Former Microsoft ($MSFT) evangelist – now Google ($GOOG) evangelist – has a new post up looking at the market valuation of $MSFT. Now I have some quibbles with some of the analysis – but the market valuation of $MSFT is an interesting question. The core $MSFT business is still really strong – nearly 10% CAGR with revenues since 2006 and EBITDA margins over 40%. But no respect from the market.

Here is the comment I left on Don’s post:

I agree that the market is valuing $MSFT more like HP ($HPQ) or IBM ($IBM) than Apple ($AAPL) or Google ($GOOG) – on an EV/EBITDA basis.

http://www.valuecruncher.com/companies/765

This is despite $MSFT having financial performance characteristics more like $AAPL and $GOOG than $HPQ or $IBM – EBITDA margins as only one metric.

$MSFT has a great core business that will endure for a while yet. The market is placing a pretty low value on that business – and nothing on any growth options that the company has.

$MSFT has EBITDA margins of 43% ($1 of $MSFT revenues produces $0.43 of profit at the EBITDA line) while $IBM has EBITDA margins of 23%. $MSFT’s revenues grew at a 9.6% CAGR between 2006 and 2009 – $IBM’s growth was a CAGR of 0.6% over the same period. The market is currently valuing a dollar of $IBM’s EBITDA higher than a dollar of $MSFT’s EBITDA – really…

Even if you think that $MSFT’s fortunes are on the wane – the stock looks cheap.

Disclosure – no positions. But thinking about changing that…

We launched an updated version of our Comparison Analysis tools last week.

Here is a quick look at some of the new features:

1. We calculate an implied share price based on the weighted average of the selected comparable companies, so you can immediately see if the company is under or overvalued on this basis.
2. We use an EV/EBITDA comparison by default (or EV/Revenue for companies with negative earnings).  Subscribers can choose between these and seven other valuation metrics.
3. We choose a set of comparable companies, based on broad industry codes.  Subscribers can swap any of the companies we select for any of the nearly 9,000 other companies in the Valuecruncher database.
4. We show the weighted average value for the selected valuation metric.  Subscribers can update this value and see how this impacts the implied share price and the buy/sell recommendation.

This new tool is shown by default when you search for a company or click through from the industry or market links.

Register today to unlock Valuecruncher and get unlimited access.

Some examples: IBM & YHOO

Valuecruncher places an implied share price of $143.66 on IBM – this is 10.4% above the current share price.  This implied share price is driven by a weighted average of the EV/EBITDA multiples of key comparators Microsoft (MSFT), Oracle (ORCL), Hewlett-Packard (HPQ) and Accenture (ACN). The current IBM share price gives an EV/EBITDA multiple of 8.14x – this is in the middle of the comparator set. Some of these businesses have a larger services offering (IBM, HPQ and ACN) – but we see IBM being undervalued.  Subscribers can adjust the weighted average value to see the implied share price impact.

View our interactive valuation of IBM.

Valuecruncher places an implied share price of $12.02 on Yahoo (YHOO) – this is 22.7% below the current share price. This implied share price is driven by a weighted average of the EV/EBITDA multiples of key comparators Microsoft (MSFT), Google (GOOG), Time Warner (TWX) and IAC (IACI). Yahoo currently has an EV/EBITDA multiple above that of Google – a dollar of Yahoo EBITDA is being valued by the market more highly than a dollar of Google EBITDA. Yahoo looks overvalued at these levels. Subscribers can adjust the weighted average value to see the implied share price impact.

View our interactive valuation of Yahoo.

What is EV/EBITDA?

Enterprise Value (EV) is simply the market capitalization plus net debt (borrowings less cash). We use EV to capture the impact of debt and cash on a companies balance sheet – market capitalization doesn’t capture different capital structures when comparing companies. EV/EBITDA shows how a dollar of profit (measured as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set.

The very smart Zack Miller asked that question on his blog. I could not help but respond – what is a 500+ word comment amongst friends. Here is that comment – with a few added links.

