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Cox Prezi

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Daniel Thrall

on 24 October 2012

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Transcript of Cox Prezi

Laura Martin: Real Options and the Cable Industry New York City - May 4, 1999 How should cable stocks be valued? Real Options EBITDA Discounted Cash Flows Definition: Real options valuation is a way of valuation that takes into consideration unexercised capacity Cox Data Credit Suisse First Boston (CSFE) 1999 Broadband Conference Background: Laura Martin, with leaders from cable industry, attempting to value cable industry. Martin introduces "real options" valuation model Analog video revenue
New technology, new potential revenue
Quickly consolidating industry Current Environment: (Black Scholes) Valuation Methods Cox Data Definition: Discounted Cash Flows are projections on future cash flows taken to the present value and then divided by the number of shares outstanding to find the stock price. Definition: Earnings Before Interest, Taxes, Depreciation and Amortization (aka earnings before anything bad happens). Measures profits and uses income statement (earnings, taxes and interests) and statement of cash flows (depreciation and amortization). Analog Video New Technology Historically, cable companies delivered only analog video signals to homes that paid for the service.
Cable industry generated revenue from analog video
Technology was advancing rapidly and according to Martin, the cable industry was at the cusp of dramatic change. 1) Revenue growth would accelerate and diversify

Projected Compound Annual Growth Rate would be 14.2% between 1998 and 2003
Shift in revenue from 100% analog to equal division between analog and digital between 1998 and 2003 2) Capital spending would slow and the nature of investments would change.

After existing-plant upgrades, spending would go towards new technologies.
Shift from non-revenue linked (plant upgrades) to revenue-linked (new technologies) capital expenditures
Less risk for investors 3 new digital potential-revenue sources:
Digital video
High-speed data
Cable telephone 3) Digital revenue streams would yield higher returns on invested capital

New-technology spending would generate much higher returns on invested capital (ROIC).
Martin estimated that marginal ROICs (excluding cost of cable plant) were 45% to 65%, compared to 1998E ROIC of around 5% for Cox. Martin - "Three value-driving changes in cable business" Revenue growth would accelerate and diversify Why should we care about Laura Martin's opinions? Harvard business school
Seven years as an investment banker
Four years as a buy-side analyst
Five years as a sell-side equity analyst Buy-side Analysis – Stock Valuation A buy-side analyst works for a mutual fund, hedge fund, pension fund, or other investment institution
Incentivized to identify investment opportunities that will improve the net worth of a portfolio
Analysis is close hold
- Recommendations are made exclusively for the benefit of the fund that
pays for them
Use discounted cash flows, dividend yield, dividend discount model, etc.
Analysis not available to anyone outside the fund
Forecasts of financial performance (forward projections)
A sell-side analyst works for investment banks or brokers
Researches industry and company performance to give recommendation to others
Typical recommendations as "buy," "sell," or "hold"
Paid by the brokerage house or firm they work for (not the clients)
Paid on commission of stocks sold
- Higher sales = Higher commission Sell-Side Analysis Antonio Arce
Tricia Cassidy-Vincent
Reza Montazeri
Daniel Thrall
Jarrod Winters Sensitivity Analysis The PV of the projected cash flows gives only part of the whole picture
Determine PV of terminal value - What does this mean? Discounted
Cash Flows

•Multiple EBITDA approach (Exit Multiple approach)
•Perpetuity approach
•Perpetuity with Growth approach NPV = Net Present Value
CF = Cash Flow
r = WACC (Weighted Average Cost of Capital) = 9.267%
W = 18%
(1-T) r = 3.65%
W = 82%
r = 10.5% EBITDA Real Options
(Black Scholes) What we would change: Laura Martin's assumptions are exaggerated:

Sell-side analysists are incentivized to generate sales Instead of setting strike price at $1.22, we recommend setting it at 50% of the current markert value of the stock.

Determine the EBITDA Multiplier using current market norm TV = The Projected Terminal Value of All the FCF’s from the end of the Projected Period Indefinitely ($38,454)
FCFn = FCF for the last 12 months of the projection period ($1,804)
g = Perpetuity Growth Rate at Which FCF’s Are Expected to Grow Forever (unknown)
WACC = Weighted Average Cost of Capital (9.3%)

The perpetuity growth rate - typically between historical inflation rate of 2-3% and historical GDP growth rate of 4-5%.
An assumed perpetuity growth rate over of 5% assumes that you expect the company's growth to outpace the economy's growth... forever. Using Real Options facilitates accurate valuation of potential market value, but you have to be conservative in your assumptions. CONCLUSIONS Capital spending would slow, and the nature of investments would change Digital revenue streams would yield higher returns on invested capital As Standard Deviation σ, a measurement of dispersion, increases, the Option Value VC increases

As Risk-Free Rate rRF increases, the Option Value VC increases

As the time to maturity t, increases, the Option Value VC increases

As the investment cost (strike price) X increases, the Option Value VC decreases Cox Data Methods to Calculate Terminal Value: See Excel Demo OPM – Sensitivity Take-Aways e e d d
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