuation spreadsheet) or mess up with other people's numbers. And, by the way, if you are Silvio Berlusconi (his name showed up on the Apple valuation shared spreadsheet, with 100% revenue growth, 99% operating margin and a 1% cost of capital for Apple), you have better things to do than valuation (perhaps, a bunga bunga party...)
Until next time!
By now, you are probably tired of equity risk premiums and I don't blame you. Today's session, though, was all about implied equity risk premiums and what causes them to change over time. Other things remaining equal, higher stock prices, higher cash flows and higher expected growth all push up the ERP, whereas a higher riskfree rate pushed the ERP down. If you get a chance, please play with the equity risk premium spreadsheet to check for yourself.
If after all of this, you still want to read more about equity risk premiums, here is the link to my magnum opus (or something opus), the annual update I do on equity risk premiums:
|2/22/13||A few quick notes. The first relates to the bottom up beta discussion from the last session. Rather than send you a webcast, I thought it might be simpler to just send you a document that I put together on the top ten questions that you may have or get asked about bottom up betas. I think it covers pretty much all of the mechanics of the estimation process, but I am sure that i have missed a few things.
I hope you find it useful. On a different note, don't forget to give the valuation of the week (Heinz) a shot as well as the weekly challenge for this week (with the implied ERP over time...). Until next time!
I hope that you are having a good start to the weekend. This week's newsletter does not have much news, since we had only one session. That session, though, did complete our discussion of equity risk premiums. I hate to plug this one more time, but please do take a look at the weekly challenge, since it relates to the equity risk premium discussion. Next week, we will finish our assessment of discount rates and start on cash flows. So, if you have not picked a company yet, please do. Until next time!
Attachment: Newsletter #3
I hope you had a chance to try the weekly challenge. If you did, you probably found it more an exercise in statistics than valuation and that is good. Statistics is a vastly under used tool in valuation. On a different note, we will complete our discussion of bottom up betas and discount rates this week and move on to cash flows. Until next time!
Attachment: Weekly challenge 2a solution
Today's class represented the final pieces of the discount rate puzzle. We began with a continued discussion of bottom up betas, focusing on defining comparable firms and expanding the sample. We continued with the cost of debt, starting with a definition of the cost of debt as a long term, current cost of borrowing and laying out a procedure for estimating this cost, even for firms that don't have traded bonds/ bond ratings. We also took a detour into estimating the cost of debt for firms that may receive subsidized debt from the government/ other entities. Finally, we looked at the costs of other hybrids and how to weight the different sources of capital to arrive at a cost of capital.
Oops.. Missed the Amazon links for forensic accounting:
|2/28/13||With the quiz coming up next week, you have probably put the project on the back burner. But just in case you are working on it (and it is great preparation for your quiz), here is where you should be. You should obviously have a company picked and been able to estimate the different pieces that go into the cost of equity: a risk free rate in the currency of your choice, an equity risk premium reflecting where the company operates and a beta, reflecting the businesses it is in. For your debt, you should have a pre-tax cost of debt, based upon an actual or synthetic rating and converted this pre-tax cost of debt into an after-tax cost with a marginal tax rate. Finally, you should be able to use this pre-tax cost of debt, in conjunction with the book value of debt, interest expenses and the "weighted" maturity of the debt to convert the interest bearing debt into a market value.
If you really are that far into your project, I am dazzled and encourage you to take one final step. Take your financial statements from last year and start cleaning up earnings. You can begin by computing the trailing 12-month earnings for your company and then looking for extraordinary items. You should also try to convert operating lease commitments (or similar commitments) to debt and R&D (and other long term asset creating expenses) into cap ex. If you are confused about either of these adjustments, I have very short webcasts (about 10 minutes or so) on how to make these adjustments on my website. You can find them by going to this link:
I hope you find them useful. Until next time!
As the discussion shifts from discount rates to cash flows, the details start mounting and it is easy to get lost in abstractions. If you are interested in getting past abstractions, I have put together three webcasts for this week (and they are also on the valuation tools page that I linked to yesterday):
On a different note, in case you have not been able to find the past quiz 1s and solutions, I have attached the links below:
Last week, we finished our discussion of discount rates, by looking at the cost of debt and capital. We then started on the estimation of cash flows, spending the bulk of our time talking about updating and cleaning up earnings. Next week, we will turn to the key question of how best to estimate growth and future earnings. The newsletter for the week is attached. Please do give the weekly challenge for this week (I have attached it to this email). It will be good preparation for the quiz. Until next time!
