Culverhouse Investment
Management Group
Discounted Cash Flow Modeling
Introduction
 Intrinsic value of the company
 Theoretical vs. relative value
 Present value of the cash that
company will make in the future
 Gotta discount that cash back to
today
Advantages of a DCF Valuation
 Intrinsic valuation gives a
theoretical worth
 Flexible, adaptable analysis
 Can tinker & play
 Requires model maker to
scrutinize value drivers
 Always obtainable
Disadvantages of a DCF
Valuation
 A DCF is only as good as its inputs
 This is two-fold:
 Your assumptions need to be
defendable
 More predictable the cash flows,
better reliability of DCF
 Would you ever rely on a DCF to value
Snapchat? What about a super volatile
commodity?
 Highly sensitive to:
 Growth rates and margin assumptions
 Terminal growth rate
 Discount rate
Making Defendable Assumptions
Management
Investor presentations
Earnings Calls
Wall Street Analysts
Bloomberg
Historical Data
Trend analysis
5
DCF Valuation
Output
$ in millions
2014A
2015P
2016P
2017P
2018P
2019P
Revenue
% yoy growth
Cost of goods sold
9,769
7,754
9,173
-6.1%
7,320
9,646
5.2%
7,697
10,127
5.0%
8,020
10,616
4.8%
8,355
11,115
4.7%
8,725
Gross profit
% margin
2,014
20.6%
1,853
20.2%
1,948
20.2%
2,106
20.8%
2,261
21.3%
2,390
21.5%
568
5.8%
503
5.5%
529
5.5%
616
6.1%
699
6.6%
754
6.8%
273
293
309
324
340
356
841
8.6%
797
8.7%
838
8.7%
940
9.3%
1,039
9.8%
1,110
10.0%
568
503
529
616
699
754
EBIT
% margin
Depreciation and Amort.
EBITDA
% margin
EBIT
367
35.5%
325
35.5%
341
35.5%
397
35.5%
451
35.5%
486
35.5%
(+) Depreciation and Amort
(-) Change in working capital
(-) Capex
273
397
313
293
(89)
293
309
(72)
309
324
(11)
324
340
(36)
340
356
(30)
356
Unlevered FCF
(70)
413
413
408
487
517
NOPAT
% taxes
Other Key Assumptions
WACC
LTGR
Valuation Output
Total disc. UFCF
Terminal Value
Enterprise Value
Net Debt
Minority Interest
Equity Value
Shares outstanding
Equity value/share
Current share price
Margin of safety
Implied Exit Multiple
9.50%
2.50%
$
$
$
1,700
4,804
6,504
1,100
33
5,371
91.978
58.39
45.00
30%
5.9x
So How Do I Build One?
($ in millions)
2011A
2012A
2013A
2014A
Revenue
Cost of goods sold
Gross profit
% margin
8,773
6,997
1,776
20.2%
9,962
7,839
2,123
21.3%
10,787
8,396
2,391
22.2%
9,769
7,754
2,014
21.3%
Operating expenses:
Selling, general and administrative expense
Depreciation
Engineering expenses
Amortization of intangibles
Total Operating expenses
717
152
276
22
1,319
861
181
317
49
1,588
877
212
353
48
1,702
812
273
313
48
1,446
EBIT
% margin
457.6
5.2%
534.9
5.4%
689.0
6.4%
568.3
5.8%
4.4%
300
152
(60)
23.0%
341
181
66
35.6%
392
212
12
35.5%
313
273
397
Other items:
Tax rate
CapEx
Depreciation and Amortization
Change in net working capital
7
Figure Out Your Assumptions
2013A
2014A
2015P
2016P
2017P
2018P
2019P
8.3%
-9.4%
-6.1%
5.2%
5.0%
4.8%
4.7%
78.7%
77.8%
79.4%
79.8%
79.8%
79.2%
78.7%
78.5%
Selling, general, and administrative expense
Base case
8.6%
8.1%
8.3%
8.3%
8.3%
8.3%
8.3%
8.3%
Depreciation expense
Base case
1.8%
2.0%
2.8%
2.7%
2.7%
2.7%
2.7%
2.7%
Engineering expenses
Base case
3.2%
3.3%
3.2%
3.2%
3.2%
3.2%
3.2%
3.2%
Amortization of intangibles
Base case
0.5%
0.4%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
Tax rate
4.4%
23.0%
35.5%
35.5%
