Monday, November 21, 2005

Tele Atlas - Valuation Case

I'm trying to get a feeling for the "value" of a company called Tele Atlas, see . They offer digital road maps for GPS applications for use in TomTom, Garmin, mobile phones, ViaMichelin, Google Earth and for webpages to name a few. What makes it interesting is the fact that they operate in a duopolistic market situation, with the only competitor Navteq. The biggest investment, building the database, has been done in the last years. The company has no debt at all.
So with the consumer market for GPS applications really taking off now, it's interesting to take a look on the theoretical value of the company. In the attached spreadsheet you'll find some financial info (including competitors and clients), with courtesy to the maker of it, Ron Belt (see ). The shares are trading on Euronext and Frankfurt stock exchange, currently around €21,00.
Is this an opportunity or is it already fully discounted in the current valuation?

Wednesday, July 27, 2005

Fortune 500 - 2005

The latest issue of Fortune (Vol. 152, No. 2, July 25, 2005) contains their latest Fortune 500 2005 list. The top-10 remained unchanged with Wal Mart at 1, BP at 2, Exxon at 3, Royal Dutch at 4, Genral Motors at 5, Daimler Chrysler at 6, Toyota at 7, Ford at 8, GE at 9, and Total taking the 10st spot.

The biggest loosers in the Fortune 500 2005 are Viacom (-17,462 M$), Vodaphone (-13,910 M$), AT&T (-6,469 M$), Delta Air Lines (-5,198 M$) and UFJ Holdings (-5,159 M$).

The biggest climbers are: Mitshubishi, Alcan, Manulife, Power Corp. of Canada, Plains all American Pipeline and Air France-KLM.

The cutof for the list - the revenue needed to be ranked No.500 rose by a record 15%, to $12,4 billion. 41 companies that were in the the 2004 Fortune 500 didn't make it into the 2005 edition, no less than 23 of them being USA companies. The weak dollar is supposed to be the underlying reason for this.

The issue of Fortune also contains intersting industry rankings and rankings within countries.

Friday, April 01, 2005

AICPA Proposes Business Valuation Standards for CPAs

The American Institute of Certified Public Accountants (AICPA) today released for public exposure a draft of proposed Business Valuation Standards for comment by interested stakeholders. The proposed standards consist of guidelines for the development of valuation conclusions and reporting on the results. The standards would apply to AICPA members who perform valuation services in a variety of circumstances, including:
• tax
• mergers and acquisitions
• litigation
• financial reporting

The users of CPA valuation services are expected to benefit from these standards, because they encourage consistency and disclosure in valuation development and reporting.
Once the standards are final, CPAs who are AICPA members will be required to comply with them when performing a valuation engagement that reaches a conclusion of value or an indication of value. The AICPA estimates that 25,000 CPAs currently provide business valuation and forensic and litigation services.

'Given the fact that an increasing number of CPAs are offering valuation services and that market demand for business valuations has experienced steady growth since the 1980s, the AICPA developed the proposed BV standards to improve the consistency and quality of practice among its members who perform BV engagements,' said Michael Crain, CPA/ABV, Chair of the AICPA Business Valuation Committee.

The American Institute of Certified Public Accountants ( is the national, professional organization of CPAs, with approximately 350,000 members, including CPAs in business and industry, public practice, government, and education; student affiliates; and international associates. It sets ethical standards for the profession and U.S. private auditing standards. It also develops and grades the Uniform CPA Examination.

For the Executive Summary and Exposure Draft of AICPA's draft Business Valuation standards, please click here.

Wednesday, December 29, 2004

Bestselling Valuation Books

Friday, December 10, 2004

Total Value = NPV + Real Options

After having been introduced by Timothy Luehrman in 1998, real options have had a difficult time catching on with managers. Often managers find options formulas too complex and some CFOs believe the method causes overvaluation of risky projects. This concern can be legitimate, but abandoning real options as a valuation model alltogether is also not the solution, according to Alexander B. van Putten and Ian C. MacMillan (HBR Dec04). They (correctly) state that companies that rely solely on discounted cash flow (DCF) analysis underestimate the value of their projects and may fail to invest enough in uncertain but highly promising opportunities.

Van Putten and MacMillan recommend business valuators and CFOs should not choose one approach over the other. Real Options are not a replacement for DCF analysis, but a project's total value should encompass both NPV and Real Options.

In a Formula:
Total Project Value = Net Present Value + Adjusted Option Value + Abandonment Value.

