Essay on Laura Martin: Real Options and the Cable Industry

614 WordsSep 13, 20083 Pages
Laura Martin: Real Options and the Cable Industry Introduction Laura Martin, an equity research analyst for cable stocks, believes that the best way to value cable stocks is through creative methods such as real options and not through more traditional or typical valuation methods such as EBITDA multiples, ROIC analysis and DCF analysis. In 1999 she presented at the Credit Suisse First Boston Broadband conference, where she wanted to portray the message that real options is a superior valuation technique for cable stocks. She also wanted to have the opportunity to demonstrate her knowledge of the drivers of value in the cable industry. The main reason why Laura Martin argues that real options is the correct method for valuing…show more content…
This implies that there is upside potential relative to the current price of $37.5; or that it is an undervalued stock. EBITDA multiple analysis was another common metric used in the cable industry. However, this method relies on historical data to predict the future which is recognized as not an effective way to value a stock. In spite of this, this methodology also yields a higher expected stock price. While performing a DCF analysis, a thorough understanding of the business being analyzed is needed to determine the correct assumptions and items used for the analysis. For this reason, Laura believed this was still a good method to value stocks in this industry. This analysis yields a higher company value than current price. Real Options Valuation Analysis By using the Black Scholes model to value the European style call option some inputs are needed. First, the present value of the stealth tier needs to be calculated. The cost of acquiring this project or strike price is another necessary input. In this case, this was defined as the spending with the Stelth Tier, which is the opportunity cost of not lighting up the fiber immediately. Next, the volatility is calculated as well as the life of the cable plant (time) and an interest rate. Clearly, this methodology includes the value of the “stealth tier” and yields a much higher value than the other methodologies. Conclusion It is important to keep in mind when

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