Business Valuation report

Discussion about guideline companies (comparables) for the purpose of valuing the Cruise unit of General Motors –posted in a discussion section by a University of Baltimore graduate student in September, 2019.

This week’s discussion topic was very interesting. It was really fascinating learning about General Motors (GM) sub unit Cruise. I knew that other automobile makers where working on developing electric cars and working towards developing autonomous vehicles but I was unaware that GM had its own sub unit that was completely dedicated to that mission. With the new trend of electric vehicles, autonomous cars and rob taxis it is important for all automakers to be following this new trend so that they stay relevant as a business. Since GM owns the sub unit Cruise it is well positioned to be in the mix and involved in the new trends taking place. General Motors sub unit Cruise has been so successful that it plans to separate that business unit and list it as publicly traded company one day in the future. Cruise is known for its self-driving car software and the potential to have a robo taxi service using its self-driving technology.

Learning about Cruise was great because after reading chapter 9 it made me really interested in practicing how to value a company using the guideline public company method. Using the guide line public company method is commonly used amongst valuation analyst to value private companies before they become public, as well as valuing public companies. The purpose of the guideline company method is to find comparative companies that are similar to the company that you are performing the valuation assignment on. In this instance comparative companies are also referred to as guideline companies. The reason that the valuation analyst does not want to just try and find one similar company is because no two companies are truly comparable. Having multiple guideline companies when performing this analysis is important because if you have multiple companies you are able to minimize the risk of market inefficiencies or trends effecting a single business that may affect your valuation. If you use only one guideline company when performing your analysis, there is a risk that a specific economic condition could be effecting that company which could cause your valuation to be inaccurate. When picking guideline companies even if they do not operate exactly in the same line of business but share some similarities they should be considered. As it is stated in Revenue Ruling 59-60 “The market price of stocks of corporations engaged in the same or similar line of business and having their stocks actively traded in a free and open market, either on an exchange or over the counter.” As the textbook reiterates multiple times from Revenue Ruling 59-60 the phrase “engaged in the same or similar line of business”, so that the reader understands when picking guideline companies that it can be the same or similar. The textbook makes it clear when performing this analysis to not only consider companies that are the same but companies that are similar because companies that are similar can provide guidance about other companies in the market place.

When beginning my research to find guideline companies for Cruise I had done some research and found that Cruise’s North American Industrial Classification System (NAICS) code was 7372. What this code means is that Cruise’s line of business falls under the category of packaged software or is engaged in the design, development, and production of prepackaged computer software. Since Cruise is a company working on self-driving cars and a robo taxi services this NAICS code makes sense, but I am also going to include some guideline companies that do not fall under the same NAICS code as Cruise. The companies that I am going to include for my guideline companies are going to be Uber (UBER), Lyft (LYFT), Tesla (TSLA), Ford (F) and General Motors (GM).

The first company that is going to be analyzed as a guideline company is Lyft. The company Lyft is a ride sharing business that functions similarly to a taxi service but instead of calling the taxi company you are able to request a ride for Lyft through an app on your phone. One of the main reasons why I wanted to use Lyft besides the fact that it was a ride sharing company was because out of the two publicly traded ride-sharing companies Lyft is the smaller one. This will be good for performing our valuation analysis for Cruise because the size of Lyft is comparable to Cruise with a market cap of $12.11 Billion. Lyft also has a segment of its business that is dedicated to developing self-driving cars with the hope to eventually use those self-driving cars as part of the ride sharing business. The ability for Lyft to have self-driving cars as its ride sharing fleet is what makes it so similar to Cruise and a great company to use as a guideline company. Some of the financial data for Lyft can be found in Figure 1 below.

Figure 1: Lyft’s pricing multiples and data

The next company that is going to be considered as a guideline company for Cruise is going to be Uber. Out of the two ride sharing companies that are available on the public market Uber is the larger one with a market cap of around $51.49 Billion. The reason for choosing Uber as a guideline company is because their main business is ride-sharing, which is similar to that of Lyft’s described above. Uber also has a similar business model but it is for food delivery and is called Uber eats. That business allows you to order from a restaurant and have it delivered to you by Uber. Uber is also in the business of developing autonomous vehicles with the goal to ultimately replace their Uber drivers with self-driving cars. The two parts of Uber’s business that are very similar to Cruise are its ride-sharing and autonomous vehicle division. If Uber is able to parley their self-driving cars into an Uber fleet for ride sharing than they will be one of Cruise’s top competitors. Uber is also the ride-sharing company that owns the majority of the market share. The financial data and some pricing multiple for Uber can be found in Figure 2 below.

