COURSE NOTES II
Outline for Equity Research Valuation
Finance 352
Finance 356
Fundamental of Security Valuation
Student Managed Investment Fund
Dr. Stephen Morrell
Fall Semester, 2018
The following is an outline of how to conduct equity valuation research. The
approach is a “top-down” one. The approach is one widely used by equity analysts.
The outline is based on the CFA Institute Investment Series as presented in J.E.
Pinto, et al., Equity Asset Valuation, 3rd edition. Wiley & Company, 2015.
I.
II.
III.
Macroeconomic Analysis
A. National and global macroeconomic trends and cycles affect almost (if not) all
industries and companies.
1. How is an industry and company affected?
2. What are the causal relationships?
3. What macroeconomic variables most affect an industry and company?
a. GDP growth?
b. Components of GDP?
c. Interest Rates?
d. Inflation?
B. How can the sensitivity of an industry and company to national and global
macroeconomic trends and cycles be empirically measured?
1. Factor models.
2. A- Theoretical time series models.
3. Multiple regression models
C. A “view” (assumptions) on the relevant economy is a prelude to security market,
industry, and firm analysis.
Equity/Security Market Analysis
A. Several common factors - risk premia - affect all (or almost all) equity returns.
B. These factors need to be assessed in estimating equity prices.
1. Earnings/cash flow growth.
2. Investor risk aversion.
Industry Assessment
A. Industry Overview
1. Description of Industry.
2. Industry SIC, NAIC, GICS codes.
3. S&P Sector/Subsector.
B. Industry Size.
1. Number of Firms.
2. Business Segments (if applicable)
3. Annual Revenues.
C. Industry Economic Structure.
1. Discussion of industry on Monopoly to “Perfect” Competition Spectrum.
1|P a g e
a) 4,8,12 firm Concentration Ratios.
b) 4,8,12 firm Herfindahl Ratios.
2. Discussion of barriers to entry/replicability of firms in the industry.
3. Discussion of regulation of the industry.
D. Industry Financial Data (last 5 years)
1. Revenues.
2. Operating Costs.
3. Earnings.
4. FCF.
5. ROA, ROE, ROIC.
E. Industry Growth Prospects (next 5 years)
1. Drivers of Growth.
2. Estimates of Revenue & EPS Growth.
F. Peers Identification
IV.
V.
Company Assessment.
A. Company Description.
B. Brief Company History.
C. Company Business Model.
D. Company Management & Governance (Brief).
E. Company Business Segments (if applicable).
F. Company Current and Anticipated Competitive Position.
G. Company Growth Strategies.
H. Company Consistency with SMIF Investment Policy Statement on Socially
Responsible Investing.
Financial Analysis (need three - five years of historical date)
A. Income Statement (last 5 years)
1. Focus on CAGR of Key Income Statement Components.
2. Total Revenue Growth.
3. Revenue Growth by Segment (if applicable).
4. COGS, SG&E, Total Operating Expenses.
B. Margins
1. Gross
2. Operating (or EBITDA)
3. Net
C. Earnings, Dividends, Free Cash Flow
1. EPS Analysis.
2. Dividend Policy
3. DPS Analysis
4. Dividend Yield
5. Retained Earnings per share Analysis.
6. Free Cash Flow
D. Liquidity Analysis.
a) Current Ratio.
b) Quick Ratio.
E. Capital Structure Analysis
a) Total $ Debt Book Value.
b) Debt/Total Capital.
c) Debt/Equity.
d) Annual Interest Expense.
2|P a g e
e) Debt Service Coverage Ratio.
f) Bond Rating.
g) Shares Authorized and Issued.
h) Book Value of Equity.
F. Three/Five Year Pro Forma Income Statement.
VI.
Equity Valuation: RAOCC, ROIC, EVA
A. Book Value per Share last 5 years.
B. Ratio Market/Book Value last 5 years.
G. Economic Value Added Balance Sheet (last 5 years)
1. Capital Expenditures
a) Purposes and growth of CAPEX.
b) CAPEX ROIIC.
c) ROICC versus RAOCC
C. Value Creation/ Destruction last 5 years.
1. Derivation of RAOCC
a) Cost of Equity
1) Use 3 factor CAPM (if possible.)
2) Consistent use of R M , R F, (R M – R F)
3) Consistent derivation of Beta(s).
4) Consistent weighting for Equity.
b) Cost of Debt.
1) Consistent Sources for Debt Tranches, Totals Outstanding, Coupon
Rates.
2) Consistent Source for Corporate Tax Rate.
3) Consistent Weighting for Debt.
2. Derivation of ROIC.
a) NOPLAT for Current Year in Numerator from Income Statement.
b) (Book Value of L.T. Debt + Book Value of Equity) for End of Prior Year in
Denominator.
3. EVA last 5 years.
4. Trend in EVA.
VII.
Valuation Models
A. Valuation by Multiples
1. Pt/Ettm Valuation.
a) Care in Choice of P/E such as average for last five years. Recall Steady
State P/E = inverse of P/E.
b) Care in Choice of E FTM. Implied Growth Rate of Earnings
c) Care in Choice of Sector/Industry/ Peer P/E.
2. PEG Ratio (P/E to earnings growth)
3. Discounted Cash Flow Models (SMIF B/B; BKM; or Damadoran)
a) No Growth Stock Price = Earnings Power Value (perpetuity model) =
EPS T+1/R E.
b) Alternative to 6 a). No Growth Stock Price = NOPLAT / RAOCC + Excess
Cash.
c) Growth Component of Stock Price = Future value creation = Investment *
(ROIC – RAOCC) x competitive advantage period (number of years)/
RAOCC * (1 + RAOCC).
d) Stock Price = either 6a) or 6b) plus 6c)
3|P a g e
e) Gordon Constant Growth, Two Stage, or Three Stage Growth Model.