Attachments: Newsletter #4
I know that weekly challenge #3 was a grind, but for those who of you who persevered, my congratulations and thank you! I have attached the solution to the weekly challenge. I would suggest that even if you did not attempt the challenge that you take a look at it and the solution, as preparation for the first quiz. See you in class tomorrow! Until next time!
Today's class covered a lot of topics, some related to cash flows and some related to growth. Let's start with the cash flow part first. I argued that capital expenditures should be defined broadly to include R&D and acquisitions, for consistency reasons. If you want to count the good stuff (growth) that comes from these investments, you have to also count the cost. To get from cash flow to the firm to cash flow to equity requires us to bring in cash flows to and from debt. While borrowing more can make your cash flows to equity higher, they also make your equity riskier, raising the cost of equity. The net effect of leverage on the value of equity can be positive, negative or neutral, depending on the firm and where it is in its borrowing cycle. On growth, we started with historic growth and quickly dispensed with the notion that it is a fact. Depending on how it is estimated (arithmetic vs geometric) and over what period, you can get different numbers. It is also thrown off when a company's earnings go from negative to positive and generally becomes lower as companies get larger. While you can use analyst forecasts of growth, they have historically not done much better than time series forecasts, perhaps because analysts wear multiple hats.
As for the quiz, it is in the first 30 minutes of Wednesday's class. There will be class after the quiz. So, please hang around, if you finish early. IF YOU WILL NOT BE MAKING THE QUIZ, I NEED TO KNOW BEFORE 10.30 ON WEDNESDAY MORNING. If you are, it is open-book, open-notes but no laptops. You can use your iPads but no connectivity... I have attached the post-class test and solution. Until next time!
I had promised you a review for the first quiz. You can find it by going to:
The presentation for the review is attached. I hope the webcast helps... I will also post it tomorrow on Lore and iTunes U.
Attachment: Review presentation
|3/5/13||I know that you are in no mood for a valuation of the week, with the quiz tomorrow. However, Groupon is an interesting company for a number of reasons:
1. The CEO just got fired: Andrew Mason was fired as CEO by the board for presumably not doing his job well enough. Here is the news story about the firing:
To get some clues on why this happened, you may want to look at the top stockholders
2. The company's stock price has been on a long downward trend.
3. The company did report an operating income for 2012 in its latest 10K
But take a look at the numbers. The company slashed its marketing costs by more than 50% and it is making less revenue per member, neither of which are good indications for the future.
I had a blog post on Groupon in August of last year, when the stock hit $4.44
I updated the valuation to reflect the 2012 numbers and I am getting a value per share of $3.91.
And that is being generous, since I will be buying the class A shares which have one vote/share whereas the class B shares have 150 votes/share and are held by the insiders.
If you do decide to try this valuation, there is a Google shared spreadsheet
Until next time!
I won't ask you how the first quiz went because that may evoke the wrong response. The good news is that it is over.
If you were able to hang in there mentally and physically, we did complete our discussion of growth by looking at the fundamentals that drive growth. Starting with a very simple algebraic proof that growth in earnings has to come either from new investments or improved efficiency, we looked at how best to estimate growth in three measures of earnings: earnings per share, net income and operating income. With each measure of earnings, the estimation of growth boiled down to answering three questions: (1) How much is this company reinvesting to generating for future growth? (2) How well is it reinvesting? (3) How much growth is added or lost by changes in returns on existing investments? We closed the discussion by looking at how to estimate growth for money losing companies or companies where margins are expected to change significantly over time. In that context, we looked at forecasting operating income for a young growth company, with small revenues and operating losses. While we will look at full fledged valuations, where these parameters all come into play, I have attached an excel spreadsheet where you can play with the key drivers of growth and see the effect on the expected growth rate.
The weekly challenge for this week revolves around fundamental growth. Try it, if you get a chance. I have also attached the post class test and solution for today's class. Hope you get a chance
Sorry about the second email in two minutes but the quizzes are done and can be picked up on the 9th floor just outside the front door to the finance department. Please don't get the quizzes out of alphabetical order. The solution is attached, as is the distribution of the scores.
