What types of companies can't be valued using the standard DCF model?
Just want to hearing other industry experts' opinions on what types of companies are not value-able using the standard DCF model (FCF-based). Currently I have the following:
- Banks (driven by loans/deposits)
- Insurance companies (driven by written premiums and claims)
- Private equities/other balance-sheet-based financial companies (driven by proprietary investments)
- REITs (driven by property assets)
- Business development companies (driven by value of portfolio companies)
- Pharma (can't assign terminal value to patents, need multiple DCF to value different drugs)
- Mining (finite value dependent on individual mines)
- Oil & gas (finite value depended on oil/gas reserves)
- Utilities (regulated ROI)
Are these correct and are there any other type of companies that can't be valued using the standard DCF model?
Sorry, I'm confused, why can't you use DCF in a REIT?
Answer from Reddit:
You don't really value a REIT using a discounted cash flow model. A Net Asset Value (NAV) model is used instead.
Here's a primer
You look at the REIT’s existing NOI by segment, and assign a Cap Rate to each segment to determine how much each one is worth. Sum up each segment’s value to calculate how much the Gross Real Estate Assets of the REIT are worth.
Then, you value the rest of the REIT’s assets (anything non-real-estate-related + anything real estate-related but non-income-generating, such as Construction in Progress) by assuming a slight premium or discount to their balance sheet values. You exclude Accumulated Depreciation completely.
Add up the total value of all their assets.
Now, assume a slight premium or discount (or nothing at all) for all the REIT’s liabilities, and sum them up.
Subtract the modified liability value from the modified asset value to arrive at the Net Asset Value (NAV), which you can then divide by the share count to get NAV Per Share.
mining and oil/gas still use a DCF model, just the TV would be 0
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