Why hasn’t Yahoo Finance changed in 10 years?

Yahoo Finance is a really interesting case. A key disruptor in Web1.0 then nothing.

You have seen my post.

Here is my quick take:

1. It isn’t that big a business for Yahoo (I think Yahoo Finance is $315 million a year in revenues – see above post for assumptions). That is approximately 5% of Yahoo’s (YHOO) total revenues of $6.46 billion LFY. Yahoo Finance is a big player in the free on-line finance space – but finance isn’t that big a part of Yahoo. Thomson Reuters had $13 billion in revenues LFY and Bloomberg had $6.1 billion in revenues in 2008. We over-estimate Yahoo Finance’s place in the financial data universe – guilty myself.

2. Business model – advertising based (primarily brokers and financial products). If Yahoo Finance innovates – they are likely going after the people that are generating their current revenues. Should they / could they disrupt the market further – probably. But I bet that there is concern about harming the current Yahoo Finance revenue base. Yahoo Finance is a solid earner as it is – why change things (possibly an internal view).

3. The platform is dated – Yahoo Finance is several base-platform generations older than Google Finance (for example) or Reuters free site. That makes keeping the platform stable probably a bigger job than we appreciate. Stability (and extending what they have) vs Innovation – stability appears the winner.

What might change the dynamic?

1. XBRL may be a game-changer. Uncoupling financial information from the existing raw data providers may generate a wave of innovation. New players (without the legacy issues) create base information platforms (not as good as Yahoo Finance initially) and quickly iterate with additional services (i.e. valuation) and disrupt the current on-line players (Yahoo Finance) and wider financial data players (Reuters, Bloomberg, etc). I believe Yahoo Finance keeps Reuters and Bloomberg awake at night today – that scenario may be even scarier for those players.

2. Thomson Reuters, Bloomberg, Morningstar and the other traditional financial data providers (very worried someone will make their multi-billion dollar industry a multi-hundred million industry) are playing really smart. The free Reuters site is amazing. From the outside it looks like these guys see the threat and are positioning to compete with free offerings. The traditional players may yet win the day – but I believe there will be, at a minimum, a value transfer from these players to the consumer.

Yahoo Finance – I think they may be the big loser caught in this cross-fire. Google Finance could be a player – but Google Finance is less of a contributor to Google than Yahoo Finance is to Yahoo. Umair Haque pushed for Google to do the job but Google has enough on their plate addressing the threat Facebook poses to their core business to worry about finance. I do really like Google Domestic Trends – it shows what could be done.

We want to see innovation in this space – and there has not been as much as some of us want. There maybe a step change coming – and that would be very cool.

Zack Miller has a new book out soon – Tradestream. It is on my must-read list.

To those of us with an interest in on-line financial information – Yahoo Finance has a pretty special place in our affections. While early on-line services (like Prodigy) provided some financial information – Yahoo Finance was the first service that provided useful “good enough” financial information for free. Good enough that traders and investment bankers use the service along-side paid offerings like Reuters and Bloomberg (I know because I was one of these guys). Why? Because it is available on a work/home PC for free (and not hidden on a paid Reuters or Bloomberg terminal) and the base information needed to feed into models and analysis is accurate.

So what is the possible future of Yahoo Finance?

This is our view of the world:

We have developed a range of scenarios for the market based on Free vs Paid and Individual vs Collaborative approaches.

Here we are focusing on the Super Commons vs Walled Garden scenarios. The We Live In Public and Rock Stars are in play (and we are watching them) – but we see the current battle being Free vs Paid.

Where is Yahoo Finance today?

The Yahoo Finance business model is primarily to license financial information then serve that information up for free and sell advertisers the audience. It is pretty simple – but you are hostage to the data providers (see the bottom of this page).