I noticed that most of you have picked up your quizzes. I will leave them out until Monday but please do pick them up, if you have not already. You are probably in no mood for more valuation, but if you are, I would spend some time estimating the "secret number" in valuation: the return on invested capital and/or return on equity. Here are the steps:
2. Go to the balance sheet for the prior year (if you are doing trailing 12 months, go to the same quarter of the previous year)
3. Adjust for leases & R&D
4. Compute your ROE, non-cash ROE and ROIC
You may get strange looking numbers. For instance, for some firms with large cash balances, your ROIC can be astronomical or negative. For young, growth firms, the ROIC and ROE can be negative. Don't freak out. You still have the power to override these numbers, when you make your forecasts for the future. In other words, what you really care about is ROE and ROIC on future new investments and you are not bound to use last year's numbers. If you are looking at industry averages for these numbers, they are on my website under updated data.
We also talked about items like goodwill and restructuring charges that can throw you off. If you are interested, here is the sleep-provoking paper of mine on ROE and ROIC that I talked about:
Until next time!
Two very quick notes. First, the newsletter for the week is attached. Second, the second packet is ready to download online. As with the first, I know the pdf file may create a problem. So, I have put the powerpoint version up, for download. You can find it by going to:
Attachment: Newsletter #5
|3/12/13||I know that you are either already on your way to spring break or getting ready to go on your way. In case you want to try a valuation before you leave, I just posted my valuation of JP Morgan as the valuation of the week. To get some background, you should read my blog post from last year, right after the Big Whale trading fiasco:
I put up a valuation of Morgan then and argued that the stock was significantly under valued, even if you took into account the worst case reading of the trading scandal.
I have updated that valuation to today, using 2012 numbers. I bought Morgan after that post and it is now up to $50 but the numbers suggest that it has more room to grow. I might be missing something big, but you can take the valuation for a test drive.
I have also attached the valuation. Until next time!
Today's class was about the loose ends in valuation, items we often pay little heed to or attach arbitrary premiums/discounts for. We began by looking at cash and whether it should command a premium at some companies (if they have a good track record and have restrictions on raising capital) and a discount at others (if investors don't trust you with the cash). We then looked at cross holdings in other companies and the numerous barriers to valuing them. Third, we looked at other assets and argued that you should never double count assets. We closed by looking at complex companies by first focusing on how to measuring complexity and then how to incorporate that complexity into valuation. I have attached the post class test and solution.
On a different note, please do get a jump on the DCF valuation of your firm. The valuation is due the Friday of the week that you return from the break... for your feedback. I have also attached the weekly challenge for this week, though this is little chance that you will be able to do it, on spring break. I will give a longer window than usual for submissions, and not send you the solution until March 24. Finally, there will be no weekly newsletter this week. In fact, I will leave you to your own devices for the next 10 days and hope that you enjoy your spring break. Until next time!
|3/21/13||I hope that your spring break was great but the bad news is that it is almost over. I do have some good news (I think). The DCF valuation that I claimed was due on March 28 is not really due until April 5. So, if you have been putting off getting to it, I guess you can procrastinate some more. If you have already completed it, I am sorry I hurried you but it means that you have one less thing to do. Until next time!|
|3/24/13||Hope you are back and raring to go (Right... But no harm hoping...)! Anyway, ready or not, we are back to work tomorrow. After tying up a couple more loose ends (debt to net out of firm value to get to equity value and employee options/restricted stock), we will start on a series of valuations. We will begin easy, using a stable growth dividend discount model to value Con Ed, move up the difficulty ladder to value 3M with a FCFF model before and just after the 2008 market crisis and follow up with a valuation of the S&P 500 at the start of 2013. We will then move into what I call the dark side of valuation, looking at difficult to value companies across the life cycle (from start up to decline), across sectors (financial service, cyclical, commodity) and across markets. If you are having trouble with your DCF valuation, odds are that we will address that issue in the context of valuing some other company in the next few sessions.
I am also attaching the solution to the weekly challenge for this week. While you probably did not get a chance to work through the challenge, please do take a look at it since it relates to DCF's biggest number, the terminal value. Until next time!
