• 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 at the same rate (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 10 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!
Thank you for the info, good to know! Where do you get 15-25 from though as an average - Terminal value is new to me so trying to get my head around it. Why not 10-20 or 5-15 for example.
Also the 10yr medium for PE a PFCF, is there a website that you use? I've looked on finchat.io, but couldn't see it on there.
Looking at Nike, they have a FCF yield of over 5% at the moment, but growth wise they may have some difficulties, would be interesting to know how you would look at the terminal value figures for Nike and growth rates.
Hello. It is the exit multiple, so the multiple i expect the business trades at by the end of year 10. 5-15 is fine to use for low quality companies, but for quality companies my perspective is that you can use a higher exit multiple, like 15-25x by the end of year 10.
The median and average PE/PFCF/POCF/PS and so on can be visulized in finchat.io. if you click the "Graphing lines" in the toolbar for the multiple you have chosen (A bit hard to explain with text, can send you a image if you want).
Well, Nike is a quality business for sure - it has a competitive advantage, strong brand that is renowned worldwide, great distribution, and pricing power to some extent. The expected long term EPS growth is around 5%. It is a high quality business that is likely to be a slowgrower over the next 5 years (Can of course prove us wrong). This is nothing new for Nike, they've had many years of growth of around 5% growth and even negative years. I'd say a exit multiple of 15-20 is OK for Nike as there are uncertainties for future growth. However, the 10 year median for Nike is 32.75. This means that you have a potential upside to the DCF analysis if the multiple expands to its median (or close to it).
I can't see the Graphing Lines part that you mentioned, happy for you to send an image.
Yeah Nike is an interesting one, there are other companies coming into the market as well, so whilst it has a moat for now, this could soon be eroded over time.
Just an FYI about side effects. In the US patients can report side effects without the side effects being verified by a healthcare professional. More anecdotal information: in California, one of the big healthcare systems, are now requiring patients to come into the office for a care visit in order to get an Ozempic or Wegovy prescription. Medicare patients can now receive a Wegovy prescription if the have a co-morbidity such as cardiovascular risk factor, with obesity.
There sure seem to be some side effects that are not shown in the official data. I know many that use both Wegovy and Ozempic with mild side effects (mood swings/nausea) but nothing serious (yet).
Congratulations for this excellent summary. I read that only one in four U.S. patients prescribed Novo Wegovy or Ozempic for weight loss were still taking the medications two years later. Considering the cost of these drugs and the need for a lenghty use to yield meaningful benefits it might become a concern. Novo quite logically is challenging this analysis.
Great article! How did you determine the terminal values of 16, 22 and 25 in your DCF analysis?
Hello, Value!
The range is usually between 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 at the same rate (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 10 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!
Thank you for the info, good to know! Where do you get 15-25 from though as an average - Terminal value is new to me so trying to get my head around it. Why not 10-20 or 5-15 for example.
Also the 10yr medium for PE a PFCF, is there a website that you use? I've looked on finchat.io, but couldn't see it on there.
Looking at Nike, they have a FCF yield of over 5% at the moment, but growth wise they may have some difficulties, would be interesting to know how you would look at the terminal value figures for Nike and growth rates.
Hello. It is the exit multiple, so the multiple i expect the business trades at by the end of year 10. 5-15 is fine to use for low quality companies, but for quality companies my perspective is that you can use a higher exit multiple, like 15-25x by the end of year 10.
The median and average PE/PFCF/POCF/PS and so on can be visulized in finchat.io. if you click the "Graphing lines" in the toolbar for the multiple you have chosen (A bit hard to explain with text, can send you a image if you want).
Well, Nike is a quality business for sure - it has a competitive advantage, strong brand that is renowned worldwide, great distribution, and pricing power to some extent. The expected long term EPS growth is around 5%. It is a high quality business that is likely to be a slowgrower over the next 5 years (Can of course prove us wrong). This is nothing new for Nike, they've had many years of growth of around 5% growth and even negative years. I'd say a exit multiple of 15-20 is OK for Nike as there are uncertainties for future growth. However, the 10 year median for Nike is 32.75. This means that you have a potential upside to the DCF analysis if the multiple expands to its median (or close to it).
I can't see the Graphing Lines part that you mentioned, happy for you to send an image.
Yeah Nike is an interesting one, there are other companies coming into the market as well, so whilst it has a moat for now, this could soon be eroded over time.
Excellent article, my friend!
Thanks for sharing!
Thank you sir!
Appreciate the comment
Just an FYI about side effects. In the US patients can report side effects without the side effects being verified by a healthcare professional. More anecdotal information: in California, one of the big healthcare systems, are now requiring patients to come into the office for a care visit in order to get an Ozempic or Wegovy prescription. Medicare patients can now receive a Wegovy prescription if the have a co-morbidity such as cardiovascular risk factor, with obesity.
Ver interesting, thanks for sharing Ann.
There sure seem to be some side effects that are not shown in the official data. I know many that use both Wegovy and Ozempic with mild side effects (mood swings/nausea) but nothing serious (yet).
Congratulations for this excellent summary. I read that only one in four U.S. patients prescribed Novo Wegovy or Ozempic for weight loss were still taking the medications two years later. Considering the cost of these drugs and the need for a lenghty use to yield meaningful benefits it might become a concern. Novo quite logically is challenging this analysis.