Question

In Chapter 7 three different stock valuation techniques are presented; the dividend growth model, the free cash flow model, the market multiple model. While none of these is the most appropriate for every single company, each is useful for determining the value of companies with certain characteristics. Pick a company, any [publicly traded] company, and argue why one of the three models would be most appropriate for your chosen company. Let the arguments begin!

Answer 1

Let's choose Accenture plc. Trading symbol: ACN

Accenture operates in technology, consulting and outsourcing. It has a large number of employees based across the globe and its practices across the globe. It's a truly service providing MNC.

I believe the most appropriate model for valuing Accenture will be discounted cash flow model. Reasons:

1. Accenture has been well established into the business segments and verticals it operates into. It has been there historically. Segmental revenues and cash flows have achieved stability.
2. The cash flows have become stable and mature. Volatility in cash flows has been limited.
3. Free cash flows had been positive year after year, quarter after quarter and don't change sign
4. Cost structure has been stabilized. Most of the costs display a stable trend with the revenues. Gross margins, EBITDA margin, operating profit margins and net profit margins have been stable over significant period of time.
5. Revenue base is well diversified. There is not too much dependence on one geography or business segment.

I also believe the market multiple method may not be appropriate because:

1. It's really tough to find the comparable or real peer set of Accenture. There are many competitors but none of them have business model, geographical spread, product and segments identical to that of Accenture. Hence, finding the true peerset for relative valuation itself is very tough.