Relative Valuation LECTURE 3 CFA- 25743
3.Compare a firm’s standardized multiple to that of comparable firms, controlling for any differences between the firms that might affect the multiple, to judge whether the stock is under- or over- valued CFA - 25743 UTS Business School
What is a multiple of (relative) value? 3 CFA - 25743 UTS Business School
Drivers of Value across Multiples 4 Value of the stock (equity) = DPS1/(Ke-g) PE=Payout*(1+g)/(Ke-g) PBV=ROE*Payout*(1+g)/(Ke-g) PEG=Payout*(1+g)/g*(Ke-g) PEG f ( t i k) PS=ROS*Payout*(1+g)/(Ke-g) f ( k) PE= f (g, payout, risk) PBV= f (g, payout, ROE, risk) PEG= (g, payout, risk) PS= (g, payout, ROS, risk) Value of the firm = FCFF1/(WACC-g) EV/FCFF=(1+g)/(WACC-g) EV/FCFF= f (g, WACC) EV/EBIT=(1+g)(1-RiR)/(WACC-g) EV/EBIT= f (g, RiR, WACC) EV/EBITDA=(1+g)(1-RiR)/(WACC-g) (1-tc) EV/EBITDA= f (g, RiR, WACC, tc) EV/Sales=Operating Margin(1- RiR)(1+g)/(WACC-g) EV/Sales= f (g, WACC, Oper.Marg, RiR) CFA - 25743 UTS Business School
Most widely used valuation methods 5 P/E, PER Price earnings ratio P/CE Price to cash earnings P/S Price to sales P/LFCF Price to levered FCF P/BV Price to book value P/AV Price to asset value P/Customer Price to customer P/Units Price to units Price/Output Price to output EV/EBITDA Enterprise value to EBITDA / l EV/S EV to sales EV/FCF EV to unlevered FCF EV/BV EV to book value PEG PER/earnings growth EV/EG EV to EBITDA growth Source: Morgan Stanley Equity Research CFA - 25743 UTS Business School
Relative valuation is pervasive… Most valuations on Wall Street are relative valuations. o Almost 85% of equity research reports are based upon a multiple and comparables 6 Almost 85% of equity research reports are based upon a multiple and comparables. o More than 50% of all acquisition valuations are based upon multiples. o Rules of thumb based on multiples are not only common but are often the basis for final valuation judgments. While there are more discounted cash flow valuations in consulting and corporate finance, they are often relative valuations masquerading as di d h fl l i discounted cash flow valuations. o The objective in many discounted cashflow valuations is to back into a number that has been obtained by using a multiple. o The terminal value in a significant number of discounted cashflow valuations is estimated using a multiple. CFA - 25743 UTS Business School
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