In which of these companies do you think valuing brand name will be easiest to do and which of them will it be hardest? Kelloggs Sony Goldman Sachs Apple Explain.
Aswath Damodaran 147 EV/Sales Ratio Regression: US in January 2011
Aswath Damodaran 148 EV/Sales Regressions across markets… Region Regression – January 2011 R Squared Europe EV/Sales =0.38 + 3.20 Expected Growth + 12.74 Operating Margin –2.50 t + 0.13 Reinvestment Rate 73.4% Japan EV/Sales =0.01 + 6.72 Operating Margin –1.99 Tax rate + 5.58 Debt/Capital 26.4% Emerging Markets EV/Sales = 2.15 - 3.50 t+ 10.09 Operating Margin - 2.01 Debt/Capital + 0.16 Reinvestment Rate 40.7%
Aswath Damodaran 149 Choosing Between the Multiples As presented in this section, there are dozens of multiples that can be potentially used to value an individual firm. In addition, relative valuation can be relative to a sector (or comparable firms) or to the entire market (using the regressions, for instance) Since there can be only one final estimate of value, there are three choices at this stage: • Use a simple average of the valuations obtained using a number of different multiples • Use a weighted average of the valuations obtained using a nmber of different multiples • Choose one of the multiples and base your valuation on that multiple
Aswath Damodaran 150 Averaging Across Multiples This procedure involves valuing a firm using five or six or more multiples and then taking an average of the valuations across these multiples. This is completely inappropriate since it averages good estimates with poor ones equally. If some of the multiples are “ sector based ” and some are “ market based ” , this will also average across two different ways of thinking about relative valuation.
Aswath Damodaran 151 Weighted Averaging Across Multiples In this approach, the estimates obtained from using different multiples are averaged, with weights on each based upon the precision of each estimate. The more precise estimates are weighted more and the less precise ones weighted less. The precision of each estimate can be estimated fairly simply for those estimated based upon regressions as follows: Precision of Estimate = 1 / Standard Error of Estimate where the standard error of the predicted value is used in the denominator. This approach is more difficult to use when some of the estimates are subjective and some are based upon more quantitative techniques.
Aswath Damodaran 152 Picking one Multiple This is usually the best way to approach this issue. While a range of values can be obtained from a number of multiples, the “ best estimate ” value is obtained using one multiple. The multiple that is used can be chosen in one of two ways: • Use the multiple that best fits your objective . Thus, if you want the company to be undervalued, you pick the multiple that yields the highest value.
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- Spring '11
- P/E ratio, PEG ratio, Aswath Damodaran, Damodaran