Paul Pignataro - Financial Modeling and Valuation: A Practical Guide to Investment Banking and Private Equity

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Copyright 2013 by Paul Pignataro. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Pignataro, Paul.
Investment banking in practice: financial modeling and valuation / Paul Pignataro.
pages cm. (Wiley finance series)
Includes bibliographical references and index.
ISBN 978-1-118-55876-8 (cloth) ISBN 978-1-118-55874-4 (ePDF)
ISBN 978-1-118-55872-0 (Mobi) ISBN 978-1-118-55869-0 (ePub)
1. Investment banking. I. Title.
HG4534.P54 2013
332.66 dc23
2012050850

This book is dedicated to every investor in the pursuit of enhancing his or
her wealth. Those that have gained; those that have lost; this continuous
struggle has confounded the minds of many. This book should be one
small tool to help further said endeavor; and if successful, the seed planted
to spawn a future of more informed investors and smarter markets.

Preface

The markets are vast and complexnot only the United States, but also the global markets. Stocks, bonds, mutual funds, derivatives, optionsyes, choices are endless, literally. Everyone wants to make money. Yet, throughout the past years we have faced tremendous market swings, rendering investors (and their money) in a sea of lost hopes and few investors with a plethora of wealth. Many of these market anomalies and swings are dependent, and in a sense dictated by the investoryou. The investor plays a part in setting the current stock price. The reaction of the investor can aid in determining the success of an initial public offering (IPO). Yes, the collective psychology of the market as a whole plays a major role, but if the everyday investor were better equipped with the proper tools to understand the underlying fundamentals of a rational investment, smarter investment decisions could be made, more rational investments would be made, and the markets would be a more efficient environment.

This book sets out to give any investor the fundamental tools to help determine if a stock investment is a rational one; if a stock price is undervalued, overvalued, or appropriately valued. These fundamental tools are used by investment banks, private equity firms, and Wall Street analysts.

We will evaluate Walmart, determining its current financial standing, projecting its future performance, and estimating a target stock price. We will further assess if this is a viable investment or not, but more importantly, give you the tools and concepts to make your own rational investment decisions. We will have you step into the role of an analyst on Wall Street to give you first-hand perspective and understanding of how the modeling and valuation process works with the tools you need to create your own analyses.

This is a guide designed for investment banking and private equity professionals to be used as a refresher or handbook, or for individuals looking to enter into the investment banking or private equity field. Whether you are valuing a potential investment or business, the tools demonstrated in this book are extremely valuable in the process.

THE WALMART CASE STUDY

We will analyze Walmart throughout this book. Walmart is an American multinational retailer corporation that runs chains of large discount department stores and warehouse stores. The company is the worlds third largest public corporation, according to the Fortune Global 500 list in 2012. It is also the biggest private employer in the world, with over two million employees, and is the largest retailer in the world. If we want to invest in Walmart, how do we determine the viability of such an investment? In order to ensure profitability from a stock investment, we need to understand what the future stock price of Walmart could be. Obviously, stock price fluctuations are largely based on public opinion. However, there is a technical analysis used by Wall Street analysts to help determine and predict the stock price of a business.

We ran this analysis in January 2012, determining there was still more room for the stock price to increase. Since that analysis, the stock price has in fact increased significantly from $57.39 to $73.82. We now want to reassess the analysis to see where the stock price can go from here. This time, we will walk you through a complete analysis of Walmart to determine the potential value of the stock. It is important to note this book was written in October of 2012 so all analyses are based on that date.