The Business of Value Investing.pdf

210 The Business of Value Investing

annual fi gures for free cash fl ow and EBITDA would be approxi-

mately $ 1.3 billion and $ 2.2 billion, respectively, for 2007. These val-

ues would imply a free cash fl ow/enterprise value (FCF/EV) yield of

13 percent and an EV/EBITDA multiple of approximately 4.3 times.

FCF / EV = $ 1.3 / $ 9.5 = 13 %

EV / EBITDA = $ 9.5 / $ 2.2 = 4.3

With Ternium ’ s steel peer group commanding EV/EBITDA valu-

ations of six to eight times, it appeared that Ternium ’ s valuation was

excessively low, even after assigning a discount to the Venezuela factor.

Discounted Cash Flow Analysis

In running a discounted cash fl ow analysis (Table 10.3 ), four

assumptions were made:

1. To be conservative, assume that 2007 free cash flow comes to
   $ 1 billion, implying no free cash flow in the last quarter.


2. Over the next five years, if FCF growth increased 10 percent a
   year, the present value (PV) of this sum of money discounted
   back at 10 percent would be $ 5 billion.


3. Apply a very reasonable terminal value of 10 times 2012 FCF.
   A terminal value essentially serves to suggest what the busi-
   ness would be worth if sold based on future projected growth
   and cash generation. With 200 million shares outstanding,
   this provides an intrinsic value of $ 75 a share.


4. If cash flow were to grow at 15 percent, intrinsic value
   per share comes to around $ 92 per share based on 200
   million shares. A 10 percent increase in shares outstanding
   would produce an intrinsic value of $ 83 a share.

Alternative Valuation

Ternium earned about $ 220 in EBITDA per ton of steel and was on

track to sell some 10 million tons in 2007 (without IMSA) compared

to 6,600 tons in 2005, a growth rate of nearly 24 percent a year.

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