The DCF valuation is only as accurate as the projected forecasts and inputs, therefore a multiples analysis will be conducted to bring perspective to the values found.
Multiples comparisons are generally used for comparing performance for companies, as they provide ease and quick measures. However, since they are quick and easy they are not very thorough and have several shortcomings. As the peer group of LEGO does not have equivalent growth potential, which is importantclxxx, the numbers might provide a skewed valuation.
The peer group used is still Mattel and Hasbro, as they are the only two other toy manufacturers on the level of LEGO. A suitable peer within the industry in regards to size and sales growth simply does not exist, theory suggest that a company with similar growth and financials could be used, but for this thesis, Mattel and Hasbro have been chosen.
The data used has been collected from Thomsen One Banker. As LEGO is a private company, its ratios cannot be found, and the listed ratios, for LEGO, are based upon the forecasted numbers found earlier. The multiples used were Enterprise Value (EV) / Sales, EV/EBITDA, EV/EBIT and P/E.
6.8.1 EV/Sales
This ratio describes the relationship between the enterprise value and sales. The ratio provides a measure of how much it costs to buy a company’s sales. LEGO’s forecasted growth is based on organic growth, while the numbers from Thomsen One Banker is based on total sales
Table 6.12 EV/Sales Sales growth
Company/Year 2012 2013 2014 2012 2013 2014 Mattel (One Banker) 2 2,3 2,2 2,5% 6,5% 4,6%
Hasbro (One Banker) 1,3 1,5 1,5 0,0% 0,6% 3,7%
LEGO forecast 4,97 4,15 3,54 23% 20% 17%
Source: Own creation
Table 6.12 clearly displays a much higher ratio for LEGO than for the peer group, which is to be expected due to high forecasted growth for LEGO. LEGO’s ratio does drop from 4,97 in 2012 to 3,54 in 2014, starting to near the peer group’s ratio. According to the projected forecasts, LEGO will in 2018 have a ratio of 2,17. LEGO is by far the most expensive of the company’s when looking at this ratio.
78 6.8.2 EV/EBITDA
This ratio describes the relationship between enterprise value and EBITDA. It is considered a more accurate measure then P/E, due to the fact that it is independent of capital structure. The higher the ratio the more expensive the company is relative to its EBITDA.
Table 6.13 EV/EBITDA EBITDA margin
Company/Year 2012 2013 2014 2012 2013 2014 Mattel (One Banker) 10,5 10,4 9,7 18,8% 22,0% 22,5%
Hasbro (One Banker) 7,7 8,1 7,7 17,1% 18,7% 18,9%
LEGO forecast 14,55 12,44 10,96 34% 33% 32%
Source: Own creation
Table 6.14 shows that LEGO’s ratios are higher than its peer group, but in 2014 the ratio is 10,96 for LEGO, while it is 9,7 for Mattel. This shows a trend that in the future LEGO’s ratios might be lower than its peers’. LEGO’s EBITDA margin is significantly higher than its competitors, which can be attributed to its premium prices and optimized operating model.
6.8.3 EV/EBIT
This ratio is quite similar to the previous, but it accounts for depreciation and amortization.
Table 6.15 EV/EBIT EBIT margin
Company/Year 2012 2013 2014 2012 2013 2014 Mattel (One Banker) 12,3 11,8 11 16,1% 19,3% 19,9%
Hasbro (One Banker) 9,8 10,1 9,6 13,5% 15,0% 15,2%
LEGO forecast 15,95 13,72 12,13 31% 30% 29%
Source: Own creation
As the values of EV/EBIT are depicted in table 6.15, it is clear that there is not a significant difference from EV/EBITDA to EV/EBIT. Hasbro has the largest depreciations and amortizations as its margin drops the most, which is also evident in its ratios, as these increase the most. LEGO is the most expensive company once again.
6.8.4 P/E
As the P/E ratio describes the relationship of stock price with the earnings per share, it is not possible to compute for LEGO. Instead the relationship between EV and NOPAT has been computed for LEGO, which should provide a similar ratio.
79
Table 6.16 P/E Net income margin
Company/Year 2012 2013 2014 2012 2013 2014 Mattel (One Banker) 16,5 15,6 14,2 12,0% 14,3% 14,8%
Hasbro (One Banker) 13,8 15 13,9 8,2% 9,2% 9,6%
LEGO forecast 21,26 18,29 16,17 23% 23% 22%
Source: Own creation
LEGO’s ratios are the highest again, shown in table 6.16, but with a decreasing trend, which is due to forecasted growth resulting in a higher NOPAT. LEGO’s net income margin is significantly better than its peers. Hasbro is the underperformer with net income margins below 10%. The high P/E ratio for LEGO suggests high expectations for the future or an inflated EV.
6.8.5 Valuation of LEGO Based on Peer Ratios
The following table illustrates LEGO’s EV, based on an average of its peers average ratios and forecasted income statement.
Table 6.17: LEGO's EV based on average peer ratio
Million DKK 2012 2013 2014
EV/Sales 38.015 52.529 59.842
EV/EBITDA 71.697 85.193 90.951
EV/EBIT 79.423 91.466 97.349
P/E 81.670 95.851 99.594
Source: Own creation
Table 6.17 illustrates that if projecting LEGO’s EV based on sales, the value is much lower than the other parameters. The ratio in particular does not take into account what the company’s costs are, and as LEGO’s cost are low in relation to its sales, estimating its value based on sales will undervalue LEGO severely. All values calculated are below the DCF valuation performed earlier, which is to be expected with the difference in growth expectations for the companies. Looking to 2014, however, the value does begin to near the projected EV of LEGO
6.8.6 Summary of Multiples Comparisons
The multiples comparisons analysis showed that LEGO’s ratios are higher than its peers, indicating that the thesis’ value LEGO highly, but also an indication of LEGO’s outperformance of its competitors. The 2012 numbers can be expected to be relatively accurate as it is only projected a year ahead and several reports from 2012 indicated LEGO’s continued growth. It was not possible to compare values for LEGO with Thomsen One Banker, as LEGO is a privately held company.