Terminal multiple is the multiple we asign to the FCF at the end of the 10 year period. So after 10 years, given X amount of growth, I assume that the business will be valued at 15-25 times FCF. So yes, it is sort of the PE, but as we use FCF here it is PFCF. If you were to use EPS, it would be the PE of the business at the end of the period.
I usually make an educated, conservative guess on this value
I've been reading a lot of your articles which are really insightful.
With regards to the terminal value, how do you make an educated guess? Your terminal values range from 10 - 35. Why do you go as high as 35 for some businesses?
It would be good to know how you termine this and if you have a caluclation for each business.
35 is probably too high for any company tbh. The range is usually in the tange of 15-25 as we are analyzing quality companies with endruing moats (without a moat I think the DCF is useless).
There are many ways to arrive at the multiple, but I prefer using the qualitative analysis as a basis, so:
• Business model (capital light/unique?/source of moat)
• Risk factors (Red flags or large potential risks that have a certain degree of likelihood of occuring)
• Historical multiple comparison (If the business has improved we can also expect higher mulitples, but often we see stagnant quality with above historical multiples)
Now, putting this together using a point based system for each can easily show you if this deserves a higher or lover exit mulitple.
To add to this I look at the historical multiple (PE and PFCF) for the last 10 years. Here we can extract the 10 year median. For example, Novo has a 10 year median PFCF of 27. I wont go above this median as the business has been improving significantly in the last 5 years and I dont expect Novo to keep improving (margins, roc, growth, patents).
It becomes a bit subjective at this point, but I like to use ~20x (+/-) for high quality companies that I believe will be solid even -0 years out. I look at the historical multiples, and I try to stay well below the 10y median as most companies dont do better in the coming 10y period vs. The past 10y period (as a general rule).
Now, that was for the normal scenario, but we also have a best case (weighted 10%), and a worst case scenario. I dont mind being a bit optimistic on the best case scenario as its weighted so low in the model. And the worst case should reflect lower than expected growth, and a exit multiple in the lower historical range.
Hope that helps! Let me know if you have any other questions!
Terminal multiple is the multiple we asign to the FCF at the end of the 10 year period. So after 10 years, given X amount of growth, I assume that the business will be valued at 15-25 times FCF. So yes, it is sort of the PE, but as we use FCF here it is PFCF. If you were to use EPS, it would be the PE of the business at the end of the period.
I usually make an educated, conservative guess on this value
Well, yes, I use several services:
- Roic.ai - great for long term economic data
- Seekingalpha - Great to read up and get an impression on certain companies
- Yahoo Finance for some quick economic data
- Tradingview for charts
All these are tools that support my investing process, I will make a substack about my Investing strategy and process soon to explain in more detail
I've been reading a lot of your articles which are really insightful.
With regards to the terminal value, how do you make an educated guess? Your terminal values range from 10 - 35. Why do you go as high as 35 for some businesses?
It would be good to know how you termine this and if you have a caluclation for each business.
Thank you.
Hello, Value!
35 is probably too high for any company tbh. The range is usually in the tange of 15-25 as we are analyzing quality companies with endruing moats (without a moat I think the DCF is useless).
There are many ways to arrive at the multiple, but I prefer using the qualitative analysis as a basis, so:
• Business model (capital light/unique?/source of moat)
• Growth prospects (Growing market, gaining market share)
• Sustainable competitive advantage (E.g. Intangible assets/cost advantage)
• Management (if relevant), includes track record, ownership, founder-led, insentive structures
• Risk factors (Red flags or large potential risks that have a certain degree of likelihood of occuring)
• Historical multiple comparison (If the business has improved we can also expect higher mulitples, but often we see stagnant quality with above historical multiples)
Now, putting this together using a point based system for each can easily show you if this deserves a higher or lover exit mulitple.
To add to this I look at the historical multiple (PE and PFCF) for the last 10 years. Here we can extract the 10 year median. For example, Novo has a 10 year median PFCF of 27. I wont go above this median as the business has been improving significantly in the last 5 years and I dont expect Novo to keep improving (margins, roc, growth, patents).
It becomes a bit subjective at this point, but I like to use ~20x (+/-) for high quality companies that I believe will be solid even -0 years out. I look at the historical multiples, and I try to stay well below the 10y median as most companies dont do better in the coming 10y period vs. The past 10y period (as a general rule).
Now, that was for the normal scenario, but we also have a best case (weighted 10%), and a worst case scenario. I dont mind being a bit optimistic on the best case scenario as its weighted so low in the model. And the worst case should reflect lower than expected growth, and a exit multiple in the lower historical range.
Hope that helps! Let me know if you have any other questions!
I prefer lifco or cs
Yeah, me too. Still think Roper is an interesting business
Would be great if you can share in detail your DCF process, thanks for sharing
Alright, I will, thank you for the feedback!