You are previewing Corporate Valuation for Portfolio Investment: Analyzing Assets, Earnings, Cash Flow, Stock Price, Governance, and Special Situations.
O'Reilly logo
Corporate Valuation for Portfolio Investment: Analyzing Assets, Earnings, Cash Flow, Stock Price, Governance, and Special Situations

Book Description

A detailed guide to the discipline of corporate valuation

Designed for the professional investor who is building an investment portfolio that includes equity, Corporate Valuation for Portfolio Investment takes you through a range of approaches, including those primarily based on assets, earnings, cash flow, and securities prices, as well as hybrid techniques.

Along the way, it discusses the importance of qualitative measures such as governance, which go well beyond generally accepted accounting principles and international financial reporting standards, and addresses a variety of special situations in the life cycle of businesses, including initial public offerings and bankruptcies. Engaging and informative, Corporate Valuation for Portfolio Investment also contains formulas, checklists, and models that the authors, or other experts, have found useful in making equity investments.

  • Presents more than a dozen hybrid approaches to valuation, explaining their relevance to different types of investors

  • Charts stock market trends, both verbally and visually, enabling investors to think like traders when needed

  • Offers valuation guidance based on less quantitative factors, namely management quality and factors relating to the company and the economy

Corporate Valuation for Portfolio Investment puts this dynamic discipline in perspective and presents proven ways to determine the value of corporate equity securities for the purpose of portfolio investment.

