SECOND A

SSIG

NMEN

T

25410 CORPORATE

FIN

ANCIAL

ANALYSIS

SPRING 2

013

VALUIN

G TEC

HNOLOGY C

OMPA

NIES

P R E S E N T E D B Y :

INTRODUCTION AND OVERVIEW OF THE

COMPANIES

Leaders in the provision of 3D content-to-print solutions:• 3D printing, print materials, on demand

custom part services, 3D authoring for consumers Current details:

• Rank 4th on Forbes ‘Fastest growing Tech Companies’ for 2013

• 46% sales growth from previous year• 30% EPS growth annually • Share price: $58.64 (October 25th 2013)

Provider of storage systems and data management solutions predominantly for Information Technology Infrastructures

FAS storage System E-series System

Current Details:

• 28% increase in profit (relative to previous

year)

• Initiation of a quarterly dividend of $0.15 per

share

• Share prices: $39.39 (October 25th 2013)

INDUSTR

Y ANALY

SIS

CO

MP E T I T

I VE F

ORC

E S

3D SYSTEM: 3D PRINTER INDUSTRY

• High barriers to industry

→ intellectual property rights held by existing

firms

• 3D printing industry interrelationship with

facets of the economy

→ education, healthcare, defence

NETAPP: ENTERPRISE STORAGE INDUSTRY

• Also high barriers to entry

• Rapid development of technological

changes

• Intense rivalry amongst existing firms within

industry• Main Competitors involved: Oracle & HP

both largely diversified companies Ability to maintain relationship with

customers/partners Offers diversified portfolio of products and

services

Equity Valuation

Model

1. FCFE

2. Residual Income

FUTURE CASH FLOW TO EQUITY MODELS (FCFE)

• ‘ T W O S TA G E F C F E M O D E L’ , C O M PA N Y T H AT I S E X P E C T E D T O I N I T I A L LY G R O W M U C H FA S T E R T H A N A S TA B L E F I R M B E F O R E T R A N S I T I O N I N G T O A S TA B L E R AT E

3D Systems

• ‘ C O N S TA N T G R O W T H F C F E M O D E L’ , C O M PA N Y T H AT I S P R E S U M E D T O B E I N A S T E A D Y S TAT E O F G R O W T H

NetApp

Measures amount of cash that can be paid to the equity shareholders of the company after accounting for all expenses, reinvestments and debt repayments

FCFE METHOD

K E Y I N P U T S :

3D SYSTEM

NETAPP

RESIDUAL INCOME APPROACH (RI)

S T O C K VA LU E = B O O K VA LU E O F E Q U I T Y + P V O F E X P E C T E D R E S I D U A L I N C O M E

M O S T A P P L I C A B L E F O R S M A L L T O N O D I V I D E N D C O M PA N I E S W I T H N E G AT I V E C A S H F LO W S E X P E C T I N G T O B E C O M E P O S I T I V E

KEY INPUTS : • current book value of equity• Net income• Required return on equity (from CAPM)• Steady-state growth rate (Industry)• A horizon point (2 years)

NETAPP

The historical data determines residual income and trends

Shows:1. Book Value of Equity – at 31/07/13 is $4018M, share price

$42.672. Net income3. Residual Income is decreasing but at an increasing rate of

13% in 2012 and 34% in 2013

NETAPP CONTINUE…

• Forecasting can be very qualitative

• Using the trend increasing rate of change, the growth could be

extrapolated to 42% then 80%.

• Instead of increasing the percentage I used the absolute value 700

(see red box).

• The PV of the perpetuity is in the green box.

• With all the values, we can find the stock price.

• V0= 4018 + (-644-94) + 889 = $4169M

• This gives $42.67 per share ($1.55 higher than

the price at valuation)

3D SYSTEM

• On 31 Dec 2012

• S.P = $53.35

• B.V = $480.33m

• Required return on equity = $41.98%

• Constant growth rate = 4.9%

2008 2009 2010 2011 2012

BV Equity 102.23 104.69 133.12 254.79 480.33

% Change 2.41% 27.15% 91.40% 88.52%

Net Income -6.15 1.14 19.57 35.42 38.94

% Change -118.51% 1617.82% 81.03% 9.94%

Residual Income -41.78 -24.39 -20.47 -68.03

% Change 41.63% 16.08% -232.35%

3D SYSTEMS CONTINUE..

• Used a 3 year horizon point

• 3D showed large variances and unpredictability with

historical values

• Estimated growth rate of -58%

• Did not correlate with market consensus that 3D had

large potential

• Predicted a negative share price for 3D

Signalled issues with model

2013 2014 2015

Residual Income -107.49 -169.83 -268.34

% Growth -58.00% -58.00% -58.00%

PV Residual Income -75.70 -84.24 -93.75

PV Horizon Value -252.79

NPV of Company -26.15

No. of outstanding Shares(millions) 101.61

Estimated Share Price ($, per share) -0.2574

THEORY FOR RI STATES…

• RI is most appropriate for growing

companies without dividends

• Higher emphasis on immediate

intrinsic value

• Less sensitive to terminal value -> limit

errors in forecasting

OHLSON, 2000

Residual Income Valuation: The Problems

• RI may not hold when there are expected

fluctuations in outstanding shares

• 3D Systems has a history of issuing

unexpected share options and splits

• Possible reason why the RI did not work

in this case

THE IN

VESTMENT

DECISIO

N