Clase 11: Modelos de valorización

de acciones

1F0032 Teoría de Portafolio

Semestre académico: 2015- 1(Sección: C)

Profesor: Paul Antonio Rebolledo, CFA

 Security Analysis
Securities are mispriced or incorrectly priced by the market when their
market prices are different from their intrinsic values.

• If the estimate for a security’s intrinsic value is lower than the market price,
the security is overvalued by the market.
• If the estimate for a security’s intrinsic value is greater than the market
price, the security is undervalued by the market.
• If the estimate for a security’s intrinsic value equals the market price, the
security is fairly valued.

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 Categories of Equity Valuation
Models
The three major categories of equity
valuation models are:

1.Present value models (also known as

discounted cash flow models)
2.Multiplier models
3.Asset-based valuation models

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 The Dividend Discount Model
The dividend discount model (DDM)
values a share of common stock as the
present value of its expected future cash
flows (dividends).

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 The Dividend Discount Model
One Year Holding Period

Example: One Period DDM

An analyst gathered the following information about a company:
– Current dividend per share (D0) of common stock = $ 4.00
– Expected growth rate for the year (g) = 20%.
– Risk-free rate of return = 6%.
– Expected return on the market portfolio = 11%.
– Beta of the company’s common stock = 1.2

Given that it is estimated that the stock will sell for $15.40 at the end of the year, calculate the value of the company’s 5
common stock.
 The Dividend Discount Model
Solution

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 The Dividend Discount Model
Multiple-Year Holding Period DDM

If we assume that dividends are growing at a constant rate every year, then:

Example: DDM for Multiple Holding Periods

Assume that a stock currently pays a dividend of $1.00, has an expected growth rate of 6%, and a required rate of return of 14.1%.
Calculate the value of stock today if we expect to sell it for $15.30 in two years.

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 The Dividend Discount Model
Solution

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 The Gordon Growth Model
It is useful for valuing companies that have historically been raising their dividend at a stable
rate.

• Applying the DDM is relatively difficult if the company is not currently paying out a dividend. A
company may not pay out a dividend because:
– It has a lot of lucrative investment opportunities available and it wants to retain profits to
reinvest them in the business.
– It does not have sufficient excess cash flow to pay out a dividend.

• The DDM can be extended to numerous stages. For example:

– A three-stage DDM is used to value fairly young companies that are just entering the growth
phase. Their development falls into three stages growth (with very high growth rates),
transition (with decent growth rates) and maturity (with a lower growth into perpetuity).
– A two-stage DDM can be used to value a company currently undergoing moderate growth,
but whose growth rate is expected to improve (rise) to its long term growth rate.

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 The Gordon Growth Model
Example: Applying the Gordon Growth Model
An analyst obtained the following information regarding Global Transporters Inc.:

Current share price = $28

Recent dividend per share = $1.95
Earnings per share = $4.25
Return on equity = 25%
Required rate of return = 20%

1. Use the Gordon growth model to estimate Global’s intrinsic value.

2. How much does the dividend growth assumption add to the intrinsic value estimate?
3. Based on the intrinsic value estimate, is the company’s share undervalued, fairly
valued or overvalued?
4. Calculate the intrinsic value if the growth rate estimate is lowered to 12%.
5. Calculate the intrinsic value if the growth rate estimate is lowered to 12% and the
required rate of return estimate is increased to 22%.
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 The Gordon Growth Model
Solution
1. Dividend payout ratio = 1.95 / 4.25 = 45.88%

Therefore, earnings retention rate = 100% – 45.88% = 54.12%

Dividend growth rate = Retention rate × ROE = 0.5412 × 0.25 = 13.53%

2. Effect of the dividend growth assumption = 34.21 – (1.95 / 0.2) = $24.46

3. Global’s current market price ($28) is lower than its intrinsic value ($34.21).
Therefore, its stock is undervalued.

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 The Gordon Growth Model
Solution (Contd.)

4..

5..

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Ecuación 18.5
Ecuación 18.6
Ecuación 18.7
 Supernormal Growth Scenario
Valuation of Common Stock with Temporary
Supernormal Growth
• Growth companies are firms that are able to earn returns on investment that are consistently above their required
rates of return.
– In order to take advantage of such opportunities, these companies tend to retain a very high proportion of
their earnings and reinvest them in the business.
– These high retention rates translate into high growth rates.