5. Valuation summaries of selected (3) other analysts.
4|P a g e
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.53405126
R Square
0.28521074
Adjusted R Square
0.27288679
Standard Error
0.06883887
Observations
60
ANOVA
df
Regression
Residual
Total
Intercept
X Variable 1
SS
MS
F
Significance F
1 0.10966885 0.10966885 23.1427977
1.11003E-05
58 0.2748498 0.00473879
59 0.38451866
Coefficients Standard Error
t Stat
P-value
Lower 95%
0.00676479 0.00919821 0.73544566 0.46503181 -0.011647437
1.48659311 0.30901829 4.81069618
1.11E-05 0.868025796
Upper 95% Lower 95.0% Upper 95.0%
0.02517701 -0.0116474 0.02517701
2.10516043 0.8680258 2.10516043
CACI Inter
Date
Adj Close
10/1/2013
71.980003
11/1/2013
71.769997
12/1/2013
73.220001
1/1/2014
74.019997
2/1/2014
78.830002
3/1/2014
73.800003
4/1/2014
69.650002
5/1/2014
71.400002
6/1/2014
70.209999
7/1/2014
68.989998
8/1/2014
72.120003
9/1/2014
71.269997
10/1/2014
82.290001
11/1/2014
89.190002
12/1/2014
86.18
1/1/2015
84.589996
2/1/2015
87.290001
3/1/2015
89.919998
4/1/2015
88.239998
5/1/2015
85.620003
6/1/2015
80.889999
7/1/2015
82.129997
8/1/2015
78.230003
9/1/2015
73.970001
10/1/2015
97.040001
11/1/2015
100.260002
12/1/2015
92.779999
1/1/2016
83.07
2/1/2016
96.620003
3/1/2016
106.699997
4/1/2016
96.150002
5/1/2016
100.769997
6/1/2016
90.410004
7/1/2016
95.330002
8/1/2016
99.360001
9/1/2016
100.900002
10/1/2016
97.849998
11/1/2016
129.399994
12/1/2016
124.300003
1/1/2017
122.800003
S&P 500
Return
Adj Close
Return
1756.540039
-0.0029176
0.02020348
0.01092592
0.06498251
-0.0638082
-0.0562331
0.02512563
-0.0166667
-0.0173765
0.04536897
-0.011786
0.15462333
0.08384981
-0.0337482
-0.0184498
0.03191873
0.03012942
-0.0186833
-0.0296917
-0.0552441
0.01532944
-0.0474856
-0.0544548
0.31188319
0.0331822
-0.0746061
-0.1046562
0.16311548
0.10432616
-0.0988753
0.04804987
-0.1028083
0.05441873
0.04227419
0.0154992
-0.030228
0.32243226
-0.0394126
-0.0120676
1805.810059
1848.359985
1782.589966
1859.449951
1872.339966
1883.949951
1923.569946
1960.22998
1930.670044
2003.369995
1972.290039
2018.050049
2067.560059
2058.899902
1994.98999
2104.5
2067.889893
2085.51001
2107.389893
2063.110107
2103.840088
1972.180054
1920.030029
2079.360107
2080.409912
2043.939941
1940.23999
1932.22998
2059.73999
2065.300049
2096.949951
2098.860107
2173.600098
2170.949951
2168.27002
2126.149902
2198.810059
2238.830078
2278.870117
0.02804947
0.02356279
-0.0355829
0.04311703
0.00693217
0.00620079
0.02103028
0.01905833
-0.0150798
0.0376553
-0.0155138
0.02320146
0.02453359
-0.0041886
-0.0310408
0.05489251
-0.0173961
0.00852082
0.01049138
-0.0210117
0.01974203
-0.0625808
-0.0264428
0.08298312
0.00050487
-0.0175302
-0.0507353
-0.0041284
0.06599111
0.0026994
0.0153246
0.00091092
0.0356098
-0.0012192
-0.0012345
-0.0194257
0.03417452
0.01820076
0.01788436
2/1/2017
125.400002
3/1/2017
117.300003
4/1/2017
118
5/1/2017
123.099998
6/1/2017
125.050003
7/1/2017
125.099998
8/1/2017
129.800003
9/1/2017
139.350006
10/1/2017
143.75
11/1/2017
131.949997
12/1/2017
132.350006
1/1/2018
140.550003
2/1/2018
149.050003
3/1/2018
151.350006
4/1/2018
151.050003
5/1/2018
166.649994
6/1/2018
168.550003
7/1/2018
175.199997
8/1/2018
195
9/1/2018
184.149994
10/1/2018
178.460007
0.02117263
-0.0645933
0.00596758
0.04322032
0.01584082
0.0003998
0.03756998
0.07357475
0.03157513
-0.082087
0.00303152
0.06195691
0.0604767
0.01543108
-0.0019822
0.103277
0.01140119
0.03945413
0.11301372
-0.0556411
-0.0308987
2363.639893
2362.719971
2384.199951
2411.800049
2423.409912
2470.300049
2471.649902
2519.360107
2575.26001
2584.840088
2673.610107
2823.810059
2713.830078
2640.870117
2648.050049
2705.27002
2718.370117
2816.290039
2901.52002
2913.97998
2711.73999
0.03719816
-0.0003892
0.00909121
0.01157625
0.00481378
0.01934883
0.00054643
0.01930298
0.02218814
0.00372004
0.03434256
0.0561787
-0.0389474
-0.0268845
0.00271878
0.02160834
0.00484244
0.03602156
0.03026321
0.00429429
-0.0694034
Beta
1.48659311
Date
Open
High
Low
Close
Adj Close
10/1/2013
69.080002
72.419998
66.089996
71.980003
71.980003
11/1/2013
71.970001
72.699997
70.480003
71.769997
71.769997
12/1/2013
71.669998
74.269997
70.739998
73.220001
73.220001
1/1/2014
73.040001
80
72.330002
74.019997
74.019997
2/1/2014
74.300003
79.989998
70.010002
78.830002
78.830002
3/1/2014
78.32
80.769997
72.93
73.800003
73.800003
4/1/2014
73.760002
