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1、CHAPTER THREE,McGraw-Hill/Irwin,Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.,Chapter 3,Prepared by: Stephen H. Penman Columbia University With contributions by Nir Yehuda Northwestern University Mingcherng Deng University of Minnesota Peter D. Easton and Gregory A. Sommers
2、Notre Dame and Southern Methodist Universities Luis Palencia University of Navarra, IESE Business School,3-2,What you will learn in this chapter,What a valuation technology looks like What a valuation model is and how it differs from an asset pricing model How a valuation model provides the architec
3、ture for fundamental analysis The practical steps involved in fundamental analysis How the financial statements are involved in fundamental analysis How one converts a forecast to a valuation The difference between valuing terminal investments and going concern investments (like business firms) The
4、dividend irrelevance concept Why financing transactions do not generate value, except in particular circumstances Why the focus of value creation is on the investing and operating activities of a firm How the method of comparables works (or does not work) How asset-based valuation works (or does not
5、 work) How multiple screening strategies work (or do not work) How fundamental analysis differs from screening,3-3,The Big Picture for This Chapter,Understand the Difference Between: Simple Valuation Schemes Stock Screening, and Fully Fledged Fundamental Analysis Understand how the financial stateme
6、nts are used in each of these types of analysis Understand how formal fundamental analysis is done Understand what generates value in a business: Operating Activities? Investment Activities? Financing Activities?,3-4,Simple (and Cheap) Schemes for Valuation,Fundamental analysis is detailed and costl
7、y. Simple approaches minimize information analysis (and thus the cost). But they lose precision. Simple methods: Method of Comparables Screening on Multiples Asset-Based Valuation,3-5,The Method of Comparables: Comps,Identify comparable firms that have similar operations to the firm whose value is i
8、n question (the “target”). Identify measures for the comparable firms in their financial statements earnings, book value, sales, cash flow and calculate multiples of those measures at which the firms trade. Apply these multiples to the corresponding measures for the target to get that firms value.,3
9、-6,The Method of Comparables: Hewlett Packard, Lenovo, and Dell 2011,3-7,How Cheap is this Method?,Conceptual Problems: Circular reasoning: Price is ascertained from price (of the comps) Violates the tenet: “When calculating value to challenge price, dont put price into the calculation” If the marke
10、t is efficient for the comparable companiesWhy is it not for the target company ? Implementation Problems: Finding the comparables that match precisely Different accounting methods for comps and target Different prices from different multiples What about negative denominators? Applications: IPOs; fi
11、rms that are not traded (to approximate price, not value),3-8,Unlevered (or Enterprise) Multiples (that are Unaffected by the Financing of Operations),3-9,Variations of the P/E Ratio,3-10,Dividend-Adjusted P/E,3-11,Typical Values for Common Multiples,3-12,Screening Analysis,Technical Screens: identi
12、fy positions based on trading indicators Price screens Small stock screens Neglected stocks screens Seasonal screens Momentum screens Insider trading screens Fundamental Screens: identify positions based on fundamental indicators of the firms operations relative to price Price/Earnings (P/E) ratios
13、Market/Book Value (P/B) ratios Price/Cash Flow (P/CFO) ratios Price/Dividend (P/d) ratios Any combination of these methods is possible,3-13,How Multiple Screening Works,Identify a multiple on which to screen stocks. Rank stocks on that multiple, from highest to lowest. Buy stocks with the lowest mul
14、tiples and (short) sell stocks with the highest multiples.,3-14,Fundamental Screening: Returns to P/E Screen (1963-2006),3-15,Fundamental Screening: Returns to P/B Screening (1963-2006),3-16,Two-way Screening: Returns to Screening on Both P/E and P/B (1963-2006),3-17,Average Monthly Returns and Esti
15、mated Betas from July 1963 to December 1990 for Ten Size Groups,Technical Screening: Returns to Size,Source: Fama and French (1992),3-18,Average Monthly Returns and Estimated Betas from July 1963 to December 1990 for Ten Beta Groups,Returns to Beta: Is Beta Dead?,Source: Fama and French (1992),3-19,
16、Returns to Two Fundamental Screens,Source: Lakonishok, Shleifer, & Vishny, “Contrarian Investment, Extrapolation, and Risk,” Journal of Finance, Vol. 49, No. 5. (Dec., 1994), p 1554.,Glamour,Value,3-20,Year by Year Returns: Value Minus Glamour,Source: Lakonishok, Shleifer, & Vishny, “Contrarian Investment, Extrapolation, and Risk,” Journal of Finance, Vol. 49, No. 5. (Dec., 1994), p 1566.,3-21,P/B and P/V Ratios: The Dow Stocks 1979-96,Source: Lee, Myers & Swaminathan, “Wh
