Analyst Valuation Method
⚫Analyst report uses comparable enterprise
value to revenue multiples with ‘discount
retailing peers’ and ‘internet bellwethers’ as
comparisons
Problems with Analyst Valuation
Method
⚫Implicitly assumes:
–OSTK can generate similar margins to comparison
companies
Gross and Net Margin Comparison
for 2003 (data from eVal)
Gross Margin Net Margin
Overstock 11.7% -4.9%
Ross Stores 27.5% 5.8%
high 2003 sales growth rate of 160% for 10 years into
future
⚫Default valuation extrapolates Overstock’s 2003 ROE
of around –25% for the infinite future
⚫Default valuation model assumes that Overstock will
eVal Assumptions for $30 Valuation
⚫Valuation Parameters
⚫Valuation date = 03/10/2004
⚫Cost of equity capital=10%
⚫Forecasting Assumptions
⚫Set Interest Rate to 8% (=cost of debt)
⚫Trend Non-operating Income/Sales to 0%
⚫Set tax rate to 36% for terminal year (leave at 0 for all prior years)
⚫Trend Operating Cash/Sales to 3%
⚫Valuation=$31.76
Company Name
Forecast Horizon
Estimated Price/Share=$31.76
Fiscal Year End Date
Implied Return on Equity
Income Statement Assumptions
Sales Growth
Cost of Goods Sold/Sales
R&D/Sales
SG&A/Sales
Dep&Amort/Avge PP&E and Intang.
Interest Expense/Avge Debt
Non-Operating Income/Sales
Effective Tax Rate
Minority Interest/After Tax Income
Other Income/Sales
Ext. Items & Disc. Ops./Sales
Pref. Dividends/Avge Pref. Stock
TERMINAL
YEAR
Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast
12/31/2004 12/31/2005 12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014
(0.236) (0.206) (0.173) (0.137) (0.098) (0.056) (0.008) 0.044 0.103 0.170 0.158
90.0% 81.5% 73.0% 64.5% 56.0% 47.5% 39.0% 30.5% 22.0% 13.5% 5.0%
88.0% 87.8% 87.7% 87.5% 87.3% 87.2% 87.0% 86.8% 86.6% 86.5% 86.3%
0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
15.0% 14.5% 14.0% 13.5% 13.0% 12.5% 12.0% 11.5% 11.0% 10.5% 10.0%
31.1% 30.5% 29.9% 29.3% 28.7% 28.1% 27.4% 26.8% 26.2% 25.6% 25.0%
8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
0.2% 0.2% 0.2% 0.2% 0.1% 0.1% 0.1% 0.1% 0.0% 0.0% 0.0%
0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 36.0%
0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Plausible Valuation Assumptions
⚫Valuation parameters
⚫Valuation date = 03/10/2004
⚫Cost of equity capital = 10%
⚫Trend Depreciation Rate down to 25%
⚫Set Interest Rate to 8% (=cost of debt)
⚫Trend Non-operating Income/Sales to 0%
⚫Set tax rate to 36% for terminal year
⚫Trend Operating Cash/Sales to 3%
Company Name
Forecast Horizon
Estimated Price/Share=$9.64
Fiscal Year End Date
Implied Return on Equity
Income Statement Assumptions
Sales Growth
Cost of Goods Sold/Sales
R&D/Sales
SG&A/Sales
Dep&Amort/Avge PP&E and Intang.
Interest Expense/Avge Debt
Non-Operating Income/Sales
Effective Tax Rate
Minority Interest/After Tax Income
Other Income/Sales
Ext. Items & Disc. Ops./Sales
Pref. Dividends/Avge Pref. Stock
TERMINAL
YEAR
Forecast Forecast Forecast Forecast Forecast Forecast
12/31/2004 12/31/2005 12/31/2006 12/31/2007 12/31/2008 12/31/2009
(0.244) (0.177) (0.099) (0.008) 0.101 0.150
90.0% 73.0% 56.0% 39.0% 22.0% 5.0%
88.0% 87.7% 87.3% 87.0% 86.6% 86.3%
0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
15.0% 14.0% 13.0% 12.0% 11.0% 10.0%
30.6% 29.5% 28.4% 27.2% 26.1% 25.0%
8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
0.2% 0.2% 0.1% 0.1% 0.0% 0.0%
0.0% 0.0% 0.0% 0.0% 0.0% 36.0%
0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
⚫Growth and ROE interact to determine value
⚫Terminal ROE must climb above cost of capital for business to be
viable
⚫OSTK operates in a highly competitive environment, so terminal
ROE is unlikely to be more than 15%