Tài chính ngân hàng - Market - Based valuation: Price and enterprise value multiples

Market-BasedValuation:Price and Enterprise Value MultiplesPresenterVenueDateValuation IndicatorsPrice MultiplesEnterprise Value MultiplesMomentum IndicatorsMethods for Price & Enterprise Value Multiples1) Method of ComparablesEconomic rationale is the law of one price2) Method Based on Forecasted FundamentalsReflects firm fundamentals and future cash flowsJustified Price MultiplesCan be determined using either methodPrice-to-Earnings MultipleRationales & DrawbacksRationalesEPS is driver of valueWidely usedRelated to stock returnsDrawbacksZero, negative, or very small earningsPermanent vs. transitory earningsManagement discretion for earningsPrice-to-Earnings Multiple DefinitionsTrailing P/EUses last year’s earningsPreferred when forecasted earnings are not availableForward P/EUses next year’s earningsPreferred when trailing earnings are not reflective of futureExample: Forward P/EStock price$20 .002011:Q1 EPS$0 .182011:Q2 EPS$0 .252011:Q3 EPS$0 .322011:Q4 EPS$0 .352011 Fiscal year forecast$1 .102012:Q1 EPS$0 .432012:Q2 EPS$0 .482012:Q3 EPS$0 .502012:Q4 EPS$0 .592012 Fiscal year forecast$2 .00Example: Forward P/EExample: Forward P/EIssues in Calculating EPSEPS DilutionUnderlying EarningsNormalized EarningsDifferences in Accounting MethodsExample: Underlying EarningsReported EPS from previous four quarters$4.00Restructuring charges$0.10Amortization of intangibles$0.15Impairment charge$0.20Stock price$50.00Example: Underlying EarningsExample: Normalized EarningsYearEPSBVPSROE2010$0.66$4.1116.1%2009$0.55$3.6715.0%2008$0.81$2.9827.2%2007$0.73$2.1234.4%2006$0.34$1.6121.1%2011 stock price$24.00 Example: Normalized EarningsExample: Normalized EarningsJustified Forward P/E from FundamentalsJustified Trailing P/E from FundamentalsExample: Justified Forward P/E from FundamentalsRetention ratio 0 .36Dividend growth rate4.0%Required return on stock10.0%Example: Justified Forward P/E from FundamentalsExample: Justified P/E from Regression on FundamentalsValues for subject firmDividend payout ratio 0.40Beta 1 .20 Earnings growth rate6.00%Actual P/E 15 .0Example: Justified P/E from Regression on FundamentalsMethod of ComparablesBenchmark Value of the Multiple ChoicesIndustry peersIndustry or sector indexBroad market indexFirm’s historical valuesMethod of ComparablesUsing Peer Company MultiplesLaw of one priceRisk and earnings growth adjustmentsPEG limitations:Assumes linear relationship Does not account for risk Does not account for growth duration Example: Method of ComparablesUsing P/E and PEGValues for subject firmFive-year EPS growth rate8.0%Consensus EPS forecast$4.50Current stock price$28.00Values for peer groupMedian P/E 9 .00Median PEG 1 .60Example: Method of ComparablesUsing P/E and PEGMethod of ComparablesUsing Industry and Market MultiplesIndustry 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 Method of ComparablesValuing the MarketFed 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 Method of ComparablesUsing Own Historical MultiplesRationale: Regression to the MeanApproaches:Average of four middle values over past 10 yearsFive-year average trailing P/EPotential Problems from Changes inFirm businessFirm financial leverageInterest rate environmentEconomic fundamentalsInflationary environmentUsing P/Es for Terminal ValueJustified P/EP/E =(D/E)/(r – g)Sensitive to required inputsP/E Based on ComparablesGrounded in market dataIf comp is mispriced, terminal value will be mispricedExample: Using P/Es for Terminal ValueValues for subject firmRequired rate of return11.0%EPS forecast for year 3$2.50Values for peer groupMean dividend payout ratio 0 .40Mean ROE8.0%Median P/E 9 .00Example: Using P/Es for Terminal ValueUsing Gordon Growth ModelExample: Using P/Es for Terminal ValueUsing ComparablesPrice-to-Book Value MultipleRationalesBook Value Is Usually PositiveMore Stable than EPSAppropriate for Financial FirmsAppropriate for Firms that Will TerminateCan explain stock returnsPrice-to-Book Value MultipleDrawbacksDoes Not Recognize Nonphysical AssetsMisleading when Asset Levels VaryCan Be Misleading Due to Accounting PracticesLess Useful when Asset Age DiffersCan Be Distorted Historically by RepurchasesAdjustments to Book ValueIntangible AssetsInventory AccountingOff-Balance- Sheet ItemsFair ValueJustified P/BPrice-to-Sales Multiple RationalesSales Less Easily ManipulatedSales Are Always PositiveP/S Appropriate For Mature, Cyclical, & Distressed FirmsP/S More Stable Than P/ECan Explain Stock ReturnsPrice-to-Sales Multiple DrawbacksSales ≠ Earnings & Cash FlowNumerator & Denominator Not ConsistentP/S Does Not Reflect Cost DifferencesP/S Can Be Misleading Due to Accounting PracticesJustified P/SExample: Calculating the Actual & Justified P/E, P/B, & P/SStock price$50 .00EPS$2 .00Dividends per share$1 .20Book value of equity per share$6 .25Sales per share$15 .00ROE22.5%Required return on stock12.0%Example: Calculating the ActualP/E, P/B, & P/SExample: Calculating the Inputs for the JustifiedP/E, P/B, & P/SExample: Calculating the JustifiedP/E, P/B, & P/SPrice-to-Cash-Flow Multiple RationalesCash Flow Less Easily ManipulatedRatio More Stable Than P/ERatio Addresses Quality of Earnings Issue with P/ERatio