Alternative Valuation Models

Alternative Valuation Models

In this post, we will be summarizing the two methods used to compute BURL's stock price which will help us determine whether BURL is truly overvalued as it was concluded in the last post. The methods used to evaluate the company are the Residual Operating Income (ROPI) Model and the Market Multiples Approach. The Dividend Discount Model was not applicable to BURL because the company does not distribute any dividends.

Residual Operating Income (ROPI)

ROPI is an evaluation method that emphasizes the necessity for a firm to generate sufficient profit to offset the required capital. Utilizing both NOPAT and NOA, it considers essential metrics from both the income statement and the balance sheet. ROPI represents the surplus profit a firm generates (NOPAT) beyond the minimum amount required to compensate investors for their investments.

 For BURL, ROPI was not a good evaluation model based on the break-even NOPAT being higher than the actual NOPAT, which yield a negative ROPI for most of FYs. This is depicted in figure 1. 

Market Multiple Approach

Choosing competitors:

When employing the Market Multiple approach, selecting competitors can be challenging but essential for achieving an accurate evaluation of the company. As this approach relies on external information about other companies, careful consideration was given when choosing BURL's competitors. 

The three competitors chosen was Macy's, Target, and TJX. To choose these competitors I first looked at my own community and the choices they make when buying products offered by BURL. From my own perspective, people go to BURL for the low price on merchandise sold at specialty stores. When they do not find such products, they tend to look for it at other places such as Macy's or Target where they are willing to pay for higher prices. Similarly, if they come across a product, they deem costly at those stores, they are inclined to check BURL before attempting to purchase it elsewhere.

 From a business model approach, these companies offer a selection of products combining affordable price with high quality merchandise. Their target market shares similarities, as they offer comparable products such as apparel, footwear, accessories, and home decor. This shared product lineup contributes to their status as competitors, each striving to attract customers. 

While Macy's may be viewed as an exception due to its sale of high-end products at higher prices, it was still chosen as a competitor. This is primarily because customers are often willing to pay a higher price for items, they desire but cannot locate at stores like BURL. Additionally, the availability of discounts and Macy's backstage products further solidifies its status as a competitor, as these offerings align closely with what BURL may provide.

Key assumptions/calculations

• For the Market Multiple approach to function effectively four metrics sourced from the Value Line report of each company were necessary. These metrics included the Sales per Share, Cash Flow per Share, Earning per Share, and Book Value of Equity per Share. These financial data points were from the 2024 fiscal years.

• Each company's stock price was obtained from Yahoo finance on April 17th, 2024.

• Multiples were calculated using each company's stock price and the metrics mentioned above (seen in figure2). 

• The multiples values were logical for each of the companies; therefore, no outliers were taken. 

• Although a multiple value for the Book Value metric was computed, it was not included in the final stock calculation. The reason behind this is because BURL is still an immature company with a high growth potential, therefore the book value would not be a good indicator of its value. 

Analyzing the final stock price

The final stock price chosen was the industry average, which wis $132.72 as seen in figure 3. The average was chosen because it is close to the cash flow model price. Although the two methods can be valuable, using one alone will not offer a compressive understanding of the company. That being said, observing how closely these two stock prices are demonstrates how using both methods when evaluating BURL can yield a more robust and comprehensive approach to analyzing the company. 

Link to Excel File