Come back to DCF
Multiples
- Value = EBITDA * 8
- We want tot value a perpetuity immediately
- EBITDA comes close enough to FCF
- So they’re essentially saying:
- Value = EBITDA / WACC - g
We don’t believe g will be more than WACC becuase that will frustrate our belief in the law of dimnishing returns
- the higher the g, the more it offsets WACC. So if you lower the denominator, then you have a higher multiple
- So WACC is connected to interest rates, then when interest rates go up we can expect multiples and others to be lower because it should offset accordingly
Cannibalization… don’t include. It’s erosiion. If there’s one aspect of economics that business fail again anad again, recognize there is competietion. HPC is a small player. You need to assume very strong brand customer loyalty that they’ll stop buying your bars and switch to only your gel. So if I have a prediliction to gels but my brand affinity is only strong enoguht ahtt i will only swtich to your gel. That’s unlikely. IN a commodity and choice, you can’t count cannibalization, because that’s just competitive erosion.
Indsutry structure… if the indsutry is very compettiitve then don’t count on cannibalization, but if you have weak ocmpetition, then you might count cannibalizaiton.
- “If we would have incorporated cannibalization, we wouldn’t have introduced a new product in the last 20 years”
- Erosion will happen anyway
Argues this picture is erosion. Gels are participating in the erosion process. He says hte gren areaa could be seen as canniblizaiton. but it feels like a philisophical point that in our absence they’d be eroded anway. So if we take that as a given, we’re actually gaining a share that would be otherwise lost. So we retain rather than canniblaizae
Compeittion and brand loyalty are the core components on whether or not to think about including erosion/cannibalization.
Costs
- Is it incremental or not? In its abence, woudl we include it?
- Anything already spent, we don’t include. At some point you evaluated those costs, but they’re now gone, so we don’t evaluate them moving forward. We’re at a new chapter. So anything that’s spent we don’t include in re-evaluation.
Capacity - Mixing Machine
- Internal costing, probably happy to do pro rata
- But withing evaluation of a potential project, shouldn’t double cost
#s
- He points out we didn’t think about inflation
HQ has resources → allocate excess resources. The role of managers manage. And managers allocate resources. You are there to maximize value.
He disagrees w/ trnasfer payments: He argues we don’t hav ea market, so if we contractin a market place, we’d have demnad and supply and a cost and that price decsirbes the right privce/value. Believes we have transfer prices to mimic a market, but if that leads us to make inefficient decisions, then I should scrap the transfer pricing. Transfer pricing shouldn’t enocde ineffecitent incentives.
- University of Pizza, pay directly to Gallileo
- Transfer price, even though we’ve created an org that’s insluated form the market, but we wnat to create the efficiency of the market. If my decision is to undertake, I don’t want tranfer payments to be in the way.
- The resrouce is owned by HQ… HPC owns these things, not HPC. Eneergy Bar doesn’t own anything.
- Love his points about only paying when net new/opportunity costs.
His analysis of HPC
- He deducts depreciation on his Incom statement b/c he can reduce his income to pay less taxes
- When I’m losing money, I can either A.) defer my taxes or B.) I can take a tax credit.
- Whenever you want to pay, paylater. Whenever you want to receive, you want to recieve as early as possible.
- The machine depreciated but no money left your bank. And if you have to fix your machine, then that should just show up in CAPEX.
- PPE:
- When I sell a building at more than I paid, that’s a capital gain. But if not, thne I get a capital loss deduction/credit
- Market value and unappreciated value, so I get to mulitply my unappreciated value by the tax rate to get my loss deduction
- He argues that yes, price increase should dampen demand, but only over a certain threshodl and often a 2.5% infaltion isn’t discirmantory
- And we anchor all inflation off of sales because then it shows up in everything else if we make everything else off a % of sales
- Excess capacity today doens’t mean forever, so yo need ot think about capacity projection along w/ our growht projections
- When we have to purchase new machines, that will be an outflow, and we must now add that depreciation and update how much we cna recover and liquidate
- To infinity and beyond, you need to hthikn about capex if it’s spiky, then how will you incoprorate? So you need to take infinity and beyond in a representative year. And if it’s spiky, then you can average and incoprorate it into the perepetuity and annuity of the future value incoprorating into expenses.