Private Market Value + Catalyst (Gabelli)
Hi Forum,
I have two questions:
1.
I was wondering if someone could share resources (i.e. books, links, videos, etc.) on how to gauge Private Market Value+Catalyst (PMV). I have watched old Gabelli's videos on youtube (Wall Street Week), and the only book on the topic I managed to find is a chapter on Mario Gabelli himself in "From Graham to Buffett, and beyond" by Greenwald.
2.
From what I see, the cornerstone to this valuation is to understand how someone can potentially unlock the value (i.e. real synergy through acquisitions, LBOs, spin-offs, and etc.). This implies a solid understanding of what/how industrialists are currently thinking, where the industry is going to be in 5-10 years, and what companies are potentially in-line to "get unlocked" in the foreseeable future. That is, not to try to predict what is the revenue and margins are going to be in the current state of the company, but rather what can happen for more value to get created outside of the current environment. In this context, what is the best way for me to learn all that on the, let's say, ISP industry (i.e. fixed wireless, cable, fibre, DSL, etc.).
A short reply is amazing, but if someone extensively practising this valuation methodology could write up a whole new post...that would be like at least 3xAmazing for me. Also, please do not hesitate to correct me on my current understanding of the concept.
Thanks a lot.
i don't follow gabelli tbh, but i'll take a stab at this.
PMV is basically precedent transactions in my understanding. basically, what an informed investor/strategic would pay for a business (obviously be aware of the fact that a strategic can afford pay a bit more due to synergies, if they can be successfully achieved. easier said than done though). it's a proxy for the 'intrinsic value' of a business with the underlying assumption that an informed buyer would have a done a ridiculous amount of research on a company. if i remember correctly, greenblatt also utilizes this as a valuation metric if that gives you a starting point in terms of doing more research.
Catalyst is something that will take the market valuation towards this PMV proxy. You can either think about this from a financial perspective (spin-offs, divestitures, etc) or from a operational & capital allocation perspective (superior management).
As an example from the financial perspective, maybe a conglomerate with many convoluted business segments has money losing divisions hiding their high margin businesses. Because these two cancel out at the bottom line, the obscurity will play a role in discounting their valuation. If they divest the money losing business/spin it off, that would be a catalyst that 'unlocks' the value by increasing transparency of the businesses.
industry knowledge wouldn't be as important from a financial perspective vs when trying to have management be a catalyst.
As an example on the operational/capital allocation side, if a company is in a high ROIC business but with low organic growth yet is still reinvesting its FCF into the business at a shit MROICWACC, the management team is destroying value. A catalyst could be management changing their capital allocation practices and focusing more on high return strategies for their FCF (dividends, buybacks, or entering a new/tangentially related business where the management team has competitive advantages).
for the operational/capital allocation part, you would need to do a lot of research, truly understand how much growth runway there is by just reading about an industry as much as possible, doing your due diligence by talking to management, reading about competitors, etc. there's not going to be an easy way to do that.
For book suggestions, take a look at Greenblatt's you can be a stock market genius and manual of ideas.
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