Can Explain Stock ReturnsPrice-to-Cash-Flow Multiple DrawbacksCash Flow Can Be DistortedFCFE More Volatile and More Frequently NegativeCash Flow Increasingly Managed by FirmsDefinitions of Cash FlowCFEarnings + Depreciation + Amortization + DepletionCFOFrom statement of cash flowsFCFEMost valid but volatileEBITDABest used with enterprise valueJustified Price-to-Cash-Flow RatioDividend YieldRationales & DrawbacksRationalesComponent of returnDividends less risky than future capital gainsDrawbacksOnly one component of returnDividends may displace future earningsMarket may not favor dividendsJustified Dividend YieldInverse Price RatiosPrice RatioInverse Price RatioPrice-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)Enterprise Value/EBITDA Multiple Rationales & DrawbacksRationalesUseful for comparing firms of different leverageUseful for comparing firms of different capital utilizationUsually positiveDrawbacksExaggerates cash flowFCFF more strongly groundedIssues in Using Enterprise Value MultiplesEV = Market Value of Stock + Debt – Cash – InvestmentsJustified EV/EBITDAPositively related to FCFF growthPositively related to ROICNegatively related to WACCComparables May Utilize TICOther EV MultiplesEV/FCFFEV/EBITAEV/EBITEV/SCross-Country ComparisonsUS GAAP vs. IFRSNet income higher under IFRSShareholder's equity lower under IFRSROE higher under IFRSValuation MultiplesP/CFO & P/FCFE most comparableP/B, P/E, & EBITDA multiples least comparableInflationHigher inflation  Lower justified price multiplesHigher pass-through rates  Higher justified price multiplesMomentum Indicators: Earnings SurprisesMomentum Indicators: Relative Strength Past PerformanceRelative to an IndexInherently Self-DestructingValuation Indicators in Practice: Averaging MultiplesArithmetic Mean & Weighted MeanOverestimate of index P/EHarmonic MeanCloser to index P/E but is influenced by small outliersWeighted Harmonic MeanEqual to index P/EValuation Indicators in Practice: Stock ScreensDatabase LimitationsVariables are predeterminedDoes not contain qualitative dataLook-Ahead BiasAssumes investor has info not yet availableSector RotationSummaryPrice & Enterprise Value MultiplesMethod of comparablesMethod based on forecasted fundamentalsPrice-to-Earnings Rationales & DrawbacksRationales: EPS  Driver of value; widely used; related to stock returnsDrawbacks: Zero, negative, or very small earnings; transitory components; management discretion for earningsTrailing and forward P/EsSummaryIssues in Calculating EPSEPS dilutionUnderlying earningsNormalized earningsDifferences in accounting methodsMethod of ComparablesIndustry peersIndustry or sector indexBroad market indexOwn historical valuesSummaryPrice-to-Book Rationales & DrawbacksRationales: Book value usually > 0, more stable than EPS, appropriate for financial firms & firms that will terminate, explains stock returnsDrawbacks: Doesn’t recognize nonphysical assets, misleading if asset levels vary or differ from accounting practices, less useful when asset age differs, can be distorted by repurchasesIssues in Calculating Book ValueIntangible assetsInventory accountingOff-balance-sheet itemsFair valueSummaryPrice-to-Sales Rationales & DrawbacksRationales: Sales less easily distorted, sales always positive, P/S more stable than P/E, appropriate for many firms, explains stock returnsDrawbacks: Sales ≠ Earnings & Cash flow, numerator & denominator not consistent, does not reflect cost differences, can be distortedPrice-to-Cash-Flow Rationales & DrawbacksRationales: CF less easily manipulated, more stable than P/E, addresses quality of earnings issue, explains stock returnsDrawbacks: can be distorted, FCFE more volatile and more frequently negative, increasingly managed by firmsSummaryMeasures of Cash FlowCF: Earnings + Depreciation + Amortization + DepletionCFO: From statement of cash flows FCFE: Most valid but volatileEBITDA: Best used with enterprise value Dividend Yield Rationales & DrawbacksRationales: A component of return, dividends less risky than future capital gainsDrawbacks: Only one component of return, dividends may displace future earnings, market may not favor dividendsSummaryInverse Price RatiosUseful when denominators are small, low, or negative (e.g., earnings)Earnings yield, book-to-market, sales-to-price, cash flow yield, and dividend yieldEnterprise Value MultiplesEV = Market value of stock + Debt – Cash – InvestmentsRationales: Useful for comparing firms of different leverage & capital utilization, usually positiveDrawbacks: Exaggerates cash flow, FCFF more strongly groundedSummaryJustified MultiplesP/E: + related to g, – related to rP/B: + related to ROE, – related to rP/S: + related to g & PM, – related to rP/CF: + related to g, – related to rD/P: - related to g, + related to rEV/EBITDA: + related to g and PM, – related to WACCSummaryCross-Country ComparisonsIFRS ROE higher than GAAP ROEP/CFO & P/FCFE most comparableP/B, P/E, & EBITDA multiples least comparableHigher inflation  Lower justified price multiplesHigher pass-through rates  Higher justified price multiplesSummaryMomentum IndicatorsUnexpected earnings (UE)Standardized unexpected earnings (SUE)Relative strength Stock ScreensDatabase limitationsPotential look-ahead biasUsed in sector rotation