How the stock market values various companies of interest, $billions as of 2 Dec. 2005:
GE $378
Wal Mart 200
Toyota Motor Corp. 161
Google 122
United Parcel Service 86
DaimlerChrysler AG 52
Honda Motor Co. 52
Caterpillar Inc. 40
BNSF 25
Canadian National Railway 22
Union Pacific Corp. 20
Norfolk Southern Corp. 18
John Deere 17
Ford Motor Co. 15
GM 13
Coach Inc. 13
CSX 11
Canadian Pacific Railway 7
Coach Inc. is a leather goods retailer.
Interesting list. By itself, the list doesnt really mean anything, other than the worth of the companies.
However, with more information, it becomes very useful. For example, what are the revenues of each company? assets? ROE? ROIC? etc.
I will take a look at the list and try to develope a little more info.
ed
Valuations of companies is a very interesting art. It is actually quite easy to value a company today…just as eastside points out, the market has determined it’s value of his selected companies.
How that determination is made is also pretty simple. It is the present value of future returns… It is what someone will pay for future returns, be that in the form of earnings, dividends (partial earnings returned to owner) or in salvage or final valuation.
I ran some numbers for several of the companies and found that the railroads are valued very closed with GE.
I must go now, but will continue this later.
Eastside, what do you make of the valuations you stated? Google is WAY out there and Coach is a reach, but it is an excellent company.
gotta go.
ed
I guess the contrast didn’t attract your attention – GM, once the Godzilla of corporations, is now worth about half of CN or UP, and a smallish, well-run retail chain is worth as much as CSX or GM!
I don’t know what your interest is, but the additional data you suggest would obscure my point. Well-run firms are rewarded with premium market capitalizations. Market cap is important in that companies often finance takeovers by paying in stock. Thus a top company – not that anyone would want a can of worms – could easily finance a takeover of GM.
Determining market cap is not art, just a matter of multiplying the number of common shares outstanding times share price. It provides a snapshot of how investors perceive the present value of the firm’s future cash flows.
You’re thinking of present value, the sum of the discounted future expected cash flows, much different from market cap. Reconciling the two is an art. It takes into account risk factors, growth, etc.
I would differ.
It isn’t the be-all and end-all, but looking at the Price-to-Earnings ratio (P/E) is interesting when evaluating a company’s stock. There was a time when Wal-Mart’s P/E ratio was 40 to 1, which meant that the company couldn’t possibly pay out a dividend of more than 2.5% and in reality would have to pay much less to grow without borrowing money. That was when the chain was growing by leaps and bounds, eating up whole regions in a few years. The co. has a more conservative P/E now, not too far from Targer or Penney. There was money to be earned, but it came from the fact that Wal-Mart’s basic valuation went up, and that took the stock price up. So you can see that fast-growth companies may sustain fairly high P/E’s even if they pay no dividends. The more slowly-growing blue chips are more reliable but because the stock market in general rewards risk, pay a moderate divident and don’t usually see much capital appreication unless the whole market is growing. I wrote all this because I sensed a couple of folks were wondering about the relationship between valuation and worth.
Thanks for hearing me out!
I am not confusing discounted future cash flows with market cap. I understand both.
The contrast between the railroads and GM did catch my eye, it is simply that very few people place a significant value on GM at this time. The more interesting play on GM in my opinion will be in the bond market.
I certainly agree with you on GM…who would want those legacy costs?
GE’s P/S ratio = 2.2
BNSF PS = 2.0
UP PS = 1.6
NSC = 2.2
CSX = 1.2
GE’s PB ratio = 3.3
BNSF = 2.5
UP = 1.5
NSC = 2.0
CSX = 1.4
GE’s P/cf = 9.4
BNSF = 8.9
UP = 9.3
NSC = 8.7
CSX = 7.8
GE’s ROA = 2.8%
BNSF = 4.8%
UP = 2.3%
NSC = 4.7%
CSX = 4.1%
GE’s ROE = 16.5%
BNSF = 14.4
UP = 6.1
NSC = 13.3
CSX = 12.6
Surprizingly, I find that the above four railroad’s are valued at similar levels as GE on the above parameters. Granted, GE is much larger. But, when comparing price to cash flow the numbers are very similar. I use cash flow rather than earnings…GE’s “earnings” were notoriously leveled during the Walsh days and may still be today. GE’s ROE and ROA are not much different than the railroads.
