Model Vs. Market: The Dow Jones Industrial Average’s Valuation by TagniFi
At TagniFi we’re big fans of the discounted cash flow model as a tool for equity valuation. We’ve run our DCF model for many of the largest companies in the world to see how their current market price compares to their intrinsic value.
Dow Jones Industrial Average
Now that we have all of the 2015 10-K data for the Dow components we’re are going to try something a little different. We’re going to value the Dow Jones Industrial Average to see what it’s really worth. To get there we’re going to create the world’s largest company (GoliathCo) by merging all 24 of the Dow’s industrial components into one massive company. Then we’re going to value this monster just like we value every other company – by discounting its projected future cash flows at an appropriate cost of capital.
Here are the industrial components of the Dow 30 that we’ll be merging into GoliathCo:
- 3M Co.
- Apple Inc
- Boeing Co.
- Caterpillar Inc.
- Chevron
- Cisco Systems Inc.
- Coca-Cola Co (The)
- E.I. du Pont de Nemours and Co.
- Exxon Mobil Corp.
- General Electric Co.
- Home Depot Inc.
- Intel Corp
- International Business Machines Corp
- Johnson & Johnson
- McDonalds Corp
- Merck & Co. Inc.
- Microsoft Corporation
- Nike Inc. Cl B
- Pfizer Inc
- Procter & Gamble Co.
- United Technologies Corp.
- Verizon Communications Inc.
- Wal-Mart Stores
- Walt Disney
Our new company generated $2.361 trillion of revenue in fiscal 2015 with EBITDA of $484,2 billion, a 20.5% margin. Interestingly, that is 6.3% below fiscal 2014 revenue and 4.6% below fiscal 2011 revenue. Another interesting item is that these companies are using surprisingly little debt as a group when you take into consideration their cash and investments. The net debt of this group is only $132.6 billion while the group’s total market capitalization is $4.784 trillion.
Financial Summary of GoliathCo:
- 2015 Revenue: $2.361 trillion
- 2015 EBITDA: $484.2 billion
- 5-Year Avg. EBITDA Margin: 20.6%
- 5-Year Avg. Income Tax Rate: 28.5%
- 5-Year Revenue Growth Rate (CAGR): -1.2%
- 5-Year Avg. Net CapEx+Acquisitions to Sales: 6.2%
| Revenue Growth | ||||
| -2.5% | -1.2% (5-year avg.) | 2.5% | ||
| Cost of Equity | 8.0% | 10,245 | 10,590 | 12,416 |
| 9.5% | 8,907 | 9,034 | 9,636 | |
| 11.0% | 7,871 | 7,866 | 7,848 | |
The most optimistic scenario in this table (2.5% revenue growth and an 8% cost of equity) values the Dow Jones at 12,416. This would represent a decline of 29% from yesterday’s close. The most pessimistic scenario in the table (-2.5% revenue growth and an 11% cost of equity) values the Dow at 7,871, a decline of 55% from yesterday’s close.
In order to arrive at the current level of the Dow Jones, revenue growth would need to be at 2.5% and the cost of equity would need to drop to 6.5%.
Feel free to download the DCF model we’ve used for this analysis to create your own scenarios. Send us a note at [email protected] if you would like a live version of the model with TagniFi links so that you can update this model with new data going forward.
