Okay, everyone, well, nothing strikes fear in the the heart of an analyst more than a a comps exercise or a comps comparables project.

You know what that entails, or perhaps you don't.

But welcome everyone. Welcome to our session today on Trading Comparables, sort of our first step down the road of, of valuation methodologies. I tease because, typically, in your early days as an analyst even as an associate, you're, you're often given a lot of comparables to do update and revise and proof. And it's usually, well historically was a a lot of work.

I think some of it's gotten a little bit easier, but with more data comes more responsibility and more higher expectations, I should say.

So let me just say, hello again. I'm Chris Cordone. I'm your instructor and host for these sessions.

And my teaching assistant, Yolanda Wadowski is here with us as well.

And also have our colleague from the admin side, Catherine vs here as well, just kind of keeping an eye on things from the background.

But I wanna get started. Because again, these sessions go by quickly and a lot to cover with, with trading comparables.

What I'd like to do before we actually get into this week's material is, is I've, I'm gonna share my screen and I'm on the, the syllabus page.

And what I would like to do, just make sure my chat gets popped back out, is what I'd like to do is actually start with a file that I ended class with, well, was the bulk of last class, which is this equity to enterprise value bridge workout in class. So if you were here last week, great you have it.

If you weren't, there's a problem in here that I'm going to get to in a moment, and it, it's just nice since not everybody's here week to week.

I just thought having it here, you could download it and I'll explain more when we get to that. So, download that file, and in this session here on trading comparables, if you can download the empty file as well, that will be all that we need for today. So, if I were to look at that file very quickly here this equity to enterprise value bridge, I had a few questions this week.

It's always nice to receive questions.

And there were a couple of problems as we got to the end of this problem set.

We were working through examples of calculating enterprise value, and we always started with equity value because market cap is published everywhere, right? And then we got to some problems that were kind of later in the set when all of a sudden they kind of flipped it on us and they said, Hey, let's start from enterprise value. So this is like problem nine here, you know, using the data below, calculate the implied equity value starting from EV, and then we'd have to kind of do the bridge in reverse.

So the question is was that something just to kind of, just turn the tables on you to get you thinking on your feet, what is the, the point of that? There's a little kind of parenthetical comment here that says that this comes from a DCF, that's great, but we haven't covered DCF, so that, how's that supposed to help you, right? We're not gonna cover DCF for a couple weeks. So, what's going on here? Well, the reality is, as we will see today, that more times than not, we will be starting with the enterprise value for a company working our way to that in implied equity value that's mentioned in this problem.

We will start with the enterprise value of a company and work our way to the equity value. Now, you might say, well if we have enterprise value, I mean, isn't that the valuation? Isn't that kind of the answer? Well, you know, again, similar to what I said about equity value. I mean, if, if you just want to assume that the market cap of a stock is the actual value of the stock, and that's what you should pay in a takeover, or buying shares just on the open market, then, then there's really not a lot of work to be done, right? So all of this effort is really about trying to understand what is the true value. You know, what is our expert opinion of the value of this stock? Is it overvalued or undervalued? So we can begin that approach from equity value.

We can also begin that approach from enterprise value.

And I'm here today to tell you that more times than not, you will begin that process from enterprise value.

And we will see mechanically how we get to an enterprise value for a target company, target company being the company that we're valuing and work our way through to equity value. So what, what we're talking about here is, if I may go back to my notes here, we're talking about, again, some of the, introducing some of the methodologies for figuring out what a company is worth. Now that problem used the term DCF discounted cashflow, and today we're gonna be talking about trading comparables. And that's actually two really good topics to start with because those represent sort of the two paths of valuation we have relative valuation, and we have intrinsic valuation.

Relative valuation would be what is the value of this company compared to others based on what others are being valued at? Intrinsic is what is the value of the company in and of itself without actually looking at benchmarks in the market. Just looking at the value of the, those operating assets and the methodologies, that we'll get to for that. So, relative and intrinsic. And just as a note here, I guess I'll put relative looks to benchmarks, other companies, et cetera. Intrinsic is dealing with the assets, the operating assets slash cash flows, earnings, et cetera.

Without going outside of that bubble.

So a trading comparable is an perfect example of a relative valuation methodology because we're going to look at the way other companies are trading in the market and figure out if that implies that our target company is trading above or below where it should be.

So in order to do this trading multiples comparables, comps, sometimes we're even called common stock comparisons, just depends on the nature of your particular company where what people are used to calling them.

Basically what we have is we have a ratio. It's where the multiple kind of comes in. We have a ratio.

And the ratio is effectively probably easier if I just draw this out, trying to draw less. Because my writing can be sloppy. But we have a value over a value driver, a value over a value driver. So the value, is ultimately the thing that we are, uh, trying to get to for the target company, right? That's where we're trying to get to for the target company.

But we're starting with a set of comparable companies. And I'll talk about how we get that set in a moment and then we place that value over the earnings, cashflow, other type of metric that, that we think is driving that value. So, just kind of looking out into the world, as we kind of come into contact every day, the most famous multiple in the history of finance, of course is the price to earnings ratio and the price to earnings ratio is, price over earnings.

The price is the value of the stock or the equity value that can be per share, or it can be market cap, right? That can be per share or market cap. Doesn't really matter.

So because it's because it's a ratio. And then we're gonna put that over, for example, the earnings that drives the stock price. Now, what are the earnings that drive the stock price? Well, I guess in theory we could have a debate about this, but ultimately when we own a share of stock, we talked about this means we have a residual stake in the company.

So one of the key kind of components, one of the key tenets of doing a multiples analysis is being consistent with what's in the value and what's in the value driver.

So we're talking about owning equity of a stock.

How we think about our ownership of the equity of a company is what is our share of the net income, because that's the only chunk that we can kind of claim is our own.

Every single line above that somebody else can dip their hand into, right? EBIT, EBITDA, sound, lovely, lots of people paying their hat on those metrics, but we haven't paid the creditors, we haven't paid our taxes, we haven't paid the ncis, we haven't paid, you know, so like great numbers, but they don't, we don't have a stake in ebitda, EBITDA as an equity older, right? So what we do have a stake in is net income.

So the driver for PE is net income, and that can also be total amount what's on the income statement, or it can be per share, which would be an earnings per share amount, right? So, equity value or equity per share over earnings would be, would be pe This is an example of how a multiple works. Now another example would be the concept of enterprise value multiples.

So just like we can do a multiple for the residual stake, we could also do a multiple for the entire company.

So now we're not focused just on that block, on the lower right hand side of the balance sheet, but we're focused on the blocks on the entire right hand side of the balance sheet. Or to kind of put it, in maybe more concrete terms for this exercise, the EV is the net operating assets, right? The net operating assets, and then this is the debt and the equity, and of course any other stakes that are in there. So that's the ev.

And so the EV would be the value that we're trying to get to the value of the debt plus the equity plus the other stakeholders.

So here's the ev and then what is the value now that's driving this stake? Well, I was just talking kind of down about EBIT, EBITDAs not being right for the equity stake because there are too many other hands in it.

But now that we've broadened our definition of what the value is, of what value is, which is the entire enterprise, now all of the stakeholders kind of have a claim in this.

So the better metrics, the more appropriate metrics for this calculation are going to be, EBIT or EBITDA.