35.5%
35.5%
35.5%
35.5%
Capital Expenditures
Base case
3.4%
3.4%
3.6%
3.2%
3.2%
3.2%
3.2%
3.2%
2012A
Revenue
% yoy growth
Costs:
Cost of goods sold
Base case
8
Output of Your Assumptions
($ in millions)
2014A
2015P
2016P
2017P
2018P
2019P
Revenue
Cost of goods sold
Gross profit
% margin
9,769
7,754
2,014
21.3%
9,173
7,320
1,853
20.2%
9,646
7,697
1,948
20.2%
10,127
8,020
2,106
20.8%
10,616
8,355
2,261
21.3%
11,115
8,725
2,390
21.5%
Operating expenses:
Selling, general and administrative expense
Depreciation
Engineering expenses
Amortization of intangibles
Total Operating expenses
812
273
313
48
1,446
763
250
294
44
1,350
802
263
309
46
1,419
842
276
324
48
1,490
883
289
340
51
1,562
924
303
356
53
1,636
EBIT
% margin
568.3
5.8%
503.2
5.5%
529.1
5.5%
616.2
6.1%
699.1
6.6%
754.1
6.8%
35.5%
313
273
397
35.5%
293
293
(89)
35.5%
309
309
(72)
35.5%
324
324
(11)
35.5%
340
340
(36)
35.5%
356
356
(30)
Other items:
Tax rate
CapEx
Depreciation and Amortization
Change in net working capital
9
DCF Output
$ in millions
2014A
2015P
2016P
2017P
2018P
2019P
Revenue
% yoy growth
Cost of goods sold
9,769
7,754
9,173
-6.1%
7,320
9,646
5.2%
7,697
10,127
5.0%
8,020
10,616
4.8%
8,355
11,115
4.7%
8,725
Gross profit
% margin
2,014
20.6%
1,853
20.2%
1,948
20.2%
2,106
20.8%
2,261
21.3%
2,390
21.5%
568
5.8%
503
5.5%
529
5.5%
616
6.1%
699
6.6%
754
6.8%
273
293
309
324
340
356
841
8.6%
797
8.7%
838
8.7%
940
9.3%
1,039
9.8%
1,110
10.0%
568
503
529
616
699
754
367
35.5%
325
35.5%
341
35.5%
397
35.5%
451
35.5%
486
35.5%
(+) Depreciation and Amort
(-) Change in working capital
(-) Capex
273
397
313
293
(89)
293
309
(72)
309
324
(11)
324
340
(36)
340
356
(30)
356
Unlevered FCF
(70)
413
413
408
487
517
EBIT
% margin
Depreciation and Amort.
EBITDA
% margin
EBIT
NOPAT
% taxes
10
Discounting Cash Flows:
Weighted Average Cost of Capital
• (Cost of Equity x Weight of Equity)+(Cost of Debt x (1-tax rate)
x Weight of Debt)
More Levered
Cost of Equity
Weight of Equity
Cost of Debt
Effective tax rate
Weight of Debt
WACC
Less Levered
14%
40%
4.5%
35%
60%
7.36%
Cost of Equity
Weight of Equity
Cost of Debt
Effective tax rate
Weight of Debt
WACC
• Go to Bloomberg
that
All Debt
14%
60%
4.5%
35%
40%
9.57%
All Equity
Cost of Equity
Weight of Equity
Cost of Debt
Effective tax rate
Weight of Debt
14%
0%
4.5%
35%
100%
Cost of Equity
Weight of Equity
Cost of Debt
Effective tax rate
Weight of Debt
WACC
2.93%
WACC
Find your company
Type in WACC
14%
100%
4.5%
35%
0%
14.00%
Use
11
Discount Projected Cash Flow
$ in millions
2014A
2015P
2016P
2017P
2018P
2019P
Revenue
% yoy growth
Cost of goods sold
9,769
7,754
9,173
-6.1%
7,320
9,646
5.2%
7,697
10,127
5.0%
8,020
10,616
4.8%
8,355
11,115
4.7%
8,725
Gross profit
% margin
2,014
20.6%
1,853
20.2%
1,948
20.2%
2,106
20.8%
2,261
21.3%
2,390
21.5%
568
5.8%
503
5.5%
529
5.5%
616
6.1%
699
6.6%
754
6.8%
273
293
309
324
340
356
841
8.6%
797
8.7%
838
8.7%
940
9.3%
1,039
9.8%
1,110
10.0%
568
503
529
616
699
754
367
35.5%
325
35.5%
341
35.5%
397
35.5%
451
35.5%
486
35.5%
(+) Depreciation and Amort
(-) Change in working capital
(-) Capex
273
397
313
293
(89)
293
309
(72)
309
324
(11)
324
340
(36)
340
356
(30)
356
Unlevered FCF
(70)
413
413
408
487
517
378
345
311
338
328
EBIT
% margin
Depreciation and Amort.
