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Market-Based Valuation: Price and Enterprise Value Multiples

Market-Based Valuation: Price and Enterprise Value Multiples. Presenter Venue Date. Valuation Indicators. Methods for Price & Enterprise Value Multiples. Price-to-Earnings Multiple Rationales & Drawbacks. Price-to-Earnings Multiple Definitions. Example: Forward P/E. Example: Forward P/E.

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Market-Based Valuation: Price and Enterprise Value Multiples

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  1. Market-BasedValuation:Price and Enterprise Value Multiples Presenter Venue Date

  2. Valuation Indicators

  3. Methods for Price & Enterprise Value Multiples

  4. Price-to-Earnings MultipleRationales & Drawbacks

  5. Price-to-Earnings Multiple Definitions

  6. Example: Forward P/E

  7. Example: Forward P/E

  8. Example: Forward P/E

  9. Issues in Calculating EPS

  10. Example: Underlying Earnings

  11. Example: Underlying Earnings

  12. Example: Normalized Earnings

  13. Example: Normalized Earnings

  14. Example: Normalized Earnings

  15. Justified Forward P/E from Fundamentals

  16. Justified Trailing P/E from Fundamentals

  17. Example: Justified Forward P/E from Fundamentals

  18. Example: Justified Forward P/E from Fundamentals

  19. Example: Justified P/E from Regression on Fundamentals

  20. Example: Justified P/E from Regression on Fundamentals

  21. Method of Comparables

  22. 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

  23. Example: Method of ComparablesUsing P/E and PEG

  24. Example: Method of ComparablesUsing P/E and PEG

  25. 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 & size • Use relative values on a historical basis

  26. Method of ComparablesValuing the Market • Fed Model: Earnings Yield vs. T-Bond Yield • Does not account for inflation correctly • Relationship between earnings yield & interest rates is nonlinear • Small rate s → large s in P/E • Yardeni Model

  27. 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

  28. Using P/Es for Terminal Value

  29. Example: Using P/Es for Terminal Value

  30. Example: Using P/Es for Terminal ValueUsing Gordon Growth Model

  31. Example: Using P/Es for Terminal ValueUsing Comparables

  32. Price-to-Book Value MultipleRationales

  33. Price-to-Book Value MultipleDrawbacks

  34. Adjustments to Book Value

  35. Justified P/B

  36. Price-to-Sales Multiple Rationales

  37. Price-to-Sales Multiple Drawbacks

  38. Justified P/S

  39. Example: Calculating the Actual & Justified P/E, P/B, & P/S

  40. Example: Calculating the ActualP/E, P/B, & P/S

  41. Example: Calculating the Inputs for the JustifiedP/E, P/B, & P/S

  42. Example: Calculating the JustifiedP/E, P/B, & P/S

  43. Price-to-Cash-Flow Multiple Rationales

  44. Price-to-Cash-Flow Multiple Drawbacks

  45. Definitions of Cash Flow

  46. Justified Price-to-Cash-Flow Ratio

  47. Dividend YieldRationales & Drawbacks

  48. Justified Dividend Yield

  49. Inverse Price Ratios

  50. Enterprise Value/EBITDA Multiple Rationales & Drawbacks

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