Market-Based Valuation: Price and Enterprise Value Multiples

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Market-BasedValuationPrice and Enterprise
Value Multiples

• Presenter
• Venue
• Date

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Valuation Indicators
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Methods for Price and Enterprise Value Multiples
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Price-to-Earnings MultipleRationales and
Drawbacks
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Price-to-Earnings Multiple Definitions
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Example Forward P/E
Stock price 20 .00
2016Q1 EPS 0 .18
2016Q2 EPS 0 .25
2016Q3 EPS 0 .32
2016Q4 EPS 0 .35
2016 Fiscal year forecast 1 .10

2017Q1 EPS 0 .43
2017Q2 EPS 0 .48
2017Q3 EPS 0 .50
2017Q4 EPS 0 .59
2017 Fiscal year forecast 2 .00
Assume we are at the beginning of December 2016.
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Example Forward P/E
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Example Forward P/E
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Issues in Calculating EPS
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Example Underlying Earnings
Reported EPS from previous four quarters 4 .00
Restructuring charges 0 .10
Amortization of intangibles 0 .15
Impairment charge 0 .20
Stock price 50 .00
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Example Underlying Earnings
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Example Normalized Earnings
Year EPS BVPS ROE
2015 0.66 4.11 16.1
2014 0.55 3.67 15.0
2013 0.81 2.98 27.2
2012 0.73 2.12 34.4
2011 0.34 1.61 21.1

2016 stock price 2016 stock price 24.00 24.00
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Example Normalized Earnings
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Example Normalized Earnings
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Justified Forward P/E from Fundamentals
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Justified Trailing P/E from Fundamentals
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Example Justified Forward P/E from Fundamentals
Retention ratio 0 .36
Dividend growth rate 4 .0
Required return on stock 10 .0
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Example Justified Forward P/E from Fundamentals
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Example Justified P/E from Regression on
Fundamentals
Values for Subject Firm Values for Subject Firm Values for Subject Firm
Dividend payout ratio 0 .40
Beta 1 .20
Earnings growth rate 6 .00
Actual P/E 15 .0
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Example Justified P/E from Regression on
Fundamentals
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Method of Comparables
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Method of ComparablesUsing Peer Company Multiples

• Law of one price
• Risk and earnings growth adjustments
• PEG limitations
• Assumes linear relationship
• Does not account for risk
• Does not account for growth duration

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Example Method of ComparablesUsing P/E and PEG
Values for subject firm
Five-year EPS growth rate 8 .0
Consensus EPS forecast 4 .50
Current stock price 28 .00

Values for peer group
Median P/E 9 .00
Median PEG 1 .60
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Example Method of ComparablesUsing P/E and PEG
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Method of ComparablesUsing Industry and Market
Multiples

• Industry or Sector Index
• Mean vs. median
• Check industry valuation against market
• Broad Market Index
• Adjust for differences in fundamentals and size
• Use relative values on a historical basis

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Method of ComparablesValuing the Market

• Fed Model Earnings Yield vs. T-Bond Yield
• Does not account for inflation correctly
• Relationship between earnings yield and interest
  rates is nonlinear
• Small rate changes ? large changes in P/E
• Yardeni Model

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Method of ComparablesUsing Own Historical
Multiples

• Rationale Regression to the Mean
• Approaches
• Average of four middle values over past 10 years
• Five-year average trailing P/E
• Potential Problems from Changes in
• firm business
• firm financial leverage
• interest rate environment
• economic fundamentals
• inflationary environment

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Using P/Es for Terminal Value
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Example Using P/Es for Terminal Value
Values for subject firm
Required rate of return 11 .0
EPS forecast for Year 3 2 .50

Values for peer group
Mean dividend payout ratio 0 .40
Mean ROE 8 .0
Median P/E 9 .00
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Example Using P/Es for Terminal ValueUsing
Gordon Growth Model
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Example Using P/Es for Terminal ValueUsing
Comparables
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Price-to-Book Value MultipleRationales
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Price-to-Book Value MultipleDrawbacks
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Adjustments to Book Value
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Justified P/B
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Price-to-Sales Multiple Rationales
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Price-to-Sales Multiple Drawbacks
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Justified P/S
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Example Calculating the Actual and Justified
P/E, P/B, and P/S
Stock price 50 .00
EPS 2 .00
Dividends per share 1 .20
Book value of equity per share 6 .25
Sales per share 15 .00
ROE 22 .5
Required return on stock 12 .0
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Example Calculating the ActualP/E, P/B, and P/S
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Example Calculating the Inputs for the
JustifiedP/E, P/B, and P/S
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Example Calculating the JustifiedP/E, P/B, and
P/S
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Price-toCash Flow Multiple Rationales
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Price-toCash Flow Multiple Drawbacks
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Definitions of Cash Flow
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Justified P/CF
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Dividend YieldRationales and Drawbacks
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Justified Dividend Yield
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Inverse Price Ratios
Price Ratio Inverse Price Ratio
Price-to-earnings (P/E) Earnings yield (E/P)
Price-to-book (P/B) Book-to-market (B/P)
Price-to-sales (P/S) Sales-to-price (S/P)
Price-to-cash-flow (P/CF) Cash flow yield (C/P)
Price-to-dividends (P/D) Dividend yield (D/P)
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Enterprise Value/EBITDA Multiple Rationales and
Drawbacks
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Issues in Using Enterprise Value Multiples
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Cross-Country Comparisons
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Momentum Indicators Earnings Surprises
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Momentum Indicators Relative Strength
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Valuation Indicators in Practice Averaging
Multiples
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Valuation Indicators in Practice Stock Screens
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Summary
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