Valuation

Good morning/evening (depending how you look at it). I've just spent the last 4-5 hours playing poker with a few good friends. I made it top 3 out of 8, but was getting anxious and went all in at the wrong time (hoping for a spade to give me a flush on the river). Anyway, it was tons of fun and in the process I only lost $5. I'm thinking that tomorrow I will easily make my $5 back when SGY is up 2%+. Brent crude is up to near $109 on news that manufacturing is increasing in China and that Iran may be closer to constricting oil supply by closing the strait of Hormuz.

On a side note, I think that the love I have for poker is rooted in the same aspect of my personality that generates my love for the stock market. Both are challenging, involve strategy, involve risk, and have the potential for incredible rewards, both monetary and emotional. I'm seriously considering reading up on some Texas Hold 'Em strategy books before I turn 21 and head to Vegas in February.

Back to the market.

Economic Data to look out for tomorrow:
7 AM P.T.- ISM Manufacturing Index data
11AM P.T.- FOMC Minutes

Both are market moving indicators. In case you've forgotten where I find this data: Here is a link.

I'll dig into more macro perhaps tomorrow.

For now, I'd like to announce a 4 part series in company valuation techniques that I am going to begin. Currently, I am studying for Investment Banking internship interviews, and these are things I need to be well versed on. As I learn all about these topics, I will be glad to share the information with my loyal readers. It benefits not only you, but also me, as the extra time spent typing and trying to teach it to you all will be a great way to solidify the ideas in my head.

The 4 parts will be as follows:
Part 1: Comparable Companies Analysis- This is when you take one company and compare it to similar companies in the same industry. Using various ratios and data you can come to a ball park valuation for the company in question by comparing it to a comparable company.
Part 2: Precedent Transactions Analysis- Precedent transactions is when you look at various transactions that have taken place in the past and use that data to estimate a valuation for the company in question. For example, say you are trying to understand the value of RiteAid. You could research and find that CareMark was recently sold to CVS for $25 billion. These are similar companies, so you could use this transaction to help you put a value on RiteAid.
Part 3: Discounted Cash Flow Analysis- If you follow my blog regularly, you should have a vague understanding of DCF analysis. Basically, you project free cash flows for a company into the future and then discount those cash flows to present value, add up the values, add a terminal value, and then subtract a few items, and divide by # of shares outstanding. In the end, you will be able to put a dollar value per share on a particular company.
Part 4: Leveraged Buyout Analysis- I believe that with LBO analysis, there is a formula to be followed, perhaps similar to the one used in DCF analysis. LBO analysis is the 1 out of the 4 that I know least about. I do know that a leveraged buyout is when a company uses mostly debt to purchase another company. I will be sure to provide a better explanation of an LBO as soon as I understand it better.

The above four descriptions are very vague and possibly incorrect. I look forward to reshaping those above ambiguous claims into well thought out, concise statements and data which you can then use to make yourself a better investor. Stay with me and check back soon for part 1.

Cheers,
EZ