Laura Martin Case Study

IIM Kozhikode |

Laura Martin: Real Options and Cable Industry |

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Group 4Ankit KumarR GayathriSandeep BhatShraddha ShrikhandeSurbhi Kothari |

Introduction

Laura Martin was a Harvard Business School graduate who had been working as sell-side analyst with CSFB. She was ranked in Institutional Investor magazine. She spent Spent approx. 40% of her time Analysing the firms she covered, 35% time communicating with clients and 25% on internal CSFB constituencies i.e sales force, trading desk and investment banking arm.

One of the sectors she was analyzing was the cable industry. Cable industry was historically dependent on revenues from provision of Analog video. Technological changes created new sources of revenues from digital video, cable telephony, and high speed Internet access. Laura martin forecasted the following as future growth drivers in the cable industry

1. Acceleration (CAGR 14.2%) and Diversification in revenue growth.

2. Slowdown in capital expenditure (CAGR -6.5%) and shift to revenue linked capex

3. Higher ROIC form Digital revenue streams( 45% -65% vs 5% for Cox.)

Cox was the fifth largest Multiple System Operator in US in 1998 with penetration rate of 63% which was highest in US. It had tightly clustered cable system with approximately 80% of subscribers in 10 clusters. Cox had stakes in cable programming services and in Technology & Telephony companies. All valuation methodologies employed by Laura Martin showed that the Cox stock was undervalued.

What is Real Option Valuation?

The real options approach is an extension of financial options theory to options on real/non-financial assets. Options are contingent decisions that provide the opportunity to make a decision after uncertainty unfolds. Uncertainty and the agent’s ability to respond to it (flexibility) are the source of value of an option. In contrast to the traditional approach that uses...