Valuing Reliable Furniture

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Valuing Reliable Furniture

• Using Price/Characteristic Ratios

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Reliable Furniture Company
Reliable Furniture Company (RFC) is a small
furniture company specializing in highly durable
tables and chairs for hotels, cafeterias,
schools, conference centers, churches, and other
institutional users of stackable and storable
furniture. RFC has differentiated itself from
competitors who make high volume, low cast, but
much less durable furniture for the home retail
market. The specialized niche allows RFC to
bypass the usual distribution system of
wholesalers and retailers and contact major
institutional purchasers directly, wither by
direct sales, tradeshows, or telephone. Although
there is no direct competition in its quality
class, the lower cost, high volume competitors
effectively keep a cap on the prices RFC can
charge because institutional buyers can always
buy the cheaper furniture and replace it more
frequently. Gary Watterson, the founder and
chief executive officer, is approaching
retirement age and would like to turn over
management of the company to the current
management. As part of the reorganization, he
would like to sell a sizeable portion of his
ownership of the company. Due to a negative
recent acquisition, the company cut back
substantially on its acquisition strategy and has
been building up sizeable cash and cash
equivalent reserves. Management would like to use
the cash to repurchase a sizeable portion of Mr.
Wattersons stock. The purchase of an insiders
shares requires care in dealing with the
accounting and regulatory restrictions on insider
transactions. As part of the process, a fair
price for the shares must be determined. To help
in the valuation process, management obtained
Value Line analyst reports on companies with
which RFC competed. Although these companies were
larger and offered a broader range of products
than RFC, management hoped that these companies
would provide data useful to estimating a fair
price of Mr. Wattersons shares. Noting that the
Value Line Analyst reports offered a long range
forecast for various financial statement items,
management prepared the following estimate for
the average of the 2005 through 2007 years to
correspond to the Value Line forecasts
(000s) Revenues 65,000 EBITDA
13,500 Net Income 7,400 The following
represent the latest financial statements for RFC.
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Reliable Furniture Company Consolidated
Statements of Income
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Reliable Furniture Company Consolidated Balance
Sheets
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Reliable Furniture Company Consolidated
Statements of Cash Flows
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P/E Multiple

• Lagged
• Leading
• Straddle

Reliable Earnings 2001
Continuing Operations
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P/E Multiple cont
Reliable Earnings Growth
Reliable Earnings 2001
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Problem With Focus on Equity Only
Comparables
Subject
100
50 debt _at_ 8 50 equity
100
100 Equity
10 million shares _at_ 10/share
5 million shares _at_ 10/share
100
Revenues 100 Costs 80 EBIT 20 Taxes
8 PAT 12
Revenues 100 Costs 80 EBIT 20 Interest
4 (850) PBT 16 Taxes 6.4 PAT
9.6
EPS 9.6/5 1.92
P/E 10/1.92 5.2
Value 5.212 62.50
Oops! Instead, use Total Market Capitalization.
TMC 510 50 100
Value 520 100 Assets 0
Debt 100 Equity 100/10 million
shares 10/share
TMC/EBIT 100/20 5
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EBITDA Multiple
Reliable 2001 EBITDA 6,807 1,178 7,985
7,985 10.6 84,492 Assets 0
Debt 84,492 Equity
16.90 per share
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EBITDA Multiple Cont.
Reliable 13,400/7,985 1 68 for
continuing operations
Reliable 2001 EBITDA 7,985 7.5 59,887
11.98 share
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Adjustments

• What was valued?
• Equity?
• Assets
• What if a synergistic acquisition?
• What if a privately held company?
• What if restricted (letter or 144) stock?
• Small company when comparables are big?

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Price/Sales Ratio (PSR)
Reliable 2001 Sales 40,094 .9 35,095
6.92/share
Reliable EBITDA/2001 Sales (6,807 1,178)/
40,094 19.9
Reliable 2001 Sales 40,094 1.5 60,141
12.03/ share
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Market/Book Ratio
Reliable Book Value Equity 27,319 2.10
57,460 11.33/share
Reliable Earnings 4,403
ROE 4,403/27,319 16.1
Reliable Book Value Equity 27,319 2.10
57,460 11.33/share
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Value of RFC

• P/E ratio 12.95 and 13.02
• EBITDA multiple 11.98
• PSR (TMC/Sales) 12.03
• Market/Book 11.33
• Adjustments for size, liquidity, restrictions

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What Does Total Market Capitalization Represent?
ABC Company
180 Accounts payable 300 Bank loan 480
Current Liabilities 100 Long Term Debt 420
Equity 1000 Total Liabilities and Equity
Current Assets 300 Long Term Assets
700 Total Assets 1000
What is net working capital of ABC Company?
Current Assets current liabilities 300-480

Negative 180???
NO!
ABC Company
Appraisers look at capitalization of the
client. 180 accounts payable is spontaneous
financing.
Net working capital 120 Long Term Assets 700
820
300 Bank loan 100 Long Term Debt 420 Equity 820
--Net working capital 300-180 120
820 is the value of the assets (Enterprise
Value)
Capitalization
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Valuing Furniture Company in Brazil
Sao Paolo Furniture Earnings 85 Reais (1.32
12) 1,348 Reais 67 Reais/share
Sao Paolo Furniture Earnings 85 Reais (212)
2,040 Reais 102 Reais/share
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Price/Operating Characteristic

• Office Building Price/ Square foot
• Hotel Price/ Room
• Cell Phone Company Price/ Pop
• Internet Company Price/ Registered Customer
• or Price/
  Monthly hits
• or Price/
  sticky hits
• Oil Company Price/ Barrel of oil equivalent
  (BOE)