More Than One Way to Find Value 203Valuation
Assigning a multiple of 15 to 20 to the $ 1.29 2003 EPS gives a price
range of about $ 19 to $ 25 per share. This a fair multiple range, as it
would have been below the EPS growth rate and implying a price to
earnings/growth (PEG) ratio of less than 1.
A very common rule of thumb metric in business valuation is that
businesses that are selling for earnings multiples that are less than
the rate of growth of earnings often can create more value, all else
being equal. It ’ s a logical assumption: Paying 12 times earnings for
a company that is growing profi ts at 20 percent a year is much more
attractive than paying 10 times earnings for a company that is grow-
ing 5 percent a year. Such was my thinking when determining an
estimate for the stock price based on future earnings expectations.
Further, it was clear that the balance sheet value of the real
estate was undervalued. Going back and looking at the company ’ s
past real estate verifi ed this assumption.
Table 10.1 looks at the historical real estate transactions. In 2002,
Sunrise had about $ 800 million in property on its balance sheet. The
entire $ 800 million was related to the real estate properties. GivenTable 10.1 Sunrise Senior Living Historical Real Estate Transactions
( $ millions)
Date Sales Price Book Value Premium to Book
December 2000 $ 130 $ 75 80%
August 2001 $ 86 $ 67 43%
May 2002 $ 200 $ 140 62%
August 2002 $ 48 $ 29 72%
September 2002 $ 200 $ 140 42%
Average Sales Price
over Book Value53%Source: Company financial reports.CH010.indd 203CH010.indd 203 9/2/09 11:50:55 AM9/2/09 11:50:55 AM