Fair market value
Price at which an asset would change hands between willing parties provided no compulsion to undertake transaction
Investment Value
Concept of value to a specific buyer taking account of potential synergies and based on the investor’s requirements and expectations
Valuation Process
Understanding the business, Forecasting company performance, Selecting the appropriate valuation model, Converting forecasts to a valuation, Applying the valuation conclusions
Quality of earning analysis
Scrutiny of all financial statements, including the balance sheet, to evaluate both the sustainability of a company’s performance and how accurately the reported information reflects economic reality
Aggressive accounting
Growth of asset at much faster rate than growth of sales, high net income consistently with low operating income
Valuation models
Absolute Valuation Models (DDM, FCFE, FCFF, Residual Income), Asset Based Valuation (values a company on the basis of the market value of the assets or resources it controls), Relative Valuation Models (using P/E, P/B)
Pairs trading
utilizes pairs of closely related stocks (e.g., two automotive stocks), buying the relatively undervalued stock and selling short the relatively overvalued stock
Sum of the parts valuation or private market value or breakup value
Valuation that sums the estimated values of each of the company’s businesses as if each business were an independent going concern
Conglomerate discount
Market applies a discount to the stock of a company operating in multiple, unrelated businesses compared to the stock of companies with narrower focuses due to inefficiency of internal capital markets, endogenous factors (i.e., poorly performing companies tend to expand by making acquisitions in unrelated businesses) and research measurement errors (i.e., conglomerate discounts do not actually exist). If break-up value is in excess of a company’s unadjusted going-concern value, strategic actions, such as a divestiture or spin-off might be needed.
Diff Val models
Potential buyer seeking controlling position (FCF), bank with high portion of marketable securities and assets (relative valuation)
Situational adjustments
Required to incorporate the valuation impact of specific issues. Control Premium (value of a stock investment that would give an investor a controlling position. Higher than a valuation produced by a generic quantitative valuation expression that did not explicitly model such a premium), Lack of marketability discount (extra return to compensate for lack of a public market) & illiquidity discount (if an investor wishes to sell an amount of stock that is large relative to that stock’s trading volume but not large enough to constitute a controlling ownership. The price that could be realized for that block of shares would generally be lower than the market price for a smaller amount of stock, a so-called blockage factor)