• The correct valuation model to value such ‘supernormal growth’ companies is the multi-stage dividend discount
model that combines the multi-period and infinite-period dividend discount models.

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 Supernormal Growth Scenario
• The following steps must be followed to value stocks of companies that
experience temporary supernormal growth:
– Estimate the amount and duration of dividends during supernormal growth phase.
– Forecast the normal, constant growth rate in dividends that will occur once the
supernormal growth period ends.
– Project the first dividend after the commencement of normal growth.
– Calculate the price of the stock at the end of the supernormal growth period using the
infinite-period DDM. The first dividend after commencement of normal growth will be
the numerator.
– Determine the cost of equity, ke.
– Calculate the present value of supernormal growth-period dividends and the terminal
stock price (the stock price at the end of supernormal growth).

• If a company has two or three stages of supernormal growth, each years

dividend must be calculated during supernormal growth separately.
– Once the growth rate stabilizes below the required rate of return, the terminal value of
the firm can be computed by using the constant growth DDM.

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 Supernormal Growth Scenario
Example: Valuation with Temporary Supernormal Growth
A company is expected to experience dividend growth rate of 20% for the next three years, 15% for
the subsequent two years, and a constant growth rate of 6% thereafter. The last dividend paid out by
the company was $1.50 per share and its cost of equity is 12%. Calculate the value of the company’s
stock.

Solution
First calculate the dividends for each year during the supernormal growth phase:

D1 = D0 (1 + g1)1 = (1.50)(1.20)1 = $1.80

D2 = D0 (1 + g1)2 = (1.50)(1.20)2 = $2.16
D3 = D0 (1 + g1)3 = (1.50)(1.20)3 = $2.59
D4 = D3 (1 + g2)1 = (2.59)(1.15)1 = $2.98
D5 = D3 (1 + g2)2 = (2.59)(1.15)2 = $3.43

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 Supernormal Growth Scenario
Solution (Contd.)
After Year 5, growth falls to a constant rate of 6%. The dividend for the sixth year will be:

We use D6 to calculate the value of the stock as of the beginning of the constant, infinite-growth period
(end of Year 5),

Finally we add the present values of the high growth-period dividends and the terminal value of the
stock at end of Year 5 to determine the intrinsic value of the stock:

Value = 1.61 + 1.72 + 1.84 + 1.89 + 1.95 + 34.36 = $43.37

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 Supernormal Growth Scenario
Example: Delayed Dividend Payment
A firm is expected to have 3 years of extraordinary growth during which no dividends will be paid.
Beginning in Year 4, earnings will stabilize and grow at sustainable 5% rate indefinitely, and the firm
will pay out 45% of its earnings in dividends. Given that earnings in Year 4 (E4) are expected to be
$3.45 and the required return on equity is 10%, calculate value of this stock today.

Solution

The value of this stock today equals the present value of the terminal value (P3), which equals $23.32.

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 The Free-Cash-Flow-To-Equity
(FCFE) Model
FCFE is a measure of dividend paying capacity and can also be used to value companies that
currently do not make any dividend payments.

• Analysts may calculate the intrinsic value of the company’s stock by discounting their projections
of future FCFE at the required rate of return on equity.

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Ecuación 18.10
Ecuación 18.11
Ecuación 18.12
Ecuación 18.9
 A Non-Callable, Non-Convertible
Preferred Stock
• When a preferred stock is non-callable, non-convertible, has no maturity date and pays dividends
at a fixed rate, the value of the preferred stock can be calculated using the perpetuity formula:

• For a non-callable, non-convertible preferred stock with maturity at time, n, the value of the stock
can be calculated using the following formula:

• Preferred shares may also be callable or putable. 26

 A Non-Callable, Non-Convertible
Preferred Stock
Example: Preferred Share Valuation: Two Cases
Aramis International issued perpetual preferred shares with a par value of $20 and pay an
annual dividend of $3.65. Given a required rate of return of 8%, answer the following questions:

1. Calculate the intrinsic value of the shares if they are non-callable, nonconvertible.
2. Calculate the intrinsic value of the shares if they are retracted at par value after 3 years.

Solution
1. Intrinsic value = Dividend / Required rate of return = 3.65 / 0.08 = $45.63

2. Retractable term preferred shares specify a retraction date, at which the preferred
shareholders have the option to sell back the shares to the issuer at a predetermined price.
The intrinsic value in such cases is calculated as follows:

Intrinsic value = [(3.65 / 1.08) + (3.65 / 1.082) + (3.65 / 1.083) + (20 / 1.083)] = $25.28

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 Price Multiples
Price multiples are ratios that compare the price of a stock to some sort of value. Price
multiples allow an analyst to evaluate the relative worth of a company’s stock.

