Case study around how to improve stock price for a single B company. Wondering what’s the best way to handle this? I’d assume DCF to get their fair value (and say they are undervalued). Then do a LBO type analysis but with dividend recap built in.
Do I need to do the sensitivity as it doing a full LBO? Do I forecast the stock price from the LBO with recap?
Also how to tackle the model if I want to do a share repo?
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To tackle a case study on improving the stock price for a single B-rated company, here’s a structured approach based on the most helpful WSO content:
1. Establishing Fair Value
2. Leveraged Buyout (LBO) with Dividend Recap
LBO Framework: Use an LBO model to analyze the impact of financial engineering on valuation. Incorporate a dividend recapitalization to simulate returning cash to shareholders.
Sensitivity Analysis: While a full LBO sensitivity analysis isn’t mandatory, it’s highly recommended to test key variables (e.g., leverage levels, exit multiples, and growth rates). This will provide insights into how changes in assumptions impact valuation and stock price.
3. Forecasting Stock Price
4. Share Repurchase Strategy
5. Additional Considerations
Key Takeaways
This approach ensures a comprehensive analysis and provides actionable insights to improve the stock price effectively.
Sources: DCF Modeling Course ~ Pre-training text.pdf, Basic Guide Ramping Up On A Company With Public Information Part Three, https://www.wallstreetoasis.com/forum/investment-banking/how-are-stock-prices-determined?customgpt=1, 21 Finance Interview Questions and Answers, Basic Guide Ramping Up On A Company With Public Information Part One
Think about the levers for increasing a stock valuation. You could lower your WACC to discount cash flows less (how much room do you have to lever up a B company?), or figure out how to trade more like a comp with higher P/E (are they less levered? More profitable?), or artificially increase the stock $ per share by reducing the denominator (repurchase equity)
increase FCF / buybacks / lower WACC / reduce CapEx
in increasing FCF you can look at anything that impacts FCF which is working capital/revenue/taxes/etc.
unclear whether your exercise is purely a financial engineering exercise or to put yourself in the management's shows and restructure the business or decide on new strategies to increase the share price
Buybacks only work if you're buying undervalued shares. Example:
EV = $1,000; debt = $300; Cash = $100. E = $800. Suppose there are 80 shares. P = $10. If I use all $100 cash to repo shares, cash goes to $0, E goes to $700, there are 70 shares remaining, still at $10 per share.
Suppose NI = $80. It traded at a PE of 10 prior to repo. EPS was $1 per share. With 70 shares out after the repo, EPS goes to $1.143. It is tempting to think "With a PE of 10, this would drive share price to $11.43." Except the PE will go down as they get rid of cash. All else equal, a firm with high excess cash holdings would have a higher PE than an otherwise identical comparable firm with no excess cash holdings.
Reducing CAPEX without also reducing future cash flows seems impossible. I need to have factory to produce goods. Reducing unnecessary CAPEX or making better investment decisions sounds like a better idea than just reducing CAPEX.
Float a rumor you’re the target of an acquisition
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