So how much reach and revenue does Yahoo Finance have? A number of analysts have tried to pull some numbers together – here is our take (using those analyst numbers as a guide):

We think that Yahoo Finance does around 17.5 million unique visitors a month in the US and 8.75 million unique visitors a month from the rest of the world (half the US number – guess at our end) – for a total of 26.25 million unique visitors per month. Based on dated statistics of the average of time on the site (just under 30 minutes per unique visitor a month) and page view numbers – we estimate an average of 50 page views per month for each unique visitor. That means a total of 1.3 billion page views per month for Yahoo Finance. We note the $9 effective CPM rate in one piece of analysis ($6 x 1.5 ads per page). However, we think that looks low – we would expect a RPM (revenue per 1,000 impressions) of around $20. That gives monthly revenues for Yahoo Finance of $26.25 million – annual revenues of $315 million. If the RPM number is only $10 that would mean annual revenues of $157.5 million or if it is $30 that means annual revenues of $472.5 million – our guess is between these numbers. That is smaller revenue than I expected – and the data costs will limit the margins.

What about the competition?

The competition are the other free financial information website – AOL Money and Finance, MSN Money and Google Finance. But also the traditional financial information providers such as Thomson Reuters and Bloomberg. Both Reuters and Bloomberg have a range of revenue streams – but their core business is selling sophisticated timely information to financial institutions. The larger opportunity for Yahoo Finance is taking on these traditional financial information providers.

To put our estimates of Yahoo Finance’s revenues in context – Thomson Reuters ($TRI) had revenues of $13.0 billion last year (enterprise value (EV) / revenue multiple of 3.0x) and Bloomberg had reported 2008 revenues of $6.1 billion. Prior to the merger with Thomson – Reuters had 2007 revenues of GBP2.6 billion ($3.85 billion at current exchange rates). Yahoo Finance’s revenues are tiny in comparison to the traditional financial information providers.

Reuters and Bloomberg would state that their services are deeper, richer and more relevant for traders and investment bankers than the free offerings of the on-line financial information sites (such as Yahoo Finance). That view would be correct today – but also potentially dangerous.  We think that these companies recognize the danger posed by the free sites. For example:

• Bloomberg hiring a former Yahoo executive to run Bloomberg.com. Bloomberg are also trialling a new retail investor friendly look for the site. Bloomberg also scooped up traditional business-weekly BusinessWeek. Creating some interesting internal dynamics.
• Reuters launched a new free website – that is, in our opinion, the best “free” offering in the market. Reuters are also launching a video offering – which has been described as a financial YouTube.  The video offering is aimed currently at subscribers – but it could easily become a free ad-supported model.
• Morningstar acquiring financial blog Footnoted.org.

We think these are just a number of examples of the traditional financial information providers preparing for a potential war with the free financial information sites. These moves position the traditional financial information providers brands much more in the retail space.

Should the traditional financial information providers should be scared?

The traditional financial information providers are worried that on-line finance sites could do to them what Craigslist did to newspaper classifieds. Take a multi-billion dollar industry and make it a multi-hundred million dollar industry – with the benefits flowing to consumers of financial information. Financial information market disruption.

What we mean by “disruption” is the Clayton Christensen disruptive innovation framework. This describes the process where a product or service starts as a simple offering at the bottom of a market (but with an advantage – examples: price, size, etc) then improves moving up-market, eventually displacing the traditional incumbents in the industry (based on being “good enough” but retaining the original advantage). Existing examples of disruption in the finance space include: index funds and discount brokers.

Our take on the potential on-line financial information market disruption:

The traditional financial information providers (Reuters, Bloomberg, etc) have an offering that is targeted at traders and corporate finance professionals. The services are subscription based and provide a lot of information – historic financials, forecast numbers, analysis tools, etc. The on-line finance sites have less information – but have quickly (on the basis of being free) attracted a sizable audience. If these free sites can improve their offerings (add sustaining innovations) – they will become attractive to more demanding customers. This means some customers stop purchasing expensive financial information products and move to the free offering. More move as the free offering improves and it meets their requirements.

How could that happen?

