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Module 8: Valuation Using the abnormal Enterprise Income growth Model

Module 8: Valuation Using the abnormal Enterprise Income growth Model. By jennifer kellner (Discount, Variety Stores Industry). Discount, Variety stores industry. Target Dollar General Wal-Mart Costco. *Costco is least comparable. Objective.

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Module 8: Valuation Using the abnormal Enterprise Income growth Model

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  1. Module 8: Valuation Using the abnormal Enterprise Income growth Model By jenniferkellner (Discount, Variety Stores Industry)

  2. Discount, Variety stores industry Target Dollar General Wal-Mart Costco *Costco is least comparable

  3. Objective • To value the Firm (Target) using Abnormal Enterprise Income Growth Model, using: =

  4. steps • Discuss the abnormal income growth model • Recall relevant material • Sales growth, EPM & EATO assumptions • Valuation • Comparison (w/ FCF, REI) • Evaluate • Choosing a model • Uncertainties

  5. Step 1: Discuss the model Abnormal Enterprise Income Growth Model • AEIG model (mathematically) = FCF model & REI model • Should therefore obtain the same value, assuming steady-state is reached • Start: FCF model, substitute and introduce a zero sum equality to derive the model • Capitalizes EPAT + “the adjustment” • Unaffected by accounting choices (Depreciation, etc.) • Anchors on

  6. Abnormal income growth: what is it? Cum-free-cash flow earnings Theoretical expected earnings • The amount above (or below) what was “expected” in earnings • We expect income to grow at the required rate of return, which explains the latter half of the equation • The first part captures both EPAT and the earnings expected to accrue outside the firm • We “assume” the distribution is invested in something with equivalent risk

  7. Step 2: Recall • From prior modules: • EPAT & NEA were forecasted based on sales growth assumptions • Sales growth rates: • 2014 less due to data breach • Increase after w/ diminishing effect, expansion and Canadian sales • Perpetuity reflects eventual (diminishing) growth rate (but still growth*) Note: 2018 & 2019 forecasts added to horizon to reach steady-state

  8. Step 3: valuation Note (again): 2018 & 2019 added to reach the steady-state

  9. Step 4: compare • All models are mathematically equivalent, should yield = final value =

  10. … =

  11. Check: • The accounting models are all related • Specifically: AEIG = ΔREI

  12. Step 5: Choosing a model • Value captured by CV decreases moving towards the right (least certain information) • AEIG model captures most value within forecasted horizon (for which we have the greatest certainty)

  13. Evaluate • According to stockanalysis.net, EV = 52,299 (in millions) • 49.52 billion by Ychart.com • Stock price 2/21/14: $56.24 • Yahoo!Finance • According to valuation (using models), Target is “undervalued” • Is this accurate? Possibly. • Under a sensitivity analysis, buy/hold varies. • Source: http://www.stock-analysis-on.net/NYSE/Company/Target-Corp/Valuation/Enterprise-Value#Current-EV REI, FCF, AEIG Model Enterprise Value: 73,710 (in millions) Stock Price: 88.74

  14. uncertainties • Value is calculated based on estimates, data we forecasted • These are anticipated accounting numbers (Sales, EPAT, NEA) • To go back and refine • WACC takes into account many assumptions • Beta • Rmkt (used in CAPM) • *All of the above can change firm value dramatically

  15. Questions?

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