A Reader’s Question on Duff & Phelps


A Reader’s Question

I was taking a look at Prof. Greenblatt’s lecture notes and have doubts with Duff and Phelps case. Can you help me?

EBIT of $43.72 x .6 for taxes = $26.23 x 13 P/E = $341. I shrank the number of shares due to the buy backs down to 3.5 million outstanding shares. I assumed that they were buying back shares with the shares increasing in price by 8% a year. Don’t forget to make assumptions about what they would do with their excess cash

Where did he get the value of $43,72 for the EBIT? Why did he use the 13 PE to valuate the company?

My response.

Below are my notes and the 10K on Duff & Phelps


Lecture 11_Balance Sheet Analysis Duff & Phelps ROE vs ROC

Class Notes #2 Intro and Duff and Phelps Case Study Analysis

If you look at the 10-K then EBIT is $15.7 million not 43.72. I don’t know why there is a discrepancy, but go with the actual figures in the 10-K.

The main points are to realize that this is an outstanding business with high returns on capital and profitable growth. 14 P/E is about the average P/E on an average American businesses. So a conservative 13 on a much better business that is growing in excess of 15% (at least for a few years) and can reinvest capital at high rates is worth more than an average multiple. I think he chose 13 as a normal/bad scenario for the multiple. Valuation is judgment not a science.

You are right to track the cash in your valuation. Either the cash builds up or is used in paying dividends or buying back stock.

I don’t know why I have 28.4 EBIT in my notes, but go always with the original 10-K figures.  Hope that helps.

11 responses to “A Reader’s Question on Duff & Phelps

  1. I assumed the $43 EBIT figure already had the next 5 year growth embedded in it but the values did not exactly match.

    Regarding the 14 multiple, wouldn’t that be for P/E? Does the same hold for EV / EBIT?

  2. Yes, for the P/E. Don’t use EV/EBIT, better to use EBITDA-Maintenance Capex then if it is growing, growth capex.

    What are the true pre-tax, pre-interest owner’s earnings? That is what you are shooting for.

    • John-

      Why is it that you use pre-tax owners earnings rather than after-tax? I often do the same but try to look at both and obviously have different multiples that I’m looking for each. I am just interested in how you think about it.

      Jean-Marie Eveillard discussed the issue recently in a Chicago CFA meeting. His preferred measures are EV/EBIT or EV/EBITDA-MCX. He admits that taxes have to be paid but he is skeptical of companies in US or EU that pay low taxes because they are either cheating the tax man or overstating their profits. I think that is the reason that, all else equal, he applies the same multiple for a company paying 20% in taxes or 35%.

      I think that is is worth considering that the company is converting more EBIT to FCF than the average company if they have opportunities to reinvest at the lower tax rate and it is legitimate.


  3. John,
    Can you explain in detail when to use EBIT or EBITDA ? Thanks !

    • type in: Placing EBITDA into perspective —in the blogs search box. READ THAT.

      EBITDA is useless except perhaps for real estate investments with minimal capex.

      Think if you were running a cab company. You get revs. minus cost of goods sold (paying the driver and the oil and gas) but without setting aside money for replacing the cab(s), you are in a fantasy.

      So focus first on the underlying principle, not the technique.

  4. The number for EBIT in the note is wrong. However, if you download the old lecture notes (Classe #2), in which John posted his answer to the Duff & Phelps case study he used the correct number for EBIT.

  5. What about working capital?

    Shouldn’t I use (considering the firm is growing) EBIT + Depreciation – Capex (growth + maint) + change in Working Capital?

  6. When Greenblatt talks about EBIT or EBITDA he is ALWAYS mentioning EBIT + Depreciation – Capex (or maint. capex) +- Change in WC? Or does he use it for some formulas and EBIT (by itself) in others?

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