Great article, congrats. One doubt about valuation which is the rational behind assuming 15% discount rate for projected period & exit rate 3-3-5% for terminal value? It is something that i have seen before in other analysts but i did not get it. Thanks
Hi! I apply 15% discount rate because that is the "minimum" return I would ask an investment. Whether to use or not use WACC would lead us to a long discussion ;).
I don't understand what you meant with exit rate 3-3-5% for terminal value. I simply applied an exit multiple based oh the historic multiple + what I believe would happen if the company performed the way I suggest in each of the scenarios.
Thank you for answering my question. What I meant is that you're not actually demanding 15%. You are demanding 15% to the projected period but 3-5% to the terminal value (probabily 70% of the total value). It is not at all a criticism simply wanted to know the rationale behind
Thank you for another great post! Nevertheless, I used to calculate FCF as Cash from Ops - CapEx but I learned 2 things:
1) If you want you to use CapEx you need to consider only Maintenance CapEx and not growth CapEx. For this, normally (as Bruce Greenwald who is a renowned professor) you could use D&A as a proxy. Have not done the analysis but I guess you would get a really different number.
2) You would be more accurate by using the FCFF or FCFE calculations from Aswath Damodaran. I tend to use FCFF as it is the cash to all claim holders and for that, you start with NOPAT and remove investments in future growth (you can check as well Michael Mauboussin on this subject).
Those analysis would give you a more precise insight into Constellation valuation in my humble opinion.
Well, it was only the valuation exercise ;) I know and have been following Constellation for several years. It took some time also to see the uniqueness ;)
Excellent post, enjoyed reading.
great take, thank you!
Great article, congrats. One doubt about valuation which is the rational behind assuming 15% discount rate for projected period & exit rate 3-3-5% for terminal value? It is something that i have seen before in other analysts but i did not get it. Thanks
Hi! I apply 15% discount rate because that is the "minimum" return I would ask an investment. Whether to use or not use WACC would lead us to a long discussion ;).
I don't understand what you meant with exit rate 3-3-5% for terminal value. I simply applied an exit multiple based oh the historic multiple + what I believe would happen if the company performed the way I suggest in each of the scenarios.
Thank you for answering my question. What I meant is that you're not actually demanding 15%. You are demanding 15% to the projected period but 3-5% to the terminal value (probabily 70% of the total value). It is not at all a criticism simply wanted to know the rationale behind
No criticism taken! :)
I discount the 5y FCF but also the x times FCF multiple I assign as "exit". This is also discounted to the present from year 5 at 15%.
Thank you for another great post! Nevertheless, I used to calculate FCF as Cash from Ops - CapEx but I learned 2 things:
1) If you want you to use CapEx you need to consider only Maintenance CapEx and not growth CapEx. For this, normally (as Bruce Greenwald who is a renowned professor) you could use D&A as a proxy. Have not done the analysis but I guess you would get a really different number.
2) You would be more accurate by using the FCFF or FCFE calculations from Aswath Damodaran. I tend to use FCFF as it is the cash to all claim holders and for that, you start with NOPAT and remove investments in future growth (you can check as well Michael Mauboussin on this subject).
Those analysis would give you a more precise insight into Constellation valuation in my humble opinion.
I think we discussed about it in Twitter ;) I encourage you again to dig deeper. Best! :)
Thanks for sharing amazing insights! You quick check is my months of research 🙏😃
Well, it was only the valuation exercise ;) I know and have been following Constellation for several years. It took some time also to see the uniqueness ;)