Lezione 12
L’ORIGINE DEL VALORE
See T. Koller, M. Goedhart, D. Wessels, Valuation, 2010, Chapters 1, 2
L’origine del valore
•
The guiding principle of value creation is that companies create value by
investing capital they raise from investors to generate future cash flows at
rates of return exceeding the cost of capital (the rate investor required to
be paid for the use of their capital)
•
The faster companies can increase their revenues and deploy more capital
at attractive rates of return, the more value they create. The combination of
growth and return on invested capital (ROIC) relative to its cost is what
drives value
2
Business Strategy e Valore
•
Companies can sustain growth and high returns on capital only if they have
a well-defined competitive advantage. This is how competitive advantage,
the core concept of business strategy, links to the guiding principle of value
creation.
•
Anything that doesn’t increase cash flows doesn’t create value
(conservation of value principle)
•
Creating sustainable value is a long-term endeavor. Competition tends
to erode competitive advantage and, with them, returns on invested capital.
Therefore, companies must seek and exploit new sources of competitive
advantage if they are to create long term value (for shareholders but for the
other stakeholders as well)
•
To the end, managers must resist short-term pressure to take actions that
create illusory value quickly at the expense of the real thing in long term
3
“FAFS” … in una pagina!
•
This course is devoted to explain both the economics of value creation
and the process of measuring and managing value
•
This knowledge should help companies to make wiser strategic and
operating decisions, such as what businesses to own and how to make
trade-offs between growth and returns on invested capital
•
Equally, this knowledge should enable investors to calculate the risks and
returns of their investments with greater confidence
•
In this sense, finance (the “science” and “art” about measuring and
managing value) is a “cross-discipline”, complementary to other fields of
management and economics
•
In general, a good management decision (for instance, an M&A project) is
something that creates long term value whose foundations (rationales) are
explained by operating variables (or levers) without any divergence between
finance and other managerial disciplines
4
Fundamental Principles of
Measuring and Managing Value
See T. Koller, M. Goedhart, D. Wessels, Valuation, 2010, Chapters 1, 2
I fondamentali della creazione del valore
(economico) delle aziende
•
We start our discussion by demonstrating why EBITDA and earnings
per share (EPS) often fail to measure value.
•
In the second part of our discussion, we demonstrate how the value of
a company can be traced to four key value drivers: core operating
profit, return on capital, cost of capital, and organic revenue growth.
–
Value creation and the practice of finance are about trade-offs. Although an action can
lead to an improvement in one metric (such as worker productivity), it may have an
adverse impact on other metrics, such as growth or capital required.
–
Every business, product category, customer group, and channel must be thoroughly
evaluated for the potential of growth and profitability.
6
Le fonti del valore economico
Sempre, per tutte le aziende
•
Say a company’s cash flow was $100 last year and will be $105 next year. This
doesn’t tell us much about its economic performance.
•
But if we told you that the company was generating revenue growth of 7 percent
per year and would earn a return on invested capital of 15 percent, then you
would be able to evaluate its performance.
7
Profitti operativi e Free Cash Flow
•
Company A earns $100 million a year in after-tax profit. Part of the profit will
be reinvested in the business, the remainder distributed to investors.
EBIT
= $180
$80
Paid in taxes
Financial Terms
$50
Reinvested
in business
EBIT(1 − T)
= $100
Investment Rate (IR) = 50%
$50
Payout Rate = 50%
Returned
to investors
8
Profitti operativi e Free Cash Flow (segue)
• The company plans to
reinvest $50 million at a
10 percent rate of return.
Company A
Investment rate (IR)
50%
Return on new investment
10%
• This investment leads to
an extra $5 million in
profits.
Growth in profits
• For simplicity, we assume
all ratios, the investment
rate, and so on never
change.
5%
Year 1
Year 2
Year 3
After-tax operating profit
100.0
105.0
110.3
Net investment
(50.0)
(52.5)
(55.1)
Free cash flow
50.0
52.5
55.1
9
Quale azienda vale di più?
•
Both Company A and Company B currently generate $100 million in profit and are
expected to grow profits by 5 percent.
•
Which one is worth more?
•
If the popular view that value depends only on earnings were true, the two
companies’ values also would be the same. But...
Company A: Volume Inc.
Company B: Value Inc.
Investment rate (IR)
50%
Investment rate (IR)
25%
Return on new investment
10%
Return on new investment
20%
Growth in profits
5%
Growth in profits
Year 1
Year 2
Year 3
After-tax operating profit
100.0
105.0
110.3
Net investment
(50.0)
(52.5)
Free cash flow
50.0
52.5
5%
Year 1
Year 2
Year 3
After-tax operating profit
100.0
105.0
110.3
(55.1)
Net investment
(25.0)
(26.3)
(27.6)
55.1
Free cash flow
75.0
78.7
82.7
10
Cosa guida la crescita dei profitti?
•
Analytics:
g = ΔNOPAT / NOPAT = crescita dei profitti
IR = CAPEX / NOPAT = tasso di reinvestimento degli utili
ROIC = ΔNOPAT / CAPEX = rendimento (marginale) sul nuovo capitale investito (più
correttamente: RONIC)
NOPAT CAPEX NOPAT
g


