dell -the basics of multiples analysis

7/28/2019 DELL -The Basics of Multiples Analysis

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The Basics of Multiple

Analysis

Capital Investment Analysis


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What is multiple analysis?

Multiple analysis is a form of relative valuation

that is used to quantitatively compare acompanys financial statements to previousyears, other companies, the industry, or even theeconomy in general.


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Why is this important?

Relative valuations are the most common valuationmeasures used on Wall StreetAlmost 85% of equity research reports are based on multiples

and comparables

Nearly 50% of all acquisition valuations are based onmultiples

Will allow valuations to be tailored or adjusted to meet thecurrent market conditions, or to portray a company in acertain light

It allows different companies to be easily comparedthrough a set of common metrics or ratios

Unfortunately, these ratios can often be abused ormanipulated in number of ways


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Steps to perform multiple analysis

One common reason for doing multiple analysisis to see if a companys stock is correctly pricedin the marketCompare a number of the firms ratios to that of its

competitors to determine if it is trading in anappropriate range

Could provide justification for where the stock iscurrently priced, as well as to determine it isover/under priced


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Steps to perform multiple analysis

First select a company that you wish to valueDell, Inc.

Next create a list of comparable companies that aresimilar in size, maturity, and industryHP, IBM, Apple, etc.

For each comparable company, calculate a number ofratios that you wish to compare to the selected

company (Dell) For example:

Price/ Earnings Price/ Sales


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MS Excel

Excel can be a very useful tool in multiple analysis

Here are some steps that can help you find a range ofappropriate prices using Excel


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First: Choose a number of comps

Choose a list of multiples and compute them for a number ofcomparable companies


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Second: Find the price for your selected

company

The price will help you to derive a value

Ex: P/E ratio

If Dells P/E ratio is 21.63, and the price is $29.40, then we know the earningsper share must be $1.36


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Third: Compare the value that you have found

to a series of benchmarks


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Fourth: Use the multiples for the comparable

companies or the benchmarks as well as a specific

value to create a price

To find a price for Dell based on the average P/E ratio of 10comparable companies, we could do the following:

Find the average P/E ratio for the comparable companies, which is 24.46(which happens to be close to Dells P/E ratio of 21.63)

Then, we take the earnings per share for Dell of $1.36

Next, we multiple the EPS by the P/E ratio to get a relative price of$33.25

This tells us that if Dells price could be about $33.25 if it kept the sameearnings of $1.36 per share, and its P/E ratio increased slightly to match thatof its closest competition

Using this information, someone may be able to say that Dell is slightlyunder-priced on a P/E basis when compared to its competition


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This process can create a range of

prices based off different

multiples and benchmarks


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Pricing the stock

As you have seen: Finding the range of prices for a stock can be done with

individual companies, averages of a large group of

comparable companies, or even with benchmarks composedof hundreds different stocks

Many different multiples can be used to compare specificmetrics or elements of a company on a relative basis to other

organizations in order to determine an appropriate price Relative valuation is very useful, and can be used in

conjunction with many different forms of valuation

dell -the basics of multiples analysis

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