Methodology

The framework

I value companies by discounted cash flow, in the tradition of Aswath Damodaran, whose framework, teaching materials and spreadsheets are public. A valuation forecasts what a company will earn and what it must reinvest to earn it, discounts that at a rate reflecting the risk, and adds a terminal value. Which cash flow gets discounted, and at what rate, depends on the company: free cash flow to the firm at a cost of capital, free cash flow to equity or dividends at a cost of equity, over two stages or three.

• The discount rate — a cost of capital for cash flows to the firm, a cost of equity for cash flows to shareholders — is built from a risk-free rate, an equity risk premium weighted by where the company actually earns its revenue (including country risk), and a beta from the business the company is in. A cost of capital adds the cost and the weight of the company's debt, and for companies without a credit rating a synthetic rating is estimated from interest coverage.
• Reinvestment is tied to growth: in a firm valuation through a sales-to-capital ratio, where every unit of new revenue requires a unit of new capital; in an equity valuation through what the company keeps rather than pays out.
• Leases and R&D are capitalised: operating leases are treated as debt, and R&D is treated as an investment with a multi-year life rather than an expense.
• Terminal value assumes growth at or below the risk-free rate, and a return on capital — on equity, in an equity valuation — that reflects how durable I think the company's competitive advantage is, often no excess return at all.
• Occasionally a company calls for a relative valuation (multiples against peers) or a contingent-claim valuation (when the value is an option on an event); where used, the valuation says so.

The output is a point estimate produced by chosen assumptions, not a measurement. Every valuation publishes those assumptions, and a sensitivity table showing what the estimate becomes when the two that matter most turn out differently.

My model

Valuations are grounded on Damodaran's public spreadsheets, data and tools, populated by hand from the company's filings. Which one depends on the company — FCFF, FCFE, 2-stage, 3-stage or the one built for financial service firms.

I take full responsibility. Any mistake is my mistake and mine alone.

Time horizon

Unless a valuation says otherwise, I am working on a horizon of at least one year, and normally much longer — five to ten years or more. That is how long I think it takes for a gap between price and value to close, and it is how I invest my own money. I state a minimum rather than a range on purpose: I can tell you this is not a short-term call, but I can't honestly tell you today which year I'll sell. Occasionally a company's situation sets its own clock — a takeover, a drug trial, a refinancing — and where that's true, the valuation says so and gives a shorter, specific horizon. I never publish a view on where a share price goes over the next weeks or months, because I don't have one.

Updates

I revalue a company when it publishes annual results, or when something material changes. There is no guaranteed schedule. A published valuation is never edited — a new view is a new valuation, and the old one stays up, dated.