Author Topic: Valuation methods yielding opposite outcomes  (Read 692 times)

tol1

  • Full Member
  • ***
  • Posts: 141
Valuation methods yielding opposite outcomes
« on: September 10, 2018, 04:55:21 AM »
Good morning

As most do I assume I usually apply a variety of valuation methods. Have you ever come across a company you looked at and 2 methods yielded opposite values? Eg FCF yield vs P/E or reproduction value vs EPV?

How did you approach the valuation then?

Thanks


Og

  • Sr. Member
  • ****
  • Posts: 283
Re: Valuation methods yielding opposite outcomes
« Reply #1 on: September 10, 2018, 06:32:59 AM »
At the end of the day, the intrinsic value of a business is all the cash flows it will ever produce discounted back to the present. So sure, this has happened. But you have to figure out the metrics that matter and that will be dependant on the company, industry, and potentially given set of circumstances. For instance - to be extreme, you're not going to value Amazon or Google using a Price/Book ratio.

netnet

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 928
Re: Valuation methods yielding opposite outcomes
« Reply #2 on: September 10, 2018, 12:57:30 PM »
At the end of the day, the intrinsic value of a business is all the cash flows it will ever produce discounted back to the present. So sure, this has happened. But you have to figure out the metrics that matter and that will be dependant on the company, industry, and potentially given set of circumstances. For instance - to be extreme, you're not going to value Amazon or Google using a Price/Book ratio.

And to continue along this analytical line, look at Amazon in the early days, (with the benefit of hindsight, we can see that all the available cash was going into growth) and for years many(including some on this board) claimed it was living on borrowed time, something approaching a fraud even!! It was like Tesla, without the ardent fan base.

So remember the rule of tools: if you can not think of three misuses of the tool, in this case valuation tools, you don't understand it.  So really, your circle of competence, should enable you to know what is the right tool, i.e. valuation metric for the company/industry involved.

Og

  • Sr. Member
  • ****
  • Posts: 283
Re: Valuation methods yielding opposite outcomes
« Reply #3 on: September 10, 2018, 12:59:02 PM »
At the end of the day, the intrinsic value of a business is all the cash flows it will ever produce discounted back to the present. So sure, this has happened. But you have to figure out the metrics that matter and that will be dependant on the company, industry, and potentially given set of circumstances. For instance - to be extreme, you're not going to value Amazon or Google using a Price/Book ratio.

And to continue along this analytical line, look at Amazon in the early days, (with the benefit of hindsight, we can see that all the available cash was going into growth) and for years many(including some on this board) claimed it was living on borrowed time, something approaching a fraud even!! It was like Tesla, without the ardent fan base.

So remember the rule of tools: if you can not think of three misuses of the tool, in this case valuation tools, you don't understand it.  So really, your circle of competence, should enable you to know what is the right tool, i.e. valuation metric for the company/industry involved.

I second this!

Cigarbutt

  • Hero Member
  • *****
  • Posts: 1118
Re: Valuation methods yielding opposite outcomes
« Reply #4 on: September 10, 2018, 01:58:24 PM »
Good morning

As most do I assume I usually apply a variety of valuation methods. Have you ever come across a company you looked at and 2 methods yielded opposite values? Eg FCF yield vs P/E or reproduction value vs EPV?

How did you approach the valuation then?

Thanks

We've entered the dark ages of balance sheet investing but, at times, book value can be useful.

1-In the past, I have valued Fairfax based on earning power multiples but also used adjusted book value measures because it was a relevant measure in the insurance/finance industry and because it helped define a lower bound in intrinsic value.

2-Listening to Mr. Bruce Flatt in the video submitted recently on the BAM thread, he mentions that he likes to buy "real" assets at a discount to replacement value because of the a)direct consequence of better returns on capital invested and also b)because of the relative competitive moat it creates versus future competitors. Neat concept.
« Last Edit: September 10, 2018, 02:00:24 PM by Cigarbutt »

tol1

  • Full Member
  • ***
  • Posts: 141
Re: Valuation methods yielding opposite outcomes
« Reply #5 on: September 12, 2018, 03:17:14 AM »
I always wondered if EVA is not flawed for companies with large goodwill on their BS:

Before adding the various economic profits you commence with the existing IC. If the IC is a material part (due to a large goodwill) of the total EV, any operating downside going forward will have a minor impact. Wonder if anyone has come across adjustments here.