Mystery Project: Valuation Class
Project Description: Attached is an excel spreadsheet containing fundamental information on the 130 largest market cap non-financial service companies listed anywheere in the world. You have two tasks:
1. Passive investment portfolio: On a relative valuation basis, please identify the 5 most undervalued and the 5 most overvalued firms in this sample. In making this analysis:
q You can pick any multiple you want to make this judgment. This multiple can either be an existing multiple (like PE or EV/EBITDA), a modified version of an existing multiple (like PEGY) or a multiple that you invent. (Just make sure that you put it through the consistency test)
q You have to show a scatter plot of that multiple against the key variable that you believe drives that multiple (For example, if you pick PE ratios, the key variable will be expected growth rates)
q You have to control for differences in risk, growth and cashflow potential. A multiple regression is one way to do this but there are other approaches as well.
2. Assume that you are an activist investor (Blackstone and KKR’s competitor) and are interested in acquiring one of the firms in the sample, which you plan to take private, restructure (operating and financing, if necessary) and take public again. Which company would you pick and why? (Note that it does not have to come from your list of 5 most undervalued companies).
Data that you wish you had but will not have: There is no market value for debt or the information necessary to compute it and no bond ratings. You only have a five year forecasted growth in EPS and no expected growth rates in revenues & EBITDA. You do have historical growth rates (CAGR) in a bunch of variables. Do the best you can with the information you have.
Final Format: Keep your write-up short and descriptive. Include your statistical output, if any, as an appendix and explain how you used it.
Grading: The grading for the project will be subjective – 8 of the 10 points will be for doing all of the above competently and the other 2 points will be for creative (and credible) analysis.
Data Restrictions: For your own sake, I am going to restrict you from going outside the data provided on the spreadsheet, since that may create a data war…. So, no visiting Bloomberg, Yahoo! Finance or any other sites…Have fun!
P.S: You can use Microsoft Excel for your statistical analysis but your options will be much more extensive if you use a statistics package. My favorite is SPSS but MINITAB will also do the trick.