74.889999
68.480003
69.650002
69.650002
5/1/2014
70.830002
74.019997
70.139999
71.400002
71.400002
6/1/2014
71.779999
72.290001
67.010002
70.209999
70.209999
7/1/2014
70.300003
71.290001
68
68.989998
68.989998
8/1/2014
69.019997
72.919998
68.349998
72.120003
72.120003
9/1/2014
72.330002
73.449997
70.760002
71.269997
71.269997
10/1/2014
71.089996
83.760002
69.150002
82.290001
82.290001
11/1/2014
82.290001
90.110001
81.480003
89.190002
89.190002
12/1/2014
89
91.800003
82.830002
86.18
86.18
1/1/2015
86.68
90.809998
79.760002
84.589996
84.589996
2/1/2015
84.610001
89.150002
82.080002
87.290001
87.290001
3/1/2015
87.599998
92.199997
85.110001
89.919998
89.919998
4/1/2015
89.620003
91.720001
85.07
88.239998
88.239998
5/1/2015
88.57
90.559998
85.279999
85.620003
85.620003
6/1/2015
85.620003
87.209999
80.699997
80.889999
80.889999
7/1/2015
81.5
84.139999
79.029999
82.129997
82.129997
8/1/2015
82.330002
85.919998
73.800003
78.230003
78.230003
9/1/2015
76.919998
79.25
73.379997
73.970001
73.970001
10/1/2015
73.949997
97.989998
72.190002
97.040001
97.040001
11/1/2015
97
101.730003
95.75
100.260002
100.260002
12/1/2015
100.389999
104.089996
92.279999
92.779999
92.779999
1/1/2016
91.379997
92.739998
81.480003
83.07
83.07
2/1/2016
82.580002
98.660004
78.080002
96.620003
96.620003
3/1/2016
97.239998
108.410004
95.870003
106.699997
106.699997
4/1/2016
106.449997
111.129997
96.07
96.150002
96.150002
5/1/2016
96.269997
100.889999
90.269997
100.769997
100.769997
6/1/2016
100.370003
102.120003
87.309998
90.410004
90.410004
7/1/2016
90.440002
97.75
87.669998
95.330002
95.330002
8/1/2016
95.889999
101.660004
92.650002
99.360001
99.360001
9/1/2016
99.400002
103.209999
96.18
100.900002
100.900002
10/1/2016
100.610001
105
96.050003
97.849998
97.849998
11/1/2016
98.199997
132.940002
98.199997
129.399994
129.399994
12/1/2016
129.600006
133.699997
123.699997
124.300003
124.300003
1/1/2017
125.550003
127.580002
118.699997
122.800003
122.800003
2/1/2017
123.5
135.350006
122.050003
125.400002
125.400002
3/1/2017
126.800003
128.949997
117.25
117.300003
117.300003
4/1/2017
117.400002
121.849998
112.099998
118
118
5/1/2017
118.199997
132.449997
115.099998
123.099998
123.099998
6/1/2017
123.400002
129.850006
118.650002
125.050003
125.050003
7/1/2017
125.349998
130.800003
123.5
125.099998
125.099998
8/1/2017
126.050003
133.149994
118.099998
129.800003
129.800003
9/1/2017
130.350006
142.850006
125.75
139.350006
139.350006
10/1/2017
138.899994
147.309998
138.800003
143.75
143.75
11/1/2017
145.100006
145.100006
121.599998
131.949997
131.949997
12/1/2017
131.649994
136.759995
128.800003
132.350006
132.350006
1/1/2018
133.449997
144.199997
133
140.550003
140.550003
2/1/2018
145
159.399994
138.399994
149.050003
149.050003
3/1/2018
147.600006
158.600006
142.850006
151.350006
151.350006
4/1/2018
151.350006
160.399994
148.399994
151.050003
151.050003
5/1/2018
150.199997
168.199997
147.149994
166.649994
166.649994
6/1/2018
167.850006
174.800003
162.649994
168.550003
168.550003
7/1/2018
167.550003
180.899994
166.800003
175.199997
175.199997
8/1/2018
175.550003
196.300003
174.300003
195
195
9/1/2018
195
200.850006
181.699997
184.149994
184.149994
10/1/2018
184.990005
186.460007
169.410004
178.460007
178.460007
Date
Open
High
Low
Close
10/1/2013 1682.410034 1775.219971 1646.469971 1756.540039
11/1/2013 1758.699951 1813.550049 1746.199951 1805.810059
12/1/2013 1806.550049 1849.439941
1767.98999 1848.359985
1/1/2014 1845.859985 1850.839966 1770.449951 1782.589966
2/1/2014 1782.680054 1867.920044 1737.920044 1859.449951
3/1/2014 1857.680054 1883.969971 1834.439941 1872.339966
4/1/2014 1873.959961 1897.280029 1814.359985 1883.949951
5/1/2014 1884.390015 1924.030029 1859.790039 1923.569946
6/1/2014 1923.869995 1968.170044
1915.97998
1960.22998
7/1/2014 1962.290039 1991.390015 1930.670044 1930.670044
8/1/2014 1929.800049 2005.040039 1904.780029 2003.369995
9/1/2014 2004.069946
2019.26001 1964.040039 1972.290039
10/1/2014 1971.439941 2018.189941 1820.660034 2018.050049
11/1/2014 2018.209961
2075.76001
2001.01001 2067.560059
12/1/2014 2065.780029 2093.550049 1972.560059 2058.899902
1/1/2015 2058.899902 2072.360107 1988.119995
1994.98999
2/1/2015 1996.670044 2119.590088 1980.900024
2104.5
3/1/2015
2105.22998
2117.52002 2039.689941 2067.889893
4/1/2015 2067.629883 2125.919922 2048.379883
2085.51001