First - XBRL. XBRL stands for eXtensible Business Reporting Language. XBRL is an open-source standard for communicating financial information. The Securities and Exchange Commission (SEC) is mandating XBRL for US companies (over a three-year roll-out) – which means it is coming for the rest of the world as well. That means that base financial information – the type traditional financial information providers charge for – will become virtually free. This will allow on-line finance players to break free of the current relationships with traditional financial information providers (and allow more innovation). It won’t take all the traditional players revenues – but it will take away an historic advantage and even the playing field.

Second - innovation from on-line financial sites (especially the major portals like Yahoo Finance). By adding tools and functionality (combined with XBRL data) Yahoo Finance can take market share from the traditional financial information providers. As Yahoo Finance’s functionality improves – current subscribers will migrate to the free service (when the functionality is “good enough”). Yahoo Finance can keep the advertising model – but good ad-targeting can extract more from users of valuation tools than those simply scanning the current Key Statistics page.  This analysis focuses on Yahoo Finance – but it could be for any of the major on-line finance portals. Do any have the ambition to do it?

There is a big opportunity for the on-line financial sites (such as Yahoo Finance) to disrupt the traditional financial information providers. I hope they can – because it would democratize finance. students and retail investors could have the same information and tools as traders and investment bankers at Wall Street firms. That would be a good thing.

Will it happen?

It does appear that the traditional financial information providers are investing more in the threat than the potential disruptors. This means that the traditional players may yet win the market. In Yahoo Finance’s case there may also be issues with management focus (peanut butter) and potentially a dated technology platform. We think there are still some powerful forces in the disruptors favor. We hope Yahoo Finance (or someone) does step up.

Mark Clare, Valuecruncher CEO

Disclosure: No Positions

Full disclosure – we have had a couple of conversations with Yahoo Finance about Valuecruncher. Nothing about big picture strategy – these are our thoughts and estimates alone.

On the 16th of October 2008 Warren Buffet wrote an Op-Ed piece in the New York Times. It includes this section:

I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

On the 16th October 2008 the Dow Jones Industrial Average was at 8,451.19.

On the 6th March 2009 – 13 months ago – the Dow Jones Industrial Average was at 6,626.94.

Today the Dow Jones Industrial Average is at 10,997.35 (having been over 11,000 at the end of last week).

The Dow Jones Industrial Average is up 30.13% since the 16th October 2008 and 65.95% since the 6th March 2009.

UPDATE: The Dow Jones Industrial Average hit an all-time high of 14,164 on the 9th October 2007.

Just amazing.

He is Warren Buffett – and he can prove it.

Cisco ($CSCO) are featured in Barron’s looking at how their revenues could hit the US$100 billion level (2009 revenues US$36.1 billion).  With the $CSCO share price over US$25 – 52-week range US$16.30-26.85 – we decided to have a quick look.

Valuecruncher Interactive Analysts Report For Cisco ($CSCO)

We have the comparator group set as Hewlett-Packard ($HPQ), Lexmark ($LXK), Intermec ($IN) and Netezza ($NZ). You can change these peer companies on the site. For example you could add:

1. Microsoft ($MSFT) – Interactive Analyst Report For $MSFT
2. IBM ($IBM) – Interactive Analyst Report For $IBM
3. Hewlett-Packard ($HPQ) – Interactive Analyst Report For $HPQ
4. Juniper Networks ($JNPR) – Interactive Analyst Report For $JNPR

So what do we think?

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$27.71 for $CSCO – 6.5% above the current share price. We see $CSCO slightly undervalued at the moment. But how about compared to a peer group?

Comparison Analysis

I changed the peer group companies to $MSFT, $IBM, $HPQ and $JNPR as noted above.  I am going to look at only one of the metrics we use at Valuecruncher – EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet – market capitalization doesn’t capture different capital structures when comparing companies. EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set.