• Popular multiples used in relative valuation include price-to-earnings, price-to-sales, price-to-

book and price-to-cash flow.

• A common criticism of price multiples is that they do not consider the future in that their values are
calculated from trailing or current values of the divisor.
– For example a company’s price to earnings ratio may be calculated by dividing the current
market price by the company’s EPS over the most recent four quarters.

• To counter this criticism, analysts make forecasts of fundamental values (e.g. earnings) into the
future and use forward-looking or leading multiples.

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 Price Multiples
Multiples based on Fundamentals
• A price multiple may be related to fundamentals through a dividend discount model such as the
Gordon growth model.
• The expressions developed in such an exercise are interpreted as the justified (or based on
fundamental) values for a multiple.

The P-E Ratio

• The P/E ratio is inversely related to the required rate of return.

• The P/E ratio is positively related to the growth rate. 29
Ecuación 18.8
 Price Multiples
• The P/E ratio appears to be positively related to the dividend payout ratio.
– However, this relationship may not always hold because a higher dividend payout ratio
implies that the company’s earnings retention ratio is lower. A lower earnings retention ratio
translates into a lower growth rate. This is known as the ‘dividend displacement’ of earnings.

• Justified forward P/E estimates are very sensitive to small changes in the assumptions used to
compute them.
– Since the growth rate is calculated as ROE times the retention ratio, any changes in the
dividend payout ratio also has an impact on the growth rate. Analysts usually carry out
sensitivity analysis to study the impact of different assumptions on the justified ratio.

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 Price Multiples
Example: Justified P/Es

Assume that a stock has an expected

payout ratio of 40% and a required return on
equity of 10%. With an expected growth rate
of dividends of 8%, calculate the stock’s
justified P/E multiple.

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 Multiples Based on
Comparables
• This method compares relative values estimated using
multiples to determine whether an asset is undervalued,
overvalued or fairly valued.

• The benchmark multiple can be any of:

– A multiple of a closely matched individual stock.
– The average or median multiple of a peer group or the firm’s
industry.
– The average multiple derived from trend or time-series analysis.

• Analysts should be careful to select only those companies

that have similar size, product lines, and growth prospects to
the company being valued as comparables.

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 Price to Earnings Ratio
Advantages:
• Earnings are key drivers of stock values.
• Simple to calculate and widely used in the industry.
• Differences in P/E ratios are significantly related to long-term average stock returns.

Disadvantages:
• Loss making companies have negative P/E ratio which are useless as far as relative valuation is
concerned.
• Volatile earnings of some companies, which makes it difficult to separate the recurring
component of earnings from the transient component.
• Management may use different accounting assumptions to prepare final statements which:
– Distorts reported EPS.
– Reduces the comparability of P/E ratios across companies.

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 Price to Cash Flow
Advantages:
• Cash flows are less prone to management manipulation than earnings.
• P/CF is more stable than the P/E ratio.
• Using the price to cash flow ratio gets around the problem related to
differences in the quality of earnings reported by companies.
• Research has shown that differences in price to cash flow ratio over time
are related to differences in long term average returns on stocks.

Disadvantages:
• When ‘EPS plus noncash charges’ is used as the definition for cash flow,
noncash revenue and changes in working capital items are ignored.
• FCFE is more appropriate for valuing a company than operating cash flow,
but it is more volatile and more frequently negative than operating cash
flow.
• Management may be able to inflate reported CFO by securitizing
accounts receivable and outsourcing payments of accounts payable (to
delay outflows of cash).

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 Price to Cash Flow
Example: Calculating P/CF
ABC Company reported net income of $2.3 million for the year 2008. It recorded noncash charges of
$0.4 million for the year, and has 2 million shares outstanding. The market price of the company’s
stock is currently $40. Compute its price to cash flow ratio.

Solution

Cash flow = $2,300,000 + $400,000 = $2,700,000

Cash flow per share = $2,700,000 / 2,000,000 = $1.35
Price to cash flow = $40 / $1.35 = 29.63

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 Price to Sales
Advantages:
• Sales are less prone to manipulation by management than earnings and book values.
• Sales are positive even when earnings are negative.
• P/S ratio is usually more stable than the P/E ratio as earnings reflect operational and
financial leverage.
• Especially appropriate for valuing mature, cyclical and loss-making companies.
• Studies have shown that differences in price to sales ratios are related to differences in
long term average returns on stocks.