Attachment: Weekly challenge 4a solution
Today, we put the two final loose ends to rest. First, while we used a narrow definition of debt, when computing cost of capital, we argued for using a broader definition of debt, when subtracting from firm value to get to equity value. Second, we talked about how best to deal with both currently outstanding employee options and potential options grants in the future. With the former, we argued for using an option pricing model to value the options and netting that value out of equity value, before dividing by the number of shares outstanding. With the latter, we suggested incorporating the expected cost into the operating expenses, thus lowering future earnings and cash flows.
I know that you are working on your own company valuations but this week's valuation is of the S&P 500. The rise in US stock prices over the last few weeks has given rise to the usual questions: Have stocks gone up too much, too fast? Are they over bought (I really, really hate that term...)? Are we headed for a correction?
Attachment: Valuing the S&P 500 - March 26, 2013
In today's class, we completed our discussion of young, growth companies by emphasizing that you will be wrong 100% of the time and that it was okay, because the market is usually even more wrong. We then moved on to valuing mature companies, arguing that you need to value many of them twice: once with existing management in place (status quo) and once with new and revamped management. We closed the life cycle part by looking at declining companies (where growth and reinvestment can be negative) and distressed companies (where you have to adjust the value for the likelihood and consequences of default).
Now that you have had the requisite period to mourn, celebrate or not care about quiz 1, you should be turning your attention to the DCF valuation. Anyway, I thought I would lend a helping hand:
Let me clarify, though, what I would like to get from you when you turn it in:
As you work on your perfect DCF valuations, employee options that your company has granted and continues to grant may be a source of imperfection. I know that we went through the mechanics in class. First, value the outstanding options, using an option pricing model. Second, subtract the value of the options from the equity value that you estimated in a DCF. Third, divide the remaining value by the number of shares outstanding (the actual number, not the diluted number). The mechanics of doing this can be tricky and that is why this week's weekly challenge is built around options. After you have tried the challenge, you may also want to watch this webcast that I put together on doing this in practice. I used Cisco, a monster option granter, to illustrate the mechanics. You can find the links below:
Attachment: Cisco options spreadsheet
Finally, we have a spring weekend... Hope you are enjoying it. Just in case you get bored, the newsletter for the week is attached... and please don't forget to get packet 2 either from the bookstore or online.
Attachment: Newsletter #7
Next week, we will put discounted cash flow to rest (and with it, packet 1). In fact, the final topic that we will address tomorrow is the contrast between price and value, which will be a good platform for the next phase of this class, where we will talk about relative value. We will start on packet 2 on Wednesday by first defining the ingredients that go into relative valuation and the four steps in deconstructing a multiple. That will become the rubric that we use to discuss PE ratios, book value multiples, EBITDA multiples and revenue multiples in the sessions that follow.
Attachments: Weekly challenge #5 solution
So, we are finally done with DCF valuation, though the principles will be reused in other parts of the class. We started today's session by looking at financial service companies, which have gone from being easy to value (just discount the dividends) to being a pain in the neck to value. I suggested using the reinvestment in regulatory capital to compute potential dividends and FCFE. We then looked at cyclical and commodity companies, where the standard adjustment is to use normalized earnings over a cycle (economic or commodity price) to value companies but adding on simulations built around the commodity price can enrich the analysis.
I know that you are working on your DCF valuations, but if you are a sports fan, you might find this week's valuation assignment interesting. I have attached the links to the Forbes lists of the most valuable sports franchises in the world:
I have an excel spreadsheet that contains all of these numbers, to make them easier to work with: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/weeklyvaluations/sportsteams/sportsteamvals.xls
Attachment: Sports franchise valuation issues/ questions
If you were not in class yesterday, you are probably wondering (or perhaps not) where the class webcast links are. Bad news.. the technology failed and the webcast did not get made of the class. Good news... I decided to recreate the class in my office. You can find the homemade webcast here:
|4/5/13||I am returning your DCF valuations as quickly as I can. If you have not already turned your DCF in, please do when you get a chance (this evening will be nice, but perhaps by the end of the weekend). The second quiz is approaching and I have put the review session up online (on the webcast page for the class) with the presentation. The links are below:
You can also find all past quizzes with the solutions in the following links:
First, a reminder that the review session is up and running (and can be accessed on the webcast page for the class). Second, the newsletter for the week is attached to this email, in case you have the time to read it. Third, I put together a little guide to dealing with cross holdings that may or may not be helpful... You be the judge. Until next time!