And we could even put sales in here as well, because sales are at the very top, right? Nothing, nothing has yet come out of sales. Um, now sales, I'm gonna kind of hold off on there are only, there are only some kinds of, of certain kinds of companies where we really let ourselves, go down the road of valuing based, based purely on selling, not based on on profit, right? Because it's kind of a dangerous path to go on to, to not say that a company's value is driven at all by their profit margin when we know, we know from just common sense that that a company's ability to turn a profit on revenue is what keeps you in business, right, for the long term. But that's kind of going to be how we look at this, right? Which is that there are some companies who haven't been in business for a very long time who haven't reached that stage yet.

So we'll come back to that probably toward the end. So for now, we're gonna focus on EBIT and EBITDA and again, we talked about those several weeks ago.

Didn't get to spend a lot of time on it, but why are they coming back in to play right now? Well, they're coming back into play right now because the, the other way to look at EBIT or EBITDA, and we talked about them as being kind of the core earnings, right? We talked about them being as a regular or recurring earnings, right? So these are core, regular or recurring earnings.

The reason why these really come into play is that, first of all, as we said, that none of the stakeholders have yet been able to dip their, hands into that pot.

So it still represents a complete total number for the enterprise.

Secondly is, if we think about what these net operating assets do well, we got capital, we raised capital, we put them to put the capital to work, buying assets, hiring people, et cetera, et cetera. We've now got a value on what we think the those assets are is worth in the market. EBIT, EBITDA reflect the expression of that, that those earnings, the operating assets generate EBIT, the operate assets generate EBITDA.

And that's why we have to match those together.

So the question then really kinda leads us to is we've got a few different multiples to look at, right? We've said we've got PE, we've got a PE ratio, we've got EV to EBIT, we've got EV to EBITDA, we've got EV also to revenues.

And you could could play around with these a little bit, as well in terms of, you can add some letters and subtract some letters. And of course we haven't discussed yet, what particular year we're looking at, what particular point in time we're looking at yet.

We know the balance sheet is gonna be valued as of today, right? But earnings are a course are over a period of time, right? So we have to come, we have to define that. But for right now, I just want to kind of set us down the right path. Like how do we, how do you choose a, a multiple, how do you, how do you choose sort of where to go with this analysis? Well for the most part in corporate valuation, we're gonna be looking at EV multiples, and we're probably gonna be looking at this, either not at all or on a secondary basis.

Now, you might say why if ultimately you've gotta go to the shareholders and say, Hey, this is, this is how much your company's worth, right? Why would you be leaving out a PE multiple? And everyone's so focused on it.

And the the reason is, is because this process that we're gonna go through is gonna involve looking at many other companies, many other companies, as many as as we can get that kind of fit the right criteria.

And the problem is, is that as we look at these companies here's company A's got a little bit of debt and a lot of equity, company B's got a lot of debt and a little bit of equity company C's got maybe half and half, right? So what we're seeing in all of these companies is that those, the earnings in these companies are gonna vary.

I know they're different sizes as well, but that will come out in the, in the relative nature of the multiple. But what's, all things being considered, what's gonna happen here is that those earnings are gonna change.

The net earnings are gonna change because the net earnings is gonna reflect how much interest expense, how much net income, how much tax shield.

So that's gonna vary up and down when we look at a broad range of companies. And so if we're focused on that ni that net income or that EPS, that EPS is going be biased, it's not gonna reflect the fact that A, B and C may may be very similar.

Companies just finance differently. So to show you this, I wanna go back to that exercise. This is workout 13, and I'm gonna show you for these three companies here how the kind of the multiples can be how the PE multiple will change, based on the way that the company is financed, even though we're gonna be talking about effectively the same company here.

So to prove to you, or to establish that this is the same company, I've basically got three, three different scenarios here in this case.

It's really this, it's really one company financed three different ways, but we can extrapolate this and think about three different similarly sized companies, right? And by similarly sized, what I mean is that they've got the same net operating asset balance, the same left hand side of the balance sheet.

So it's essentially the same size company, three times 3,500, and they've all got a little bit of cash.

But what we see differently is that the way that the, companies have been leveraged is different. So in the first case, we've got 900 of leverage. So that's gonna leave us with an equity value. Again, if we go back to the EV bridge, this is a nice kind of recap, the equity value, I'm gonna take my enterprise value, I add my cash because that effectively goes to the equity value or to the equity shareholder, but I have to subtract the debt first.

So I'm either kind of netting it mentally, or I'm just kind of going through that process of saying the cash goes to equity, but then the debt comes out first, and that leaves me with an equity value in the first case of 2,900.

And now if I copy that formula over, what we see here is that with the company that's got more leverage, what happens is, is that the equity value drops because they're sitting underneath a greater stake. So their, their stake comes after, and therefore the equity value is smaller.

And now, how would this show up in the market? If we're just looking at these two companies, how would this co, how would this show up in the market? Well, the market would factor that leverage in, and, and it would understand intrinsically that, that that stake, that equity stake purely by math, by, by mathematics, is less than the equity stake of a similar company.

That is, it has fewer obligations ahead of the equity claim.

And so if I copy that over again, to the third case, this is the company that has very low leverage, the equity value is quite high.

Now, again, in this case, I'm, I'm assuming it's the same company, capitalized three different ways.

So I've got the same number of shares outstanding, but again, this would, this would really work even if we had three different similarly sized companies.

So now the share price, of course, is going to reflect that, that phenomenon that I just told you, and prices in the risk for the high debt company and the kind of lower risk for the low debt and for kind of the middle of the road company as well. Okay? So, if I were to think about what this kind of means in terms of price to earnings ratio, well, I'd have to kind of go through the rest of the process. Here's my EBIT.

And my EBIT, again, is the same for these three scenarios, right? Because it's the same operating assets, the 3,500, which is generating the ebit. So the EBIT is consistent here, but to get from EBIT to net income, that's gonna be how I get my PE ratio done.

So my interest expense is gonna be 5% 0.05 times my debt value, and I'm gonna make that negative, just make it negative one, and I'll copy that across.

And then I'm also gonna generate a little bit of interest income here, but this is actually kind of irrelevant because it's the same for everyone.

But I'll do it anyway, that's gonna be 0.01 times the 300, and I'll just put my formulas over here.

And now my profit before tax is where we're gonna start to see the change happening, right? So that's just gonna be the net of these, and we can see that the profit before tax is starting to, to deviate quite a bit, right? And now of course, my tax, uh, expense will just be, dependent on that profit before tax.

So 0.3 times the PBT, that should be negative as well.

And then my net income, of course, will be the net of those, and we see the same deviation, the same variation in my net income. So now earnings per share, I can do simply by dividing the net income by the shares outstanding.

That should always be two decimals, by the way, not to be a nit picker, but, I am about that.

And we can see what the EPS is.

So if I were to crank out a couple of ratios here, kind of build our first kind of comps analysis, what I would do here is I would take my equity value, which is the 2,900 and divide it by the net income that would give me an EPS, which I'll express as a multiple of 12.6. Now, I could do the same thing on a per share basis.

I could take my share price and divide it by my EPS and I get the same exact thing, okay? So that's just, kind of proving that to you, but probably didn't, didn't need to prove that that much.

And what we see here is that the EPS in this situation is, is varying, right? Because, I'm sorry, the, PE is varying because of that variation in the earnings. So if these were three different companies, coincidentally with the same EV, and, and that could happen, maybe not to the dollar, right? But, but it could happen similarly sized companies, we we're seeing this fluctuation.

So if I'm dependent on this multiple to, to imply the value of my target company, I would be like, well, I guess it really just depends on how I want to capitalize my target, right? But, but that shouldn't really be an issue at this point. We wanna find out value, right? The value that's unaffected by that.

