Nestl é Module 3: Market Multiple Valuation

1. NestléModule 3: Market Multiple Valuation Dan Finan

2. A Few Caveats • Market multiple valuation lacks theoretical foundation • Valuation method is sound; it’s the various estimations along the way that can throw everything off • Investors must realize the level of assurance this method provides is fairly weak

3. Why Use Market Multiples? • Classification of balance sheet items • First-pass, parsimonious indicator of value • Stock screening device • Means to create summary metrics for comparison of peer firms • Do not rely on subjective (and sometimes very difficult to obtain) forecasts of future performance….rather, hard data!

4. 5 Step Process • Select the summary performance measure • Select comparable companies (our group) • Compute the market multiple • Compute each individual ratio, then take the average. • Compute the target company’s value • Find equity value, then divide by common shares outstanding (this is our per-share value!)

5. Coffee Production Industry

6. Data for Valuation using Balance Sheet Multiples

7. Estimating Value using a NEA Multiple • Enterprise Value / NEA • Average the multiples • Subtract NFL to get equity value • Divide by common shares outstanding • BUT… NEA works best when reported asset values approximate market values (i.e. financial companies)…not very applicable to coffee.

8. Estimating Value using a BV Multiple • Equity value / BV of equity • Average the multiples • Multiply by BV of equity • Divide by common shares outstanding • BUT…large variation…let’s try something else.

9. Data for Valuation using Income Statement Multiples

10. Estimating Value using an EPAT Multiple (excluding Mondelez—multiple was ~180) • Enterprise value / EPAT • Average the multiples • Multiply by EPAT • Subtract NFL • Divide by common shares outstanding • BUT…doesn’t represent whole industry…let’s try something else.

11. Estimating Value using a NI Multiple • Equity value / NI • Average the multiples • Multiply by NI • Divide by common shares outstanding • Multiples are all over the map. Can we try anything else?

12. Estimating Value using a Sales Multiple • Enterprise Value / Sales • Average the multiples • Multiply by Sales • Divide by common shares outstanding • Looks good…can we try an industry specific multiple though?

13. Estimating Value using a Price Minus Book Value to R&D Ratio Multiple • R&D is key to our industry! Constantly evolving processes and products. • Looks accurate!

14. Combining Estimates from Differing Multiples

15. My Recommendation • Multiples analysis says price = $87.27 • January 24 price = $66.85 • Weak “BUY”—very attractive multiples result, but how much can we trust it?

16. Questions?