On an EV/EBITDA basis $CSCO is trading at 13.6x ($CSCO is being valued at 13.6x last year’s profit at the EBITDA line). A dollar of $CSCO EBITDA is worth more a dollar of $MSFT, $IBM or $HPQ EBITDA. $CSCO’s EV/EBITDA is less than $JNPR’s but that relates to greater growth expectations and a poor 2009 financial year for $JNPR.  $CSCO makes more margin at the EBITDA line than any of these comparators except $MSFT. The comparators look about right.

Summary

Based on our DCF valuation – $CSCO looks slightly undervalued. Looking at some comparators – the market is valuing $CSCO in-line with expectations – compared to the peer group. $CSCO is trading close to 52-week highs – but this looks justified.

Disclosure: no positions.

In November 2006 – Telecom New Zealand ($TEL.NZ) announced plans to sell their directory business in a competitive process. Analysts placed a range of values between NZ$1.5 billion to NZ$2.2 billion. I ran some numbers and came up with a NZ$850 million valuation – using Yell Group ($YELL) in the UK as a comparator. In my analysis I wrote the following paragraph:

I believe these numbers (NZ$1.5-2.2 billion) are fantasy.  The top of our valuation – based on sensitivities – is NZ$1.1 billion.  Using the current 13.8x Yell multiple gives a valuation of NZ$1.21 billion.

As a result of some discussions I revised the analysis 24 hours later with some more aggressive assumptions. My updated valuation was NZ$1.10 billion with a range of NZ$867 million to NZ$1.36 billion.

But hey – there was a fully-fledged private equity boom going on. What did I know.

In early 2007 to get to the short-list of potential acquirers for the Telecom New Zealand directory business required a NZ$2.1 billion bid. I wrote yet another piece – with the following excerpts:

But it appears our valuation was wrong.  The rumours in the market were that it took NZ$2.1 billion to make the short-list and the four finalists are all private equity players.  Our valuation was NZ$1.1 billion – that is a long way short of NZ$2.1 billion.

Here at Valuecruncher we back our analysis – and when we are that far out we want to know why.

and

This has been bugging me – I don’t like being this far out on valuations.  I like to think it isn’t typical.

Then I proceeded to explain the bid valuation as best I could (summary – really cheap debt).

In March 2007 with the closing of the sale to CCMP I noted:

Valuecruncher believes the result is an excellent one for Telecom.

Since 2007 it hasn’t been an easy time for owners of highly leveraged directory assets. Debt isn’t as cheap as it was (check out this Bloomberg piece from February 2007 – the world has changed). Another strange thing – people are also using this internet thing where they previously relied on services like directories. That means there is pressure on key directory revenue streams (like advertising).

There is a long piece in the New Zealand media today (Sunday Star Times written by Tim Hunter) about the challenges facing the directory business – now called Yellow Pages Group. It quotes a number of unnamed sources using Yell Group ($YELL) in the UK as a valuation comparator (“Yell in the UK has just restructured and trades at seven times earnings“). With Yellow Pages Group having EBITDA of around NZ$130 million – that places an enterprise value on Yellow Pages Group of “NZ$750-$800 million“. Note the article has senior debt holders being owed NZ$1.2 billion – ouch. The article is a good piece of analysis by Tim Hunter.

Our Valuecruncher interactive analyst report for Yell Group backs up this analysis (have a play with the DCF tab as well). A 6.3x EV/EBITDA multiple for Yell Group and a NZ$130 million EBITDA gives an enterprise value for Yellow Pages Group of NZ$819 million. Enterprise value is the value of the whole business (equity and debt).

Hold on – isn’t that just about where I started?

Lesson: Do robust analysis and run the numbers – and back that (even in the middle of a private equity boom).

It has been a tough and challenging 2010 for Telecom New Zealand ($TEL.NZ) – New Zealand’s largest listed company. $TEL.NZ is trading close to a 52-week low at NZ$2.24. There has been widespread outages on their mobile XT network and yesterday a group of New Zealand entrepreneurs (including Valuecruncher investor Lance Wiggs) announced a new international broadband initiative to complete with the Southern Cross Cable Network (of which $TEL.NZ is the largest shareholder). Time to look at some valuation numbers – where is $TEL.NZ coming out?

