How am I supposed to give you something that is better than what you have seen when I am the one asking for the numbers that I need to make an evaluation? I'm not bragging that I have better facts or knowledge or models. I am asking for inputs so I can even have an opinion.
Okay, let me give you two examples at opposite extremes.
Example #1:
EBITDA: $150M/yr
EV/EBITDA Multiple: 5
Capex Required: $700M
In this case, enterprise value is $750M (5*150). Assume capex is financed by debt. Residual of $50M becomes the new marketcap for equity since
enterprise value = marketcap ($50M) + debt ($700M) = $750M.
Since the equity trades for $100M - more or less - that is a 50% loss.
Example #2:
EBITDA: $180M/yr
EV/EBITDA Multiple: 7
Capex Required: $450M
In this case, enterprise value is $1260M (7*180). Assume capex is financed by debt. Residual of $810M becomes the new marketcap for equity since
enterprise value = marketcap ($810M) + debt ($450M) = $1260M.
Since the equity trades for $100M, that is an eight bagger.
Yes, I am ignoring cash, because whatever cash they have here is trivial by scale to the numbers we need for production.
Small changes in assumptions about EBITDA, EV/EBITDA multiples to calculate enterprise value, and capex make the difference between losing 50% on an investment in the stock today versus making 800% on the investment. Is it clear now why I care about these things?
So, what I was hoping to get out of this discussion was some educated guesses and reasoning about what are appropriate values for:
EBITDA
EV/EBITDA multiples for valuing the production entity
capex
I realize these are all guesses at this point, but it is better to have a range of intelligent guesses than to just wave your hands and believe the stock is going up.
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