Ups and Downs: Valuing Cyclical and Commodity Companies

40 Pages Posted: 3 Sep 2009

See all articles by Aswath Damodaran

Aswath Damodaran

New York University - Stern School of Business; New York University (NYU) - Leonard N. Stern School of Business

Date Written: September 1, 2009

Abstract

Cyclical and commodity companies share a common feature, insofar as their value is often more dependent on the movement of a macro variable (the commodity price or the growth in the underlying economy) than it is on firm specific characteristics. Thus, the value of an oil company is inextricably linked to the price of oil just as the value of a cyclical company is tied to how well the economy is doing. Since both commodity prices and economies move in cycles, the biggest problem we face in valuing companies tied to either is that the earnings and cash flows reported in the most recent year are a function of where we are in the cycle, and extrapolating those numbers into the future can result in serious misvaluations. In this paper, we look at the consequences of this dependence on cycles and how best to value companies that are exposed to this problem.

Keywords: valuation, cyclial, commodity, normalized earnings

JEL Classification: G12, G31, G34

Suggested Citation

Damodaran, Aswath, Ups and Downs: Valuing Cyclical and Commodity Companies (September 1, 2009). Available at SSRN: https://ssrn.com/abstract=1466041 or http://dx.doi.org/10.2139/ssrn.1466041

Aswath Damodaran (Contact Author)

New York University - Stern School of Business ( email )

Stern School of Business
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New York, NY 10012-1126
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212-998-0340 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.damodaran.com

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

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