culverhouse investment management group discounted cash flow modeling

Culverhouse Investment Management Group

Discounted Cash Flow Modeling

Introduction

Intrinsic value of the company Theoretical vs. relative value

Present value of the cash that company will make in the future Gotta discount that cash back to

today

Advantages of a DCF Valuation

Intrinsic valuation gives a theoretical worth

Flexible, adaptable analysis Can tinker & play

Requires model maker to scrutinize value drivers

Always obtainable

Disadvantages of a DCF Valuation

A DCF is only as good as its inputs This is two-fold:

Your assumptions need to be defendable

More predictable the cash flows, better reliability of DCF

Would you ever rely on a DCF to value Snapchat? What about a super volatile commodity?

Highly sensitive to: Growth rates and margin assumptions Terminal growth rate Discount rate

Making Defendable Assumptions

ManagementInvestor presentationsEarnings Calls

Wall Street AnalystsBloomberg

Historical DataTrend analysis

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DCF Valuation Output

Valuation OutputTotal disc. UFCF 1,700$ Terminal Value 4,804 Enterprise Value 6,504 Net Debt 1,100 Minority Interest 33 Equity Value 5,371 Shares outstanding 91.978 Equity value/share 58.39$ Current share price 45.00$ Margin of safety 30%

Implied Exit Multiple 5.9x

$ in millions 2014A 2015P 2016P 2017P 2018P 2019P

Revenue 9,769 9,173 9,646 10,127 10,616 11,115 % yoy growth -6.1% 5.2% 5.0% 4.8% 4.7%Cost of goods sold 7,754 7,320 7,697 8,020 8,355 8,725

Gross profit 2,014 1,853 1,948 2,106 2,261 2,390 % margin 20.6% 20.2% 20.2% 20.8% 21.3% 21.5%

EBIT 568 503 529 616 699 754 % margin 5.8% 5.5% 5.5% 6.1% 6.6% 6.8%

Depreciation and Amort. 273 293 309 324 340 356

EBITDA 841 797 838 940 1,039 1,110 % margin 8.6% 8.7% 8.7% 9.3% 9.8% 10.0%

EBIT 568 503 529 616 699 754

NOPAT 367 325 341 397 451 486 % taxes 35.5% 35.5% 35.5% 35.5% 35.5% 35.5%

(+) Depreciation and Amort 273 293 309 324 340 356 (-) Change in working capital 397 (89) (72) (11) (36) (30) (-) Capex 313 293 309 324 340 356

Unlevered FCF (70) 413 413 408 487 517

Other Key Assumptions

WACC 9.50%LTGR 2.50%

So How Do I Build One?

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($ in millions) 2011A 2012A 2013A 2014A

Revenue 8,773 9,962 10,787 9,769 Cost of goods sold 6,997 7,839 8,396 7,754 Gross profit 1,776 2,123 2,391 2,014 % margin 20.2% 21.3% 22.2% 21.3%

Operating expenses:Selling, general and administrative expense 717 861 877 812 Depreciation 152 181 212 273 Engineering expenses 276 317 353 313 Amortization of intangibles 22 49 48 48 Total Operating expenses 1,319 1,588 1,702 1,446

EBIT 457.6 534.9 689.0 568.3 % margin 5.2% 5.4% 6.4% 5.8%

Other items:

Tax rate 4.4% 23.0% 35.6% 35.5%CapEx 300 341 392 313 Depreciation and Amortization 152 181 212 273 Change in net working capital (60) 66 12 397

Figure Out Your Assumptions

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2012A 2013A 2014ARevenue% yoy growth 8.3% -9.4%

Costs:Cost of goods soldBase case 78.7% 77.8% 79.4%

Selling, general, and administrative expenseBase case 8.6% 8.1% 8.3%

Depreciation expenseBase case 1.8% 2.0% 2.8%

Engineering expensesBase case 3.2% 3.3% 3.2%

Amortization of intangiblesBase case 0.5% 0.4% 0.5%

Tax rate 4.4% 23.0% 35.5%

Capital ExpendituresBase case 3.4% 3.4% 3.6%

2015P 2016P 2017P 2018P 2019P

-6.1% 5.2% 5.0% 4.8% 4.7%

79.8% 79.8% 79.2% 78.7% 78.5%

8.3% 8.3% 8.3% 8.3% 8.3%

2.7% 2.7% 2.7% 2.7% 2.7%

3.2% 3.2% 3.2% 3.2% 3.2%

0.5% 0.5% 0.5% 0.5% 0.5%

35.5% 35.5% 35.5% 35.5% 35.5%

3.2% 3.2% 3.2% 3.2% 3.2%

Output of Your Assumptions

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($ in millions) 2014A 2015P 2016P 2017P 2018P 2019P

Revenue 9,769 9,173 9,646 10,127 10,616 11,115 Cost of goods sold 7,754 7,320 7,697 8,020 8,355 8,725 Gross profit 2,014 1,853 1,948 2,106 2,261 2,390 % margin 21.3% 20.2% 20.2% 20.8% 21.3% 21.5%

