One trick to hone your valuation skills is to read merger proxies. Thank you Mr. Michael Price. Investment Bankers will do a valuation for an acquirer in a “Fairness” Opinion. You will learn more about how Wall Street values companies than through reading the typical brokerage research report. Investment bankers often lean heavily on multiples of comparable companies in arriving at their valuation. I wonder if the analyst arrives at a conclusion and then works backward.
Insight into other companies within an industry is another reason to read merger proxies.
Try to value American Dental Partners, Inc., ADPI, then compare your work to the investment bankers.
Go here to pick up the case study: http://www.scribd.com/doc/74913098/ADPI-Fairness-Opinion-2011
Here is a chance to test your valuation skills. Remember there are two ways that are theoretically sound:
- Discounting ALL future cash flows back to their present value using an appropriate discount rate for risk (“DCF”). A DCF may be a theoretically correct method to value a company but extremely difficult in practice. A slight change in assumptions and your method becomes similar to using the Hubbell Telescope, you are looking at a different galaxy. Small changes in discount rates and/or cash flows change your valuation drastically.
- A second method is what would the business trade for in a CASH transaction between two equally informed buyer and seller. Here you have a real transaction to anchor your valuation.
Do NOT look at the price of ADPI. Go to the documents and based on the financials try to figure out what you would pay for the entire business. Support your assumptions.
I will post the answer in a few days.
For an overview of ADPI go to the Value-Line here: http://www.scribd.com/doc/71933981/ADPI-Sept-2011
View the ADPI 2010 annual report here: http://www.annualreports.com/Company/2610
If you are lost, then you can view past research reports on the company here at www.valueinvestorsclub.com. You will have to become a member but it is free. Once you login, type in ADPI in the search box for companies and two research reports will pop up. The Value Investors’ Club (“VIC”) is highly recommended as a learning tool.
Good luck! Test your skills.