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Valuing capital intensive businesses


WeiChiLoh
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Its a lot easier when you just compare your forward rate of return, that is something you can compare over all asset classes and different valued stocks. Then its just

distance to fair bookvalue/holding period in years + dividend yield + bookvalue growth (everything in percent).

But perhaps its just because i never understood which discount rate to use and i never found a good explanation for that. :)

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How do you guys value capital intensive businesses? Discounted cash flow doesn't seem to be useful in this area because rising EBIT is matched with rising CAPEX and working capital requirements.

 

Well...you've sort of figured out a key insight.  Growth alone tells you nothing - its the capital required to generate that growth and the return on said capital.

 

think of ROIC in a kind of dupont framework where you have NOPLAT margin * sales/IC.  The more capital intense a business is the more important Sales/IC becomes as a driver of intrinsic value.

 

For a service business with no capital its hardly worth thinking about capital intensity or even ROIC on the base business - instead focus on margin and where the excess cashflow goes.

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  • 2 weeks later...

My short answer would be: no different that you value any other business.

 

What are free cash flows the business will be able to generate to maintain or grow itself, to the extent growth opportunities exist.  By looking at free cash flow, you'll already be taking the degree of capital intensiveness into account.  And how do these cash flows compare to invested capital including debt and equity.

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