So what we would do here is we would look to the EV and what the EV is gonna tell us here, if I were to take my EV to EBIT, my EV to EBIT is going to be the 3,500 divided by the three 70. Now, I don't even have to copy this over because you can see obviously the EV doesn't change in these three situations, and the EBIT doesn't change.

And that's proving effectively that the more consistent way to look at a company companies is through the enterprise value.

Now, you might say, well, you know, again, I'm not gonna have three companies that are the exact same size. You know, does that really matter? Well, it doesn't matter, right? It doesn't matter. The underlying theory here is that the net income of a variety of companies is going to be variable, and it's not gonna be as closely linked to the value, because we're gonna see a lot of other things.

When you get to the analysis of an income statement between EBIT and net income, or EPS, there's a lot of things that can be happening, which we, some of which we talked about last week and a couple of weeks ago, right? What if, what if one company has a lot of non-core investments, has bought up a bunch of, you know, stakes in other companies? Well, that income, that equity income, which is what we call it, hits this section here between EBIT and net income.

So we've got equity income flowing through there. We've got, the income from, from cash and from marketable security.

One company's got a ton of marketable securities, another company does not.

So you're seeing interest, income and income from other investments, from financial investments, obviously the differences in taxes, all of this stuff is gonna impact the taxes.

For that reason, we avoid net income too hard to peg.

And we focus on the EV to EBIT EBITDA multiples. Now, we could kind of take a peek really quick. We had a little bit of practice here and doing multiples. So we could take a quick peek at our, problem set, which is the trading comparables valuation workout. You'll notice that there are three tabs on here. There's a lot, really a lot to do in this section. This is probably a whole, whole day if you do it right, really kind of get into cranking comparables and then also analyzing them.

But what we can at least see here is, how we can just kind of mathematically do them. And then the other thing about this problem that I like, is it's gonna introduce this concept of, when do we decide we want the earnings to come from, right? How do we figure out where these earnings could come from? Because, you know, remember valuation, as I said, is a balance sheet issue.

It's a point in time. Therefore, I'm buying this company today.

What is the value to the shareholders today? Well, in order to do that, I've gotta look at the earnings drivers over a period of time.

And that period of time question is kind of what this problem deals with.

So let me, well let's just go ahead and do that. Let's just, just take a look at what, what happened. Basic, I'm not running anything. Oh, well, maybe I was. So here, we're gonna, we're gonna crank out the EV to sales. So I, I'm gonna take my enterprise value as it's given, and I'm gonna divide this by my sales, and this is for the actual, or sometimes we'll call this even the LTM year, the most recent period.

So then I'll take my EV and I'll divide it by my ebit, take my EV and divide it by my ebitda.

And I'll take my equity value or my earnings per share, or I'm sorry, my share price and divide it by my earnings per share.

Put all of these into multiple form so we can tell them apart.

And now I've got what I call my trailing earnings.

These are my trailing earnings.

So that's kind of probably well, I don't know, I wanna say the easiest one to do. I mean, all of this data can be, can be complicated, pulled together, but that's kind of the one that think that makes the most sense to us intuitively, right? Because we think, well, if a company has generated this kind of profit, this kind of these kind of revenues, these kinds of earnings or cash flows, that's what they're being kind of rewarded for, right? That's what they're being valued for in the market.

And actually, the reality is the opposite of that.

Which is to say that more times than not, we're really interested in future value.

We're interested not in rewarding a company with a high share price because it is done well in the past, but rather rewarding it for its future growth, its future earnings potential.

And if you talk to most people that follow the markets, they will tell you that growth is probably the biggest, driver of, of high multiples, right? So we're looking at, you know, future value, and we're looking for growth. Now, if you think about it for a moment, right? You're a buyer. You're here to buy a company to, to run it and extract more value out of it.

You're not looking to reward the share the shareholders of the previous period for their good job. I mean, that's the way they're looking at it.

But you're saying, how do I know how much this is worth in terms of the value that I'm gonna extract out of it? And because of that, we need to be looking at future multiples.

So generally speaking, when we're looking at an m and a context, merger and acquisition context, we're thinking about forward multiples. And so we're, what we have here, what we have here are actually forward values.

Now, don't I know we have like a, an estimated share price here. Don't worry too much about how we got that.

Because that's not really the point of the problem.

But this is showing us what this, what, what these values are worth based on next year's earnings.

And then the second year beyond that earn is earnings.

So, again, that's done primarily because of that concept of, of future value. And that's, that's really, um, you know, for the most part, well, when we get to LBO in a few weeks, we we're gonna kind of revise this a little bit.

It's a very unique form of valuation, but for the most part, when we do multiples, we're trading multiples.

We're looking at future value, and we're looking at discounted cash flow.

We're looking at future value. So I'm just gonna copy these over.

It's not really, we're not gonna do a lot of analyzing of what all this means, but this is sort of just again, how these, how these multiples shape out.

Now, let's just take a pause here for a moment.

I wanna see if there's any questions on that.

And then I want to just go back to a little bit, kind of more of the mechanics behind this before we get into more problems.

Anybody have any questions about anything that's been covered so far? Okay, looking good. Yolanda's here as well.

Even if it's a question that you just, you know, on the side, Yolanda can take it. Don't, don't have to worry about it. We're, we're covered for questions. Don't have to worry about asking anything here. Okay? So that's, you know, those are the basics of kind of what a multiple is and what we're looking for.

So, you know, the steps to creating comparables set, set of data that we're gonna use for valuation.

The first thing we're gonna do, where'd we go? And no alt H come on. N alright, first step is we have to actually figure out what is that comparable set going to be.

We're not gonna spend a lot of time on this today. It's, it's, it's a great exercise and there's some, there's one in there that you can, I'll point out to you. You could try it on your own. It's just, it's something honestly that, that most junior resources don't spend a ton of time doing, because you're always looking to people who have a little bit more experience with the industry, with the companies themselves for guidance here.

But in general, we're gonna create a set of comparable companies.

And there's some creativity to this too, because sometimes you're looking at an industry where there, there aren't competitors. I mean, our mind always goes to who are the competitors, right? And that's sometimes, easy to do in some cases than the industry doesn't shape out that way. And so we've gotta, we've gotta be a little bit more creative in that. I use it as an example, and this isn't a great example because it probably isn't crossing anybody's desk anytime soon. But if you had a value, a company, like Apple Nike or Coca-Cola, you know, how would you do that? And the reality is that those companies are very, very separate, but they actually might be decent comps for each other because they trade, you know, other established with outsized brands. And so that's the kind of a creativity sometimes that you need in creating a comps set of comparables. But in general we're looking at sector or industry. We're looking at profitability, meaning you don't want if there's a bunch of companies in the group that are not profitable, have never been profitable, that's gonna obviously drag down the sets.

We've gotta be careful with that. Overall size is very important.

Fortune 500 companies generally don't compete with middle market companies.

It just is, you know, they don't, they don't trade the same either, right? They don't trade the same.

So that's gonna really affect the ultimate valuation.

Sector, industry, profitability, size, uh, those are the big ones. There are a bunch of other ones as well.

And a lot of that's kind of in the notes and in the videos that are, that are available through Felix. If you really want to deep dive on this, I suggest going back to that. But I would say, you know, those are the ones we're gonna kind of take our, you know, our focus to first.

Now, the second thing that we have to do, we create a set of comparable companies. There's a lot of work that goes into kind of cleaning the numbers, right? So we got that set. Now we have to clean the numbers. And what that is we need to get the share count, correct.

We're gonna spend a minute on that in a moment.

