Gordon Growth Model - OXY vs. ED
Hi everyone:
I'm a junior taking a securities analysis class. I'm currently working on a Gordon Growth Model of Occidental Petro (OXY) and ConEd (ED). I've been working on it for about a week now and I feel satisfied with the figures that I've calculated. However, before I turn it in I would greatly appreciate a second opinion on the formulas.
I know lazy people ask stupid homework questions on here all the time (aka the econ101 kid) and it pisses you guys off big time.
So just to reiterate, I'VE DONE ALL THE WORK! I would just appreciate if someone could look it over and give me some feedback. My main concern is primarily with LT growth and Implied Price on sheet 1.
SBs for the help!
Thanks in advance!!
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| rj_ddm.xls 98 KB | 98 KB |
Change all Hard-coded values to blue text.
How did you get These Betas? It is important to know whether oyu rae regressing these against the S&P or a market-based index.
There is nothing in here about oil prices. Don't you think that is important? How far out is OXY hedged? How has there somewhat recent coporate spinoff (2014 i think) changed their earnings and affectted the deta you have in here?
Evenif LTG made sense, 7% growth is ridisicout. Long term growth should almost always be 2%. This calculation makes no sense.
Where are you gettin expected market return of 10%. Long run S&P generally considered 8%
Q1 Dividend discount Model / GG is not appropriate for valuing Oxy. They are a production company and the logic of infinetly growing finite reserves doesnt make sense.
Im done looking over this.
Sorry it it looks terrible but its my first GGM case study. All the data for OXY and ED were given, I only had to calculate CAGR for 3yr/5yr, LT growth, and Implied Price. I appreciate the qualitative aspects that your brought and I'll be sure to mention them in my open ended responses.
Your formulas are correct, but a bunch of different things stick out.
Where are you getting your data for: Risk-free Market return Beta EPS DPS
Explain your logic for each and I'll help you.
Unfortunately, even though you've done the work, it's wrong and I probably would have given you at max a B with good qualitative answers. And that's tough to do considering that this is pretty much all subjective but what you proposed would mean a negative plowback.
When I do GGM, as rare as it is, I typically project out a few years before going to a terminal value, why are you projecting terminal from "today?"
The goal of valuation is to get a somewhat accurate value for the current state of whatever you are valuing. Getting a value that is approximately the same as the stock price isn't the objective, unless you're a big EMH guy. You have to have good assumptions to get a good valuation.
The risk-free rate, market return, beta, eps/dps data were all given by the professor.
Gotcha, that's interesting.
You can't really use a formula to get LT growth like that. You have to think of it as the company is going to grow by x% for every year forever. Not to undermine SaltySpitoon but I typically think of LT growth more in the 3-4% range because typically inflation is around 1.5% so the business is creating no real economic growth unless you're making over that number. Long story short, LT growth of 3 to 4% means your business is growing about 2% more than the economy.
pretty much what everyone else said...
Eius distinctio quia sit libero quis aut. Qui veritatis iste eum rerum. Maxime maxime quia dicta non possimus inventore.
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