Their final advice is certainly also valuable when working with Real Options (as also any investor in financial options will confirm): option valuations only make sense when applied to projects that can AND ARE terminated early at low cost if things don't go well. No valuation method will save a company that does not actually pull out quickly, if a project fails to deliver on its initial promises, and redeploy their talent and capital elsewhere.

Tuesday, September 14, 2004

Linking capital allocation to individual capital expenditure decisions

I just finished reading an excellent new book on Value Based Management called "Questions on Value". One of the 11 papers in the book is about "Linking capital allocation to individual capital expenditure decisions".

In this article Erik Ottosson and Fredrik Weissenrieder from Anelda AB write that managers are increasingly focusing on cash flows and discounted values when making decisions regarding capital expenditure. But to evaluate actual outcome, instead of monitoring realized cash flows, they measure accounting profit. They recommend to improve this feedback loop to make sure management and investors are able to evaluate the actual performance of investment decisions.

In the rest of this article highly worth reading the authors explain how individual capital expenditure decisions can be made part of a larger screening and capital allocation process.

The part of the article I found most interesting is where the authors explain that and how investments in new business and technology creating new value (strategic expansion investments) should be differentiated from investments in existing business and technology to defend existing value (major strategic replacement investments and maintaining investments).

Friday, August 20, 2004

Wd (in WACC formula)

In viewing a recent valuation report, I noticed that the consultant didn't use the actual debt on the balance sheet in the WACC calculation. The percentage debt used was 33.3%, which appears to have been derived from an "ideal" debt to equity ratio of 1:2, although differentiation was not expressed anywhere in the report.

Was this an error, or is this a common practice among valuation consultants?

NPV valuation is unreliable

According to Henry Blodget, no investing advice seems more sound than that you should buy stocks when they are "cheap" and sell when they are "expensive." Wall Street, the financial press, and millions of investors devote countless hours and dollars to unearthing "undervalued" opportunities and panning "overvalued" ones. Business school professors forever develop and teach ever-more-refined valuation techniques. Fanatically precise analysts compute projected earnings to the penny and "intrinsic value" to the dollar.
But when are stocks cheap?
A share of stock is, in theory, worth the "present value of future cash flows" attributable to the share. Given the confidence with which some commentators cite the theory, a casual observer might assume that the "present value of future cash flows" is an indisputable number, akin to a price tag on a can of soup. In reality, however, it is not a number but an argument, and, in most cases, it is a surprisingly imprecise argument, with a wide range of reasonable conclusions.
An analysis of the "present value of future cash flows" requires, at minimum, two components:
1) an estimate of the future cash flows; and
2) an appropriate discount rate with which to determine their present value.
1. No one really knows what the future cash flows will be; and
2. Discount rates and terminal multiples are subjective assessments based on the trading prices and outlook for other securities (and, consequently, change as the prices of the securities change).
As a result, most valuation conclusions are extraordinarily subjective, and small tweaks in assumptions can yield big changes in estimated value. Rest of article

Friday, August 06, 2004

Does EVA beat Reported Earnings?

In an article in the latest issue (Winter 2004) of the Journal of Applied Corporate Finance, Glenn Feltham, Grant Isaac, Chima Mbagwu and Ganesh Vaidyanathan (all professors of Canadian University of Saskatchewan) report the results of their revisit of the famous study by Garry Biddle, Robert Bowen and James Wallace (Journal of Accounting and Economics, 1997) in which they found that market-adjusted stock returns were more closely associated with reported earnings than with EVA.Feltham ea report that they were unable to replicate the findings of Biddle ea. The results of the new analysis supports the claim that EVA has greater power than earnings in explaining market-adjusted stock returns. A significant conclusion I'd think.

Saturday, July 10, 2004

Apple shares reflect new method

The more than 50 percent rise in Apple Computer Inc.'s stock price this year has mirrored the brisk sales of its market-leading iPod digital music player and growth at its retail stores.
In the view of some analysts, the share price's ascent also reflects a transformation in the way investors are willing to value the Cupertino, California-based company, innovator of the first operating system to make personal computers friendly to everyday users.
Once seen as a value play that traded at little above its cash value, Apple's stock is now attracting long-term and momentum investors sold on Chief Executive Steve Jobs' vision of the company as a high-margin style-setter at the hub of an emerging "digital lifestyle."
Momentum investors typically look at trading patterns of stocks and the amount of money flowing into and out of them, while value investors tend to look for companies that are undervalued relative to their competitors.
Reuters - Apple's reinvention transforms stock's valuation