Disadvantages:
• Using sales reveals no information about the operating profitability of a company.
• Using the P/S ratio does not reflect differences in cost structure and operating
efficiency between companies.
• There is a ‘logical mismatch’ when price is compared with sales.
• Management can come up with ways to manipulate revenue figures.
• They may not reflect a sudden change in a key indicator.

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 Price to Sales
Example: Calculating P/S
Krivya Chemicals reported net sales of $4,650,000 for the year ended 2008. It currently has 225,000
shares outstanding and its stock price is $14.35. Calculate Krivya’s P/S ratio.

Solution

Sales per share = $4,650,000/225,000 = $20.67

Price to sales ratio = $14.35 / $20.67 = 0.69

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 Price to Book Value
Advantages:
• Can be used for loss-making companies.
• Book value is typically more stable over time compared to reported earnings.
• Useful for financial sector companies that have significant holdings of liquid assets.
• Useful in valuing distressed companies.
• Differences in P/B ratios over time are related to differences in long term average returns on
stocks.

Disadvantages:
• Ignores nonphysical assets (e.g., quality of a company’s human capital, brand image).
• Misleading when comparing firms with significantly different levels of assets.
• Accounting differences can impair the comparability.
• Inflation and changes in technology may result in significant differences between
accounting book values and actual market values.
• Share repurchases or issuances can distort historical P/B comparisons.

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 Price to Book Value
Example: Calculating P/BV
The following table contains the equity portion of ADF Company’s balance sheet:

The current market price of ADF stock is $14.35. Calculate its P/BV ratio.

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 Price to Book Value
Solution

Common shareholders’ equity = Total shareholders’ equity - Total value of equity claims that are
senior to common stock

= $269,875 - $25,000 = $244,875

Book value per share = $244,875/20,000 = $12.24

P/B = $14.35 / $12.24 = $1.17

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 Enterprise Value Multiples
• Enterprise value (EV) can be thought of as the cost of taking over a company.

Enterprise value = Market value of common equity + Market value of preferred

stock + Market value of debt + Minority interest – Value of cash
and Short-term Investments

• The most widely used EV multiple is the EV/EBITDA multiple.

• The EV/EBITDA multiple is often used when comparing two companies with different capital
structures.
– Loss-making companies usually have a positive EBITDA, which allows analysts to use the
EV/EBITDA multiple to value them.

• Enterprise value may be difficult to calculate for companies whose debt is not publicly traded.
– Analysts may then use market prices of similar debt issues that are publicly traded as a
proxy for the market value of the company’s debt.

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 Enterprise Value Multiples
Example: EV/Operating Income
An analyst gathered the following information regarding 5 companies operating in the same industry:

1. Based on the information given, calculate each company’s EV/OI.

2. Which company is the most undervalued?

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 Enterprise Value Multiples
Solution
1.The following table shows the EV/OI for
each company:

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 Asset-Based Valuation Models
Asset-based valuation uses market values of a company’s assets and
liabilities to determine the value of the company as a whole.

• Asset-based valuation works well for:

– Companies that do not have a significant number of intangible or “off-the-book”
assets, and have a higher proportion of current assets and liabilities.
– Private companies, especially if applied together with multiplier models.
– Financial companies, natural resource companies and companies that are being
liquidated.

• Asset-based valuation may not be appropriate when:

– Market values of assets and liabilities cannot be easily determined.
– The company has a significant amount of intangible assets.
– Asset values are difficult to determine (e.g. in periods of very high inflation).
– Market values of assets and liabilities significantly differ from their carrying values.

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 Haga clic para hemos
¿Qué modificaraprendido?
el estilo de
título del patrón
• En épocas de boom, conviene acciones con beta alto
• En épocas de recesión, conviene acciones con beta
bajo
• Una alternativa, ante épocas de desaceleración, es
diversificar en otros mercados
• El cash es siempre una opción, pero hay que tener
cuidado cuando la economía de la vuelta (peligro de
desinversión)
• El crecimiento orgánico es base para la valorización
de acciones.
• El sesgo de política monetaria es también un
elemento crucial vía las tasas de financiamiento.

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