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WEBSITE: EQUITY VALUATION: MODELS FROM LEADING
INVESTMENT BANKS
The material on this website is for educational purposes only. Please do not make
investment decisions based on the information provided on this webpage. For the
readers of the book Equity Valuation: Models from Leading Investment Banks, we
provide three different models on this website which can be used to value equities.
Please note that the models are based on a number of assumptions which might not
hold in reality. The models and its assumptions are discussed in detail in Equity
Valuation: Models from Leading Investment Banks.
MODEL 1:
MC-FCFF model (MATLAB Version):
The Monte Carlo Free Cash Flow (MC-FCFF) model programmed in MATLAB can be
used to value an unlimited number of stocks. Running the model requires that
MATLAB and the MATLAB version of the MC-FCFF model are installed properly on
your PC. The manual MonteCarloFCFF.doc explains in detail how to install the MCFCFF program on your PC.
If the MATLAB version of the MC-FCFF is properly installed on your PC, you can run
MC-FCFF models for an unlimited number of stocks. The inputs of the model are
briefly explained in the manual MonteCarloFCFF.doc. For a more detailed
explanation of the model and its assumptions please refer to Part I and Part II of
Equity Valuation: Models from Leading Investment Banks.
We already entered input data for 40 stocks which are identified below by their
Bloomberg ticker. Please note that the inputs of a valuation model are highly
subjective. Please also note that we do not update the inputs. However, you can
change the inputs of the model for each stock and then run Monte Carlo simulations
for each stock based on your assumptions using the MC-FCFF model.
AG
AKS
ANA
ASEI
BBY
BGC
BID
BSY
BWIN
CBK
CC
CCI
CPR
CQB
DELL
ELNK
EZPW
FCC
GOOG
LGBT
LH
LTO
NRE1V
NTRI
ORAT
PEP
PLA
PTV
REDF
RIMM
SAS
SBUX
SZU
TDY
TIE
UHAL
VK
VMI
WEN
WW
If MATLAB and the MC-FCFF model are properly installed on your PC, you can find
the models by typing in your MATLAB command window:
>> loadModels
>> Models
You can open the Model for GOOG, or Google, for example by typing in MATLAB:
>>Model.GOOG=MonteCarloFCFF(Model.GOOG)
In Part II of Equity Valuation: Models from Leading Investment Banks, we explain in
detail how to model Baidu.com’s fundamental value per share. Baidu is the leading
internet search company in China. The MATLAB version of our MC-FCFF model
allows you to model fundamental value per share of an unlimited number of
companies. We recommend that you use stock codes, e.g. Bloomberg tickers, when
entering input data for a new stock. Baidu’s Bloomberg ticker is BIDU. To model
Baidu’s share price simply type in MATLAB:
>>Model.BIDU=MonteCarloFCFF()
This opens an input mask in MATLAB. You can now enter the input data for Baidu
discussed in Part II of Equity Valuation: Models from Leading Investment Banks to
run your first Monte Carlo FCFF model. However, we recommend that you input your
own assumptions for Baidu. If you have troubles running the program, please refer to
the manual MonteCarloFCFF.doc. We used MATLAB Version 7.3 (R2006b) to
program the MC-FCFF model. If you have questions about MATLAB, please visit:
www.mathworks.com
MODEL 2:
MC-FCFF model (Excel Version):
In the Excel file Baidu.xls you find Excel models to determine the fundamental value
per share of Baidu.com. The spreadsheet Baidu.xls contains five sheets:
(1) The Excel sheet Standard FCFF model 2005 in Baidu.xls explains how analysts
at leading investment banks valued Baidu.com in Fall 2005. The model is explained
in detail in Part II of Equity Valuation: Models from Leading Investment Banks. On
average, analysts believed in fall 2005 that a share of Baidu.com is worth USD 35. Of
course, Baidu’s shares today trade at much higher prices, mainly because Baidu’s
revenues increased more than analysts predicted in fall 2005.
(2) The Excel sheet Standard FCFF model 2007 in Baidu.xls explains how analysts
at leading investment banks valued Baidu.com in early 2007 after the company
reported FY 2006 results. The model is explained in detail in Part II of Equity
Valuation: Models from Leading Investment Banks. On average, analysts believed in
early 2007 that a share of Baidu.com is worth USD 135. In 2005 - 2007, analysts
have increased their share price targets dramatically for Baidu.com, mainly because
Baidu’s revenues increased much stronger than earlier predicted in fall 2005.
(3) The Excel sheet MC-FCFF model 2007 (univariate) in Baidu.xls allows you to
run Monte Carlo simulations to model Baidu’s fundamental value per share. The main
driver of Baidu’s intrinsic value is its revenue growth. The model allows you to enter
different input distributions based on your revenue growth assumptions for
Baidu.com. The model is explained in detail in Part II of Equity Valuation: Models
from Leading Investment Banks.
(4) The Excel sheet MC-FCFF 2007 (multivariate) in Baidu.xls allows you to enter
your assumptions for multiple share price drivers of Baidu.com:
- Revenue growth
- EBIT margins
- Tax rate
- Depreciation and amortization (D&A)
- Change in net working capital (ΔNWC), and
- Capital expenditures (CAPEX)
The model is explained in detail in Part II of Equity Valuation: Models from Leading
Investment Banks.
(5) The Excel sheet Invested Capital in Baidu.xls explains how we determined
Baidu’s invested capital.
To run a sophisticated Monte Carlo simulation in Excel, you need a Monte Carlo addinn. We recommend Palisade’s @Risk software to run Monte Carlo simulations in
Excel. @Risk is a sophisticated add-in to Microsoft Excel. The software enables
Excel users to run simulations in Microsoft Excel, an operating environment most
people are familiar with. To use @Risk, you first have to install the software. If you do
not have @Risk 4.5, you can easily download the software from Palisade’s
homepage:
www.palisade.com.
On palisade’s website you will find a full evaluation copy of @Risk for free which can
be used for a limited period of time. The user guide @Risk: Guide to Using on
Palisde’s website explains the full functionality of @Risk in detail. We strongly
recommend @Risk’s online tutorial. Once @Risk is properly installed on your PC,
you can start the online tutorial by selecting:
StartMenu/Programs/PalisadeDecisonTools/Tutorial/@RiskTutorial/Risk45.html.
Please note that you have to install @Risk properly on your PC to run the Excel
sheets:
-
MC-FCFF model 2007 (univariate)
-
MC-FCFF model 2007 (multivariate)
The three other Excel sheets in Baidu.xls do not require @Risk. All models and the
use of @Risk are explained in detail in Part II of Equity Valuation: Models from
Leading Investment Banks.
MODEL 3:
Leverage Buyout (LBO) Model
The model Conti LBO.xls explains in detail how analysts at UBS Investment Bank
valued Continental AG in late July 2006. Investors of publicly listed companies can
benefit from leveraged buyouts as private equity investors typically pay a control
premium when they take a public company private. Many leading investors and
investment banks have developed LBO models to screen for potential LBO
candidates.
LBO models are based on a number of subjective assumptions, including:
-
Transaction details (control premium)
-
Financial structure (leverage / cost of debt)
-
Operational assumptions
-
Debt schedule (use of free cash flows and length of interim period)
-
Final cash flows and exit multiple
These assumptions and the valuation of Continental AG are discussed in detail in
Part VI of Equity Valuation: Models from Leading Investment Banks.