Public Company Analysis Model
The Public Company Analysis Model provides investors with an easy-to-use tool for forecasting and analyzing the operating performance and intrinsic value of selected public companies.
There are two integrated components of the model - the public company forecast component, and the intrinsic valuation component.
- Financial Forecast Component
The financial forecast portion of the model operates on the public company's historical financial information, which you will be prompted to enter. The historical financial information plus the few assumptions creates the first draft of a comprehensive five-year financial forecast for the public company. This first draft is principally a "momentum forecast" - a forecast based largely on the public company's historical performance.
Change any or all of the first draft assumptions to see how the changes impact future results; and to produce a "working" forecast of the public company's financial results.
The output of the forecast component consists of the primary historical and forecasted financial statements - annual income statements, balance sheets and cash flow statements; documentation detailing the key assumptions underlying the financial forecast; and actual and forecasted financial ratio data and statistics which are used by business managers, banks and other providers of capital to evaluate financial performance.
- Intrinsic Valuation Component
The objective of this component of the model is to estimate the "intrinsic" or "fundamental" value of a public company's common stock (that is, the value a share should have, based on a rigorous analysis of the facts, not to be confused with its market or trading value).
This valuation method operates on the already-completed five-year financial forecast of the public company. The forecast, plus a few assumptions, is all that is needed to create an estimate of the public company's intrinsic value per share.
The intrinsic valuation model analyzes the value of the public company based on the theoretical sale of the company to a buyer (at the beginning of year two of the five-year forecast) who re-capitalizes the company, owns it for four years and then sells it. That buyer realizes the operating results depicted in the financial forecast and receives all of its investment return from the future operations of the company. The intrinsic value estimate is determined by calculating the amount the buyer pays to the current common equity owners (in aggregate and per share) to buy the company.
In order to generalize the purchase and sale transaction across a potentially infinite range of "deal" attributes, the valuation component assumes the buyer purchases the assets of the company and pays off all of its liabilities at the closing. Therefore, the owners of the public company receives a payment equal to the enterprise value of the company, less the amount of liabilities assumed and paid-off by the buyer.
Inherent differences in value - between privately owned and publicly traded companies due to marketability; between highly leveraged and less leveraged companies; and between small and large companies - are recognized through selection of the discount rate used to calculate the buyer's required rate of return on its investment and, accordingly, the purchase price paid by the buyer of the public company.
The output of the intrinsic valuation component consists of:
Intrinsic Valuation Analysis Summary
Primary historical and forecasted financial statements - annual income statements, balance sheets and cash flow statements - showing the company's financial performance before and after the pro forma sale by the current owners.
Documentation detailing the key assumptions underlying the analysis.
Actual and forecasted financial ratio data and statistics which are used by business managers, banks and other providers of capital to evaluate financial performance.
You may change any or all of assumptions, including all of the five-year financial forecast assumptions and the two intrinsic valuation assumptions, to see how the changes impact the financial results and the estimated intrinsic value of the public company.
In line with the theoretical and forward-looking nature of the intrinsic value concept, you should run several different assumption sets in order to create an estimated range (vs. a single estimate) for the intrinsic value of the public company's common stock.