Valuation framework for a manufacturing company: A case study on ABB

Abstract

Valuation of any company is a topic much subjective than it seems. A disciplined approach and sound judgment needs to be adopted to deal effectively with the challenges involved in valuing companies. Developing a generic valuation framework for companies of all sectors is difficult since the value and growth drivers differ from industry to industry. However, frameworks can be developed for different sectors. In this study we developed such a framework for a manufacturing company and use ABB to test the framework. In the process, we discover interesting insights which could be of strategic significance for the company. This paper is divided into 2 parts. In the first part, we develop a generic valuation framework that can be applied consistently to any manufacturing organization. Here, we identify the key parameters that determine firm and equity value. We also identify the inter-linkages between critical components of a manufacturing firm’s balance sheet and income statement. Finally, we identify the impact of debt and financing structure on the value of the stock of the firm, and facilitate a fairly sophisticated and dynamic debt modeling schedule within the worksheet. In the second part, we take up the case study of the company ABB. We apply the template created in part 1 to the balance sheet and income statement of ABB to arrive at the stock value as is. We then perform some simulation exercises on the key growth drivers of the company and the financing structure of the firm to see the impact on stock price. In essence, we try to build a link between strategic moves made by the firm and the consequent impact on stock price. Finally, we perform an exhaustive sensitivity analysis on the various parameters that determine stock value. We conclude by summarizing our key findings from this exercise and providing strategic and financing recommendations to ABB.