SRZ: Valuation and Earning Estimate

This is with respect to questions on Yahoo message board with regards to valuations and earnings estimate of Sunrise Senior living (SRZ). Yahoo message board is the most active board for SRZ and here are my thoughts.

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PureGamble:

Basically when we buy a stock we are trying to evaluate if the company is worth the price that we are paying. Earnings can be doctored (legally) to show higher positive numbers even when the companies are not doing so well.

The question in our mind should be: If I am a business man/woman how much would I pay for a company and how do I calculate it.

The general rule of the thumb is 1 times annual sales. In case of SRZ Sales are 1.7 billion
Current market capitalization of SRZ is 40 million so thats a great value buy.

Ofcourse anything available at steep discount we need to do a deep dive and try to evaluate the networth of the company to determine the true price of SRZ as a company. (is it really cheap)

From asset prespective we know SRZ has 54,000 resident capacity and approximately 50% is owned by SRZ and the rest is under management contract (other people's Assets)

I have previously done some calculations (on Dec 22,2008) and we will use the same. The valuation comes to about 10 USD per share even considering bankruptcy levels. (here is the link)

That is, the company from an asset prespective.. throw away valuation is 10USD ie. 10 * 50 Million = 500 million market capitalization.
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Valuation 1: Let us now look at the company from Operating Cash flow basis.

Operating Cash flow is a pretty stringent and standard process to determine the health of the company. We will look at SRZ annual cash flow from operations for past 4 years and determine how much is the company worth.

Cash flow analysis has also been done before (Jan12,2009) and here is the Link

As we deep dive there are a lot of numbers and numbers can drag you down.

Gist of Cash Flow is : SRZ 4 years 2004,2005,2006,2007 Annual Operating Cash flow average is 130 million. If you can buy a company for equal to operating cash flows it would be a great buy
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The question is still what is the true worth of SRZ in market capitalization terms?

Generally when a company is valued, its true/ideal market capitalization is determined by ..
considering the "Time value of money" principles.
If we apply to the operating cash flow of SRZ (130 million) the time value of money fundas the question statement would be:

How much money would I need in super safe Govt bonds to earn 130 million each year.
Current 1 year MTA rate is : 1.633%
Last year 1 Year MTA rate is :4.326%
(from Bankrate.com Link)
SRZ loan rates are right now 6.5 to 7% assuming the worst case 7% interest rate, restating the question.

How much money do I need to earn 130 million each year when interest rate is 7%
= 130million /0.07 = 1857 million ie 1.8Billion
At different inetrest rates the numbers would be:

at 7% interst rate 130 million cash flow would be valued at : 1857 million
at 8% interest rate 130 million cash flow would be valued at : 1625 million
at 9% interest rate 130 million cash flow would be valued at : 1444 million
at 10% interest rate 130 million cash flow would be valued at : 1300 million

So we get 2 important observations.
1. the valuation (1.857 billion) is pretty close to 1 times sales (1.7 Billion)
2. As the interest rate goes up the valuation of the company goes down. So interest rates rise is a no-no for stock prices..

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Valuation 2: Another way to dice the valuation matrix is: how much would you need to get the company back on roll.. (pay out the debt and other issues which are depressing the company's valuations)

40 million (Current market cap) + 120 million (Current credit facility payment) + 180 million (German operations debt) = 340 million.

So if you have 340 million and if you could potentially buy SRZ for current market cap with a total investment of another 300 million the company would be as good as a new dime.

So by spending 340 million you can effectively get a company worth 1.8 billion.

PN: This is what the hedge fund/private equity players do.. invest 340 million and make 1.46Billion (1.8Billion - 340 million)

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Valuation 3: Another way to slice it would be if we need 300 million to fix the company how much time would it take for the company to become as good as new? (fix itself)

300 million /130 million (annual Cash flow from operations) = 2.3 years

So 2.3 years down the line the historical data available about the company tells us we can expect SRZ to have a valuation of 1.8 billion

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Earning 1: The final question that comes up is what is the earning estimate for the company.

SRZ current market cap is know 40 million.
Current interest rate is known 7%
using cash flow as equal to earnings we can determine cash flow 1 year down the line as 40 * 0.07 = 2.8 million

So my answer to PureGamble would be: SRZ earnings in Cash flow prespective is going to be +ve2.8 million cash flow within 12 months time frame.

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Conclusion: Anyway you slice it or dice it current valuation (40 million market cap) is noting but rediculous. Its a screaming Buy!!! for SRZ.

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