Because that's something that people generally have a lot of questions on. We have to get the share count correct for each company.

We have to get the drivers the earnings cleaned out, right? So that's, kind of the two major things that we're gonna have to do.

So after we clean, kind of clean the numbers, we're gonna create the kind of the multiple output create the output of multiples.

Because now what you've basically got is all the data that you need output of multiples.

You've got the data that you need to create the, the set. And so, you know, how is this done? Well again, we're looking at how these companies trade in the market.

So we're starting with those equity values, those market capitalizations.

What is the market capitalization of comparable company A? And then we go through the process of going from equity value to enterprise value.

And then we put that enterprise value over our driver, our EBIT or EBITDA, which we've spent hours and hours com compiling and cleaning and calculate the multiple.

Okay? So now you've got your EV to EBITDA for, you know, 10 different companies, right? Hopefully, hopefully you've got a big, nice big juicy set. Well now what are we gonna do? Well, now we're gonna take those implied multiples and average and median, you know, however you want to kind of break that down.

And we're going to apply that multiple to the driver of our target company.

So we're going to apply the chosen multiple.

Let's just say, for example, EV to EBITDA, to the driver of the target should be the EBITDA.

And so now if I take an EV EBITDA of 10, and I multiply it by the EBITDA of a target company of a hundred, I have an implied enterprise value of a thousand.

And that 1000 is probably gonna be very different, or could be the same as the enterprise value according to what the market says it is today, right? But that's what we're trying to find out.

Are we, are we in line with the market or are we overvalued or undervalued? So now, once we get that enterprise value implied, we walk the equity value bridge to get that equity value amount, walk the EV to equity value bridge to get the equity value.

And then we could put that in per share.

And now we can kind of see where we're at.

We can see is this share price? When we look at a set of comparables companies, is this share price? Are they trading higher or are they trading lower? Now, if I go over to Felix very quickly here, if I go over to Felix and we're gonna, we're gonna do some problems to get, get the hang of this, if I were to go over to Felix and just pick a company, this used to be a great example. They've kind of, they've kind of come back into the fold, but for a long time, Facebook was having problems, meta as you know, was having problems.

And they've, they've kind of had some, some good luck of late.

But if we look at meta, and you know, what, what nice Felix kind of takes a guess at what the comparables are for a company based on industry codes and what whatnot. Now, those are not always correct, but for this, right now, this is, okay.

So the first thing we see here, if I look at this comparable set for Facebook meta, they'll always be Facebook to me.

We see that they're a bit smaller than the comp set.

So that's something we might wanna consider.

These are all pretty hefty companies, so I don't think that meta is just not a small cap company, right? I don't have to worry about it being kind of knocked around in the market.

The float kind of going all over the place. These are pretty huge companies, huge companies. So what we can see here is that actually, even still, they've come back a little bit, but if we look at where, where it trades relative to other companies, what this is saying is, is that meta using, its its own current share price, right? Its own equity and enterprise value has a multiple, of EV to current year or current year EBITDA of 12.4 times, which is very, very similar to Alphabet or Google.

But relative to Amazon, it's actually a little bit low.

And relative to Apple, it's actually, they're all quite, they're all a bit lower than Apple. So this, you know, is a tougher, you know, a tougher kind of company to value.

But I'm just sort of showing you just in general, kind of how we look at this sort of thing. So just, again, purely mechanically speaking, if I take a company that's trading higher in the market, meaning has a higher multiple, higher EV multiple, if I assume that Facebook trades not at 12.4 times EBITDA, but at 15 times EBITDA, that means that Facebook's implied share price would be much higher. By the same token, if I took Amazon and I valued them at Facebook's multiple, that would imply that they're overvalued in the market.

Now we, you know, that's a data point, right? It's a data point.

We'd have to kind of think about maybe why that is. I mean there's a lot going on in these numbers, right? Was there a recent earnings release? Was there a, you know, an announcement that hit one company? So we kind of have to always take this sort of stuff with a grain of salt. That's why the bigger, the bigger comps dataset, the better.

because it tends to, you know, smooth out some of this stuff.

The beauty of using things like using EBITDA of course, is that EBITDA should be pretty consistent, right? It's not gonna have one-off items and things like that.

But if you have a bad period, if you have a bad quarter or bad year if your earnings are terrible, your earnings are terrible, right? It may not be a one-time thing, it may just be that you just had a bad year of sales and profits.

So that's something that could be in these numbers as well.

So we've gotta kind of take a look at that. So that's sort of like, kind of the overall process of where we're going with this. I wanna just, again, pause. Does anybody have any questions about like, what I'm looking at here and, and, you know, some of the assumptions that I've made just very broadly about this data set? Alrighty, well, you'll notice that our, our comparables output here doesn't even show pe, right? Most of the ones that I see internally at banks, they will put it there, they'll put it there in, in the, in the output.

And the reason why they do that is because ultimately when you're having a conversation with a client. Clients are very, they're very stock price focused, and they're gonna be very, you know, attuned to that, what that PE multiple says. I mean, no matter how you try to steer them toward enterprise value, and that is the right way to look at it, they're, they kind of wanna see that, that PE there to see, because that's what they're hearing, you know, from, from shareholders, right? And rightfully so. Because the shareholders, you know, they have a stake in that, in that EPS, okay? So, the big picture stuff is fascinating, and I hope, you know, you all get to spend some time on that at some point.

The probably the hardest thing kind of the har the hardest thing to do with th with this stuff is to get all the numbers to work out, to be correct and to be properly cleaned.

And that's really where you spend most of your time kind of as a more junior resources on is on that.

So the first thing that we're gonna do is we're gonna spend some time looking at the concept of fully diluted shares outstanding. Now, you'll notice in this problem here, this is kind of a good overall summary of what's happening here.

So a workout force says to establish a share price valuation range for company X, using comparables valuation, use the minimum and maximum enterprise value to the forward year one multiples, meaning the next year's earnings or EBITDA to derive your answer. So here we have company X, and what we know about company X is this little tiny little subset of data that we have here. We have their basic shares, we have their diluted shares, we have their debt, and we have their ebitda, their net debt, and their ebitda.

And we have this on a trailing basis, and we have this on a forward basis.

Now, our comp set, we have five solid multiples, and those five companies have, trailing EV to EBITDA multiples that range from six to seven on a trailing basis. And five point eight to 6.6 on a forward basis.

Now, I will just say right out, right off the bat that in general, forward multiples are usually lower than current multiples or trailing multiples, right? So as you, if you were to do trailing forward year one, forward year two, we generally see this kind of trend in the multiple going down.

And the reason why is because generally speaking, the EV is based on today's share price, right? So the enterprise value for any company, no matter how many years of this you're doing trailing one forward year one, forward year two, forward year three, the enterprise value is always gonna stay the same. Because we can only take, we can only take the current share price, right? We only know the current share price.

So EV stays the same.

And generally the EBIT or EBITDA increases over time. Generally speaking, we might have picked a company that has, you know, some forward, regression going on, right? A decrease in earnings, but this creates an earnings multiple slope that generally goes down. So that, that in and of itself is nothing to be alarmed at. Just point that out.

So if we take a look at, this kind of problem, how are we gonna get to the implied value for company X? Well, the first thing we're gonna do is we're gonna take the small, the smallest value of the multiple and the, and the greater value of the multiple as our range.

So that may or may not be something you do in real life that might create two bigger range, and we'll talk a little bit more about that kind of stuff in the last class on, how to build a valuation football field.

So you gotta, unfortunately come back, I think five more times if you want that answer. But for right now, we're just gonna create a, create a kind of a broad range.

