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Author: atta9508 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 27504  
Subject: Valuation Question - Growth / Acquisition Date: 10/18/2012 4:49 PM
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Hello - I am looking at a company that has had some lumpy CapEx primarily due to acquiring other companies. I am currently trying to reconcile my caclulated growth rate (Investment Rate X ROC) = Growth, where investment rate is a function of CapEx. Since this company has historically made a number of acquisitions in the last 5 years my implied growth rate is fairly high. Much higher than I would expect and higher than what I think they are capable of doing organically.

I don't really understand how acquisitions affect growth, but I can appreciate the fact that if you are acquiring a company with X% of the market, their revenue now becomes your revenue and I guess that added revenue is growth. Is this a good way to grow? Seems that this is what you do if you don't know how to grow your own business.

I feel that it might be risky to assume large growth in EBIT due to acquisition. I suppose in the end, the cashflow in my model will take a hit due to the heavy spend on acquiring other companies. Maybe it works out in the end. My valuation shows that the stock should be trading twice what it currently is. I suspect this is due to this high growth rate assumption and this makes me nervous. I could manually put in a lower growth rate to see how sensitive the numbers are to the acquisition assumption.

I would appreciate any thoughts on growth through acquisition.

Thanks,

Jared
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