Attachment: Newsletter #8
By now, you should have received back your DCF valuation back. If you have not, please send it again to me. Rather than make myself into an all-knowing oracle (which I am not), t thought I would take you through the process I used to diagnose your DCF valuations.
Input page checks
Output page checks:
- If you are forecasting operating income, cap ex, depreciation and working capital as individual line items, back out your imputed return on capital:
One common error to watch out for is estimates of terminal value that use the cash flow in the final year, grow it out at the stable growth rate. That locks in your reinvestment rate from your last high growth year forever.
Try it out with your own DCF valuation and then offer to do it for a friend... Then, take your toolkit on the road. Pick up a valuation done by an investment bank or equity research analyst and see if you can diagnose any problems in them. You are well on your way to being a valuation guru.I have also attached a full set of diagnostic questions that you can consider in the context of valuation to this email. Until next time!
Attachment: Valuation post mortem
The quizzes are ready to be picked up. The solution and grading template are both attached and copies are next to your quiz. The distribution of scores for the quiz is attached. Until next time!
You probably read the story today about the turnover at the top of JC Penney:
In today's class, we extended our analysis of multiples by looking at enterprise value multiples: EV/Invested Capital, EV/EBITDA and EV/Sales. In particular, we noted that the drivers for EV multiples are analogs of the equity multiples: growth in operating income replacing growth in net income, reinvestment rates replacing payout ratios, ROC replacing ROE and cost of capital replacing cost of equity.
As promised (or threatened), the mystery project is ready for you. It is a group project, due a week from today (Friday, April 26 at 5 pm). The assignment is a pretty straightforward one, and the write up should be brief and to the point. Be creative, use statistics as a tool and don't be afraid to be different.... I have attached the project description and the data that you will need (it is also online on the webcast page for the class and under the main menu for the class... will also be posted on Lore and iTunes U)
Looking like a much nicer day than yesterday. If you are short of reading for the weekend, the newsletter is attached. It is filled with strange and wondrous thoughts (NOT). As an aside, the weekly challenge is still up for grabs. Please try it when you get a chance... and the mystery project was posted yesterday. Until next time!
Attachment: Newsletter #9
The solution to the weekly challenge on relative valuation (with JC Penney). If you were not able to submit your answer on Lore, that was my fault (I forgot to turn submissions on..) Anyway, I am attaching both the challenge and the solution to this email. This week, in class, we will continue and complete our discussion of relative valuation and then make a short detour into asset based valuation - liquidation valuation and sum of the parts valuation. We will then start on the valuation of privately owned businesses. Until next time!
Attachment: Solution to weekly challenge 7a
In today's class, we closed the book on relative valuation by first talking about how to do relative valuation in sectors filled with unstable or young companies by either using proxies to capture what investors in that sector are pricing in or using forward values for revenues/earnings. We then extended relative valuation from looking at companies in a sector to companies across the entire market, using a market regression. We finished by looking at how to pick the "right" multiple for a valuation, with the answers ranging from cynically picking one that best fits your agenda to picking one that reflects what managers in that business care about. It is amazing how widespread relative valuation is. I found this site recently on rules of thumb in valuation. Take a look at it.... especially the multiples mentioned
At the start of the class, we tied up a loose end on sum of the parts valuation, taking United Technology through both a relative and a DCF sum-of-the-parts valuation. We then turned to private valuation. Private company valuation is almost an art form, at least in the way in which it is practiced, filled with 'arbitrary" discounts on value. In today's session, we brought private company valuation into the DCF framework, though we did note that the discount rate for a private business valuation can reflect the buyer's diversification status and that the value itself may have to be adjusted for illiquidity and key person losses. The key, though, is that motive matters in private company valuation and the same private company can have different values to different buyers.
|4/17/13||I am sorry for getting this to you a day late, but better a day late than never. I have put the data on gold prices and my write up on gold online.