So I'm gonna use a simple min formula here, and I'm gonna say take, show me the minimum of, all of these, sorry, it's set to use the forward year one, sorry, so forward year one, which means we're gonna focus on just this column here.

So I'm gonna take the minimum of all of these values, and that's gonna give me a multiple on the low end of 5.8 times.

And then I will take the highest of this same range, and that will give me the max. I'm just gonna move those over so you can see those two formulas.

And you know, honestly, at this point, that's kind of all it's, that's kind of all that. I would need to go through this.

I'm gonna we're gonna build this out kind of step by step.

So I'm gonna do the same thing now for all of these other values here, because this is gonna help us get our implied value at the end. Now, this is the EV two forward year one. Just wanna make this clear. I don't think it's too clear in the problem.

ebitda, multiple, okay, so there's our range. Now, there is no range of EBITDA because I'm now focusing on all this stuff is for the target. All this stuff belongs to the target now.

So everything down here, I'm just kind of formatting this, my way.

How can I get to the implied value of the target? Well, let's apply the multiple. So the first thing is, is that I need to pull in my forward year EBITDA from the target, and that's given to us up here. That's the 1450.

So I pulled that in and I locked it. That's not gonna change. There's no min or max. I guess in theory, you could have a, range of estimates for your target and say we have a high, medium, low, for our target estimates. You could do that. But, you know, generally speaking we take the range from the multiples and we apply it to a single forecast amount for the driver, and that's gonna be this 1450.

So now what is the implied valuation of, of company X? Well, that's gonna be the 5.8 times 1450 on the low end and the 9570, or 6.6 times 1450 on the high end.

Now, I have to do that sort of step. If we go back to my slides here, well, we got a set of comparables, thank God, somebody did the cleaning for us. We got the output was given to us as well. And now we're bit, this problem kind of focuses really just on these two steps here. We did four, and now we're gonna walk that EV bridge, which is a recap sort of of last week.

And that's gonna get us to, uh, the equity value. So what is my net debt? Well, again, we gotta be careful here because if you have a forecast for your target for company X, you might be very tempted at this point, since you pulled your EBITDA from year one of your forecast and got 1450, you might be very tempted here to go into the forecast as well for net debt and say, I need my forward year one net debt.

And this would actually be incorrect, because now we're kind of firmly rooted in the balance sheet. We're going from EV to equity value, and EV to equity value is a balance sheet as of today problem.

So the net debt is going to be the most recent total of net debt that you can get. And that's typically for most situations that you're gonna be in, it's gonna be the most recent balance sheet. Could be a 10 K or a 10 q whichever's come out, but that's gonna be where you get it from.

You're almost always getting this balance sheet data from an SEC document, sometimes from a client if it's a private company. But, Let's see net debt here is going to be 3,500.

And I'm gonna anchor that with lock it so that when I copy it over, it doesn't, change.

And now my equity value will be the net of those two.

Now, as far as how to get to the share price, well, we were given basic, we were given diluted.

I talked about this last week and what I said was, you know, whenever we're talking about valuation, whenever we're, whenever we're talking about most first share things, in corporate finance, almost all of them, with the exception perhaps, of dividends, we always want diluted.

We always wanna know what are the potential shares that could come into play here.

And so my diluted shares outstanding are given to us, but we're gonna spend some time calculating them in a moment.

That's gonna be the again, most recent, most recent 102.

And what that'll do is give me an implied share price of range of 48.14 to 59.51. And that's actually not a bad range.

I'm going to be kind of persnickety here and put this into currency dollar two decimals. Sounds good to me. And now we've got kind of a, a valuation done.

Any questions on that? Okay. So what I wanna do now is I want to, I want to talk about this diluted shares outstanding number and just kind of give, give us kind of a quick way to think about it.

If you think about what's happening here once we get all of the comparables together, once we get our companies together, usually these are in a spreadsheet that's updated constantly. And if that spreadsheet, if you're working inside of a bank investment bank, that spreadsheet is probably linked to a database like cap IQ or FactSet. If not, you certainly could, you could do a great beautiful comparable set just with using Felix, but it wouldn't be, wouldn't update regularly. But that market price, that share price, is gonna be continuously feeding into the spreadsheet and being updated.

So generally, you know, the first thing that you do when you're calculating numbers in a, in ACSC or in a comp, is to calculate the market cap for your comp, because that's kind of where it begins, right? It begins there.

And then we adjust, obviously for debt to get to enterprise value.

So we did get a comment here that came in about clarifying what I meant about debt.

Let me actually, I'm going to just see if I should pull up this., Do I, I don't know if I have a good set to show you.

So to clarify about the debt, what do I mean by that? Well, we've got this set of comparables here, right? Company.

We had company, 1, 2, 3, 4, and 5, and they, this problem kind of gave us a lot of this stuff done for us.

So we had this, but how this would've looked in a, in reality is, we would've had some data that was kind of already, Lemme just insert, I'll, I'll take these out in a minute. Nope, I don't want that. We would have just move my doodle.

What we'd have for each of these five companies is we would have the market cap, right? And that might be broken down into shares and share price, but it might just be market guess. Market cap is usually pretty easy to get fully diluted. And then we would have net we would've debt, we would've cash, and we would've EV So for each of these companies, we have to calculate their EV.

So the market cap is as of today, right? Or maybe yesterday's close, depending on when you're doing it.

The debt and the cash and any other balance sheet items that we're gonna adjust for here. If, if there are other items, meaning like, not controlling interest and whatnot.

All of this stuff has to come from the most recent balance sheet.

And what that does is it gives us an enterprise value as of today. Now, why do we go to the most recent balance sheet? Well, we can't get debt and cash as of today.

There's no database on earth that is linked into the bank accounts of every company, every publicly traded company that can tell us how much cash is in their bank account and, and how much debt they have on a given day.

There just isn't, right? I mean, even if you just added up all the bonds in the market, if they had bonds, that still wouldn't be accurate, right? So we have to go back to the most recent document.

And so that's gonna be either 10 K or 10 q.

And so the enterprise value as of today, which is what we're always valuation is always, always, always, as of today, the way we get closest to today's value is to take the market cap, which is a, is as of today, and adjust it for the most recent documentable, verifiable other balance sheet accounts.

And then once you get your EV and you'd get your, you know, you'd get your EBITDA as well for these companies that would be, in this case trailing or whatever it was, then you could get to these multiples out here.

So, focusing again on that step one, which as I said is this market cap, you could go to a database and, and get an actual market cap number. Like here, the market cap for for meta is listed at 891,761. Now, Felix, because it's built for four the investment banking, private equity, kinda world asset management world, like it, we're already doing this for you, we're showing you how to go from basic shares, which are the shares that are currently trading and outstanding in the market to the fully diluted amount. And so our number, our fully diluted market cap is in fact accurate. But I work with analysts and associates regularly, that ask me for help with their, with their work. And I, so I get to look at a lot of other databases. And those databases do not necessarily always calculate the, the dilution adjustment correctly.

So I'm gonna give you just a couple of very basic rules about it, and we'll go through a calculation and then we'll move on for, from it. It is a purely technical thing, but, this is kind of appropriate for I think this audience.

So I wanna make sure we go over it. So the, the dilution adjustment that we're talking about here, adjusting for dilution. Now, I mentioned this last week, I think, but basically what we have to know is, if I took over this company today, if I made an offer, a tender offer for these shares, how many shares would I have to buy? Now, obviously, the shares that are trading in the market are the low hanging fruit, right? We know, we know what those are, and those are the basic shares. But there are other, what we call potentially dilutive shares that have to be dealt with other potentially dilutive shares mean on a given day.