Operating expenses:Selling, general and administrative expense 812 763 802 842 883 924 Depreciation 273 250 263 276 289 303 Engineering expenses 313 294 309 324 340 356 Amortization of intangibles 48 44 46 48 51 53 Total Operating expenses 1,446 1,350 1,419 1,490 1,562 1,636

EBIT 568.3 503.2 529.1 616.2 699.1 754.1 % margin 5.8% 5.5% 5.5% 6.1% 6.6% 6.8%

Other items:

Tax rate 35.5% 35.5% 35.5% 35.5% 35.5% 35.5%CapEx 313 293 309 324 340 356 Depreciation and Amortization 273 293 309 324 340 356 Change in net working capital 397 (89) (72) (11) (36) (30)

DCF Output

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EBIT 568 503 529 616 699 754 % margin 5.8% 5.5% 5.5% 6.1% 6.6% 6.8%


EBITDA 841 797 838 940 1,039 1,110 % margin 8.6% 8.7% 8.7% 9.3% 9.8% 10.0%

EBIT 568 503 529 616 699 754

NOPAT 367 325 341 397 451 486 % taxes 35.5% 35.5% 35.5% 35.5% 35.5% 35.5%


Unlevered FCF (70) 413 413 408 487 517

Discounting Cash Flows: Weighted Average Cost of Capital

• (Cost of Equity x Weight of Equity)+(Cost of Debt x (1-tax rate) x Weight of Debt)

• Go to Bloomberg Find your company Type in WACCUse that

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More Levered

Cost of Equity 14%Weight of Equity 40%Cost of Debt 4.5%Effective tax rate 35%Weight of Debt 60%

WACC 7.36%

Less Levered


WACC 9.57%

All Debt


WACC 2.93%

All Equity


WACC 14.00%

Discount Projected Cash Flow

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EBIT 568 503 529 616 699 754 % margin 5.8% 5.5% 5.5% 6.1% 6.6% 6.8%


EBITDA 841 797 838 940 1,039 1,110 % margin 8.6% 8.7% 8.7% 9.3% 9.8% 10.0%

EBIT 568 503 529 616 699 754

NOPAT 367 325 341 397 451 486 % taxes 35.5% 35.5% 35.5% 35.5% 35.5% 35.5%


Unlevered FCF (70) 413 413 408 487 517

Present Value of UFCF 378 345 311 338 328

/ (1+WACC)^1 / (1+WACC)^5



Terminal Value

• We have cash flows projected from 2015-2019: What about 2020-Eternity?– In comes the Terminal Value calculation

• Use the Perpetuity Growth Model– Assumes cash flows grow to perpetuity at a constant rate– Inputs required:

• Terminal year FCF, WACC, LTGR

• Long term growth rate: Generally use between 2% - 3%– Long term GDP growth rate

• Terminal Value Formula: (Terminal Year FCF*(1+LTGR))/(WACC-LTGR)– Must discount this value back to present: (Result of Above Calculation/(1+WACC)^(# of years in future we

projected (5))

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Project Terminal Value

• Final projected FCF: $517mm

• WACC: 9.5%; LTGR 2.5%

• Terminal Value = (517*(1+.025))/(.095-.025) = $7,563

• Discount Terminal Value = 7,563/(1+.095)^5

• Terminal Value: $4,80414

Add! to get Enterprise Value

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Subtract! to get Equity Value

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Divide! By Shares OutstandingCompare to Current Stock Price

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DCF Valuation Output






EBIT 568 503 529 616 699 754 % margin 5.8% 5.5% 5.5% 6.1% 6.6% 6.8%


EBITDA 841 797 838 940 1,039 1,110 % margin 8.6% 8.7% 8.7% 9.3% 9.8% 10.0%

EBIT 568 503 529 616 699 754

NOPAT 367 325 341 397 451 486 % taxes 35.5% 35.5% 35.5% 35.5% 35.5% 35.5%


Unlevered FCF (70) 413 413 408 487 517



Best Practices and Other Notes

• Pull historical finances from 10K– Found on company website

• Keep your growth assumptions realistic! Ramp down revenue growth over the projection period

• When in doubt, average past percentages of revenue

• Don’t get too caught up in being exact. You’re going to be off. Just be sure everything you do has a reason

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Best Practices and Other Notes

• WACC should range from 8%-12%. LTGR: 2%-3%

• This is a quantitative analysis. Be sure your company holds up under qualitative AND quantitative scrutiny

• Build a DCF over Christmas Break– Info is all over the internet if you get stuck. Pick a simple company that makes sense

(Nike, Coach, etc.)

• Will have Secretary Jason send you a sample model so you can look at all the calculations

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culverhouse investment management group discounted cash flow modeling

Documents

obtainable slide

discount terminal value

dcf valuation output

equity value

terminal value calculation

relative value present

value drivers

value snapchat