Covance (FRA:CVD) Earnings Power Value (EPV) : €18.69 (As of Sep14)

Covance Earnings Power Value (EPV) Chart

Covance Annual Data
	Trend	Dec04	Dec05	Dec06	Dec07	Dec08	Dec09	Dec10	Dec11	Dec12	Dec13
Earnings Power Value (EPV)		Get a 7-Day Free Trial					9.92	11.19	14.53	14.17	20.29

Covance Quarterly Data
	Dec09	Mar10	Jun10	Sep10	Dec10	Mar11	Jun11	Sep11	Dec11	Mar12	Jun12	Sep12	Dec12	Mar13	Jun13	Sep13	Dec13	Mar14	Jun14	Sep14
Earnings Power Value (EPV)	Get a 7-Day Free Trial															16.94	20.29	19.14	18.89	21.84

Competitive Comparison of Covance's Earnings Power Value (EPV)

For the Diagnostics & Research subindustry, Covance's Earnings Power Value (EPV), along with its competitors' market caps and Earnings Power Value (EPV) data, can be viewed below:

* Competitive companies are chosen from companies within the same industry, with headquarter located in same country, with closest market capitalization; x-axis shows the market cap, and y-axis shows the term value; the bigger the dot, the larger the market cap. Note that "N/A" values will not show up in the chart.

Covance's Earnings Power Value (EPV) Distribution in the Medical Diagnostics & Research Industry

For the Medical Diagnostics & Research industry and Healthcare sector, Covance's Earnings Power Value (EPV) distribution charts can be found below:

* The bar in red indicates where Covance's Earnings Power Value (EPV) falls into.

Covance Earnings Power Value (EPV) Calculation

Earnings Power Value also known as just Earnings Power is a valuation technique popularised by Bruce Greenwald, an authority on value investing at Columbia University. It is arguably a better way to analyze stocks than Discounted Cash Flow analysis that relies on highly speculative growth assumptions many years into the future.

The basic concept of EPV is that one should value a stock based on the current free cash flow of a company and not on future projections which may, or may not, come true. This valuation tool excludes the potential growth that a company may have so that needs to be looked at separately. Since future growth is excluded from the analysis, only the maintenance capital expenditures are subtracted from after-tax EBIT (earnings before interest and taxes) and growth capex is ignored.

Covance's "Earning Power" Calculation:

1. Start with "Earnings" not including accounting adjustments (one-time charges not excluded unless policy has changed). "Earnings" are "Operating Income.

2. Look at average margins over a business/Industry cycle: Average Operating Margin = 6.50%

To normalize margins and eliminate the effects on profitability of valuing the firm at different points in the business cycle, it is usually best to take a long-term average of operating margins. Ideally this would be as long as 10 years and include at least one economic downturn. However, since most of companies do not have as long as 10-year history, here GuruFocus uses the latest 5 years data to do the calculation. To smooth out unusual years but reflect recent developments, we take an average of the 5 year margin.

3. Multiply average margins by sustainable revenues and then adjust for maintenance SGA. This yields "normalized" EBIT:

To be conservative, GuruFocus uses an average of the 5 year revenues as the sustainable revenue.
EPV analysis recognises that part of SG&A expenditure is made to maintain and replace the existing assets, while part is made to grow sales. Since EPV is only interested in what it costs a going concern to maintain its existing asset base, it adds back a percentage of SG&A (between 15% and 50% - this is a matter of judgment and industry knowledge) to make up for the fact that some of this expenditure went to fund growth and shouldn't be accounted for. To start off, we assume 25% for the sake of prudence.
Sustainable Revenue = €1,764 Mil, Average Operating Margin = 6.50%, Average Adjusted SGA = 76,
therefore "Normalized" EBIT = Sustainable Revenue * Average Operating Margin + Average Adjusted SGA = 1,764 * 6.50% +76 = €191.120025782 Mil.

4. Multiply by one minus Average Tax Rate (NOPAT):

Same as average operating margin calculation, GuruFocus takes an average of the 5 years tax rates.
Average Tax Rate = 26.51%, and "Normalized" EBIT = €191.120025782 Mil,
therefore After-tax "Normalized" EBIT = "Normalized" EBIT * ( 1 - Average Tax Rate ) = 191.120025782 * ( 1 - 26.51% ) = €140.45124014681 Mil.

5. Add back Excess Depreciation (after tax at 1/2 average tax rate). This yields "normalized" Earnings:

Excess Depreciation = Average DDA * % of Excess Depreciation (after tax at 1/2 average tax rate) = 87 * 0.5 * 26.51% = €11.55053032 Mil.
"Normalized" Earnings = After-tax "Normalized" EBIT + Excess Depreciation = 140.45124014681 + 11.55053032 = €152.00177046681 Mil.

6. Adjusted for Maintenance Capital Expenditure:

First, calculate the revenue change regarding to the previous year. If the revenue decreased from the previous year, then the Maintenance Capital Expenditure = Capital Expenditure (positive).
Second, if the revenue increased from the previous year, then calculate the percentage of Net PPE as of corresponding Revenue.
Third, calculate Capital Expenditure (positive) - percentage of Net PPE as of corresponding Revenue * revenue increase.
If [Capital Expenditure (positive) - percentage of Net PPE as of corresponding Revenue * revenue increase] was negative, then the Maintenance Capital Expenditure = Capital Expenditure (positive).
If [Capital Expenditure (positive) - percentage of Net PPE as of corresponding Revenue * revenue increase] was positive, then the Maintenance Capital Expenditure = Capital Expenditure (positive) - percentage of Net PPE as of corresponding Revenue * revenue increase.
Fourth, GuruFocus uses an average of the 5 year maintenance capital expenditures as maintenance CAPEX.
Covance's Average Maintenance CAPEX = €88 Mil *.
* GuruFocus does not store EPV value into our database if Average Maintenance CAPEX is 0.

7. Investors require a return of "WACC" for the risk they are taking: WACC = 9%

8. Covance's current cash and cash equivalent = €547 Mil.
Covance's current interest bearing debt = Long-Term Debt & Capital Lease Obligation + Short-Term Debt & Capital Lease Obligation = 194 + 0 = €194 Mil.
Covance's current Shares Outstanding (Diluted Average) = 57 Mil.

Covance's Earnings Power Value (EPV) for Sep14 is calculated as:

* For Operating Data section: All numbers are indicated by the unit behind each term and all currency related amount are in USD.
* For other sections: All numbers are in millions except for per share data, ratio, and percentage. All currency related amount are indicated in the company's associated stock exchange currency.

* GuruFocus does not store EPV value into our database if Average Maintenance CAPEX is 0.

Covance  (FRA:CVD) Earnings Power Value (EPV) Explanation

Assumption: Current profitability is sustainable.

Earnings power value (EPV) uses a very basic equation which assumes no growth, although it does rely on an assumption about the cost of capital as well as the fact that current earnings are sustainable. It also involves several adjustments to clean up the underlying Earnings figures.

Be Aware

Though using today's earnings in calculating Earnings Power Value, GuruFocus is normalizing these earnings to the business cycle. This eliminates the effects on profitability of valuing the firm at different points in the business cycle. This means that we are considering the average earnings over 5 years.

Covance Earnings Power Value (EPV) Related Terms

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Covance (FRA:CVD) Business Description