Valuation metrics for Industrials and E&C
What do you guys use to value industrial companies? They usually do not have a lot of debt.
Do you use EV/EBITDA or EV/EBIT? What is the main difference between these?
Also, how would you treat the CapEx in these companies?
CapEx = Depreciation?
Thanks for the help.
depends on the company you are looking at...if it's a mature company with a steady growth...it makes sense that its CapEx = Dep...if a growth company, CapEx would be higher
often, industrials are heavy on capex...i would throw in EV/CapEx
Thanks.
Can someone explain the difference between EV/EBITDA and EV/EBIT, and perhaps when you would use which?
as i said earlier, for a mature company, you may assume that Dep to be the same as your CapEx. in that case, EBIT accounts for the firm's going forward CapEx since you "subtracted" D&A=CapEx from your EBITDA. whereas EBITDA does not...obviously.
Use bloomberg function "RV".
EV/CapEx? This gives a huge bias towards large companies because maintance Capex is not going to change much but EV will. You never want to just use CapEx in the denominator, because it is subjective to firm's management. If you want to incorporate Capex, the correct way to do this would be to use EV/EBIT+CapEx, because you want to account for the depreciation breaks as well in industrials.
Most of the time ev metrics are EV/EBITDA or EV/FCF, but you want to use if over operating income (EBIT) because it will give you a more realistic picture (for a Capex intensive firm).
For instance, say Firm A spends a lot on Capex compared to a competitor- Firm B (lets say EV is the same) Then, D&A is higher which makes ebit lower EBIT is lower Capex is higher
So when you do EV/(lower EBIT and Higher Capex)
The denominator offset eachother somewhat.
But generally, EV/EBITDA is more appropriate because firms can choose depreciation methods in certain LT Assets Ok back to work.
Ok, so just to make sure I get this right:
If we're dealing with a CapEx intensive firm, we want to either use EBIT or EBIT + CapEX in the denominator, correct?
This is because we don't want to compare two companies using EV/EBITDA if one is more CapEx intensive than the other.
LondonE1, so you are saying that if we are dealing with a mature E&C firm, we can assume that D&A=CapEx and therefore use EBIT as the denominator?
for a capex intensive firm, use EV/EBIT
I wouldn't use ebit and capex together because it puts EXCESS weight into a company that's capital intensive. If you're putting the two together, why add the capex on the denominator? I would think that it makes more sense to just do EV/(Ebitda - Capex), which would be similar to EV/FCF. Either way, I'd stick with EV/EBIT, even though what MonkeyKingdom said about firms being able to tamper with D&A schedules is a very valid point.
For a capex intensive firm, you use EV/(EBITDA - Maint. Capex)... Amortization can include a bunch of wild accounting derivation in there which may not be accurate...
In Need of Industrial Sector Knowledge (Originally Posted: 09/23/2013)
Hey Monkeys,
I have a presentation for class coming up and am in need of some Industrial-specific industry insight. I got cross-staffed on a couple Industrial deals this summer, but didn't get nearly as much exposure as I would've liked. So if anyone has primers or general knowledge on some of the more common metrics and multiples used in the core sub-sectors (Capital Goods, Transportation, etc.), or even simple things like what's typically included in COGS I would really appreciate it. I have a lot of primers on O&G and the Energy space as a whole if anyone's interested. Also, you can obviously expect SB's for the help.
A2
http://ebookee.org/Investment-Banking-Industry-Primers_2229111.html
scroll down to the bottom of first post. You can download from those 2 links for free, but it'll take 30 minutes for each part.
I would like some SBs lol.
^ My man.
Logistics primer: https://www.dropbox.com/s/x8huc0j3n4tn01q/Logistics%20Primer.pdf
I did ER in a transportation group last summer so PM me if you have specific questions. At the very least I can direct you to another source if I can't answer anything.
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