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Multiples: Use in Relative Valuation

Multiples: Use in Relative Valuation. February 8 th , 2012. Multiples Overview. Main Uses Relative Valuation DCF Many Price/Earnings Price/Book Price/Sales Enterprise Value/EBITDA. What Is The Significance?. Phone Manufacturers. Note: numbers are made up. It’s a Ratio!. Apple.

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Multiples: Use in Relative Valuation

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  1. Multiples: Use in Relative Valuation February 8th, 2012 MSU Student Investment Association

  2. Multiples Overview • Main Uses • Relative Valuation • DCF • Many • Price/Earnings • Price/Book • Price/Sales • Enterprise Value/EBITDA MSU Student Investment Association

  3. What Is The Significance? Phone Manufacturers Note: numbers are made up MSU Student Investment Association

  4. It’s a Ratio! Apple Supermarket Price: $5 $5/Apple MSU Student Investment Association

  5. It’s a Ratio! Company Price-to-Earnings (P/E) $ Dollars/$1 Earnings Ex: P/E: 8.5x – you are paying $8.5 for $1 in earnings MSU Student Investment Association

  6. What’s Wrong With This Picture? Supermarket Prices $2 $3 $7 MSU Student Investment Association

  7. What Should Happen Supermarket Prices $2 $3 $0 MSU Student Investment Association

  8. What’s Wrong With This Picture? Bad Company Good Company Better Company P/E: 50x P/E: 10x P/E: 12x MSU Student Investment Association

  9. What Should Happen Bad Company Good Company Better Company P/E: 5x P/E: 10x P/E: 12x A Company with worse prospects should trade at a lower multiple! MSU Student Investment Association

  10. Example Note: numbers are made up RIMM: Bad Prospects, but trading at a higher multiple Verdict: Overvalued! Compared to Apple Apple: Crushing it, but trading at a lower multiple Verdict: Undervalued! Compared to RIMM MSU Student Investment Association

  11. Pitfall: Low Multiple = Undervalued Understand competitive position in the industry Note: Real numbers (close: 2/8/2012) RIMM: Low P/E Verdict: Undervalued! Compared to Apple Apple: High P/E Verdict: Overvalued! Compared to RIMM MSU Student Investment Association

  12. It’s All Relative • Low/High Multiple has no meaning without relation • Compare to: Industry/Competitors • Tech: 10x P/E is considered a low multiple • Shipping: 10x P/E is considered a high multiple MSU Student Investment Association

  13. Questions? MSU Student Investment Association

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