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How much would you pay for this company?

May 22, 2011
How much would you pay for this company?

Sales: $20 billion

EBIT: $4.6 billion

NI: $3.4 billion

Cash from Ops: $4 billion

FCF: $2.4 billion

Net Cash: $2.7 billion

Ok, you don’t know enough about the past performance. Check the table below for 3, 5 and 7 year growth rate…

CAGR Growth Rates 3 year 5 year 7 year
Revenue 49 57 65
EBIT 39 50 79
Net Income 38 56 82
EPS 41 58 80
Tangible Book value 26 29 22
Cash from Ops 36 93 81


You want your profitability metrics …here you go.

Profitability 2006 2007 2007 2008 2009 2010
ROA % 15.6 18.7 25.2 25.0 23.9 25.1
ROC % 19.3 22.4 33.6 34.7 32.5 35.1
ROE % 18.8 28.2 40.3 38.6 36.5 41.2
Margin Analysis 2006 2007 2007 2008 2009 2010
Gross Margin % 55.2 54.6 51.3 46.1 44.0 44.3
EBIT Margin % 29.9 26.6 28.8 24.6 23.5 23.3
NI Margin % 18.1 20.8 21.5 17.1 16.4 17.1
FCF Margin % -1.4% 15.8% 20.4% 5.6% 13.5% 14.9%


I have not provided small facts like the name of the company, its industry, its competitors, its products, its location, its management etc. I understand that without this information it is impossible to value the company in reality. But, I just want to see based on numbers alone ( I think I provided a lot of numbers) what kind of Market Cap you guys come up for this company. Its just a fun exercise.

I look forward to your answers.

About the author:

Adib Motiwala
Adib Motiwala is a Portfolio Manager at Motiwala Capital LLC, an investment management firm that manages separate accounts for its clients.

Visit Adib Motiwala's Website


Rating: 3.8/5 (12 votes)

Comments

Sivaram
Sivaram - 3 years ago
(In the bottom table, did you accidentally duplicate 2007 twice?)

This one is much tougher than it seems, at least for me. The growth rate has been so high, and ROE/ROA/etc so high, that it all comes down to how sustainable the current earnings are. The big risk is that one may be looking at peak earnings. Revenue growing at 65% per year and net income going up 82% every year isn't going to continue for very long.

If this is not a cyclical business, I would pay around 12x FCF or around $30 billion (with some cash added back in). If it was cyclical, I would only pay around 7x peak FCF (assuming the current numbers are closer to peak than the trough), which is around $17 billion.
Adib Motiwala
Adib Motiwala - 3 years ago
Sivaram,

Thanks for the comments. The business is not cyclical however it is an extremely competitive industry. It used to be the leader in the space and recently its position has been under attack.

The growth rates have slowed down as can be seen from 3 year numbers which are lower than 5 year numbes. Gross and EBIT margins are also coming down.

Thanks for playing along. Lets see if there are any more 'educated' guesses.

Adib
yswolinsky
Yswolinsky - 3 years ago
Adib can you just tell us about 2007 (which is the right table)?
Adib Motiwala
Adib Motiwala - 3 years ago
The tables are from 2005 - 2010. Sorry about that.
pmisleh05
Pmisleh05 - 3 years ago


I use this company's product everyday single day...obsessively. Good exercise Adib.
sudhanshujain
Sudhanshujain - 3 years ago
I see that this stock satisfies Magic Formula stock.

Would be awesome if I can get this stock for $2.4 billion i.e Net Cash. Just kidding!

I am ready to pay 1 times sales or 5 times EBITDA or 7 times Earning OR 10 times FCF without any knowledge of its business.

So around $20 - $25 Billion.
Adib Motiwala
Adib Motiwala - 3 years ago
Wow. Sudhanshu thats a pretty good one. 1x Sales.

EBITDA was $5.57 Billion. So you would max pay $27 billion on that metric. On the low end you indicated 1x Sales which is $20 billion. 7x earnings is $24 billion. and 10x FCF = $24 billion.

The company in question is in the technology 'space'. It was a former darling and now is one of the most out of favor companies.....

