Damodaran examines impact of inflation on profitability

In his fifth data update for 2023, Professor Aswath Damodaran (New York University Stern School of Business) focuses on trends in company profitability in 2022, including the impacts of inflation. His analysis includes measures across global regions and industries.

Sector performance:Inflation can increase profits for some firms and lower them for others. Sectors with the highest operating margins include energy (reflecting higher oil prices), a few technology groups (software and semiconductors) and, interestingly, tobacco (a declining, but high-profit business). On the downside, those sectors with the lowest operating margins include four industry groups from the retail space (not surprising, given this sector’s history of low operating margins), the young online software sector, and two industries in “long-term trouble,” namely, airlines and hotel/gaming.

Excess returns:Cost of capital in the U.S. saw its greatest increase last year, from 5.6% at the beginning of 2022 to 9.63% at the start of 2023. In terms of returns, almost 70% of all listed companies across the globe earned returns that were lower than their costs of equity or capital. U.S. companies have the highest percentage of companies that earn more than the cost of capital but still fall short of 50%, his analysis shows. There are clear differences among industry sectors in terms of returns in excess of the cost of capital. Time for companies to revisit hurdle rates, Damodaran advises, and they should figure out how to make money instead of going for “growth, growth, and more growth.”

The post is also helpful in that Damodaran goes into some basics that are sometimes easy to forget. He worries about “insulting” some in the audience, but it’s always a good idea to keep an eye on fundamentals.

Extra: Damodaran’s framework for assessing the impacts of inflation on the value of a private company can be found in an article in Business Valuation Update.

In a damages case, one expert survives Daubert, another does not

In an ongoing damages case in Delaware, the plaintiff had a Daubert motion to exclude the opinions of the defendant’s rebuttal expert. But the court denied the motion, finding that the expert did not impermissibly exceed the scope of a rebuttal expert, her opinion was reliable, and she did not make a credibility determination of the plaintiff (i.e., an accusation that the plaintiff was untruthful). The defendant also filed a Daubert motion to exclude the opinions of the plaintiff’s expert, and it was granted in part. The court found that a portion of the expert’s report was unreliable as it was ipse dixit (an assertion made but not proved). Also, some of his opinions violated the law of the case, and he relied on the rejected “value creation” theory of damages.

The case is LCT Capital, LLC v. NGL Energy Partners LP, 2022 Del. Super. LEXIS 1448, and a case analysis and full court opinion are available on the BVLaw platform.

SaaS valuation multiples see dramatic decrease

While the software-as-a-service (SaaS) industry is poised for significant growth, revenue multiples are projected at a three-year low, averaging a prepandemic level of about 5.5%, according to a report from FirstPageSage. During the third quarter of 2021, valuations hit a record high of 9.8x, and the projections represent “such a dramatic decrease [that] is both a comment on the economic impact of global events (e.g., inflation or Russian invasion of Ukraine) as well as the volatile nature of SaaS and the tech sector as a whole.” The report provides SaaS valuation multiples for ranges of EBITDA, revenue, and seller’s discretionary earnings (SDE) and for various business types. The report points out that, while most companies often rely on EBITDA, the “vast growth potential and large sunk investments in growth for SaaS companies often means that SDE or revenue-based valuations are more valuable within this industry.”

New Deal Alert feature in DealStats

In response to user feedback, DealStats has added a Deal Alert feature that allows you to receive notifications when new transactions are added to DealStats, based on your specific saved search parameters. And you can specify how—and how often—you want to be notified of new transactions. You can see new deals when you log in, or you can be notified via email, or both. And you can specify the frequency: daily, weekly, or monthly—it’s your choice (you can modify your selections at any time). You can add a Deal Alert to your saved searches as well as to a new search. There is a video tutorial that shows how the new Deal Alert feature works. If you have any questions about it, please feel free to contact info@bvresources.com or 1-503-479-8200.

Dental practices take top spot in industry research on Vertical IQ

For 2022, the most popular industry profile on the Vertical IQ industry research platform was dental practices, based on number of user visits. Vertical IQ can’t quantify the reasons for the high level of interest, but it’s interesting to speculate. Did more dentists retire and sell their practices? Were more dental practices caught up in a divorce and needed valuing? These same questions can be asked about the rest of the top 10 most-visited industry profiles: full-service restaurants, HVAC and plumbing contractors, physician practices, law firms, trucking companies, lessors of residential buildings, residential brokers and property managers, management consulting services, and auto repair shops. These industries are just a small fraction of the platform’s profiles that cover more than 570 distinct industries, representing more than 97% of the U.S. economy.

Global BV News

First-ever Innovation Valuation Summit in Korea March 21-22

“Valuation of new assets, what’s the future?” is the theme for the premier Innovative Valuation Summit. Sessions will cover big data, cryptocurrency, NFTs, the metaverse, startups, intellectual property, artificial intelligence, ESG, and more. The event will be live on-site at the UST Auditorium in Daejeon, Korea March 20-21 and will also be livestreamed. The language will be Korean with simultaneous English translation. The conference brochure and agenda are available if you click here. A registration form is available if you click here. The event offers 16 CPD credits and is sponsored by the International Association of Certified Valuation Specialists (IACVS), Korea Valuation Association (KVA), and Korea Institute of Science and Technology Information (KiSti). If you have any questions, please e-mail info1@iacvs.org