My write up on gold: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/weeklyvaluations/goldvalue.pdf
My blog post from last year on intrinsic value of collectibles/gold: http://aswathdamodaran.blogspot.com/2011/06/thoughts-on-intrinsic-value.html
Paper on gold prices by Erb & Campbell Harvey: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2078535
Data on gold prices & other variables: http://www.stern.nyu.edu/~adamodar/pc/blog/golddata.xls
I know that you have other things on your plate but I think gold is a fascinating asset to value/watch. I am still feeling my way around it, but with Apple at $400, I am thinking of bailing out of all financial assets and just buying a hunk of gold. By the way, if you have a strong view on gold prices, I have put up a Google shared spreadsheet for you to post your views:
|4/18/13||For the moment, I expect that you are working on the mystery project. I don't have much specific advice for you on the project, but remember that your mission is to do a relative valuation (not an intrinsic value). That gives you a lot more leeway in how you deal with items. For instance, if your were doing DCF valuations, you would have to value the employee options, using option pricing models, and subtract from the value of equity to get to value of common stock. With multiples, you may adjust for options much more casually (adjusting the number of shares for options outstanding, for instance). It will also mean that if you do not have the data to do something correctly, you may have to settle for an approximation. In case, the confusion about the due date is still persisting, the mystery project is due on April 26 at 5 pm.|
I hope that you are getting a chance to enjoy the weather today, even if it means lugging your laptop to the park. Anyway, the newsletter for the week is attached. Also, please give the weekly challenge a try (it is a very easy one).
Attachments: Newsletter #10
|4/21/13||If you did try the weekly challenge, the solution is attached. Even if you did not, you can take a quick look at it. I also posted my views on the gold price (the valuation of the week) on my blog:
Browse through it, if you get a chance and you can still post your views on gold on the Google shared spreadsheet:
Until next time!
In today's class, we put the finishing touches on private company valuation by looking at valuing IPOs. In particular, the question of what happens to the proceeds from an offering can affect value per share, and the offering price itself is subject to the dynamics of the issuance process, with investment bankers more likely to under price than over price offerings. We then started on the mechanics of option pricing by looking at replicating and arbitrage. In particular, we argued that while real options add a premium to DCF valuation, they should be used sparingly and only if you pass the three tests: Is there an option embedded? Does the option have significant economic value? Can you use an option pricing model. I am attaching the post class test & solution for today.
In keeping with our discussion of IPOs in class yesterday, I decided to do a valuation of Seaworld. It is worth noting that Blackstone bought Seaworld from Anheuser Busch a few years ago and is now looking to exit the investment. In fact, it is amazing how many little pieces of the IPO pie go to Blackstone. However, a side effect of the Blackstone acquisition is that Seaworld is still heavily burdened with debt and a big chunk of the IPO proceeds will go to pay down existing debt. I have built in this debt pay down and what I think are fairly optimistic assumptions about revenue growth, operating margin and reinvestment and come up with a value of only $15.56. The stock was taken public at $27 and the price jumped to more than $33 on the offering date. So, investors are a lot more optimistic about Seaworld than I am. Here are the links:
Attachments: Valuation of Seaworld
In today's session, we tried applying (with mixed results) option pricing to value a patent and undeveloped natural resource reserves. With a patent, we argued that the fact that a patent is not viable today does not imply that the patent is not valuable. Valued as an option, patents have values in excess of their discounted cash flow value, though the magnitude of the premium can be a function of how competitive the market place is. With undeveloped reserves, we are on more solid ground arguing that companies have to weigh the benefits of developing the reserve against the benefits of waiting. The option premium makes undeveloped reserves more valuable, with the premium being a function of how volatile oil prices are. I have attached a simple option pricing model that I use to value patents and one for natural resource options. I also have attached the post class test & solution.
|4/25/13||The first mystery project submissions are coming in and I realized that I had not given you the magic subject line to get them in the right mailbox. Here are the general suggestions for submission:
1. Put "No mystery here" in the subject line
2. If you could list your 5 cheapest and most expensive stocks on the cover page, the multiple you used to make that judgment and your takeover stock on the cover page, it would make my life easier.
3. Please try to create one pdf file of your report rather than a word file or multiple excel files.
If you have already submitted your report, no problems. I will move your submission to the right place.