EBITDA
% margin
EBIT
NOPAT
% taxes
Present Value of UFCF
/ (1+WACC)^1
/ (1+WACC)^5
Other Key Assumptions
WACC
LTGR
9.50%
2.50%
12
Terminal Value
• We have cash flows projected from 2015-2019: What about 2020-Eternity?
– In comes the Terminal Value calculation
• Use the Perpetuity Growth Model
– Assumes cash flows grow to perpetuity at a constant rate
– Inputs required:
• Terminal year FCF, WACC, LTGR
• Long term growth rate: Generally use between 2% - 3%
– Long term GDP growth rate
• Terminal Value Formula: (Terminal Year FCF*(1+LTGR))/(WACC-LTGR)
– Must discount this value back to present: (Result of Above Calculation/(1+WACC)^(# of years in
future we projected (5))
13
Project Terminal Value
• Final projected FCF: $517mm
• WACC: 9.5%; LTGR 2.5%
• Terminal Value = (517*(1+.025))/(.095-.025) = $7,563
• Discount Terminal Value = 7,563/(1+.095)^5
• Terminal Value: $4,804
14
Add! to get Enterprise Value
Valuation Output
Total disc. UFCF
Terminal Value
Enterprise Value
Net Debt
Minority Interest
Equity Value
Shares outstanding
Equity value/share
Current share price
Margin of safety
Implied Exit Multiple
$
$
$
1,700
4,804
6,504
1,100
33
5,371
91.978
58.39
45.00
30%
5.9x
15
Subtract! to get Equity Value
Valuation Output
Total disc. UFCF
Terminal Value
Enterprise Value
Net Debt
Minority Interest
Equity Value
Shares outstanding
Equity value/share
Current share price
Margin of safety
Implied Exit Multiple
$
$
$
1,700
4,804
6,504
1,100
33
5,371
91.978
58.39
45.00
30%
5.9x
16
Divide! By Shares Outstanding
Compare to Current Stock Price
Valuation Output
Total disc. UFCF
Terminal Value
Enterprise Value
Net Debt
Minority Interest
Equity Value
Shares outstanding
Equity value/share
Current share price
Margin of safety
Implied Exit Multiple
$
$
$
1,700
4,804
6,504
1,100
33
5,371
91.978
58.39
45.00
30%
5.9x
17
DCF Valuation
Output
$ in millions
2014A
2015P
2016P
2017P
2018P
2019P
Revenue
% yoy growth
Cost of goods sold
9,769
7,754
9,173
-6.1%
7,320
9,646
5.2%
7,697
10,127
5.0%
8,020
10,616
4.8%
8,355
11,115
4.7%
8,725
Gross profit
% margin
2,014
20.6%
1,853
20.2%
1,948
20.2%
2,106
20.8%
2,261
21.3%
2,390
21.5%
568
5.8%
503
5.5%
529
5.5%
616
6.1%
699
6.6%
754
6.8%
273
293
309
324
340
356
841
8.6%
797
8.7%
838
8.7%
940
9.3%
1,039
9.8%
1,110
10.0%
568
503
529
616
699
754
EBIT
% margin
Depreciation and Amort.
EBITDA
% margin
EBIT
367
35.5%
325
35.5%
341
35.5%
397
35.5%
451
35.5%
486
35.5%
(+) Depreciation and Amort
(-) Change in working capital
(-) Capex
273
397
313
293
(89)
293
309
(72)
309
324
(11)
324
340
(36)
340
356
(30)
356
Unlevered FCF
(70)
413
413
408
487
517
NOPAT
% taxes
Other Key Assumptions
WACC
LTGR
Valuation Output
Total disc. UFCF
Terminal Value
Enterprise Value
Net Debt
Minority Interest
Equity Value
Shares outstanding
Equity value/share
Current share price
Margin of safety
Implied Exit Multiple
9.50%
2.50%
$
$
$
1,700
4,804
6,504
1,100
33
5,371
91.978
58.39
45.00
30%
5.9x
Best Practices and Other Notes
• Pull historical finances from 10K
– Found on company website
• Keep your growth assumptions realistic! Ramp down revenue
growth over the projection period
• When in doubt, average past percentages of revenue
• Don’t get too caught up in being exact. You’re going to be off. Just
be sure everything you do has a reason
19
Best Practices and Other Notes
• WACC should range from 8%-12%. LTGR: 2%-3%
• This is a quantitative analysis. Be sure your company holds up under
qualitative AND quantitative scrutiny
• Build a DCF over Christmas Break
– Info is all over the internet if you get stuck. Pick a simple company that makes
sense (Nike, Coach, etc.)
• Will have Secretary Jason send you a sample model so you can look at all
the calculations
20