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.

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