Laura Martin: Real Options and the Cable Industry

HBS Case No.: 201-004; Teaching Note: 202-060 9

Posted: 29 Jan 2002

See all articles by Mihir A. Desai

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Peter Tufano

University of Oxford - Said Business School; National Bureau of Economic Research (NBER); University of Oxford - Said Business School

Date Written: May 1999

Abstract

SUBJECT AREAS: Real option theory, Valuation, Equity Analyst Research

CASE SETTING: May 1999, U.S. Cable/Broadband

CSFB equity research analyst, Laura Martin, publishes a report on valuing Cox Communications that introduces an innovative approach to valuation. She contends that EBITDA multiple analysis, typical for the cable industry, is flawed because it overlooks the value of the "stealth tier" (unused capacity on cable companies' fiber optic network). Martin proposes using real options valuation to impute value to the stealth tier, and she thereby arrives at a higher valuation for Cox stock.

This provides the context for contrasting several valuation methodologies traditional DCF analysis, regression-based ROIC and multiple analysis, and real option theory and assessing how selected assumptions impact the various valuation techniques. In particular, Martin reviews ways in which the industry is evolving and students can think about how these changes impact what valuation method is most appropriate. More generally, this case provides a context for discussing the role of equity research analysts, highlighting all the constituencies they serve and how this can create conflicts of interest. Martin's application of real options theory provides an opportunity to evaluate where it works, where it doesn't, and why.

Suggested Citation

Desai, Mihir A. and Tufano, Peter, Laura Martin: Real Options and the Cable Industry (May 1999). HBS Case No.: 201-004; Teaching Note: 202-060 9. Available at SSRN: https://ssrn.com/abstract=298768

Mihir A. Desai (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6693 (Phone)
617-496-6592 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter Tufano

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 (0) 1865 288551 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 (0) 1865 288551 (Phone)

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