A closer look at the new Butler Pinkerton Model Report, an e-book published in collaboration with Morningstar, reveals a number of compelling insights for BV experts. Consider: Pilgrim’s Pride, a poultry slaughtering and processing company, tied for the highest total cost of equity (TCOE = 58.3%), and one of the highest company-specific risk premiums (CSRP = 28.4%), of all of the companies included in the sample database. It is a surprising finding, until one realizes that Pilgrim’s Pride filed for bankruptcy protection on December 1, 2008 after a year of losses caused by high feed costs, low chicken prices, and large debt obligations.
Another example: Providence Service Corp, a provider of social services under government contracts, also had a very high TCOE (56.7%) and one of the highest CSRPs (36.0%). Why does this government contract company have such a high cost of capital and such a high CSRP? Answer: Its stock plummeted in 2008 as government budget problems hurt the company's outlook. Moreover, last December, Standard & Poor’s downgraded the company’s credit rating two notches from “B-plus” to “B-minus.” The downgrade was the result of “materially weaker-than expected performance” and concerns with the company’s liquidity position, including its ability to comply with debt covenants. In addition, in the third quarter of 2008, Providence took a material impairment charge to its goodwill ($141 million).
Interestingly, the report also validates the usefulness of the TCOE and Company-specific Risk Calculator available at www.bvmarketdata.com. The Calculator is updated daily, so it captures real-time events. Appraisers can key in on TCOEs directly or allocate the total risk amongst market risk, size risk, and CSR, or alternatively among market risk and a combined size/CSR, to assist in developing appropriate costs of capital for their privately held companies.
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