Figure 2: Uber’s pricing multiples and data

The next company that we are going to consider for one of the guideline companies is Tesla. The reason for using Tesla is because the company is one of the most innovative tech companies when it comes to automobiles. The CEO Elon Musk has been a visionary in creating electric cars that have the ability to be autonomous. The reason for picking this company is because they are already a car manufacturer that is making electric cars that are partially autonomous. Some of the newer cars that have been developed by Tesla have the ability to go on auto-pilot which allows them to park themselves, drive on the highway and also switch lanes when on the highway. Tesla’s vision is to eventually have fully autonomous vehicles that one day may have the ability to function as a robo-taxi service. Tesla’s pricing multiples can be found below in Figure 3.

Figure 3: Tesla’s pricing multiples and data

The next two companies that we are going to consider as guideline companies are going to be Ford and General Motors. I know that Cruise is a sub-unit of General Motors but I wanted to use some valuation metrics of General Motors to have a comparison next to Ford since both of these automobile manufacturers are two of the largest in the world. The reason for using these two companies is because they have a similar business such as manufacturing cars so it is reasonable to use them in our analysis. The financial data and pricing multiples of GM and Ford can be found in Figure 4.

Figure 4: GM & Ford pricing multiples and data

When doing some further research on Cruise I was able to find that the company has recently increased its value to $19 billion after receiving equity investments from T. Rowe Price Associates, Honda, Softbank Vision Fund and its parent company GM. After looking at all of the guideline companies side by side like I presented below in Figure 5, I believe the two companies that compare the most to Cruise are Tesla (TSLA) and Lyft (LYFT). One of the reason I think Lyft is a good comparative company is because it has a similar valuation to cruise and has a ride sharing business. Tesla is also a great comparative company because they are at the forefront of innovation in the automobile industry, but like we learned in chapter 9 we must use all similar companies when performing a guideline public company method analysis.

Figure 5: Guideline companies data

References:

https://finance.yahoo.com/quote/LYFT?p=LYFT

https://finance.yahoo.com/quote/GM/

https://finance.yahoo.com/quote/F/

https://www.naics.com/sic-industry-description/?code=7372

https://seekingalpha.com/symbol/TSLA?s=tsla

https://seekingalpha.com/symbol/UBER?s=uber

Market Cap 36.23B

Price/Sales 0.23

Price/Book 1

Total Debt/Equity 431.88

Current Ratio 1.2

Quick Ratio1.08

EBITDA Margin 7.63%

Asset turnover ratio0.61

EPS0.51

P/E17.80392

Ford ($9.08)

Market Cap 53.43B

Price/Sales 0.37

Price/Book 1.22

Total Debt/Equity 229.34

Current Ratio 0.96

Quick Ratio0.74

EBITDA Margin 9.41%

Asset turnover ratio0.64

EPS6.14

P/E6.094463

GM ($37.42)

Market Cap Price/Sales Price/Book Total Debt/Equity Current Ratio Quick RatioEBITDA Margin Asset turnover ratioEPSP/E

LYFT12.11B4.183.6911.831.731.56-62.72%0.64-7.95N/A

UBER51.49B4.233.2338.932.572.44-79.22%0.57-3.01N/A

Tesla43.37B1.747.59200.281.060.719.35%0.83-3.85N/A

GM53.43B0.371.22229.340.960.749.41%0.646.146.094

Ford36.23B0.231431.881.21.087.63%0.610.5117.8

Market Cap 12.11B

Price/Sales 4.18

Price/Book 3.69

Total Debt/Equity 11.83

Current Ratio 1.73

Quick Ratio1.56

EBITDA Margin -62.72%

Asset turnover ratio0.64

EPS-7.95

Lyft ($41.35)

Market Cap 51.49B

Price/Sales 4.23

Price/Book 3.23

Total Debt/Equity 38.93

Current Ratio 2.57

Quick Ratio2.44

EBITDA Margin -79.22%

Asset turnover ratio0.57

EPS-3.01

Uber ($30.29)

Market Cap 43.37B

Price/Sales 1.74

Price/Book 7.59

Total Debt/Equity 200.28

Current Ratio 1.06

Quick Ratio0.71

EBITDA Margin 9.35%

Asset turnover ratio0.83

EPS-3.85

Tesla ($242.13)