Valuecruncher Interactive Analyst Report For $TEL.NZ

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of NZ$2.70 for $TEL.NZ – 20.5% above the current share price. We see $TEL.NZ undervalued at the moment. But how about compared to a peer group?

Comparator Analysis

I am going to look at only one of the metrics we use at Valuecruncher – EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet – market capitalization doesn’t capture different capital structures when comparing companies. EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set.

On an EV/EBITDA basis $TEL.NZ is trading at 3.7x ($TEL.NZ is being valued at 3.7x last year’s profit at the EBITDA line). A dollar of $TEL.NZ EBITDA is worth less than a dollar of $T, $VZ, $VOD.O or $TLS.AX EBITDA. $TEL.NZ is a smaller scale but broadly similar business – $VOD.O is perhaps an outlier.

If we raise the $TEL.NZ EV/EBITDA multiple to the average of $T, $VZ and $TLS.AX (4.7x) then this gives a share price of NZ$3.17 – 41.5% above the current share price. This valuation is in line with our DCF analysis – but even higher.

Summary

Based on our DCF valuation – $TEL.NZ looks undervalued. Looking at some comparators – the market is valuing $TEL.NZ lower compared to the peer group. $TEL.NZ looks cheap at current prices – even with the challenges the business is facing.

Disclosure: no positions.

We tend to get some complaints when we write about New Zealand-based issues. This post is one of those New Zealand focused ones. Feel free to skip it if that isn’t what you are interested in.

Dear NZX

We like your work – we really do. The relevance and professionalism of the New Zealand share market has improved by an order of magnitude over the last ten years.

But we also love the quote from Il Gattopardo (The Leopard) – “If we want things to stay as they are, things will have to change”

We know you get that – for New Zealand to remain competitive we need stronger capital markets. The Capital Market Development (CMD) Taskforce has some good thinking – which needs the political support to implement. However, looking at the majority of suggestions – they are 20^th century solutions. Do they need implementing – absolutely. But for a small market like New Zealand we need to be looking at different solutions as well – what works in a big market doesn’t necessarily work here. We need to be looking at more innovative solutions – and again, I do think you get this. Adding Rod Drury to the NZX board is a step in the right direction.

We are in the broad equity research space – and we were disappointed by sections of the CMD Taskforce report. The CMD report (from page 69) outlines a situation where there is limited traditional equity research coverage of smaller listed companies. The CMD report offers solutions including public and private funding of additional equity research (supplied by traditional research providers) – because that is what other markets are doing. There is discussion about a “small levy on trades” (page 70).

Really. That is the best solution we have got. New Zealand is a very small market – quoting the CMD report:

“INFINZ data show that 30 stocks are covered by all six major New Zealand brokerages, and a further 37 stocks are covered by some of those firms. There are 47 (41 percent) NZX companies without any analyst coverage at all, and a further 15 have only one or two analysts covering them. There is generally no coverage of small stocks, and no coverage of the companies on the smaller exchanges, the NZAX or Unlisted.”

“All six major New Zealand brokerages”. Unless the plan is to make a significant investment in research (more than one analyst per company) – and that doesn’t seem possible – why are we bothering? The traditional large market research model doesn’t seem to be relevant here. Never mind that most traditional research reports are virtually impossible for the average retail investor to comprehend – anecdotally the consumption of research reports by retail investors in New Zealand is low. NZX knows where retail investor education is in New Zealand – the large electronic ticker going around the NZX Centre in Wellington uses full company names and the share price not ticker codes and the share price. That is the right thing for NZX to do by the way – but it shows how far we have to go.

Why not start with a plan to provide base financial information and valuation resources for the market? Let’s initially make information and tools available – how people use them is the next step. NZX.com is the logical home for those resources.

There will be traditional coverage where the market deems it worthwhile – the largest companies on the NZX only. For the rest not covered by traditional research (in fact for all of the NZX companies) NZX should be following Jeff Jarvis’ rule from What Would Google Do – “do what you do best and link to the rest”.

