Valuation:
Valuation is a funny thing. If you talk to ten different people about it, you will get ten different answers. There are two important concepts I'd like to cover in how I think about valuation:
Steak vs. Sizzle:
Famed value investor Michael Price once told a class of Columbia students that he wanted to invest in steak ,what actually was, and buy the sizzle, the hopes and dreams of the company for free.
As an example he used pharmaceutical companies. It is pretty easy to find out how much revenue a drug is generating. He assumed that 80% of this stream of revenue would fall to the bottom line until the patent on the drug expired. He would discount these readilly reliable cash flows throughout the life of the drug, and subtract the net present value of these cash flows from the enterprise value of the company.
The remaining amount was how much the market valued the drug company's pipeline. The pipeline of course wasn't generating any cash flows and many of the drugs in the pipeline might never generate any cash flows if they weren't approved. Those that were approved however, could generate massive cash flows for years to come.
Price saw the drugs already on the market as "steak" and the pipeline as "sizzle". Steak is easy to value, and sizzle is difficult to value. Ideally, Price wanted to buy drug companies at the point where he was paying for the steak and getting the sizzle for free.
DCF vs. Multiples or What is Intrinsic Value?
There are generally two ways to value a company.
#1 Forecast the company's future cash flows from now till the end of time.
#2 Slap a multiple on a metric such as earnings, earnings before interest taxes and depreciation, book value, revenue...etc.
Such a number is based upon what comparable companies are trading for or the price they've been sold for. This is extremely usefull in industries that are consolidating.
My take on this is that the DCF can often have a "hubble telescope problem". Slight changes your expectations will give you a completely different outlook on the value of the company. If you turn your telescope an inch, you look at the world a completely different way.
Hence, I tend to look at what smart buyers have paid for assets.
Yet I don't always tend to look just at traditional multiples. I also look at what assets are actually generating revenue for the company. After all, when you invest in an asset, you are investing in the qualities of the asset that will generate cash flow in the future.
Case Study
Lets look at one industry where the assets tend to be similar. Cell phone tower companies. Cell phone tower companies do one thing. They lease out cell phone towers to cell phone carriers such as Sprint or Verizon Wireless in hopes of generating a long-term revenue stream. Lately the industry has been consolidating with hopes that cell phone companies will need to pay more for cell phone towers as they update their networks. The most recent deal was reported in the Wall Street Journal on October 7th. Crown Castle International, the second largest company in this industry, bought Global Signal, the third largest company in this industry. According to the story, this was the third large transaction in this industry in the past two years. In fact there have been seven such mergers in the past two years. Three were mergers of public companies four were not. One way to look at these mergers is to look at is how much these deals are on a per tower basis.
Total Average= $454,000/tower
Average of public companies purchased = $502,000/tower
Range = $320-$546/tower
After the Crown/Global Signal deal is completed, there will be two public companies that own 20,000+ towers. The remaining one, SBA Communications, with many fewer towers is an obvious aquisition candidate.
Is this already reflected in the stock price?
SBAC currently has a enterprise value to towers of $678,000. Of course SBAC has several sites that aren't producing revenues. Such sites are the equivlent of undrilled oil wells. They may produce cash flows one day but they may not. They are the sizzle in our steak
What might I pay for SBAC?
6078(revenue producing sites)
X 504000
= $3.06B
- $1.45B (debt)
= $1.62B/103.76M (shares)
= $15.55
At that price I'd stand a good chance of not losing money in an aquisition and I might make even more if SBAC increased its revenue per site or rented out their non-revenue producing sites.
NEXT....Can an expensive stock be a value?
Valuation is a funny thing. If you talk to ten different people about it, you will get ten different answers. There are two important concepts I'd like to cover in how I think about valuation:
Steak vs. Sizzle:
Famed value investor Michael Price once told a class of Columbia students that he wanted to invest in steak ,what actually was, and buy the sizzle, the hopes and dreams of the company for free.
As an example he used pharmaceutical companies. It is pretty easy to find out how much revenue a drug is generating. He assumed that 80% of this stream of revenue would fall to the bottom line until the patent on the drug expired. He would discount these readilly reliable cash flows throughout the life of the drug, and subtract the net present value of these cash flows from the enterprise value of the company.
The remaining amount was how much the market valued the drug company's pipeline. The pipeline of course wasn't generating any cash flows and many of the drugs in the pipeline might never generate any cash flows if they weren't approved. Those that were approved however, could generate massive cash flows for years to come.
Price saw the drugs already on the market as "steak" and the pipeline as "sizzle". Steak is easy to value, and sizzle is difficult to value. Ideally, Price wanted to buy drug companies at the point where he was paying for the steak and getting the sizzle for free.
DCF vs. Multiples or What is Intrinsic Value?
There are generally two ways to value a company.
#1 Forecast the company's future cash flows from now till the end of time.
#2 Slap a multiple on a metric such as earnings, earnings before interest taxes and depreciation, book value, revenue...etc.
Such a number is based upon what comparable companies are trading for or the price they've been sold for. This is extremely usefull in industries that are consolidating.
My take on this is that the DCF can often have a "hubble telescope problem". Slight changes your expectations will give you a completely different outlook on the value of the company. If you turn your telescope an inch, you look at the world a completely different way.
Hence, I tend to look at what smart buyers have paid for assets.
Yet I don't always tend to look just at traditional multiples. I also look at what assets are actually generating revenue for the company. After all, when you invest in an asset, you are investing in the qualities of the asset that will generate cash flow in the future.
Case Study
Lets look at one industry where the assets tend to be similar. Cell phone tower companies. Cell phone tower companies do one thing. They lease out cell phone towers to cell phone carriers such as Sprint or Verizon Wireless in hopes of generating a long-term revenue stream. Lately the industry has been consolidating with hopes that cell phone companies will need to pay more for cell phone towers as they update their networks. The most recent deal was reported in the Wall Street Journal on October 7th. Crown Castle International, the second largest company in this industry, bought Global Signal, the third largest company in this industry. According to the story, this was the third large transaction in this industry in the past two years. In fact there have been seven such mergers in the past two years. Three were mergers of public companies four were not. One way to look at these mergers is to look at is how much these deals are on a per tower basis.
Total Average= $454,000/tower
Average of public companies purchased = $502,000/tower
Range = $320-$546/tower
After the Crown/Global Signal deal is completed, there will be two public companies that own 20,000+ towers. The remaining one, SBA Communications, with many fewer towers is an obvious aquisition candidate.
Is this already reflected in the stock price?
SBAC currently has a enterprise value to towers of $678,000. Of course SBAC has several sites that aren't producing revenues. Such sites are the equivlent of undrilled oil wells. They may produce cash flows one day but they may not. They are the sizzle in our steak
What might I pay for SBAC?
6078(revenue producing sites)
X 504000
= $3.06B
- $1.45B (debt)
= $1.62B/103.76M (shares)
= $15.55
At that price I'd stand a good chance of not losing money in an aquisition and I might make even more if SBAC increased its revenue per site or rented out their non-revenue producing sites.
NEXT....Can an expensive stock be a value?
posted by Roger Fritz at 10:17 AM
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