What type of companies cannot 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)
- Biopharma (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?
Every industry is going to have some modified version of DCF that can value the business you're looking at.
I've valued REITs, O&G, pharma, banks using DCFs. It's just not the fastest way to do it. If your assumptions are consistent, you will end up with the same result.
How would you derive FCF for a bank?
Do a standard FCFE model. Normalize net income to be used as a proxy for FCFE and modify it based on regulatory capital constraints, same as any other company needing to retain a portion of their earnings/issue equity to grow revenues.
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