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]

Core Insights - Parker-Hannifin Corporation is approaching its largest M&A deal in history, which is expected to enhance investor satisfaction due to strong momentum in the company [1] Valuation Methods - Various methods exist for sell-side analysts to determine a company's fair value, including DCF, multiples approach, and reverse valuation, each with its own strengths and weaknesses [1] - The DCF method requires precise assumptions and can introduce biases, while the multiples approach relies on the assumption that peer companies are fairly priced, which is often not the case [1] - Reverse valuation starts from the market price and discount rate, working backward to reveal the free cash flow assumptions embedded in the price, providing a more straightforward assessment of market beliefs [1] Free Cash Flow Analysis - The Free Cash Flow to Equity (FCFE) model is utilized to determine what belongs to shareholders, calculated as Earnings + Amortization – CAPEX – average acquisition cost = FCFE, ignoring working capital and debt changes [1] - The analysis focuses on three key numbers: earnings, amortization, and investments [1] Forecasting Approach - The H-model is applied for forecasts, which includes a 10-year two-stage growth fade with terminal growth equal to the risk-free rate, specifically 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]

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]