Valuation Methods - The article discusses various methods sell-side analysts use to determine a company's "fair" value, highlighting the DCF method as complex and prone to biases such as overconfidence and anchoring [1] - The multiples approach is noted for its simplicity but relies on the assumption that peer companies are fairly priced, which historical data often contradicts [1] - Reverse valuation is introduced as a method that starts from market price and discount rate to uncover the free cash flow assumptions embedded in the price, providing a more straightforward assessment of market beliefs [1] Free Cash Flow Analysis - A Free Cash Flow to Equity (FCFE) model is utilized to ascertain what truly belongs to shareholders, calculated as Earnings + Amortization – CAPEX – average acquisition cost = FCFE, while ignoring working capital and debt changes [1] - The analysis emphasizes three critical numbers: earnings, amortization, and investments, which are essential for accurate valuation [1] Forecasting and Discounting - The H-model is applied for forecasts, featuring a 10-year two-stage growth fade with terminal growth aligned to the risk-free rate, specifically the 10-year government bond yield [1] - All cash flows are discounted using the cost of equity formula: RFR × beta + 5% ERP, resulting in a clear and noise-free valuation of the business [1]

Parker-Hannifin Corporation ( PH ) is one of those companies that made its investors very pleased with strong momentum . Now, the company is on the verge of its largest M&A deal in history, paid inThere are many ways sell-side analysts try to find a company’s “fair” value — some useful, others pure illusion. The DCF method is like a massive LEGO set: every tiny assumption has to fit just right, and it opens the door to bias — overconfidence, hindsight, and anchoring. The multiples approach seems easier — co ...

Core Insights - A company experiencing a 90% drawdown over five years may not necessarily be due to management failures, indicating that external factors could be at play [1] - Various methods exist for sell-side analysts to determine a company's "fair" value, with some being more reliable than others [1] Valuation Methods - The DCF (Discounted Cash Flow) method requires precise assumptions, which can lead to biases such as overconfidence and anchoring [1] - The multiples approach, while seemingly simpler, relies on the assumption that peer companies are fairly priced, which is often not the case historically [1] - Reverse valuation starts from the market price and discount rate, revealing the free cash flow assumptions embedded in the price, providing a more straightforward assessment of market beliefs [1] Free Cash Flow Analysis - A Free Cash Flow to Equity (FCFE) model is utilized to determine what belongs to shareholders, calculated as Earnings + Amortization - CAPEX - average acquisition cost = FCFE [1] - The analysis disregards working capital and debt changes, focusing on core business metrics [1] - Key components for valuation include earnings, amortization, and investments [1] Forecasting Approach - The H-model is applied for forecasts, featuring a 10-year two-stage growth fade with terminal growth aligned to the risk-free rate, represented by the 10-year government bond yield [1] - All cash flows are discounted using the cost of equity, calculated as RFR × beta + 5% ERP, resulting in a clear picture of the business's true worth [1]