Table of Contents

  1. Title Page
  2. Copyright Page
  3. Dedication
  4. Foreword
  5. Preface
  6. Acknowledgments
  7. CHAPTER 1 - Corporate Valuation for Portfolio Investment: A Philosophical Framework
    1. Valuation Defined
    2. The Importance of Equity
    3. Equity Defined
    4. Articles of Faith Undermined: Securitization at Risk
    5. Benefits of the Equity Marketplace
    6. The Flexible Nature of Equity Capital
    7. Long-Term Superiority of Equity over Debt—with a Caution about Volatility
    8. The Focused Nature of Valuation for Investment
    9. Two Main Sources of Information about Equity
    10. Financial Reports: Issues with GAAP and IFRS/IAS
    11. Sources of Complexity in Accounting for Company Value
    12. Reforming GAAP and IFRS
    13. The Problem of Fair Market Value: Reporting Values for Securities with No Current Market
    14. Three Studies
    15. The Need to Read between the Lines
    16. Human Nature Complicates (but Also Informs) Equity Valuation
    17. George Soros’s Concept of Reflexivity
    18. Other Paradoxes in Equity Investing
    19. The Observer Effect
    20. Human Nature as the Key to Equity Value
    21. Need for Expression in Currency Values
    22. On Financial Mathematics
    23. In Closing: About This Book
    24. A Range of Approaches
    25. Notes
  8. CHAPTER 2 - Valuation Based on Assets
    1. Overview of Assets as a Unit of Valuation
    2. An Opening Caveat: The Limitations of Accounting Numbers
    3. Accounting Numbers: Why Assets as a Starting Point?
    4. Definition of an Asset
    5. Flow-Dominant vs. Value-Dominant Assets
    6. The Market Premium and Nonmarket Discount
    7. Bear Stearns: A Cautionary Tale
    8. The Asset-Focused Investor
    9. Current Asset Value
    10. Taking Clues from Assets
    11. The Sykes Model
    12. Beyond Assets: Clues from Liabilities and Equity on the Balance Sheet
    13. The Role of the Appraiser and Appraisal Standards in Valuing Assets
    14. Fair Market Value Treatment Assets
    15. Fair Value of Assets Under FASB (GAAP) and IASB (IFRS)
    16. Valuing Intangible Assets on the Balance Sheet
    17. Valuing Intangible Assets That Are Not on the Balance Sheet
    18. Using the MD&A for Insights on Assets
    19. Improvements in Fair Value Disclosures: A Checklist for Investors
    20. Asset-Based Valuation by Industry
    21. Special Topics in Asset Valuations: Valuing Assets in Pension Plans
    22. Lens Check
    23. Conclusion: Asset Values in Bailouts
    24. Appendix 2.1: Common Ratios, Multiples, Averages, and Algorithms Based on Assets—and Examples of Their Use
    25. Appendix 2.2: Asset-Based Approach to Business Valuation (American Society of Appraisers)
    26. Notes
  9. CHAPTER 3 - Valuation Based on Earnings (Income)
    1. Earnings Defined
    2. Types of Earnings
    3. Operating Earnings Are Key to Value
    4. Earnings Are Relative to Revenues and Expenses
    5. Earnings Are Ultimately Based on Assets
    6. Hard Times Reveal Earnings-Asset Connection
    7. How the Standard Setters Currently Define Earnings
    8. A Brief Pause to Look at Our Compass
    9. The Other Side of the Equation: Revenues Minus Expenses
    10. How XBRL Can Connect the Dots between Earnings and Assets
    11. Earnings Management and Fraud
    12. Earnings Caveat from a Sage
    13. The Quality of Earnings
    14. Models to Assess Earnings
    15. Earnings Guidance: A Waning Trend?
    16. Consensus Earnings Programs
    17. Earnings Examples
    18. EPS: An Emerging Standard
    19. Earnings-Based Valuation by Industry
    20. Impact on Industries of New Global Accounting Standards for Revenue Recognition
    21. Is a New Earnings Measure Needed?
    22. Lens Check
    23. Conclusion
    24. Appendix 3.1: Hoover’s Definitions of Basic Income Statement Terms
    25. Appendix 3.2: Ratios and Other Valuation Indicators Using Earnings
    26. Appendix 3.3: Net Income Example
    27. Notes
  10. CHAPTER 4 - Valuation Based on Cash Flow
    1. Cash Flow Statements—Something Old, Something New for Investors
    2. Value and Liquidity
    3. Cash Flow: What the Global Standard Setters Say
    4. What the Cash Flow Statement Shows
    5. Accounting Note: Converting an Indirect Method Statement of Cash Flows to a Direct Method
    6. DCF: Projecting Future Cash Flow
    7. Crystal Ball: Two Kinds of Questions
    8. Some General Methodologies for Considering Cash Flow
    9. Cash Flow from Projects: What Investors Should Know
    10. The Work of Alfred Rappaport
    11. Using Monte Carlo Simulations for Future Cash Flow Estimates
    12. Using Cash Flow to Calculate Amortized Cost
    13. IFRS Impact on Cash Flow
    14. Cash Flow Patterns in Industries
    15. Lens Check
    16. Conclusion
    17. Appendix 4.1: AT&T Example
    18. Appendix 4.2: ASC 230 Summary
    19. Appendix 4.3: Summary of IAS 7
    20. Notes
  11. CHAPTER 5 - Valuation Based on Securities Prices
    1. Overview of Securities Prices
    2. Definition of Stock Price