You no doubt will differ from my opinion of GE and the railroads being valued differently…you are correct in the market cap numbers. I have never really paid much attention to size in my evaluations, performance catches my eye. I do see your point when it comes to market cap being important for taking over another company.
ed
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The only “reality check” that matters is revenue adequacy. According to the STB’s latest numbers, only NS is officially revenue adequate for the time being (based on the standard of 10.1% ROI):
KCS - 8.3%
Grand Trunk (CN) - 5.95%
BNSF - 5.84%
UP - 4.54%
CSX - 4.43%
Soo Line (CP) - 3.28%
Sans accounting and tax charges:
Soo Line - 7.56%
BNSF - 7.43%
UP - 5.27%
CSX - 4.51%
Source: Railway Age Magazine
http://www.railwayage.com/breaking_news.shtml
It’s a good thing for the railroads that Wall Street is seemingly oblivious to the admittedly arbitrary STB revenue adequacy standard. Either Wall Street types are clueless, or the STB revenue adequacy standard is artificially high for reasons of PR and regulatory expediency.
What I see are similar financial ratios used in share valuation, not valuation of an entire firm, which market capitalization and present valuation are. If you estimate the value of a firm using present value you’ll use something like the operating cash flow amounts, an absolute amount. Thus for calendar 2004 GE had a cash flow of $36 billion. Here are the C/Fs for the RRs for the same time period:
BNSF $2 billion
UP $2.2
CSX $1.4
NS $1.6
CN $2.1
CP $0.8
Whatever discount rate you use, GE will still be much larger, but let’s say we value the firms on the basis of the 2004 C/Fs as perpetuities, and use a discount rate of 6%. The present values of the firms would be
GE $600 billion
BNSF $33
UP $37
CSX $23
NS $27
CN $35
CP $13
Such a simple valuation ignores many factors, such as growth, risk, and inflation. Still GE maintains its size relative to the other firms.
Finally, I’d hesitate to compare financial ratios of companies in fundamentally different industrial sectors (GE vs the RRs) because accounting and regulatory differences often make comparisons difficult.
Company performance and valuation matters if you’re an executive and read in the papers that another company or a corporate raider is buying your shares, a signal that your company is being taken over! If you’ve done a lousy job, your shareholders won’t hesitate to tender their shares. The importance of financial performance ratios tends to fade from the mind as you concentrate on mere existence. From what I know Wall Street does indeed pay attention to
Eastside:
You make good points. It is difficult to make comparisons between companies in different sectors based on discounted cash flow. However, when investing in companies, I believe it is critical to make such comparisons.
As you state, other factors must be considered such as growth. That is where you would come up with different valuations. For instance, to consider the current cash flow into perpetuities would not take into consideration several factors such as growth and a reliance on current market conditions rather than change.
Case in point. If one had made such analysis 10 years ago on GM and F based on the then current cash flow, then the value of the stock and the subsequent market valuation would have been much higher than today.
I jumped a few levels in my earlier post when I refered to market valuation as an art. It isnt. All it is is simple math. However, the underlying fundamentals to determine the current share price can be an art. One can argue it is simply the current price of the stock * number of shares, but one must determine the price of the stock.
Some folks out there are deciding what their value is of a company and then making decisions of buying or selling that stock. Collectively, that determination leads to share price and market value.
I am an amatuer investor, so I am limited in ability on this issue and am nearing my theoretical limits, so dont expect too deep of discussion from me from this point on. But, I do use discounted cash flow analysis in my individual stock purchases. I normally limit it to 10 years. The art comes from being able to see in the future as to the growth and the perpetuity values. For someone like Google, I wouldnt know where to begin.
Rails and other “value” stocks are fairly easy to determine. I do think your 6% discount rate is a little low.
The market is now realizing that rails finally have a bit of pricing power and is valuing them
To be honest, my investing in RR stock is a matter more of heart than head. Twenty-oh-four was an exceptional year, but the stock of an industry considered “mature” can’t be expected to grow in share price or shed a big dividend in the long run. Nor are they blue chips – they’re too cyclical. As for sector assignment, which I agree has some circularity about it, GE weighs in as a large-scale multinational, which as demonstrated above doesn’t necessarily mean that its ROI and such need be diffferent from other sectors. RR’s in general are transportation, but they have different earnings trajectories than airlines. My broker considers CSX a “mature cyclical,” which means it has the feast-or-famine earnings history of a cyclical, and the not-likely-to-grow-fast incapacity of a mature industry. However, CSX stock has been doing rather well lately, it seems.
“An industry analyst is someone who can tell you how many crossties
there are between New York and Chicago, but not whether to buy
railroad stock.” - Old saying, dates from Penn Central days.