5/1/2015 2087.379883 2134.719971 2067.929932 2107.389893
6/1/2015 2108.639893 2129.870117 2056.320068 2063.110107
7/1/2015
2067 2132.820068
2044.02002 2103.840088
8/1/2015
2104.48999 2112.659912
1867.01001 1972.180054
9/1/2015 1970.089966 2020.859985 1871.910034 1920.030029
10/1/2015 1919.650024 2094.320068 1893.699951 2079.360107
11/1/2015
2080.76001
12/1/2015 2082.929932
2116.47998 2019.390015 2080.409912
2104.27002
1993.26001 2043.939941
1/1/2016 2038.199951 2038.199951 1812.290039
1940.23999
2/1/2016 1936.939941 1962.959961 1810.099976
1932.22998
3/1/2016 1937.089966 2072.209961 1937.089966
2059.73999
4/1/2016 2056.620117 2111.050049 2033.800049 2065.300049
5/1/2016 2067.169922
2103.47998 2025.910034 2096.949951
6/1/2016 2093.939941 2120.550049 1991.680054 2098.860107
7/1/2016 2099.340088 2177.090088
2074.02002 2173.600098
8/1/2016 2173.149902 2193.810059 2147.580078 2170.949951
9/1/2016 2171.330078 2187.870117 2119.120117
2168.27002
10/1/2016 2164.330078 2169.600098 2114.719971 2126.149902
11/1/2016 2128.679932 2214.100098 2083.790039 2198.810059
12/1/2016 2200.169922 2277.530029 2187.439941 2238.830078
1/1/2017 2251.570068
2300.98999 2245.129883 2278.870117
2/1/2017 2285.590088 2371.540039 2271.649902 2363.639893
3/1/2017 2380.129883
2400.97998
2322.25 2362.719971
4/1/2017 2362.340088 2398.159912 2328.949951 2384.199951
5/1/2017
2388.5 2418.709961 2352.719971 2411.800049
6/1/2017 2415.649902 2453.820068 2405.699951 2423.409912
7/1/2017 2431.389893 2484.040039 2407.699951 2470.300049
8/1/2017 2477.100098 2490.870117 2417.350098 2471.649902
9/1/2017 2474.419922 2519.439941 2446.550049 2519.360107
10/1/2017 2521.199951
2582.97998 2520.399902
11/1/2017 2583.209961
2657.73999 2557.449951 2584.840088
12/1/2017 2645.100098 2694.969971
1/1/2018
2575.26001
2605.52002 2673.610107
2683.72998 2872.870117 2682.360107 2823.810059
2/1/2018 2816.449951 2835.959961 2532.689941 2713.830078
3/1/2018 2715.219971 2801.899902 2585.889893 2640.870117
4/1/2018 2633.449951
2717.48999 2553.800049 2648.050049
5/1/2018 2642.959961
2742.23999 2594.620117
6/1/2018 2718.699951 2791.469971
2705.27002
2691.98999 2718.370117
7/1/2018 2704.949951 2848.030029 2698.949951 2816.290039
8/1/2018 2821.169922
2916.5 2796.340088
2901.52002
9/1/2018 2896.959961 2940.909912 2864.120117
2913.97998
10/1/2018 2926.290039 2939.860107 2603.540039
2711.73999
Adj Close
Volume
1756.540039 76647400000
1805.810059 63628190000
1848.359985 64958820000
1782.589966 75871910000
1859.449951 69725590000
1872.339966 71885030000
1883.949951 71595810000
1923.569946 63623630000
1960.22998 63283380000
1930.670044 66524690000
2003.369995 58131140000
1972.290039 66706000000
2018.050049 93714040000
2067.560059 63600190000
2058.899902 80743820000
1994.98999 77330040000
2104.5 68775560000
2067.889893 76675850000
2085.51001 72060940000
2107.389893 65187730000
2063.110107 73213980000
2103.840088 77920590000
1972.180054 84626790000
1920.030029 79989370000
2079.360107 85844900000
2080.409912 75943590000
2043.939941 83649260000
1940.23999 92409770000
1932.22998 93049560000
2059.73999 92639420000
2065.300049 81124990000
2096.949951 78883600000
2098.860107 86852700000
2173.600098 69530250000
2170.949951 75610310000
2168.27002 77270240000
2126.149902 73196630000
2198.810059 88299760000
2238.830078 75251240000
2278.870117 70483180000
2363.639893 69162420000
2362.719971 81547770000
2384.199951 65265670000
2411.800049 79607170000
2423.409912 81002490000
2470.300049 63169400000
2471.649902 70616030000
2519.360107 66337980000
2575.26001 70871570000
2584.840088 95142800000
2673.610107 65251190000
2823.810059 76860120000
2713.830078 79579410000
2640.870117 76369800000
2648.050049 69648590000
2705.27002 75617280000
2718.370117 77439710000
2816.290039 64542170000
2901.52002 69238220000
2913.97998 62492080000
2711.73999 91327930000
Running head: AT&T INDUSTRY AND COMPANY ASSESSMENT
AT&T Industry and Company Assessment
Name of Student
Name of Professor
Course Title
Date
Institution
1
AT&T INDUSTRY AND COMPANY ASSESSMENT
2
AT&T Industry and Company Assessment
Equity Valuation
A. Book Value per Share last 5 years.
Book value per share shows the accounting value of each share of stock in a company. It
is a company’s net asset value that is calculated by taking total assets of the entity less intangible
assets and liabilities.