Absolutely no chance that you will try this tonight, but if you do get a chance, please give it a shot! It my help you on the third quiz, since it relates to private company/IPO valuation.
Attachment: Weekly challenge #9
|4/26/13||The review session for quiz 3 is up and running! You can get it on the webcast page for the class. The link to the webcast is below:
The slides for the presentation are at this link:
You can find the past quiz 3s and the solutions below:
Past quiz 3s: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz3.pdf
Remember that the earlier quiz 3s included a big chunk of real options, which are not covered on this quiz. So, stick with the relative valuation and private company valuation questions.
I won't ask you whether you are enjoying the weekend, because I risk provoking a violent response. The newsletter for the week is attached. See you in class on Monday!
Attachment: Newsletter #11
If you have tried to access the quiz review webcast (not the class webcasts), you probably have noticed that the webcasts don't load. Here is why. The links are posted on Dropbox, because server space at Stern in limited. However, Dropbox has a bandwidth constraint, where if your public files downloads exceed 200 GB a day, your account gets suspended for three days. Turns out that the limit was hit yesterday and no more downloads will be allowed for three days. I am looking for an alternate file sharing site but they all have constraints. I have moved just the quiz review webcast to the Stern server and you can get it by clicking below:
You can also access the quiz review webcasts on Lore or on iTunes U
Remember that this does not affect any of the class webcasts, since they are housed on the Stern server. That server has had some isssues, off and on, but the webcasts should be accessible. I am sorry and I am working on fixing the problem.
I am sorry but I forgot to email you the solution to weekly challenge #9. Since some of you may have worked through it, in preparation for the quiz, I have attached it. See you in class later today! Until next time!
The quizzes are done. I have attached the solution and the distribution. You know what to do.
I am sorry. That quiz turned out to be harder than I anticipated. In fact, to show you how badly I misjudged it, I was considering rewriting the second problem because I thought it was too easy. It has been quite a while since I have given a quiz where no one gets a ten, but this one had no perfect scores and a handful of 9.5s. Hopefully, for some of you it was your outlier and gets replaced with the average on the other quizzes. If you did miss one of the other quizzes, I am afraid that the luck of the draw worked against you on this one, but the final can still bail you out.
In today's class, we looked at two more investment options: the options to expand into new markets or products and the option to abandon. We then considered the value of financial flexibility as an option, though modeling and valuing it can be messy. Using the framework, though, we estimated that the value of financial flexibility will be greater for capital constrained firms in uncertain businesses with large positive excess returns. That, in turn, may explain why these firms will choose to stay under levered.
After yesterday's class, you are probably zoned out but exciting things are happening at Apple. I just posted this on my blog:
In today's class, we continued with our examination of equity in trouble, debt-laden companies. Given that the equity in these companies takes on the characteristics of an option, we teased out three implications:
We then turned to acquisitions, by first documenting the sorry history of acquisitions, at least for acquiring company stockholders. Not only does the stock price for acquiring firms drop, on average, on the acquisition date but there is little evidence of better stock price performance or improvements in profitability in the longer term. I am attaching the post class test and solution for today's class.
I know that it has been a few days since you got your mystery project back, but looking over your analyses, here are some of the overall impressions I have:
2. Regressions: Almost everyone followed the script and ran the regressions... One thing I did notice is that some of you chose to stick with all of the variables in the regression, even when there was no statistical significance. Sometimes, taking a variable out rather than leave it is the better choice. About 20% of the groups reported regressions with dummy variables for emerging markets, but the statistical significance of that variable was marginal. The reason may lie in the types of firms that are in this sample. These are the largest market cap firms and most of them are multinationals. The fact that they are incorporated in emerging markets may therefore not matter very much. Five groups ran the regressions by sector or used sector dummies. While this makes sense, you have to be careful to make sure that you have enough data within each sector to sustain the regression. (The simple rule of thumb is that you can have one independent variable for every 15 observations. Thus, if your sample size is 35, you can have at the most 2 independent variables.)
3. Recommendations: When picking under and over valued companies, what matters is the percentage and not the absolute difference. In other words, a company that trades at a PE of 10 with a predicted PE of 15, is more undervalued that a company that trades at a PE of 40 with a predicted PE of 50. As I checked through the lists, I was struck by how little commonality there was across the lists. Each of you had your own idiosyncratic list, which tells me that there are no clearly under or over valued companies that stick out, across all approaches and multiples. Good to know, but perhaps not surprising.