Who else could potentially become a shareholder because

of an instrument that they're holding that would be triggered upon takeover.

So those usually fall into a couple of categories. The first one are stock options.

Stock options can actually be stock awards. Well, let me, that's kind of what we're talking about here. Lemme just see how they can be kind of a tra I'll call it a traditional, compensation or traditional award is what it is.

Traditional award or compensation given to employees that are basically pegged to a future share price.

So you join my company, I say, Hey, work with me for five years, and I'm gonna give you these options.

And these options are, you know, triggered at $75 a share.

And right now the stock is only trading at $25 a share. So you just say, all right, well, I'll put those away for a rainy day, and in five years, let's see where the share price is, right? And if the share price is higher than 75, then I've come into some value, right? So that's kind of how a traditional stock award looks like. Sometimes that's abbreviated as SBC stock-based, or share-based compensation. There's another kind of stock option which we call a restricted stock unit or a performance stock unit.

And those work a little bit differently. These are often awarded to kind of senior management.

And these are not, for the most part, you know, these are not pegged to share price.

They're not pegged to share price because we're basically trying to take some of the, vicissitudes of the market out of the performance. They're saying, look, in five years you'll earn this much stock in seven, you know, seven years, you'll earn whatever it is.

And they're not actually pegging it to a share price. So that gives the, the management a little bit more confidence that if they do a great job, then if the share price is down because the market is down overall, that they're not gonna lose all their compensation. Now, you may say, yeah, but shouldn't they, you know, really be pegged to stock price appreciation and what, yeah, and there are, there are some of those metrics in there as well.

The PSUs take that into consideration, but for the most part, it just kind of removes just that market unknown factor.

So we've got those, we've got those. And then we've also got things like convertible, convertible bonds, which are very big right now, slowing down a little bit because of the high interest rates, but convertible bonds, uh, convert bonds that convert into stock.

So those are kind of the three big ones that as an analyst, you've gotta get into the financial statements and figure out, you know, how many of these things are out there and how much is it gonna change that shares outstanding from basic to fully diluted.

So we're, we're really gonna focus probably most on the top one, maybe the top two, but, but essentially, if you think about, you know, what's happening, there's two, there are two components to get to getting a stock award for the most part, I've talked about them a little bit. One is time.

So how long you work for the company.

And the second is the share price.

Now, for the most part, what we assume here is that time does not matter.

Just the share price does. And the reason why is because generally speaking, we assume that in a takeover, most of these options will automatically vest, right? They'll automatically vest. And that means they'll become, they'll become kind of in play. So now the question is, are they actually valuable to you? And that will depend on the share price.

So the share price is what's going to determine that. So, we'll think of an example here, right? Fiirst example is that you have options at $50 per share.

So that's what the award says, right? On it is you, when at $50 you have, you have the right to buy stock from the company. And that's important, not from the open market, but from the company. Buy stock from company at $50 per share.

So let's just say that, you know, again, we're gonna eliminate the time component here.

Let's just say that company is gonna get bought out, and that stock is the, the, the buyout price of the stock has been announced, and that's gonna be $75 per share buyout at $75 per share.

So that means that at the moment of the buyout, you'll have the ability buy shares at 50 and sell them at 75 to the purchasing entity. Now, that's a deal, right? That's a really good deal. You didn't have to do anything, well, you had to work all that time, but you bought at 50, you sold at 75, done deal.

So this is what we would call an in the money option.

And now obviously in the same scenario, if the buyout was at $45 a share, you would be out of the money because you would never buy at 50 and then turn around to sell at 45.

Just be handing money right? To them. So that's called outta the money. Now, these are terms that are used in derivatives and in options all over the world, but this, this kind of option that we're talking about is, is not an option that's traded on a market like the CBOT, right? This is not, you know, straddles and calls and puts and whatnot. This is an actual, technically it's a warrant, but they still call them options because this stock is what's owned by the company. You're buying the shares from the company. So, raises an interesting point.

Where does the company get this stock from? Well, that's part of the problem, right? So what the company has to do when you wanna buy shares to fulfill your, your reward is, you go to the company and say, I want to, I have a thousand options at $50 per share.

So you had a thousand options and you want to exercise them, you have to buy them from the company. This is the contract.

So you purchase 50 times a thousand, which would be $50,000 from the company. So the company now has your cash and has to give you the shares, but where does it get the shares from? And that's kind of the, you know, the issue here. Well, it's got this $50,000, right? Company has $50,000, and it needs to, now the treasurer of the company turns to his, his staff or her staff and says, now what do we do? They, they want their stock. Who figured, right? We gave out all these shares, I didn't know the company was gonna be worth anything. And now it's worth a ton.

I gotta, we gotta get this, this gal, her shares, okay? Has two options.

Two options, no pun intended. Two choices, just to keep the, keep the vocabulary clean here. Two choices.

First choice is to actually go out into the market and buy shares.

That's easy enough to do, just calls up their, their broker, their Charles Schwab or their equity capital markets, banker at whatever bank and says I need to buy $50,000 worth of stock. Now, that's possible, but there's a slight problem here.

The problem is that the stock is now trading at $75 a share because of the buyout, right? Or, but maybe there isn't a buyout there, there, that's what the stock is trading at. That's why this person is cashing out their options.

So I'm gonna put that in the note here.

Stock is currently trading at 75 for share.

So the treasurer says to the, the broker, well, I have 50,000 shares.

I sorry, $50,000.

But I need unfortunately I need $75,000 worth of, of stock.

So the only chunk of this that the treasurer can actually buy in the open market is technically the $50,000, right? So it'd be 50,000 divided by $75 per share. Now, what about the remaining, what about the remaining shares? Where are they gonna get those from? So that's 333.3 shares. Where are they gonna get those from? Well, I mean, in theory, I guess they could, they could still buy those, but now they're taking cash from the company that wasn't paid in by the employee. They're taking cash from the balance sheet. That's technically, you know, that's lowering equity value, right? Because you're taking cash that really should be the shareholders' cash and you're using it to reward. So that's one way to do it.

What what they will typically do is they will, they will issue shares from treasury.

Now, what does that mean? That means that these are shares that had previously been purchased by the company. Share buybacks. We talked about them a couple weeks ago, I believe.

Share buybacks, company bought shares and just stuck them in treasury for a couple of reasons. One, to reward shareholders. So those shares, if you're going to give them to an employee, they need to be reissued to the market.

An employee does not want, as a reward, shares that aren't in the market. Because then they have no value, right? They technically have to get issued first.

So right now, they're, they're not outstanding, right? They have to be issued to the market again.

So shares that issued from the treasury become dilutive.

So that's kind of the problem with these options is that, when you offer somebody ownership in the company, effectively, that ownership stake has gotta come out of somebody else's ownership stake.

And, you know, you've gotta figure out the least dilutive way to do it.

The least dilutive way to do it. And the least dilutive way to do it is to take as much of that as you can from the market itself.

So this first choice here is to buy as many shares as you can on the public market. Because those shares already exist. They're in the share count.

See, these shares are already in the share count.

So this is not dilution and the shares from treasury when they re when they're reissued to the market, become diluted.

So we gotta be very careful about these instruments when we're counting shares for that reason. So, any questions about that in theory? And then we'll do a couple of problems.

No? Okay, well, let's see how it looks on paper. So let's come over here to let's come over to workout one.

Workout one says, what? Let's actually, Let's skip one and two.