Year
Book Value Per Share
12/31/2013
17.50
12/31/2014
17.40
12/31/2015
20.12
12/31/2016
20.22
12/31/2017
23.13
From the above 5 year trend of the book value per share of AT&T Company, it is clear
that the entity recorded an increase in book values per share from year 2014 to year 2017 (SEC
Filings, 2018). The value dropped slightly in year 2013 compared to the other years. Increase in
earnings or profits from year 2014 to 2016 were caused an increase in the book value per share
of the company (Patel, Stuber, & Pratt, 2005). In 2013, the earnings of the company dropped
slightly and this led to the decrease in book value per share as well as total common share count
of the company. Some of the investment decisions that AT&T has also influenced the stock price
making it more attractive for most investors.
AT&T INDUSTRY AND COMPANY ASSESSMENT
3
B. Ratio Market/Book Value last 5 years.
The price-to-book ration also referred to as P/B ratio is a financial ration that is used to
compare a company’s current market price and its book value. It is used to link the share price of
a company with the book value of the share.
Year
Ratio Market/Book Value
12/31/2013
1.56
12/31/2014
1.58
12/31/2015
1.48
12/31/2016
1.92
12/31/2017
1.61
The ratio market/book value of AT&T shows that the stock price is not over or under
valued. The book value and the market price are almost the same. From 2013 to 2017, the ratios
have had slight upward and downward movements but still on the range (CSI Market, 2018). The
stock price of the company reflects the market value and does not mislead the investors by
portraying it to be strong.
A. Economic Value Added Balance Sheet (last 5 years)
➢ EVA last 5 years and Trend in EVA.
Economic Value Added (EVA) is an internal performance measure in which
companies/businesses compare net operating profit to total cost of capital. It is a difference
between the revenues and the costs (SEC Filings, 2018). Costs also include capital. It is an
indicator of how profitable business projects are and therefore reflects the performance of the
management.
AT&T INDUSTRY AND COMPANY ASSESSMENT
4
AT&T Economic Value Added Calculations
Dec 31, 2017
Dec 31, 2016
Dec 31, 2015
Dec 31, 2014
Dec 31, 2013
18,534
20,183
21,439
11,365
27,874
5.12%
5.44%
5.27%
5.36%
5.55%
Investment capital 271,907
318,708
315,443
217,119
208, 160
Economic profit
2,805
4,816
(266)
16,322
Net operating
profits after taxes
(NOPAT)
Cost of Capital
4,608
Workings
a. NOPAT Calculation (ROACC and RIOCC)
AT&T Inc., NOPAT
calculation
USD $ in millions
12 months ended
Net income attributable to
AT&T
Deferred income tax
expense (benefit)
Increase (decrease) in
allowances for doubtful
accounts
Increase (decrease) in
equity equivalents
Interest expense
Interest expense, operating
lease obligations
Adjusted interest expense
Tax benefit of interest
expense
Adjusted interest expense,
after taxes
Dec 31,
2017
29,450
Dec 31,
2016
12,976
Dec 31,
2015
13,345
Dec 31,
Dec 31,
2014
2013
6,224 18,249
-15,940
2,947
4,117
2
-43
250
-15,938
2,904
4,367
1,743 6,178
6,300
1,118
4,910
1,163
4,120
1,111
3,613 3,940
1,188 1,016
7,418
-2,596
6,073
-2,126
5,231
-1,831
4,801 4,956
-1,680 -1,734
4,822
3,947
3,400
3,120 3,221
1,772 6,242
-29 -64
AT&T INDUSTRY AND COMPANY ASSESSMENT
(Gain) loss on marketable
securities
Investment income, before
taxes
Tax expense (benefit) of
investment income
Investment income, after
taxes
Net income (loss)
attributable to noncontrolling interest
Net operating profit after
taxes (NOPAT)
5
-302
-2
-24
-26 -121
-302
-2
-24
-26 -121
106
1
8
-196
-1
-16
-17 -79
397
357
342
294 304
18,534
20,183
21,439
9 42
11,365 27,874
USD $ in millions
Debt maturing within one
year
Long-term debt, excluding
maturing within one year
PV of operating lease
payments
Total reported debt & leases
Stockholders' equity
attributable to AT&T
Net deferred tax (assets)
liabilities
Allowances for doubtful
accounts
Equity equivalents
Accumulated other
comprehensive (income)
loss, net of tax
Non-controlling interest
Dec 31,
2017
38,374
Dec 31,
2016
9,832
Dec 31, 2015
7,636
Dec 31,
2014
6,056
Dec 31,
2013
5,498
125,972
113,681
118,515
76,011
69,290
21,576
24,373
23,869
25,120
19,904
185,922
140,861
147,886
123,135
150,020
122,671
107,187
86,370
94,692
90,988
-43,176
58,717
55,088
36,402
35,109
663
661
704
454
483
-42,513
-7,017
59,378
-4,961
55,792
-5,334
36,856
-8,060
35,592
-7,880
1,146
975
969
554
494
AT&T INDUSTRY AND COMPANY ASSESSMENT
Adjusted stockholders'
equity attributable to AT&T
92,477
6
178,527
174,098
115,720
119,194
Under construction
-4,045
-5,118
-5,971
-3,053
Investment securities
-2,447
-2,587
-2,704
-2,735
Invested capital
271,907
318,708
315,443
217,119
b. Calculation of the Invested Capital using the financial approach (Above)
-3,276
-2,450
208,160
c. Cost of Capital Calculations (Cost of debt and Cost of Equity)
i.
