1 / 16

Module 9: Valuation of equity

Module 9: Valuation of equity. By jennifer kellner (Discount, Variety Stores Industry). Target (in brief). Similar to Walmart , but target a customer willing to spend more Focus on the “shopping experience” Refer to their customers as “guests”

mya
Download Presentation

Module 9: Valuation of equity

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Module 9: Valuation of equity By jenniferkellner (Discount, Variety Stores Industry)

  2. Target (in brief) • Similar to Walmart, but target a customer willing to spend more • Focus on the “shopping experience” • Refer to their customers as “guests” • Sales pretty evenly distributed; mainly in household essentials • Currently expanding (to continue within forecast horizon) • CityTargets • > SuperTargets (grocery) • Stores in Canada, U.S. • Recent data breach (December 2013) • Loss of trust • But updated security, focus on becoming leaders • Yields uncertainty in Target’s future

  3. Visuals 10-K

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

  5. Objective • To find • the equity value of Target directly, • discover related issues, • evaluate analysts’ forecasts, • show the impact of several assumptions through a sensitivity analysis, • and discuss timing adjustments.

  6. steps • Estimate the value of an equity share in Target • Compare Enterprise vs. Equity Valuation • Which is superior? Discuss related issues • Estimate equity value using analysts’ forecasts • Dividend discount model • RI model • Sensitivity analysis • Adjustments • Date adjustment • Mid-year adjustment

  7. Step 1:Estimate equity value Recall: • Enterprise value less NFL from 2013 • Divide by the number of Common Shares Outstanding • Above current stock price; $59.70 as of 3/20/14 • Signaling it could be undervalued • Target recently released its 10-K; recent data

  8. Step 2: Enterprise v. Equity valuation • So far, we’ve valued equity indirectly • Assumed a constant cost of enterprise capital (rent) • Risk of Target’s operating activities will be constant (assumed) • To value equity directly, we also need to make assumptions • That equity risk going forward will be constant • Not a reasonable assumption; assumes leverage will be constant • Infeasible to forecast leverage going forward and rEqeach period Rearranging…

  9. Step 3: Using analysts’ forecasts to estimate equity value • Two forecast sets: Valueline and 4-Traders • Make the previous assumption that leverage is constant • Nevertheless, we can gather an indication of value • Results fell in a wide range (varied significantly) Valueline 4-Traders $66.33 $71.96 $122.29 $166.31

  10. Valueline: estimate • Information, given and implied (calculated): • Growth rate implied by 2016-2018 forecast; 13.08% and 7.72% • Used to develop EPS, dividends, and BV per share for 2014-2018

  11. Estimate using Div Discount model • Using information just gathered, • Discount dividends each year back to today • Add to continuing value (Target price of $80) • $66.83 per share is higher than at 2/20/14, $59.70

  12. Estimate using REI model • Discount REI each year back to today • Add to beginning book value, $27.40 in 2013 • Add continuing value (assumed growth rate of 3% in perpetuity; appears reasonable) • Much higher value

  13. Step 4: Sensitivity Analysis(evaluating uncertainty) • How does a change in WACC impact Target’s enterprise value? • How does a change in growth rate impact the value? • Every value indicates Target is currently undervalued; Buy • Concerns • The expectation was a mix of buy/sell values • ALL indicate buy, over optimism in valuation? • Or pessimism in the market? (Data breach, etc.) • Target’s future is especially uncertain

  14. Step 5:adjustments • Information availability • Use information after balance sheet date, necessitates adjustment • “Roll” the estimated value forward using rEnt • Target’s year end is 2/1/14 • Multiply by (1+rEnt)87/365 • Timing • Thus far, we’ve assumed pay-offs occurred at year-end • Assuming they occur evenly, adjustment is necessary • Multiply above value by (1+[rEnt/2])

  15. 2 Adjustments

  16. Questions?

More Related