Because we already talked about that. We can do, we can do two.

I guess it's just throws a little bit more jargon at you.

Calculate the equity value. We've got share price of the common stock.

We've got a share price of preferred stock, which they have.

And we've got some other stuff here. We've got shares outstanding. We've got diluted shares outstanding. We've got weighted average outstanding.

We've got preferred shares. Outstanding. My, my, my we have a lot of stuff going on here. Well, the first thing is let's, let's completely get rid of the weighted average stuff because,

we never want weighted average shares for fully eluded calculation. Never, never, never. Unless it's EPS, right? This is a balance sheet problem.

Weighted average shares are for earnings only.

Okay? Earnings. Earnings, okay, well, what about the preferred, well, preferred stock can occasionally convert to common, so that might be potentially dilutive, but it's not right? Unless we, they tell us that.

So the preferred shares outstanding here are not dilutive unless they are convertible preferred, not unless they're convertible preferred, then they convert to common. But we weren't told that, right? So we only care here about the common share price and the diluted shares outstanding.

And so the equity value here is gonna be the nine 20 times the 9 62, I'm sorry, the 1,026,430 1,26,430.

Make sense? Okay, so that one didn't deal with options.

Let's now look at an options problem.

We'll just kind of go right for the heart of the matter here to see how this, how this actually works.

So we've got a share price that's currently at seven 50.

There's 10,000 shares outstanding.

There's 1000 stock options outstanding. And there's a stock, there's a strike price or exercise price of those options of five.

So this employee was given a thousand options at the $5 price. So we're just, it's called the intrinsic method methodology. But don't, it doesn't matter what the name is, the name sounds, it sounds very black schulze or something. We don't want to think along those lines. We just wanna get to the, to the understand what's happening here. So, well, what's happening here is that the, the intrinsic value of the option, so to speak, is the difference between the strike price and the, and the actual kind of current price of the stock.

And that's gonna be seven 50 minus the five.

So what that's basically saying is that each option is kinda worth 2 250 in a sense, in market value, right? Because that's the real profit on the gain on the option.

And then if we take that and we multiply that by the number of options that'll tell us sort of what the overall value is.

So that's just the overall value of the options themselves. Now, what is the current market capitalization? What is the current market capitalization? Sort of without, without that dilution? Well, it's the share price times the shares outstanding.

So when we dilute that market cap or those options, we get a diluted equity value of 77,500.

So that just tells us again, that the market cap is higher once we factor in for options.

Now, how does this breakdown kind of in, in reality, well, it's like what I just explained.

The first thing that happens is that employee takes the thousand options buys the $1,000 of options, buys the 1000 options for $5 each from the company. And this is actually in currency.

So I'm gonna put this in currency.

I just think it's helpful when you're dealing, going back and forth with options and prices to actually have that in currency. Okay? Now the company takes that 5,000 and wants to minimize dilution. So it goes to the public market and says, how many can I buy for 5,000? Well, if the price of the stock is currently seven 50 per share, the only,

the amount of options that they can buy for that is only 666.7 coincidental, same number as in my problem.

So that means they're stuck with this dilemma.

How do I fulfill the other 333.3 shares? Well, I've gotta, issue them out of treasury, put them back into the market.

And when I put more stock, more shares onto the market, I'm diluting the ownership.

So that's gonna be equal to the 1000 options that I need minus the 666.7 that I've bought.

And the, difference there is going to be the, sorry, number of shares issued. Did I do that right? Number of shares bought back, 5,000 cash raised by options, number of share. Now this needs to be the 1000, sorry, this is an extra step, but move this down. This is the 1000, okay? So I need a thousand, I bought 6 66.7, and that means that I have to issue 333.3 and that, that's where the dilution is gonna come in.

So the diluted shares outstanding go from the 10,000, the basic number plus the increase in the share cut of 33.3.

I don't have to count the 666.7 because those came from the market, no dilution there.

So I'll put that here. No dilution. Dilution, okay? And so now my diluted, equity value is the diluted shares outstanding times the share price.

And I get to that same number that I got to above.

So in, in effect, you can kind of, you can kind of get at that number any, any way you want.

Generally speaking, what we use is this thing called the treasury stock method, which basically kind of combines the two, so to speak.

And what that does is it takes the market price minus the option price or the strike price, whatever you wanna call it, over the market price times the options.

And what that gives you is the net diluted shares, net dilutive shares.

And more times than not, people want to see this kind of calculation broken out.

Getting the share count right is probably one of the more once you're in a, in a transaction, maybe not so much when you're cranking out comps, but once you're in a transaction, getting the share count right is one of the more, burdensome things that an investment bank has to do.

There's a lot of legal issues around that getting that right versus getting it wrong.

So we like to make sure that we have this calculation kind of worked out.

So going back to this problem, what would that be? I would take the market price, which is the seven 50 minus the stock, strike price divided by the market price times the options outstanding.

And that gives me the 333 that I got to in, you know, three steps here, I guess.

And that should go down here. And then of course I take that, I add it to the 10,000, blah, blah, blah. And we get the same, get the same thing, right? So in the interest of the time, I won't go through that, but that's the bottom three steps here.

Same exact thing. Now, what I'd like to do is I wanna show you how this works in a, an actual problem and in an actual 10 k or document so that you can see it done more realistically.

And then I wanna spend just a few minutes talking about about LTM. Because we didn't, we didn't even get to do that on day one.

And essentially when you open up a document, you've gotten to kind of know where to get things.

so this is Mattel, right? The toy manufacturer. So I'm working on Mattel, dunno if they're even still, are they still public? Yeah, they're, they're public. Okay. So I'm working on Mattel, right? So I'm gonna use the data that's in the, in the problem because it'll just be confusing otherwise, but, you know, this is the first one I've gotta do. So the first question is, you know, where do I get the basic shares? I know where I get the share price. Now at this, when this sheet was made, it was trading at 31 17. What's it trading at now? Trading at 1917, right? So there, there may have been a split in there. I don't really know. It won't, won't comment on that. But regardless, where do I get the basic shares from? So in Felix, one of the things I like about it a lot is that if I go into Felix and I click on a number, it's gonna take me to the place in the document where that number came from.

So you'll notice that the basic shares for a company are always gonna come from the front page of the most recent document.

That could be AK or AQ. In this case, it's I believe it's AQ and it's taking me putting a box around this, this number here, 354,139.

So that's the number we're gonna start with, not the number that's on Bloomberg or in kaki. That's, this is the documentable number that we're gonna start with, and now we need to adjust it. So if I go, um, to the dilution adjustment, if I click on this 3.9, what's telling me is that it's got no options, but it does have some of those RSUs and the RSUs, and I didn't cover them in my problem.

What makes RSUs very, very, um, lovely in a sense is that because they don't have a strike price, if you put them into that formula for if you put them into that formula for the treasury stock method, which is right here, right? It's the market minus the strike over the market. Well, if the, if I change my strike price to zero, what happens is it means that all of those options are dilutive, right? There is no strike price because there is no cash coming to the company. The company cannot buy any shares in the public market, has to issue all of them out of treasury.

So RSUs are very easy to deal with in that sense, right? So that's what's happening here is there are no stock options, but if I click on the 3.86, it takes me to a table in their

most recent document. Now this is actually gonna be from their 10 K, and that's g that's telling me that. Now I lost it. Where'd it go? Telling me that there were at the end of 2021. So this is a little bit old now, I'm not exactly sure, I guess the 20 no, 2022 should be out.

