Chapter 9

Case Study 2

Valuation of a Cyclical Business

This chapter applies the principles in the previous chapters to a valuing a cyclical business. The focus is on forecasting a cycle and establishing normalized cash flow.

Cyclical businesses are actually a bit more complicated to value from a technical standpoint than growth businesses. This is not to say that growth businesses are easy to value; they are not. Forecasting growth businesses is more difficult since assumptions regarding market development, product, and competition are much more uncertain. Cyclical businesses are more complicated in that they require understanding and adjusting for the business cycle in the forecast horizon and terminal value. But their identification as cyclical by virtue of their having been around for many economic cycles usually means that ample industry data is available.

This chapter will walk through a valuation of a commodity construction materials manufacturer, BlockCo, by another company in the same industry. Since it is assumed that the reader is already competent in developing financial projections, the financial statements used in this example have been simplified in order to make it easier to highlight the most important valuation elements. Our target is a public company with 10.1 million shares outstanding, trading at about $14 per share with $20 million in debt and $5 million cash. It has no other investments.

Enterprise value or total market value is the value of equity plus ...

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