How to Value Roll-up Companies

[no_free_lunch]

When you have a company that has a long-term (10 years) track record of successfully acquiring and integrating complementary companies, what value do you give to the historical growth?  Is it even a factor or do you value the company based purely on the current set of companies?  Or would you use a hybrid approach?  The company has essentially flat to slow-growth organic revenues but has grown at 20%+ via acquisitions for the past decade or so.  If it was a fast-food company, it would probably have a PE of 40-50 but perhaps the scaling is more reliable with a franchise.  Any suggestions?

[Green King]

You value them case by case basis. The price you give depends on your understanding of the business and comfort in terms of it future prospects. It is always best to get those characteristics for free. Since seeing the future is very hard and you never know what will happen.

[Vish_ram]

what value do you give to the historical growth? 

 

Are  you really asking "how much of historical growth can I project into future?"

 

I would project more if industry is fragmented and the rollup is a leader in consolidation. I'll project less if the company fails to show organic growth in periods of no M&A. I would project more if mgmt is young and has a good track record.

 

It is always safer to assume a base case valuation with growth=0; (last 4 Q op CF - capex)/(r-0) ; r is discount factor.

[Palantir]

Are you valuing MLAB? My issue is there's so much expenditure on acquisitions, your future levels of earnings/cash flow are real high, but your current yield is pretty low due to high rates of reinvestment. No different from valuing AMZN or a firm that's buying back stock aggressively.

[Liberty]

Are you valuing MLAB? My issue is there's so much expenditure on acquisitions, your future levels of earnings/cash flow are real high, but your current yield is pretty low due to high rates of reinvestment. No different from valuing AMZN or a firm that's buying back stock aggressively.

 

I'm guessing this is a question about VRX :)

[no_free_lunch]

It is no secret, the stock is CSU.TO (constellation software), I just didn't want to bring up the stock name as I don't know enough about it yet to have much of an opinion.  I was thinking the description sounded like Valeant while I was writing.  :)

 

The basic numbers are cash flow of around $10.50 per share and a $185 share price.  About 18x adjusted earnings.  However, the stocks earnings grew 6 fold in the last 5 or 6 years, without taking on any debt.  They finance the entire growth using short-term debt and then pay it down with cash flow.  I actually feel fairly conservative estimating that it will grow 15% going forward given the past history.  It definitely is not cheap enough if I assume they won't be doing acquisitions.

 

So given the past history, isn't it cheap at 18x?  BWLD, a restaraunt, grows 20%-ish and has a PE of around 40.  So from that perspective, why shouldn't constellation have a similar multiple?  Any suggestions on what I might be missing?

[no_thanks]

It is no secret, the stock is CSU.TO (constellation software), I just didn't want to bring up the stock name as I don't know enough about it yet to have much of an opinion.  I was thinking the description sounded like Valeant while I was writing.  :)

 

The basic numbers are cash flow of around $10.50 per share and a $185 share price.  About 18x adjusted earnings.  However, the stocks earnings grew 6 fold in the last 5 or 6 years, without taking on any debt.  They finance the entire growth using short-term debt and then pay it down with cash flow.  I actually feel fairly conservative estimating that it will grow 15% going forward given the past history.  It definitely is not cheap enough if I assume they won't be doing acquisitions.

 

So given the past history, isn't it cheap at 18x?  BWLD, a restaraunt, grows 20%-ish and has a PE of around 40.  So from that perspective, why shouldn't constellation have a similar multiple?  Any suggestions on what I might be missing?

 

 

I would also be really interested if anyone else had looked into this? 

[Bagehot]

It is no secret, the stock is CSU.TO (constellation software), I just didn't want to bring up the stock name as I don't know enough about it yet to have much of an opinion.  I was thinking the description sounded like Valeant while I was writing.  :)

 

The basic numbers are cash flow of around $10.50 per share and a $185 share price.  About 18x adjusted earnings.  However, the stocks earnings grew 6 fold in the last 5 or 6 years, without taking on any debt.  They finance the entire growth using short-term debt and then pay it down with cash flow.  I actually feel fairly conservative estimating that it will grow 15% going forward given the past history.  It definitely is not cheap enough if I assume they won't be doing acquisitions.

 

So given the past history, isn't it cheap at 18x?  BWLD, a restaraunt, grows 20%-ish and has a PE of around 40.  So from that perspective, why shouldn't constellation have a similar multiple?  Any suggestions on what I might be missing?

 

CSU is different from most rollups in that the underlying business is quite good. You don't generally see sustained organic growth in the high single digits for most rollups. Ask yourself this: what would I pay for a business with CSU's margins and returns on capital as a standalone entity, if they never did another deal? Then ask: is Mark Leonard more likely to increase or decrease my estimate of standalone intrinsic value over time via smart capital deployment?

[SandwichesAreBeautiful]

the question was never answered. Anyone have an opinion on how to value a roll-up such as csu?

[Guest cherzeca]

so growth by acquisition comes with a price of course, which is paid up front to sellers of the acquired companies, but of course buyer's shareholders are told that synergies will come and that patience is a virtue.  I am not a big believer in this strategy offering an eventual payoff for buyer's shareholders...but as the buyer gets larger, its compensation for management increases because larger companies pay their management more than smaller companies...so there is a strategy at play just maybe not for the shareholders