Any one else want to provide their best guesses before we disclose the company in question
tonyg34
Tonyg34 - 3 years ago
despite the high level of profitability and fantastic returns of the past this company (CSCO?) has rapidly declining earnings and the stock market is at least in part an exercise in predicting growth. This businesses growth trajectory is in decline and as its earnings growth rate slows down its market multiple (P/E ratio) will continue to contract (much like its margins have). Unless there is a catalyst to return the company to previous growth rates I will value the company at tangible book plus net cash plus ten years of forward looking free cash flow based on the expectation that both margins and revenue growth will continue to decline/contract at a higher rate going forward. Since margins went from 55% in 2005 to 45% in 2010 lets assume 25% by 2020 (because I have to assume something, you can of course create a range of values based on a range of possible outcomes), and growth (revenue) went from 65% yoy seven years ago to 40% yoy today, lets take that down all the way to 15% by 2020. I don't have hard numbers for book value and my valuation model is kinda obtuse anyway, but the idea is that you value the company based on its ability to throw off cash going forward since the industry is either in decline (like MO, except they have pricing power) or becoming commoditized by competitors (like CSCO). You buy assets, not earnings.
pmisleh05
Pmisleh05 - 3 years ago
It's not CSCO :). I'll throw up my back of the napkin once Adib posts the actual Company. I think it is fair to say however that the comparisons of it and another certain company that was acquired a little bit back are ridiculous.

sdsgrp
Sdsgrp - 3 years ago
This company is RIMM.
Adib Motiwala
Adib Motiwala - 3 years ago
Yes, you are right. It is indeed Research In Motion (RIMM). Please see my follow up article.
marcolanaro
Marcolanaro - 3 years ago
Interesting!! without knowing the company I was willing to pay just tangible book value since it was clear that the moat was eroding very fast, but at first I thought that maybe value was between 1 times sales (20 billion) and 30 billion.
balajisridharan
Balajisridharan - 3 years ago
I do not understand enough to envision how the cellphone market will look in five years.... I will pass on RIMM... (too tough for lesser mortals like me)

Even though it is clear to me cellphones or smartphones will used more in the future than in the past, I do not know any competitive edge that RIMM has that I can predict with any accuracy on the future!!! The future depends on their ability to introduce a new innovative product every two to three years...

In such a scenario, liquidation value will be the safest option...
rijk40
Rijk40 premium member - 3 years ago


interesting debate, RIMM definitely appears cheap but what about durable competitive advantage?

why buy RIMM when MSFT is on sale for P/E & P/FCF< 10?

this is a top 10 Hamblin Watsa position, I would love to see their investment case

regards

rijk
kfh227
Kfh227 premium member - 3 years ago


With the given article data, the to hard pile. Worth $0.

From the notes, I see it is RIMM.

I know nothing about the company. I'll play along though. Probably worth $20-$35 billion so I'd be willing to pay $10 to $18 billion for it. Current market cap is $22 billion. If it drops under $18 billion let me knwo and I'll research it :-) Contact me through the Gurufocus user system.

http://www.gurufocus.com/ic/
Sivaram
Sivaram - 3 years ago
--- QUOTE ---

RIJK40: "interesting debate, RIMM definitely appears cheap but what about durable competitive advantage?"

---- END QUOTE ---

Yep... you nailed the reason market partcipants are heading for the exit.

It's just not clear how sustainable the current sales and profits are. Although not a cyclical, this is the type of company that can fall apart very quickly.

--- QUOTE ---

RIJK40: "why buy RIMM when MSFT is on sale for P/E & P/FCF< 10?"

---- END QUOTE ---

I can't speak for others but I've been seriously looking at Nokia for a while (Nokia is somewhat similar to Research In Motion when it comes to its problems and future uncertainty) and I don't thnk anyone looking at a company like RIM or Nokia will necessarily compare it a potential investment Microsoft.

Microsoft is a megacap and diversified. Anyone investing in it is likely making a bet on the company as a whole and not necessarily on a specific industry (i.e. Microsoft's fortunes depend on different industries such as operating systems, office productivity, enterprise software, home entertainment, Internet services, etc). In contrast, companies like RIM are more a pure play on mobile communications. One of the reasons I'm looking at Nokia is because I'm bullish on mobile communications over the next few decades, if not century, and Microsoft doesn't offer the same opportunity.

In my view, industry analysis for Microsoft is much harder than for RIM or Nokia. The latter are more dependent on company-specific events and narrow industry outcomes than Microsoft is. However, Microsoft has a big moat and given its relatively low valuation, it is likely much "safer" than Nokia or RIM. Related to that, upside is likely much lower for Microsoft than someone like RIM or Nokia.
Sivaram
Sivaram - 3 years ago
This is a good exercise by Adib Motiwala. You can see what type of investor someone is by looking at their answers. For instance, classic value investors and those that are very conservative may want to buy a company like this at tangible book value (plus a bit more) but a company like this will never trade at that value except during distress (in any case, tangible book value is almost meaningless for a company like RIM).

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