2017
Equity
Debt
Fair
Value
225,824
173,758
PV of
21,576
operating
lease
payments
Total:
421,158
ii.
2016
Equity
Debt
PV of
operati
ng
lease
payme
nts
Total:
Weights
225,824
173,758
÷
÷
421,158
421,158
= 0.54
= 0.41
0.54 ×
0.41 ×
21,576
÷
421,158
= 0.05
0.05 ×
7.08% =
4.40% × =
(1 –
35.00%)
4.40% × =
(1 –
35.00%)
1.00
Fair
Value
254,752
254,752
÷
129,858
129,858
÷
24,373
24,373
÷
408,984
Cost of Capital
Weights
3.80%
1.18%
0.15%
5.12%
Cost of Capital
408,9 =
84
408,9 =
84
0.62
0.62 ×
7.08% =
0.32
0.32 ×
408,9 =
84
0.06
0.06 ×
4.20% × =
(1 –
35.00%)
4.20% × =
(1 –
35.00%)
1.00
4.41
%
0.87
%
0.16
%
5.44%
AT&T INDUSTRY AND COMPANY ASSESSMENT
iii.
Equity
Debt
2015
Fair Value
227,533
130,297
PV of
operating
lease
payments
Total:
iv.
23,869
Weights
227,5 ÷ 381,69
33
9
130,2 ÷ 381,69
97
9
23,86 ÷
9
381,69
9
7
=
0.60
=
0.34
=
0.06
381,699
2014
Cost of Capital
0.60 ×
7.08% = 4.22%
0.34 × 4.00% × = 0.89%
(1 –
35.00%)
0.06 × 4.00% × = 0.16%
(1 –
35.00%)
1.00
5.27%
Fair
Value
176,881
176,881
÷
292,803
= 0.60
0.60
×
7.08%
=
Debt
90,802
90,802
÷
292,803
= 0.31
0.31
×
=
PV of
operating
lease
payments
Total:
v.
25,120
25,120
÷
292,803
= 0.09
0.09
×
4.20%
× (1 –
35.00%
)
4.20%
× (1 –
35.00%
)
Equity
Equity
Debt
PV of
operating
lease
payments
Total:
Weights
Cost of Capital
292,803
2013
1.00
Fair Value
170,785
79,613
170,785
79,613
19,904
19,904
270,302
=
Weights
÷ 270,302
÷ 270,302
=
=
0.63
0.29
÷
=
0.07
270,302
4.28
%
0.85
%
0.23
%
5.36%
Cost of Capital
0.63 ×
7.08% =
0.29 ×
4.50% × (1 =
– 35.00%)
0.07 ×
4.50% × (1 =
– 35.00%)
1.00
From the above calculations and analysis of the Economic Value Added, it is clear that
the management of AT&T Company has been performing exemplary in 2017, 2016, 2015, and
4.47%
0.86%
0.22%
5.55%
AT&T INDUSTRY AND COMPANY ASSESSMENT
8
2013 as shown by the positive economic profit in those years (Last 10K.com, 2018). The positive
economic profits are as a result of good decisions that have been made by the management. Poor
management decisions led to economic losses in year 2014. The management performance of the
company in this period can be regarded as poor.
1. Capital Expenditures
a) Purposes and growth of CAPEX.
CAPEX or capital expenditures are funds that are used by a company to acquire, upgrade,
and maintain physical assets of a company. The funds are also used to maintain or increase the
scope of business. Purpose of CAPEX is to show the amount of investment that an entity has on
different areas of business. The analysis of the Economic Value Added of AT&T reveals the
capital expenditures that the company has incurred from 2013 to 2017.
CAPEX AT&T
Historical Spending
Capital Expenditures
% of Revenue
5-Year Average
Dec-13
20,944
16.3%
14.3%
Dec-14
21,199
16.0%
Dec-15
19,218
13.1%
Dec-16
21,516
13.1%
Dec-17
20,647
12.9%
Jun-18
10,959
b) CAPEX ROIIC.
Return on Incremental Invested Capital (ROIIC) is used by the management to determine
the effectiveness of capital employed. It is an extension of return on investment but narrows
down each investment made to show how profitable it is.
AT&T INDUSTRY AND COMPANY ASSESSMENT
9
Valuation Models
A. Valuation by Multiples
1. Pt/Ettm Valuation.
a) Care in Choice of P/E such as average for last five years. Recall
Steady State P/E = inverse of P/E.
The relationship between a company’s stock and the earnings per share (EPS) is provided
for by price earnings ratio (P/E). Price earnings ratio is also used in valuation of companies. It
accesses whether a stock is over or under valued. It is calculated by taking the latest closing price
and dividing it by the most recent earnings per share (EPS). The table below shows the P/E ratio
of AT&T for the last five years.
Year
31 Dec, 2017
31 Dec, 2016
31 Dec, 2015
31 Dec, 2014
31 Dec, 2013
P/E Ratio
7.83
18.56
12.76
23.16
8.03
The earnings ratio for the last five years shows that AT&T has been performing well. The
highest that it has ever gone was in 2014 by 23.16 while the lowest it has ever been was in 2017
at 7.83 (Last 10K.com, 2018). The low P/E ratio may be caused by investors having no
confidence in higher growth of a company in the future which might be because of the debt
levels of the company among other economic reasons.
b) Care in Choice of E FTM. Implied Growth Rate of Earnings
According to implied growth rate of earnings, stock is worth its next year’s dividend by
the difference between the targeted return and the dividend growth rate.
