2. What valuation method appears to be the most appropriate in this situation? What method
would you use to value Eaton’s?
When doing the valuation of a company there is a couple different methods you
can use. The valuation methods fall into two broad categories. Relative which is comparing the
company with other similar companies in the industry using ratios or Absolute which finds
intrinsic values based on factors like dividends, cash flows and growth rates for a single
company. The dividend discount model and the discount cash flow model both go through the
absolute approach and the comparable method takes the relative route.
Due to the fact that Eaton’s had a decline in sales (1.7 billion down from 2.3 billion) and
experienced fluctuating revenue we are unable to use the DDM and DDC models. The dividend
discount model requires a constant dividend payout and the discount cash flow model requires
predictable positive cash flows for a 5 year span, both of these things Eaton does not have
therefore canceling out these two methods. This leaves us with using the Comparable method.
The comparable method uses multiples of similar firms within the industry and adjusts the
numbers to find the value of Eaton. The most important part of the comparable method is
finding the right firms to use as comparison and evidently selecting the correct multiples to use.
The most appropriate companies to compare were Hudson’s Bay, Sears and Canadian Tire
(exhibit 7). In order to determine the true value of the firm we have chosen to go with the
EV/EBITDA ratio. EV takes into consideration the cost of paying off debt and EBITDA processes
profit before interest expense, unusual expenses and D&A.
4. As Mary Vitug, what share price would you recommend to Sandra Schumacher? How
many shares would you issue? What other recommendations would you make?
As our final recommendation we think that Eaton’s should issue the IPO. In the
retail industry there has been significant increases in disposable income which in
turn is resulting in an increase in consumer spending and projected increase in
growth for the coming year. Eaton’s was a well-recognized firm with a good
reputation for many years which will work in their favor to appeal investors.
Amongst other things Eaton has a new board of directors in which they are hoping
will form a better relationship with the shareholders. Eaton’s is also implementing
a new business plan to make better quality product and renovate the appeal of
their stores. By enforcing this new plan Eaton’s is hoping to move out of a low
margin business into a higher margin.
With all this in mind there is one downfall, In most cases with a company having
just experienced the financial distress that Eaton’s did, they are more likely to
start with a small IPO and after seeing improved earnings will issue a larger new
seasoned issue. With Eaton’s they need the capital as soon as possible and are
hoping to take advantage of the full IPO value off the start. This could work very
well and take care of all their needs but in the event that equity markets fall soon
after the IPO issue it will affect Eaton’s likelihood to raise capital in the future.
Being the underwriter in the IPO process, Mary Vitug should follow a more
conservative approach when valuing Eaton’s where it is a turnaround company.
Investors won’t be willing to put money into the company if it doesn’t somewhat
discounted in comparison to the share prices of other companies in the industry.
However in the end Eaton’s has a lot of good factors working on their side so
ultimately we recommend them going ahead with the IPO