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Market Multiple Valuation Target Corp.

Market Multiple Valuation Target Corp. by Jennifer Kellner. Steps:. Select relevant summary measures Identify comparable companies Compute the ratio for each comparable Multiply the summary performance measure by the “market multiple” (from step 3)

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Market Multiple Valuation Target Corp.

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  1. Market Multiple ValuationTarget Corp. by Jennifer Kellner

  2. Steps: • Select relevant summary measures • Identify comparable companies • Compute the ratio for each comparable • Multiply the summary performance measure by the “market multiple” (from step 3) = Estimated Value of the “TARGET” Company (no pun intended) FINALLY: Adjust, Enterprise measure subtract and divide, Equity measuredivide

  3. Note: • Method, not a model • Particular performance measures are more suited to some industries over others • Presumes the target company is not fairly valued • Helpful in: Fraud, IPOs • No correct answer to how we “produce the multiple” • Equity value = closing price per share * common shares outstanding • Enterprise value = Equity value + value owed to debt holders • Target – no stock split since 2000 • Because we are calculating ratios, currency differences = o.k.

  4. Step 1: Select relevant summary masures • EPAT • NEA • Sales per sqft • Often used in the retail industry • Most revenue from in-store purchases • Wanted one B/S multiple and one I/S multiple • + an industry specific multiple • Focus on enterprise values so that capital structure need not be considered carefully • Debt v. equity holders

  5. Step 2: Identify Comparable companies Target Dollar General Wal-Mart Costco *Costco is removed for sensitivity analysis

  6. Step 3: computing multiples

  7. 1) EPAT Multiple

  8. Sensitivity Analysis for EPAT (less Costco): *Costco’s EPAT market multiple was 23.66

  9. 2) NEA Multiple

  10. Sensitivity Analysis for NEA (less Costco):

  11. Sales per sqft multiple Sensitivity analysis (less Wal-Mart) * Exemplifies Issue with market multiple method

  12. Buy, Sell or Hold? • Price per share as of 1/24/14: $57.72 • Valuation using EPAT multiple: $74.69 (buy) • Less Costco: $59.98 (hold) • Valuation using NEA multiple: $122.84 (buy) • Less Costco: $94.19 (buy) • Valuation using Sales per sqft multiple: $92.98 (buy) • Less Wal-Mart: $2.68 • Both suggest Target is undervalued (Buy) • (consider we are basing this on previous performance) • Depends on the performance measure used

  13. Where I felt… Uncomfortable • In using sales per sqft, how does this take into account online sales (which are becoming more and more relevant)? • Sales per sqft calculations • Inherent limitations (measure not all-encompassing) • Security breach • Comfortable • NEA & EPAT • Comparables • Calculations

  14. Evaluating Results: An Analysis • Subjective measure; many assumptions/judgment calls • There is no one “right” measure • No one measure entirely captures Target’s performance • Results could have been very different • Used different performance measures • Market multiple calculation method (average, median) • Different companies

  15. Market Multiples: Why we still use them • Done in practice • Simplicity • Place to start (gives a sense of where firm stands) • Difficult to get data for making forecasts

  16. Questions?

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