AT&T INDUSTRY AND COMPANY ASSESSMENT
Dividend growth rate (G) implied by Gordon Growth Model
g = 100 × (P0 × r – D0 ) ÷ (P0 + D0 )
= 100 × ($31.71 × 7.08% – $1.96) ÷ ($31.71 + $1.96) = 0.85%
Where;
P0 = current price of share of AT&T's common stock
D0 = last year dividends per share of AT&T's common stock
r = required rate of return on AT&T's common stock
Dividend growth rate (g) forecast
H-model
Year
Value
gt
1
g1
2.27%
2
g2
1.91%
3
g3
1.56%
4
g4
1.20%
5 and thereafter g5
0.85%
Where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2 , g3 and g4 are calculated using linear interpolation between g1 and g5
10
AT&T INDUSTRY AND COMPANY ASSESSMENT
11
Calculations
g2 = g1 + (g5 – g1 ) × (2 – 1) ÷ (5 – 1)
= 2.27% + (0.85% – 2.27%) × (2 – 1) ÷ (5 – 1) = 1.91%
g3 = g1 + (g5 – g1 ) × (3 – 1) ÷ (5 – 1)
= 2.27% + (0.85% – 2.27%) × (3 – 1) ÷ (5 – 1) = 1.56%
g4 = g1 + (g5 – g1 ) × (4 – 1) ÷ (5 – 1)
= 2.27% + (0.85% – 2.27%) × (4 – 1) ÷ (5 – 1) = 1.20%
Dividend Growth Rate (G) derivation using PRAT Model
Average
Selected Financial Data (USD $ in
millions)
Dividends to stockholders
Net income attributable to AT&T
Operating revenues
Total assets
Stockholders' equity attributable to
AT&T
Ratios
Retention rate
Profit margin
Asset turnover
Financial leverage
Averages
Retention rate
Profit margin
Asset turnover
Financial leverage
Dividend growth rate
Dec 31,
2017
Dec 31,
2016
Dec 31,
2015
Dec 31,
2014
12,157
29,450
160,546
444,097
140,861
11,913 10,755
12,976 13,345
163,786 146,801
403,821 402,672
123,135 122,671
9,629
6,224
132,447
292,829
86,370
9,589
18,249
128,752
277,787
90,988
-0.55
4.70%
0.45
3.39
0.47
14.17%
0.46
3.05
0.59
18.34%
0.36
3.15
0.16
10.85%
0.41
3.23
2.27%
0.08
7.92%
0.41
3.28
0.19
9.09%
0.36
3.28
Dec 31,
2013
AT&T INDUSTRY AND COMPANY ASSESSMENT
12
The calculations using Gordon as well as PRAT model show growth of dividends from one year to
another. It is an indication that the company is performing well and that investors will be
rewarded by higher dividends in the future. The implied growth of earnings is achieved.
c) Care in Choice of Sector/Industry/ Peer P/E.
The averages highest P/E of the industry for the last five years was 56.13 while the
lowest was 19.32. The average highest P/E of the sector for the last five years was 43.56 while
the lowest was 14.65 (Patel, Stuber, & Pratt, 2005). It is an indication that the sector is strong
and is valued high.
2. PEG Ratio (P/E to earnings growth)
Price earning to growth ratio (PEG ratio) is a stock’s price-to-earnings ratio divided by
the rate of its earnings for a specified period of time. It is a valuation model used to determine
the relative trade-off between the price of a stock, EPS, and the expected growth of a company
over a period of time. Current PEG ratio of AT&T is 1.75 compared to the Wireless National
Industry’s PEG of 4.42. PEG ratio of 1 or less is considered good for a company while that of
above 1 is considered bad for a company (Belo, Collin‐Dufresne, & Goldstein, 2015). A
company with high price earnings ratio as well as high growth rate will have a low PEG while a
company with low price earnings ratio and low growth rate will have a high PEG rate indicating
that it is not performing well. AT&T has a good PEG ratio that shows it price earning as well as
growth rate are high. The table below shows the overall PEG ration for the last five years.
Year
31 Dec, 2017
31 Dec, 2016
31 Dec, 2015
31 Dec, 2014
31 Dec, 2013
PEG Ratio
1.64
8.88
5.45
19.46
2.35
AT&T INDUSTRY AND COMPANY ASSESSMENT
13
3. Discounted Cash Flow Models (SMIF B/B; BKM; or Damadoran)
a) No Growth Stock Price = Earnings Power Value (perpetuity model) =
EPST+1 /RE.
AT&T Inc.
Annual Rates (per share)
Revenue Growth %
10 yrs.
3.40
5 yrs.