4. LBO candidate: A good target for a leveraged buyout will be under valued, under levered, easy to takeover and badly managed. Almost all of you focused on finding an under valued company (which is good), an under levered company (makes sense) and a company easy to takeover (low takeover defenses), but the search on the fourth dimension (bad management) was all over the place. Some of you were looking for companies with high margins and others with stable cash flows. The most widely picked candidate was General Motors. As a general rule, control requires inputs that you can change and that indicates a firm with below-average margins. There was almost no overlap between the groups with no company being picked more that twice. I have a paper on LBOs that fleshes out what you may want to look for in a LBO candidate. f you get a chance, please browse through it.
I will be sending out a to do list on your project shortly. So stay tuned.
As promised, here is your to-do list on the rest of the project. It is a long email but I hope it helps.
1. DCF Valuation
2. Relative valuation
3. Option valuation (Wednesday's class)
Attachments: Valuing equity as an option spreadsheet
I was going to post this on Wednesday but did not think it would be a good idea, after the quiz. Anyway, if you feel like trying your hand out at option pricing (think of it as review for the final exam), give it a shot. It is on Lore, if you want to submit your answers.
Attachment: Weekly challenge #10 solution
Quick note. The newsletter for the week is attached. Hope you get a chance to read it. For those already looking ahead to next week, there are two final exams scheduled for the class:
Attachment: Newsletter #12
In today's session, as promised, I will take you through a series of seven tests on acquisitions. I am absolutely confident that you will get every test right, but I wanted to get it to you ahead of time, so that you have a chance to think about the right answer. It won't take more than 10 minutes to do. So, please try.
Attachment: Acquisiton tests
I am sorry if you found today's session to be a downer. Don't get me wrong. Acquisitions are exciting and fun to be part of but they are not great value creators and in today's sessions, I tried to look at some of the reasons. While the mechanical reasons, using the wrong discount rate or valuing synergy & control right, are relatively easy to fix, the underlying problems of hubris, ego and over confidence are much more difficult to navigate. There are ways to succeed, though, and that is to go where the odds are best: small targets, preferably privately held or subsidiaries of public companies, with cost cutting as your primary synergy benefit. If you get a chance, take a look at a big deal and see if you can break it down into its components. Post class test and solution are attached. I am also including the solution to the weekly challenge for last week on patent valuation.
As you work through the relative valuation section, a few questions that seem to be recurring:
2. Market regressions: The updated market regressions from the start of 2013 are on my website under updated data. Look to the bottom of the page (and at the first link in the first column, not the archives). Here is the direct link
3. Option valuation
In today's class, we started by drawing a contrast between price and value enhancement. With value enhancement, we broke down value change into its component parts: changing cash flows from existing assets, changing growth rates by either reinvesting more or better, lengthening your growth period by creating or augmenting competitive advantages and lowering your cost of capital. We then used this framework to compute an expected value of control as a the product of the probability of changing the way a company is run and the value increase from that change (optimal - status quo value). This expected value of control allows us to explain why market prices for stocks rise when corporate governance improves, why voting shares usually trade at a premium over non-voting shares (and why they sometimes don't) and why there is a minority discount in private company transactions. We closed by taking a brief look at why consulting firms/banks come up with their proprietary measures of value creation and how they all draw from the same base. I have attached the post class test and solution.
I know that this is a busy weekend and I won't be a nag (Actually, I will, but this is the obligatory "I will not nag you" email). As you nail the numbers down for your companies, please send me the summary numbers as soon as you have them. I will take them until Sunday night, but if you get done earlier, you don't have to wait. I am attaching the summary spreadsheet.
Attachment: Summary spreadsheet
|5/11/13||I know that you still have time as an ally and I promised that I would not nag. But in the interests of keeping you informed, I will post an update of summaries received through the weekend:
Summaries received so far: 0 (Really. It is starting to scare me)
Summaries yet to come: 70 (though I am sure that you are really, really close)
By the way, if you are stuck on a detail or a valuation dead end, I will be checking my email through the weekend.