Most investors in New Zealand go to the NZX website for information on listed companies. NZX has added news feeds from Fairfax to encourage more engagement – but where is the financial information and analysis? NZX should make base financial information and valuation resources available. NZX.com is in a position to be the default portal for listed company information in New Zealand. There are options available to NZX where other parties are providing free access to information and tools to fill the current gaps on NZX.com.

Example 1 – Reuters

It isn’t well known – but the free Reuters website has good coverage of NZX listed companies. We can use New Zealand’s largest listed company Telecom New Zealand ($TEL.NZ) as an example.

For New Zealand companies all you need to add is a “.nz” suffix to the ticker code and there is a quantity of quality free information. The information is comprehensive – and in a single location. Using $TEL.NZ as an example – consensus analyst estimates, historical financial statements, charts and even paid research options. It isn’t only the large NZX companies – for example Xero ($XRO.NZ) even though they have no analyst coverage.

Example 2 – Valuecruncher

At Valuecruncher we provide interactive valuation tools for listed companies. This already includes 156 companies on the NZX. These are comparator based tools. Using $TEL.NZ as the example again.

Valuecruncher Interactive Analyst Report For Telecom New Zealand ($TEL.NZ)

Our algorithms choose the peer group from an international selection. But you can change the peers to a New Zealand focused group. The tools are interactive.

Disclosure: Yes – one of the solutions is Valuecruncher. In case there is any doubt – that is the company associated with this blog.

NZX – do what you do best and link to the rest. What would Google do? Google Finance uses links to Reuters for deeper data.  NZX.com can be the default financial information and valuation resources location for New Zealand as a first step to a potentially bigger future. It is time to look for specific solutions for this market – not simply copying the actions of larger markets.

Regards,

Mark Clare

Valuecruncher CEO

Apple ($AAPL) announced quarter one results today.  With the $AAPL share price over US$200 – 52-week range US$82.33-215.59 – we decided to have a quick look.

Valuecruncher Interactive Analysts Report For Apple ($AAPL)

We have the comparator group set as Microsoft ($MSFT), IBM ($IBM), Google ($GOOG) and Hewlett-Packard($HPQ). You can change these peer companies on the site. For example you could add:

1. Research In Motion ($RIM) – Interactive Analyst Report For $RIM
2. Palm ($PALM) – Interactive Analyst Report For $PALM
3. Qualcomm ($QCOM) – Interactive Analyst Report For $QCOM

So what do we think?

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$189.23 for $AAPL – 6.7% below the current share price. We see $AAPL overvalued at the moment. But how about compared to a peer group?

Comparison Analysis

I changed the peer group companies to $IBM, $RIM, $QCOM and $GOOG.  I am going to look at only one of the metrics we use at Valuecruncher – EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet – market capitalization doesn’t capture different capital structures when comparing companies. EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set.

On an EV/EBITDA basis $AAPLT is trading at 18.6x ($AAPL is being valued at 18.6x last year’s profit at the EBITDA line). A dollar of $AAPL EBITDA is worth more a dollar of $IBM (more than double), $RIM, $QCOM or $GOOG EBITDA. This is despite $AAPL making less margin at the EBITDA line than any of these comparators ($AAPL made a 22.8% EBITDA margin last year comparded with 23.0% at $IBM and 41.6% at $GOOG). There are still some steep expectations being priced into the current share price.

If we lower the $AAPL EV/EBITDA multiple to 17.5x (a slight premium to $QCOM) then this gives a share price of US$187.57 – 7.5% below the current share price. This valuation is in line with our DCF analysis.

Summary

Based on our DCF valuation – $AAPL looks overvalued. Looking at some comparators – the market is valuing $AAPL highly compared to some peers. We believe if you are investing in $AAPL at the current price – you are paying a full price and there are cheaper options available. We know that we will hear about that from the $AAPL fans out there however.

Disclosure: no positions.