Valuation - McKinsey

[Liberty]

One of the best books I've read on valuation has a new edition coming out next month. This is the 6ht, the 5th that I've read had a red and white cover. Thought it'd interest some here:

 

http://www.mckinsey.com/client_service/corporate_finance/latest_thinking/valuation

 

http://www.amazon.com/Valuation-Measuring-Managing-Companies-Website/dp/111887370X/

[LR1400]

I learned a lot from the book and its counterpart, Value. However, it's not my favorite for corporate valuation. I found it needlessly complicated at times.

 

Security Analysis and Business Valuation on Wall Street is better for what most people on this site want.

 

 

[Liberty]

I learned a lot from the book and its counterpart, Value. However, it's not my favorite for corporate valuation. I found it needlessly complicated at times.

 

Security Analysis and Business Valuation on Wall Street is better for what most people on this site want.

 

This one?

 

http://www.amazon.com/Security-Analysis-Business-Valuation-Companion/dp/0470277343/

 

What would you say makes it better? Thanks in advance.

[innerscorecard]

That's very exciting. My technical skills could always use improvement. I will get the new 6th edition.

[jawn619]

One of the best for sure

[LR1400]

I learned a lot from the book and its counterpart, Value. However, it's not my favorite for corporate valuation. I found it needlessly complicated at times.

 

Security Analysis and Business Valuation on Wall Street is better for what most people on this site want.

 

This one?

 

http://www.amazon.com/Security-Analysis-Business-Valuation-Companion/dp/0470277343/

 

What would you say makes it better? Thanks in advance.

 

Yes. I think that book, the book Investment Banking by Rosembaum & Pearl and the Wall Street Prep materials are better. They are written by practitioners.

 

The book referenced above does a good job of giving an overview of valuing different industries as well. For example, they point out the difference in valuing a natural resource company, a finance company, etc. Hooke walks through examples and describes the thinking behind the valuations.

[undervalued]

What do you guys think of Aswath Damodaran valuation books? This one is pretty concise and short http://www.amazon.com/Little-Book-Valuation-Company-Profit/dp/1118004779/ref=asap_bc?ie=UTF8.

 

Does McKinsey's book use examples straight from 10K without adjustments?

 

I've been reading Damodaran's book and still has trouble finding where he get the depreciation numbers from (in the Free cash flow to Equity section). Since I can't find it in 3M 2007 10K report, I am not sure whether that number is a typo or he did some other adjustments to get to that depreciation number.

[LR1400]

What do you guys think of Aswath Damodaran valuation books? This one is pretty concise and short http://www.amazon.com/Little-Book-Valuation-Company-Profit/dp/1118004779/ref=asap_bc?ie=UTF8.

 

Does McKinsey's book use examples straight from 10K without adjustments?

 

I've been reading Damodaran's book and still has trouble finding where he get the depreciation numbers from (in the Free cash flow to Equity section). Since I can't find it in 3M 2007 10K report, I am not sure whether that number is a typo or he did some other adjustments to get to that depreciation number.

 

I prefer the books from practitioners myself. Green wald's book is good though.

 

I personally think the academics and those like them over complicate subjects. The Hooke book helped me a lot because it helped me understand how to value and look at various industries.

[jawn619]

What do you guys think of Aswath Damodaran valuation books? This one is pretty concise and short http://www.amazon.com/Little-Book-Valuation-Company-Profit/dp/1118004779/ref=asap_bc?ie=UTF8.

 

Does McKinsey's book use examples straight from 10K without adjustments?

 

I've been reading Damodaran's book and still has trouble finding where he get the depreciation numbers from (in the Free cash flow to Equity section). Since I can't find it in 3M 2007 10K report, I am not sure whether that number is a typo or he did some other adjustments to get to that depreciation number.

 

yes the McKinsey book uses examples. Also, some of what they say is very clear. They care a lot about cash flows, and seeing increase in intrinsic value as the main driver of share price growth, and separating a business into operating and non operating assets/liabilities.

[vinod1]

Most of my favorite books on valuation are mentioned above.

 

The books mentioned above cater to different sets of needs and provide different perspectives.

 

Damodaran's investment valuation is most comparable to McKinsey's book, in that they do a deep dive on the minutia of valuation. Except for the part about using beta to estimate required returns, it is useful to know almost all the other facets of valuation covered in these books. You might not actually make LIFO to FIFO adjustments or currency translation adjustments in real world valuation - it is one thing to know how these are impacting the financial statements and consciously ignore them for simplification and not knowing what is going on and if it is a positive or negative or if these effects cancel out over the long term. Even if you end up just using multiples, knowing the underlying assumptions behind them helps you to think more clearly. I found out I had been abusing the DCF method before I read Damodaran's book in depth - one of many many but this is most glaring.

 

I personally liked Damodaran's book much better than McKinsey. Perhaps because I started with Damodaran's book and breezed through McKinsey as they cover very very similar material with a slightly different terminology.