I got a, maybe I just picked a bad example, but it's telling me that there are 38 55 RSUs and all of those are effectively gonna convert into shares. Now, why did it get the basic shares from the 10 Q and the options in this case, the RSUs from the 10 K? Why did it do that? Well again, this is one of the tricky things about doing this type of math, which is that we generally don't get the detail that we need in the 10q.

We only get that detail in the 10 K.

So for the purpose of cranking out comparables, which is oftentimes no matter how much you know you fine, fine tooth comb them, it's always gonna be slightly imperfect.

And this is one of the imperfections that we're gonna be going kind of back for older option data, older RSU data.

And that's generally accepted again for a comparables analysis. There shouldn't be a significant change a, a market moving change in options or RSUs in that time period.

So that's what we're looking at here on Felix is how they got to the fully diluted shares for Mattel as of today. Now, in this problem, why is it a little bit different? Well, this was probably done a few years ago, maybe at that point in time.

It looks like at that point in time they actually had stock options.

So we got the shares outstanding from the front of the 10 K 10 Q in this case or recent doc.

And now we need to adjust.

So we look at a table like this and we're like, oh my God, what do I do? My eyes are hurting. What number do I take? Well, you might be, think logically and just say, well, exercisable sounds like the number that I want because these are gonna be exercised. And then that's what triggers this whole chain, right? And that does sound very logical. Unfortunately it's not accurate because exercisable also factors in that time element, the time element of, vesting. And that's not a factor in our analysis. Remember, we ignore the time, we just focus on the price. So we don't want exercisable, we want outstanding.

And so I want the outstanding as of the end of the year, that's the ten five, two, three. Now here's the next, problem with with this fun exercise is that the shares were given to us in millions, but the options table is given to us in thousands. Now, what genius at the accounting firm thought that that was a good idea? I don't know, but I would like to have a word with them if you, if you know who that is.

So what we gotta do here is we gotta, we gotta put this into, millions, which is 10,523, and now those are the options in millions. The strike price of the, the options, again, you know, we have to use a weighted average here.

So we're gonna use 30.77 and then my net new shares from the options that's going to come from the treasury stock method. And once again, I'm gonna do the market price, which is the 31,117 Oh, before I start, let's just eyeball it.

Are these in the money or out of the money to the, to the brave souls who have remained? Are these in the money or out of the money? Can I buy them and sell them immediately for a profit? Yes, it's a puny profit.

It's maybe a take Yolanda out to the pub for a beer after class profit, but it's a profit.

So I'm gonna just calculate this as a market minus strike divided by market times the that 10.5.

And that's gonna tell me that I've just got a tiny wee wee wee little bit of dilution here because we didn't, we don't, we almost were able to buy all of that stuff in the, in the primary market we had a issue. Very few, right? So that's the relationship. The bigger the, the bigger the gap between,

the options strike price and the market price, the more dilution there will be.

Because that means the company's on the hook for all those shares.

So my diluted shares outstanding will then be the 0.14 plus the 338.3. And the equity value, is therefore going to be on a diluted basis, the 338.4 times the current stock price, which is the 31.17.

And we can see that it's not, not terribly different from the undiluted amount.

I think it's just a tiny bit different, right? So tiny bit of dilution, but you know what, it all matters. It all matters obviously.

So that's gonna be gonna be that. So, that's the the option issue and you know, there, there are a few other kinds of tables. I don't really have time to take you through them. This, this is an option table where you actually have to get in there and calculate each one tranche by troche.

And it's sometimes a little bit better when you get a table like this because, because they give us the outstanding options here, right? They give us the this is the contractual weighted average this is the price that's going in here, strike price.

So we've got this kind of table.

The only thing we gotta be careful of is because we have a very wide range of strike prices.

If my share price is $30 and 93 cents, this last bucket here is completely out of the money, right? 'cause I would never wanna buy at I would never wanna buy shares at 45 and sell them at 30. That's just not gonna work, right? So we want to we would want to make sure we factor that one out. So you gotta, you know, kinda have a perspective on this.

There are some formulas you can put into to, you know, that'll, that'll obviously, help you kind of work that stuff out.

We have a couple of minutes left. I did want to quickly talk about, you know, that LTM thing, but we won't really do much with it.

I just wanna just pause here, see if the people that have hung around, if you have any questions on anything that I've done or maybe something I didn't cover that you'd like me to, to just touch on before we do wrap.

Okay? So we go back to that first page.

I think it was, we had this sort of actual year, which I said means it's trailing, right? It's the trailing period and the trailing period could, could be the last reported period if you're very close to it.

But more times than not you are unfortunately kind of in the middle of a year or in the third quarter or whatever.

And even though our documents are, you know, fantastic in this country for being able to look at interim statements, we've the, we have the best interim reporting in the, in the world that may actually contribute, you know, to some of the myopia that people claim. You know, the quarterly, this quarterly that, you know, take your, take your eye off the long game, right? Focusing on all these quarters.

But what that allows us to do is it allows us to to look at something like earnings on a trailing basis for a full year no matter where we are.

So what that means is if we think about it, and I'll just draw this out very quickly and then I'll leave it up to Felix itself and the videos to kind of be the teaching guide is that if I have a full year, let's just say one let's just say 2023 to 1223, right? But unfortunately where I am in 2023 is I'm in November, which is way over here.

And I don't wanna go all the way back to the 10 K from 2022 because those earnings are way old, right? So, but what I've got here is I've got, I've got my first quarter, I've got my,

second quarter and I've got my third quarter kind of complete and in the tank.

So what I could do here because of this quarterly system is I could take the three quarters from this year, take these three quarters, and then all I would really need to do is figure out a way to kind of get this fourth quarter from 2022 to make myself a full year.

So this is sort of what I'm looking for is this kind of full four quarters.

Now there's no document that's gonna do that. What's nice about the quarters, the quarterly documents is that they roll up.

So you get like one first quarter is first quarter, second quarter is second quarter, but it also shows you six months.

And then third quarter is third quarter and it also shows you nine months.

So what I could actually do is, how do I get that, how do I get that last quarter? Well, there's no four quarter, fourth quarter, 10 K, they don't fourth quarter, 10 q they don't issue one.

So you can't go looking for that.

But what you can do is you could go back and you could get the, the 2022, 10 K.

Now that's got three of the quarters that you don't want, but it's got the one that you do.

So if we take the 2022 10 K and I add to it three quarters from 2023, all I'd have to do here is subtract the same three quarters from 2022. So now if I draw this out kind of entirely, here's 1 2022 to 12 2022, and then here's 12, 2023. I'm basically saying, give me this and this and let's get rid of this.

So that's what we're doing, we're subtracting that out and that gives us what we call a last 12 months calculation. And fortunately there's like a lot of models that, you know, kind of do this pretty easily. Now, I always thought it was kind of funny because you'd spend a lot of time in the old days doing this, and then almost always you look at the forward multiples. So it's like, who even really cared? I worked in leveraged finance.

So we did look a lot at LTM, but I will cover that at a future in a future class and explain why LTM works for that analysis. But forward earnings works for kind of the more traditional, you know, m and a analysis. So that being the case I'm going to I'm going to leave it there. I, I will post everything on the site, make everything available, field all your questions in the meantime. And then when we come back next week, I think we're gonna jump into I believe wac, which is gonna start laying the groundwork for the intrinsic valuation methodology, which is the DCF. But good news is, is that we're gonna review a little bit of this when we get to DCF as well because it comes back, comes back in a very, in a very timely way. So thank you Yolanda, for your help.

And thank you all for joining., And I'll see you back here next week.

Have a good night.