 IR  ROIC
NOPAT
NOPAT CAPEX
11
Il valore con la formula della rendita perpetua
•
A company is worth the present value of its future free cash flows. For
example, Company A can be valued as:
Value 
•
50
52.5
55.1


. . .
(1.10) (1.10) 2 (1.10)3
In our simple example, cash flows grow forever at a constant rate.
Therefore, we can use the growing perpetuity formula to value each
company.
Value 
Cash Flow 3
Cash Flow 1
Cash Flow 2


. . .
(1  WACC) (1  WACC) 2 (1  WACC)3
Value 
Cash Flow 1
WACC  g
via the
Growing
Perpetuity
Formula
12
Formalmente:
Value 
Cash Flow 3
Cash Flow 1
Cash Flow 2


. . .
2
3
(1  WACC) (1  WACC) (1  WACC)
CF1
CF1 (1  g )
CF1 (1  g ) 2
(1) Value 


. . .
(1  WACC) (1  WACC) 2 (1  WACC)3
(2) Value
(1  WACC)
CF1
CF1 (1  g )
 CF1 

. .
(1  g)
(1  WACC)1 (1  WACC) 2
(1  WACC)
CF1 (1  g ) n
(2) - (1) Value[
 1]  CF1 
(1  g)
(1  WACC) n 1
With n  Infinitive and WACC > g
Value 
Cash Flow 1
WACC  g
13
Da dove ha origine il valore?
Cash Flow 1
Value 
WACC  g
But what
determines
cash flow?
As cash flow rises, what happens to value?
As weighted average cost of capital (WACC) rises, what happens to value?
As growth rises, what happens to value?
14
La formula con i Value Driver-chiave
• In order to develop the key value driver formula, we will rely on
two simple substitutions.
Value 
Cash Flow 1
WACC  g

nopat (1  IR)
WACC  g

g 

nopat 1 

 ROIC 
WACC  g
Substitution #1
Substitution #2
Cash Flow = nopat (1 – IR)
Growth = IR × ROIC
15
La formula con i Value Driver-chiave
g 

NOPAT1 

ROIC 

Value 
WACC  g
Terminology Used by Consulting Firms
NOPAT - After-tax operating profit
ROIC—Return on invested capital
WACC—Weighted average cost of capital (hurdle rate)
g—Long-term growth in nopat and cash flows
16
Da dove ha origine il valore?
g 

NOPAT1 

ROIC 

Value 
WACC  g
As starting profit rises, what happens to value?
As ROIC rises, what happens to value?
As WACC rises, what happens to value?
As growth rises, what happens to value?
17
Quale delle due vale di più?
•
Despite identical earnings and growth rates, the companies have different
earnings multiples because their cash flows are so different
– Value Inc. generates higher cash flows because it doesn’t have to invest as
much as Volume Inc., thanks to its higher rate of ROIC.
Matrice crescita-redditività
•
Since the three variables are tied together, you only need two to know the third, so
you can describe a company’s performance with any two of the variables.
•
If the spread between ROIC and WACC is positive, new growth creates value.
•
The market value of a company with a starting profit of $100 million and a 10
percent cost of capital is as follows:
ROIC
Growth
7.5%
10.0%
12.5%
15.0%
2%
$917
$1,000
$1,050
$1,083
4%
778
1,000
1,133
1,222
6%
500
1,000
1,300
1,500
A
19
Valutare strategie alternative
ROIC
Growth
7.5%
10.0%
12.5%
15.0%
2%
$917
$1,000
$1,050
$1,083
4%
778
1,000
1,133
1,222
6%
500
1,000
1,300
1,500
WACC = 10%
•
Assume your company earns a 15 percent return on invested capital, while growing
at 2 percent. The new CEO has argued that the company should grow faster, even
if it means sacrificing some financial performance. What do you think?
•
Assume your company earns a 10 percent return on invested capital, while growing
at 6 percent. The new CEO has argued that the company should focus on higherprofit customers, even if it means reducing growth. What do you think?
20
La creazione di valore: lezione appresa
• As long as the spread between ROIC and WACC is positive,
new growth creates value. In fact, the faster the firm grows, the
more value it creates.
• If the spread is equal to zero, the firm creates no value through
growth. The firm is growing by taking on projects that have a
net present value of zero!
• When the spread is negative, the firm destroys value by taking
on new projects. If a company cannot earn the necessary
return on a new project or acquisition, its market value will drop
(and often does).
21
Le determinanti della crescita dei profitti
•
Before we value the two companies, let’s examine a general
relationship between IR (investment rate), ROIC (return on invested
capital), and g (growth).
Company A
Investment rate (IR)
50%
Return on new investment
10%
Growth in profits
5%
Growth = Reinvestment * Rate of Return
g = IR * ROIC
Company B
Investment rate (IR)
25%
Return on new investment
20%
Growth in profits
5%
Company A:
5% = 50% * 10%
Company B:
5% = 25% * 20%
22
Redditività o crescita?
23