Loblaw’s Deal with Shoppers Confirms our Model Price Calculation

What are individual stocks worth in the public traded equity markets?

This question plagued me for sometime not only early in my financial career but when I started taking finance courses in university.  Would you believe the world of finance does know how to answer this basic question?  Sure there is the famous ‘Discounted Cash Flow’ calculation but having spent 5 minutes doing this calculation and the amount of guess work about time frames, normal business activity and interest rates (discount rate) makes, at least in my mind, the calculation dubious and imprecise.  The other well-known calculation of valuation can be ‘Enterprise Value’.  Again spend any time with this calculation, and its simplistic nature and I have always wondered whether there was a better way.

Unfortunately in today’s financial world, there seems to be no definitive or agreed upon technique – algorithm – about what a company is worth especially public companies. In other words, business valuation is more art than science.

Enter Model Price

After many years of hard work and R&D our algorithm – Model Price – was born in 2002.  I have been observing our model price calculation for over 10 years with amazing observations.  Four years ago we decided, conceptually, to release Model Price to the public on the Facebook platform.  A year and a half ago we released our Model Price App (Application) on Facebook.  This application allows the general public to view model price on our database of stocks – over 2,000 companies both Canadian and US listed – at their (and your) convenience.

Our algorithm – Model Price – is so robust that we can calculate model price or fair market value for all companies in our database no matter what kind of business or peculiarities a specific industry sector may inhibit, like finance.  In my opinion model price represents a major break through in security analysis and helps me considerably in the evaluation of individual public companies for investment.

Hopefully model price can help you as well!

However in order for you to use model price you have to be convinced that our calculation – algorithm – is relevant.

How do I do this?

Certainly one way is to evaluate M&A activity, where independent parties come together and make acquisitions on an arms length basis.  This transaction price would certainly be considered fair market value especially in the transparent world of company boards, investment bankers and various experts on both sides of the transaction.

Since the start of my blog, a year and a half ago, the M&A activity has been a little ‘light’ but a few deals confirmed model price as fair market value.  (I have highlighted these transactions in previous blogs confirming our model price calculation – see links at the bottom of this blog.)

Finally a Blockbuster Deal

On Monday morning, Loblaws announced the acquisition of Shoppers Drug Mart.  (Both Canadian Companies)  This is a major acquisition worth over $12 billion dollars.  The financial press priced the acquisition of Shoppers at $61.54 a share even though Loblaws was offering both cash and stock as consideration.

Here was last Friday’s model price chart for Shoppers Drug Mart (SC)

Shoppers Drug Mart with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Shoppers Drug Mart with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

On Friday, before the merger was announced, we calculated the model price of Shoppers (SC) to be $60.54.  This represented a 25% upside from the close on Friday afternoon of SC at $48.40

After the fireworks of trading on Monday, July 15, 2013, the end of day model price chart appeared as follows:

Shoppers Drug Mart with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Shoppers Drug Mart with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Conclusion

Our simple dashed purple line, included on our model price charts, probably looks superficial to the sophisticated and complicated world of finance.  I prefer elegant!

In my opinion the world of security analysis and investing becomes a much more interesting place when participants begin to realize and have confidence in what the true fair market value of a public company really is.  Maybe investing becomes much more ‘rational’, at least for those who use Model Price and may have a significant impact on your net worth.

I have seen model price work for over 10 years.  I know this simplistic purple line ‘delivers’ the goods in terms of fair market value.  I also realize I need to prove to you that our calculation of model price is relevant.  Well the Loblaw’s acquisition of Shoppers Drug Market at our predetermined calculated model price gives our users a piece of evidence that our elegant purple line is worthy of consideration.

Links to other transactions conforming model price.

Warnaco (WRC) Acquisition Confirms Model Price Calculation

Another Data Point for Model Price – Flint Energy (FES)

Does Model Price Work? The Defense calls Gennum (GND.CA)

Other links to blogs about Model Price you may find interesting.

Model Price – Conversations About Model Price. (Part 1)

Model Price – Conversations About Model Price. (Part 2)

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