Bob Auer Comments on the Power of Enterprise Value for Medical Economics
SBAuer Founder and Senior Portfolio Manager Bob Auer shares his thoughts surrounding the common misconceptions of enterprise value and market capitalization with Medical Economics. Auer presents the belief that many investors may have, that market capitalization represents company value, but he debunks that belief with the concept of enterprise value.
Enterprise value equals market capitalization and total debt, minus the cash and cash equivalents. Auer describes it as the “dollar figure that, if broken down into its component parts, tells investors what they mistakenly believe market cap is telling them.” It is important for stock assessors to know how enterprise value, also referenced to as EV, serves companies in terms of their value.
“Though knowing a company’s EV is essential when assessing its stock, it’s widely overlooked by investors. Before looking at market cap, investors should first consider the EV and then compare it with that company’s market cap. If the EV/market cap ratio is a big number, the company probably has a boatload of debt.”
Auer shares that, not surprisingly, the stocks of companies with EVs close to their market caps tend to perform better over the long term, as having scant debt is highly positive for earnings projections. He then lists some examples of companies and their EVs in November of 2023 that were different than their market caps:
“As of early November, Tesla had a market cap of about $706 billion and an EV of about $685 billion, as the company was apparently net-debt-free.
By contrast, General Motors (Fund owns 1.51% on 11/29/2023) then had a market cap of nearly $38 billion and an enterprise value of about $126 billion because of high debt. Ford had a similar market cap, about $40 billion, with the albatross of even more debt, which brought its EV to nearly $142 billion.
(If GM had entered the recent United Auto Workers strike with an EV close to its market cap, it might have been able to wait out the union. But interest payments coming due on massive bond debt make that strategy infeasible.)”
In showcasing comparisons of major companies’ EVs to their market caps, Auer solidifies the importance of evaluating enterprise value and not just market capitalization to better determine a company’s actual value.
As of November 29, 2023, AUERX does not own stock in Verizon, Apple, Tesla and Ford mentioned in the article. Current and future portfolio holdings are subject to risk. Holdings are subject to change and do not constitute a recommendation or solicitation to buy or sell a particular security.
The thoughts and opinions expressed in the article are solely those of the author as of November 29, 2023. The discussion of individual companies should not be considered a recommendation of such companies by the Fund’s investment adviser. The discussion is designed to provide a reader with an understanding of how the Fund’s investment adviser manages the Fund’s portfolio.