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Definition: Price-To-EBV, or Price to Economic Book Value ratio

Monday, June 18th, 2012

The price-to-economic book value (“Price-to-EBV”) ratio measures the difference between the market’s expectations for future profits and the no-growth value of the stock. Economic book value (“EBV”) is our measure of the no-growth value of a stock.

When stock prices are much higher than EBVs, the market predicts the economic profitability (as distinct from accounting profitability) of the company will meaningfully increase. When stock prices are much lower than EBVs, the market predicts the economic profitability of the company will meaningfully decrease. If the stock price equals the EBV, the market predicts the company’s economic earnings will stay the same into perpetuity.

EBV measures the no-growth value of the company based on the current Net Operating Profit After Tax (NOPAT) of the business. It is also known as the “pre-strategy value” of the company because it focuses only on the perpetuity value of the current NOPAT or cash flows.

As an example, in Blue Light Special on WMT, I explain how Wal-Mart’s valuation went from Very Dangerous in the late 1990s to Very Attractive recently. This change occurred as the stock remained flat while the cash flows (NOPAT) increased substantially. Figure 1 from my article, below, compares the EBV per share of Wal-Mart to its stock price.

The Formula for EBV is:

(NOPAT / WACC)

- Adjusted total debt (including off-balance sheet debt)

+ Excess cash

+ Unconsolidated Subsidiary Assets

+ Net Assets from Discontinued operations

- Value of Outstanding Employee stock option liabilities

- Under (Over) funded Pensions

- Preferred stock

- Minority interests

+ Net deferred compensation assets

+ Net deferred tax assets

= Economic Book Value (EBV)

EBV per share equals EBV divided by shares outstanding.

Disclosure: I have a position in WMT. I receive no compensation to write about any specific stock, sector or theme.

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3 Comments

  1. varadha says:

    Terrific, yet simple analysis. I’ve always been a fan of ROIC as a measure of capital efficiency and believe that no size/growth outperformance can replace the quest for efficiency.

    Sort of like a big gas guzzling v8 that needs ever increasing gallons of fuel to keep its engine running

  2. David says:

    But Angie’s $90 per user acquisition cost is going to go away. That’s what their approach probably is. How would their outlook be if that $90 cost dropped down to a total cost of $3 per user?

  3. David:

    That would be great, but cost per user acquisition is not something that’s very easy for a company to fix. ANGI can slash their marketing budget to the bone, but then they would stop acquiring new members. They would probably lose members in fact, as their membership renewal rate is at ~75% and declining. If they cut marketing expense by ~95% as you seem to be suggesting, ANGI might be able to eke out 1 year of slight profits, but they would start shedding members and losing money very quickly. ANGI’s only hope is to keep its marketing budget high and hope it can reach the scale and brand awareness to be able to sustain its business while scaling back marketing costs enough to turn a profit. The fact that ANGI’s revenue growth is slowing down even as its marketing costs keep increasing makes it very unlikely it will achieve that goal.

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