Are You Missing Something in Your Company Valuations?
Accounting rules make it easy for companies to manipulate traditional measures of profitability and value. That’s why we make over 30 types of accounting adjustments to strip out the effects of these accounting policies.
Several of these adjustments help us accurately calculate economic book value (EBV) and shareholder value in our discounted cash flow model. EBV is our measure of the no-growth value of a stock based on the current net operating profit after tax (NOPAT) of the business, and it helps us measure the market’s expectations relative to the company’s current economic profitability. Shareholder value is the value available to shareholders in our DCF model after other, senior claims on cash flows have been met.
Some adjustments represent senior claims to equity holders that reduce economic book value and shareholder value while others are assets that we expect to be accretive to shareholder value. For example, Tesla (TLSA), instead of paying employees in cash, elects to pay much of its compensation in the form of stock options, which amounted to $553 million at the end of 2012. Of course, after the stock’s historic run-up over 2013 and 2014, these options were worth much, much more. By the end of 2014, the value of Tesla’s outstanding stock options had reached $4.1 billion, or 15% of the company’s total market value. These options represent future share dilution that reduce the cash flows that are paid out to shareholders, which reduces Tesla’s value in our model. As Tesla has failed to become a cash machine in the past 12 months, investors have begun to worry about the company’s position, and shares have dropped over 33% since their peak in September 2014.
There are countless other examples of how footnotes diligence could have given investors a clear picture of what companies were worth investing money into in 2014.
We’ve compiled a “top 10” list of the companies (who have already filed for 2014) with the largest adjustments to their valuations.
Photo Credit: Lending Memo