 

I also like Jeffrey Hooke's book and Greenwald a lot. They provide a completely different perpective, Hooke's a high level overview and how to value different types of businesses using industry specific methods. Greenwald comes about from a completely different angle based on moat vs. no moat and reinvestment opportunity.

 

I think reading Damodaran or McKinsey's book and both Hooke's and Greenwald provides a nearly comprehensive valuation toolkit for investors.

 

Vinod

[LR1400]

I am in 100% agreement with Vinod.

[undervalued]

Does anyone actually use the separate DCF tool that you have to purchase separately for the McKinsey book? This one is for the 5th ed Valuation DCF Model, CD-ROM http://www.amazon.com/Valuation-DCF-Model-CD-ROM-Companies/dp/0470424575/ref=sr_1_1?s=books&ie=UTF8&qid=1437196956&sr=1-1&keywords=Valuation+DCF+Model%2C+CD-ROM%3A+Designed+to+Help+You+Measure+and+Manage+the+Value+of+Companies%2C+5th+Edition&pebp=1437196947157&perid=13G3CF4757HSXX0C993S

[undervalued]

So I've been reading the 5th edition of Valuation by McKinsey and I have a question. In Ch 2 Fundamental Principles of Value Creation - Cash flow risk pg 36.

 

Deciding how much cash flow risk to take on What should companies look out for? Consider an example, Project A requires an up-front investment of $2000. If everything goes well with the project, the company earns $1000 per year forever. If not, the company gets zero. (Such all or nothing projects are not unusual). To value Project A, finance theory directs you to discount the expected cash flow at the cost of capital. But what is the expected cash flow in this case? If there is a 60 percent chance of everything going well, the expected cash flows would be $600 per year. At a 10 percent cost of capital, the project would be worth $6000 once completed. Subtracting the $2000 investment, the net value of the project the investment is made is $4000.

 

This is probably a basic question to most of you. Trying to understand everything slows me down a lot in trying to figure how these stuff works.

 

How did he get $6000? Is 10 percent cost of capital the same as the DCF discount rate in this case?

[vinod1]

So I've been reading the 5th edition of Valuation by McKinsey and I have a question. In Ch 2 Fundamental Principles of Value Creation - Cash flow risk pg 36.

 

Deciding how much cash flow risk to take on What should companies look out for? Consider an example, Project A requires an up-front investment of $2000. If everything goes well with the project, the company earns $1000 per year forever. If not, the company gets zero. (Such all or nothing projects are not unusual). To value Project A, finance theory directs you to discount the expected cash flow at the cost of capital. But what is the expected cash flow in this case? If there is a 60 percent chance of everything going well, the expected cash flows would be $600 per year. At a 10 percent cost of capital, the project would be worth $6000 once completed. Subtracting the $2000 investment, the net value of the project the investment is made is $4000.

 

This is probably a basic question to most of you. Trying to understand everything slows me down a lot in trying to figure how these stuff works.

 

How did he get $6000? Is 10 percent cost of capital the same as the DCF discount rate in this case?

 

Yes. Cost of capital is essentially the same as discount rate or required return.

 

Cost of capital is from the company perspective while discount rate or required return is from investors point of view. Assuming all equity funding, they become one and the same.

 

So $600/0.1 = $6000

 

Vinod

[undervalued]

Is there an equation anywhere for that Vinod? Why do we divide the expected cash flow with cost of equity?

[Jurgis]

https://en.wikipedia.org/wiki/Terminal_value_%28finance%29

 

T0 = FCF/(k – g)

 

Your g is zero, so it's just FCF/k

[undervalued]

Thanks Vinod and Jurgis.

[innerscorecard]

I just received Hooke's book and have begun to read it. I am learning a lot already.

[Liberty]

I just received Hooke's book and have begun to read it. I am learning a lot already.

 

What do you like about it so far, and what have you learned about?

[feynmanresearch]

Most of my favorite books on valuation are mentioned above.

 

The books mentioned above cater to different sets of needs and provide different perspectives.

 

Damodaran's investment valuation is most comparable to McKinsey's book, in that they do a deep dive on the minutia of valuation. Except for the part about using beta to estimate required returns, it is useful to know almost all the other facets of valuation covered in these books. You might not actually make LIFO to FIFO adjustments or currency translation adjustments in real world valuation - it is one thing to know how these are impacting the financial statements and consciously ignore them for simplification and not knowing what is going on and if it is a positive or negative or if these effects cancel out over the long term. Even if you end up just using multiples, knowing the underlying assumptions behind them helps you to think more clearly. I found out I had been abusing the DCF method before I read Damodaran's book in depth - one of many many but this is most glaring.

 

I personally liked Damodaran's book much better than McKinsey. Perhaps because I started with Damodaran's book and breezed through McKinsey as they cover very very similar material with a slightly different terminology.

 

I also like Jeffrey Hooke's book and Greenwald a lot. They provide a completely different perpective, Hooke's a high level overview and how to value different types of businesses using industry specific methods. Greenwald comes about from a completely different angle based on moat vs. no moat and reinvestment opportunity.