    3. Seven Basic Points of Departure to Determining the Value of a Security
    4. Approach 1: Ratios or Formulas That Include Stock Prices
    5. Approach 2: Technical Analysis of Stock Price Movements
    6. Approach 3: Analysis of Values According to Efficient Market-Random Walk Hypothesis
    7. Approach 4: Stock Valuation Based on Expectations
    8. Approach 5: Valuations Implicit in Algorithmic Trading
    9. Approach 6: The Black Swan Approach to Stock Price Valuation
    10. Approach 7: Reflexivity Theory and Stock Values
    11. An Overview of Chaos/Complexity Theory
    12. Securities Valuation as an Asset on the Balance Sheet
    13. The Duff & Phelps Valuation Model
    14. Revisiting Mark-to-Market
    15. Can We Bring Back the Equity Premium?
    16. Reconnecting with the Good Old Capital Asset Pricing Model
    17. Stock Price Patterns in Industries
    18. Lens Check
    19. Conclusion
    20. Notes
  12. CHAPTER 6 - Hybrid Techniques for Valuation
    1. Building vs. Buying a Model
    2. A Word about Building a Model Within a Model
    3. Words of Caution
    4. Fourteen Approaches
    5. Using Metrics to Measure Management
    6. A Basic Distinction: Residual Income vs. Discounted Cash Flow
    7. Out-of-the-Box, or Generic, Valuation Models
    8. Reconciling the Balance Sheet and Income Statement
    9. Reconciling the Income Statement to the Statement of Cash Flows
    10. A New Balance Sheet Metric
    11. Use of Hybrid Valuation Approaches in a Key Industry: Energy
    12. Concluding Caveat and a Fifteenth Model
    13. Appendix 6.1: National Standard Company: Description of Bonus Plan Based on EVA
    14. Notes
  13. CHAPTER 7 - Market Value Drivers of Public Corporations: Genius, Liberty, Law, Markets, Governance, and Values
    1. The Nonmarketability Discount
    2. Six Key Elements
    3. Element 1: Genius
    4. Element 2: Liberty
    5. Element 3: Law
    6. Element 4: Markets
    7. Element 5: Governance
    8. Element 6: Values
    9. Long-Term Investing
    10. A Note on Valuation for Divestment
    11. Conclusion
    12. Appendix 7.1: Rating Governance
    13. Appendix 7.2: Enhanced Business Reporting Framework
    14. Appendix 7.3: The Caux Round Table Principles
    15. Appendix 7.4: Trucost
    16. Notes
  14. CHAPTER 8 - Situational Valuation: Equity Values throughout the Corporate Life Cycle
    1. Scenarios
    2. Valuation of Shares Under Public Policy Pressure: A Story in Medias Res
    3. Valuation of Shares at Par (or No Par)
    4. Valuation of Shares in IPOs and Secondary Offerings
    5. Valuation of Shares upon the Declaration of a Dividend or a Stock Split
    6. Valuation of Shares in Buybacks
    7. Valuation of Shares in Companies with Underfunded Defined Benefit Pension Plans
    8. The Example of Endowments
    9. Valuation of Shares Tendered, Exchanged, or Retained in Mergers or Acquisitions
    10. Valuation of Shares in Spin-Offs and Divestitures
    11. Valuation of Shares Impacted by Shareholder-Led Governance Changes
    12. Valuation of Shares in Companies in the Zone of Insolvency or Filing for Bankruptcy
    13. Valuation of Shares in Companies Emerging from Bankruptcy
    14. Conclusion
    15. Notes
  15. CHAPTER 9 - Conclusion
    1. Need for Humility in Valuation
    2. A True Beauty Contest
    3. No Single Definition for Valuation
    4. A Word about Genius
    5. Real Impact
    6. A Need for Investor Talent
    7. Looking for the Story
    8. On the Social Impact of Corporations and Investors
    9. Work in Progress
    10. Notes
  16. APPENDIX A - Equity vs. Debt Securities: A Global Definition
  17. APPENDIX B - Basic Accounting Concepts for Corporate Valuation
  18. APPENDIX C - Convergence of Global Standards: FASB, IASB, and Their Joint Standards as of June 1, 2010
  19. APPENDIX D - Report to the Congressional Oversight Panel Regarding Fair Value of Certain Securities and Warrants Acquired by the Treasury under TARP
  20. APPENDIX E - The Use of Mathematics in Finance
  21. APPENDIX F - The Modigliani-Miller Theorems
  22. APPENDIX G - Uniform Standards of Professional Appraisal Practice (USPAP)
  23. APPENDIX H - Global Industry Classification Standard (GICS) Sectors and Industry Groups
  24. APPENDIX I - Damodaran Spreadsheets for Valuation
  25. APPENDIX J - Monte Carlo Simulation for Security Investments
  26. APPENDIX K - Antivaluation! Human Valuation and Investment Foibles
  27. APPENDIX L - Fair Value Measurement of Derivatives Contracts
  28. APPENDIX M - Final Report of the Advisory Committee on Improvements to Financial Reporting to the United States Securities and Exchange Commission
  29. APPENDIX N - Valuing Values
  30. APPENDIX O - XBRL Guidance
  31. APPENDIX P - Pension Fund Valuation Guidance
  32. APPENDIX Q - Stock Indexes
  33. APPENDIX R - U.S. Business Cycle Expansions and Contractions
  34. APPENDIX S - Wisdom from Norway: Two Speeches from a Norwegian State Pension Plan Inspire a Long-Term View
  35. Recommended Reading on Corporate Securities Valuation
  36. Index