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Stock Based Compensation

I have some questions relating to stock based compensation expense. I am doing a valuation of a company using DCF and Comparable Company analyses and SBC expense has raised its ugly head. For our comparable company analysis, while all analysts seem to be submitting their EPS figures on a GAAP bas... Read More

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by Guest 1.

added 11 years ago

RE: Stock Based Compensation

For our comparable company analysis, while all analysts seem to be submitting their EPS figures on a GAAP basis (incl. SBC), it is ambiguous as to whether they submit their EBITDA figures to consensus with or without SBC. So basically one comp has an EBITDA consensus number that is the average of EB... For our comparable company analysis, while all analysts seem to be submitting their EPS figures on a GAAP basis (incl. SBC), it is ambiguous as to whether they submit their EBITDA figures to consensus with or without SBC. So basically one comp has an EBITDA consensus number that is the average of EBITDA forecasts incl SBC and EBITDA forecasts excl. SBC. If we are using consensus estimates in our comps, this seems to really murk things up? Is there any simple answer to this that I am missing?

What should be done?
After looking at which analysts include SBC vs. exclude SBC, you should pick the most common methodology. If a majority of analysts have included SBC expense in their figures, then you should adjust all the ones that did not include it to keep things on an apples-to-apples basis. However, this is extremely arduous to do and a ton of hassle. However, it is the most accurate way to do it.

What is done?
Research analysts are more focused on trends vs. a true bottom up when deriving a forecast P&L. Thus, in some instances it is difficult to know if their SG&A number includes stock based comp. If they don’t have a separate line item for SBC, then you will have to figure out if they are including it in SBC or not based on the way they present their historicals.

Why it doesn’t matter?
In many instances, you can argue why it does not matter whether you make these adjustments or not, since it’ll be wash in terms of the people who do or don’t include. You are taking the averages of these numbers, so your margin of error is a lot less now. Additionally, you will probably use a rounded multiple range anyways that is based on an average of the comps.

What you can do without the brain damage….
Make an estimate of the analysts who used stock-based compensation. Take an average of the stock based comp adjustment from the analysts and make this adjustment to the ones who did not include it. I think it is safe to say that the adjustment can be assumed to be X*(1-T)

For the DCF analysis, the acquiror (our client) has created internal projections of the target and based them off of consensus estimates to begin with. The consensus estimates for this particular company overwhelmingly does not seem to include SBC. Does this significantly alter how we should look at computing the standard DCF? One suggestion is to subtract out a run-rate SBC in all of the years at the EBIT line in order to get the tax benefit and add it back along with the other items to get to free cash flow.

In practice adding back SBC expense in the FCF calc in a DCF is not done, its fair to assume not to add back stock based comp in any case, because:

Even though the expense is non-cash at the time, there will be a cash outflow when they are exercised
If you are a private company, you wont pay back in stock but might pay in profit sharing Read More

by WST Expert 1.

added 11 years ago

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