 

I think reading Damodaran or McKinsey's book and both Hooke's and Greenwald provides a nearly comprehensive valuation toolkit for investors.

 

Vinod

If you had to chose between the McKinsey book and Damodaran's book, which would you chose?

[jawn619]

Most of my favorite books on valuation are mentioned above.

 

The books mentioned above cater to different sets of needs and provide different perspectives.

 

Damodaran's investment valuation is most comparable to McKinsey's book, in that they do a deep dive on the minutia of valuation. Except for the part about using beta to estimate required returns, it is useful to know almost all the other facets of valuation covered in these books. You might not actually make LIFO to FIFO adjustments or currency translation adjustments in real world valuation - it is one thing to know how these are impacting the financial statements and consciously ignore them for simplification and not knowing what is going on and if it is a positive or negative or if these effects cancel out over the long term. Even if you end up just using multiples, knowing the underlying assumptions behind them helps you to think more clearly. I found out I had been abusing the DCF method before I read Damodaran's book in depth - one of many many but this is most glaring.

 

I personally liked Damodaran's book much better than McKinsey. Perhaps because I started with Damodaran's book and breezed through McKinsey as they cover very very similar material with a slightly different terminology.

 

I also like Jeffrey Hooke's book and Greenwald a lot. They provide a completely different perpective, Hooke's a high level overview and how to value different types of businesses using industry specific methods. Greenwald comes about from a completely different angle based on moat vs. no moat and reinvestment opportunity.

 

I think reading Damodaran or McKinsey's book and both Hooke's and Greenwald provides a nearly comprehensive valuation toolkit for investors.

 

Vinod

If you had to chose between the McKinsey book and Damodaran's book, which would you chose?

 

McKinsey's. I enjoyed both but got more out of McKinsey's

[undervalued]

So I have been reading Valuation by McKinsey since I received the new edition. Just finished reading the chapter about forecasting.

 

The question is.. Is it normal that I still feel that I don't know where to start?

 

I am trying to apply what I've learn and I think I need to:

 

1. Find 1 company to value

2. Bring 10k history data for at least 5 years worth of data

3. Forecast what the company will earn for next 5 years

4. Find and identify value drivers ROIC, FCF, and value the company

5. Repeat #1 thru 4 for their competitors

6. Probably wait and buy the company shares when it's cheap?

 

Even after compiling all these data, what do I need to do to understand what the data means?

 

Do you guys usually read 500 pages 10Ks http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/500-pages-a-day-of-10k's-10q's-what's-your-technique/msg235730/?topicseen#msg235730 first then when you find an interesting company do a valuation or do you guys do valuation for an industry and learn about trends?

[vinod1]

Most of my favorite books on valuation are mentioned above.

 

The books mentioned above cater to different sets of needs and provide different perspectives.

 

Damodaran's investment valuation is most comparable to McKinsey's book, in that they do a deep dive on the minutia of valuation. Except for the part about using beta to estimate required returns, it is useful to know almost all the other facets of valuation covered in these books. You might not actually make LIFO to FIFO adjustments or currency translation adjustments in real world valuation - it is one thing to know how these are impacting the financial statements and consciously ignore them for simplification and not knowing what is going on and if it is a positive or negative or if these effects cancel out over the long term. Even if you end up just using multiples, knowing the underlying assumptions behind them helps you to think more clearly. I found out I had been abusing the DCF method before I read Damodaran's book in depth - one of many many but this is most glaring.

 

I personally liked Damodaran's book much better than McKinsey. Perhaps because I started with Damodaran's book and breezed through McKinsey as they cover very very similar material with a slightly different terminology.

 

I also like Jeffrey Hooke's book and Greenwald a lot. They provide a completely different perpective, Hooke's a high level overview and how to value different types of businesses using industry specific methods. Greenwald comes about from a completely different angle based on moat vs. no moat and reinvestment opportunity.

 

I think reading Damodaran or McKinsey's book and both Hooke's and Greenwald provides a nearly comprehensive valuation toolkit for investors.

 

Vinod

If you had to chose between the McKinsey book and Damodaran's book, which would you chose?

 

Did not see this until now. I would pick Damodaran's book. To me the terminology is a bit more intuitive. But you cannot go wrong with either one.

 

Vinod

[Mohammed Al Alwan]

McKinsey book is an excellent reference on the topic but a better book in my view which I think is underrated is Greenwald book which provides the best valuation framework I have come across.However,with regard to valuing franchise or growth companies greenwald second book which is competition dymetified is better than first book .The author is supposed to finish an updated version of his first book value investing where he update his work on franchise investing but for a reason or another is not yet out.

[spartansaver]

Working my way through and noticed something that struck me in chapter 2. Often we are taught to think about a project as having an expected cf where you take the average of the different cf's based on probability and work them out. In Valuation they point out that sometimes a project with a small probability to produce a negative cashflow can have a much greater effect on the entire organization, that project should not be undertaken. I believe that Buffett over the years has made a strong case for this by constantly reminding us of how even under the worst circumstance of a Supercat the company would still operate healthy. Sorry for the rambling, but I thought it was important to point out.