3.40
12 months
-2.80
EBITDA Growth (%)
1.60
4.00
-0.80
Operating Income Growth (%)
2.00
6.30
2.20
EPS without NRI Growth (%)
4.20
18.30
153.80
Free Cash Flow Growth (%)
1.00
0.40
16.90
Book Value Growth (%)
1.80
6.50
24.20
Per Share Data
Annuals (Year End)
TTM
Quarterly
Dec17 Sep18
Sep18
Fiscal Period
Dec15
Dec16
Revenue ($)
26.00
26.46
25.97
25.26
6.25
EBITDA
8.29
8.17
7.41
7.96
2.24
Operating Income
4.40
3.99
3.86
3.85
0.99
Free Cash Flow
2.95
2.88
2.99
3.14
0.90
EPS
2.37
2.10
4.76
5.28
0.65
EPS without NRI
2.37
2.10
4.76
5.28
0.65
AT&T INDUSTRY AND COMPANY ASSESSMENT
Dividends
Book Value
14
1.89
1.93
1.97
2.00
0.50
19.96
20.06
22.94
25.29
25.29
Reversed DCF Growth rate
Intrinsic Value:
DCF (Earnings Based)
$ 56.5
Margin Of Safety
44%
Reversed DCF
Growth Rate
-4.47%
The levered free cash flow (FCF) over the next five years and discounted these values at
the rate of 8.49%. The result is present value of 5-year cash flow of $69,345 million. The total
value is the sum of cash flows for the next five years and the discounted terminal value results to
the total Equity Value of the company which is 278,947 million dollars (Belo, Collin‐Dufresne,
& Goldstein, 2015). Dividing the equity value by the number of shares outstanding gives the
intrinsic value. The intrinsic value of the share is 45. The intrinsic value compared to the value to
the current share price at the company which is 38 shows that the entity might be slightly
undervalued.
b) Growth Component of Stock Price = Future value creation =
Investment * (ROIC – RAOCC) x competitive advantage period
(number of years)/ RAOCC * (1 + RAOCC).
Fiscal Years Ending
Dec-17
Revenue
160,54
6
-2.0%
% Growth
Dec-18
Dec-19
Dec-20
171,569
185,781
6.9%
8.3%
186,45
4
0.4%
Dec-21
189,923
1.9%
Dec-22
202,12
1
6.4%
AT&T INDUSTRY AND COMPANY ASSESSMENT
EBITDA
% of Revenue
45,336
28.2%
55,524
32.4%
15
60,447
32.5%
61,340
32.9%
61,033
32.1%
61,097
30.2%
The above table above shows a forecast of the growth of revenues from 2017 to 2018. The table
indicates that revenues will increase from year 2017 to year 2021 but decrease in year 2022.
With the information, it is possible to have an idea of the future value creation of the company
(Patel, Stuber, & Pratt, 2005).
Future value creation = Investment * (ROIC – RAOCC) x competitive advantage period (number
of years)/ RAOCC * (1 + RAOCC).
= 20160*(12.2-8.76)*5/8.76*(1+8.76).
=363,875
Above is the amount of value creation that AT&T Company is expected to make in the next 5
years. It is a positive value meaning that the company is likely to enjoy better economic times in
the future.
Calculation of Free Cash Flow
Projected Unlevered Cash Flow
Dec-18
EBITDA
D&A
EBIT
Pro forma Taxes
NOPAT
Capital Expenditures
NWC Investment
(+) D&A
Dec-19
Dec-20
Dec-21
55,524
60,447
61,340
61,033
(26,232)
(28,405
)
(28,508)
(29,038)
29,292
(6,737)
22,555
32,042
(7,370)
24,672
32,832
(7,551)
25,281
31,994
(7,359)
24,635
(23,019)
(23,372
)
1,000
28,405
(23,233)
(24,398)
47
28,508
244
29,038
776
26,232
AT&T INDUSTRY AND COMPANY ASSESSMENT
16
Free Cash Flow
26,544 30,705
30,604
29,520
% Growth
16%
0%
-4%
Projected growth of free cash flows of AT&T is uncertain. There is a significant drop
from one year to another. In terms of valuation, it shows that the value of the company might
decrease in the future (CSI Market, 2018). Reason for the decrease could be the capital
expenditures that are being incurred by the company. However, the value of the company might
go up if the value of the share goes up as well even with the decline in the free cash flows.
Valuation summaries of selected (3) other analysts
From the above analysis, several discounted cash flow models have been used to analyze
the valuation of AT&T Company. From the valuation of the intrinsic and market value of the
shares of the company, the use of levered free cash flow (FCF) in analysis indicates that the
company might be undervalued. The free cash flows will also decrease in the future and this will
affect the valuation of the company. However, the perpetuity model indicates that earnings of the
company will improve in the future. Other models that have been used in the valuation of the
company include Dividend growth rate (G) implied by Gordon Growth Model and Dividend
Growth Rate (G) derivation using PRAT Model which show that there will be a growth in
dividends of the company (Patel, Stuber, & Pratt, 2005). Growth of dividends means that
earnings will be improved and the valuation of the company will also go up.
AT&T INDUSTRY AND COMPANY ASSESSMENT
17
References
Annual Reports.com, (2018). AT&T Inc. Most Recent Annual Reports. Retrieved from
http://www.annualreports.com/Company/att-inc
Belo, F., Collin‐Dufresne, P., & Goldstein, R. S. (2015). Dividend dynamics and the term
structure of dividend strips. The Journal of Finance, 70(3), 1115-1160.
CSI Market, (2018). AT&T Inc. (T). Business Segments. Retrieved from
https://csimarket.com/stocks/segments.php?code=T
CSI Market, (2018). Communications Service Industry Revenue Growth. Retrieved from
https://csimarket.com/Industry/industry_growth_rates.php?ind=905&hist=16
Last 10K.com, (2018). AT&T Reports Fourth-Quarter and Full-Year Results. SEC Filings.
Retrieved from https://www.last10k.com/sec-filings/t
Patel, C. S., Stuber, G. L., & Pratt, T. G. (2005). Comparative analysis of statistical models for
the simulation of Rayleigh faded cellular channels. IEEE Transactions on
Communications, 53(6), 1017-1026.
SEC Filings, (2018). Financial Reports. AT&T. Retrieved from
https://investors.att.com/financial-reports/sec-filings
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