multiples: use in relative valuation
DESCRIPTION
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. - PowerPoint PPT PresentationTRANSCRIPT
![Page 1: Multiples: Use in Relative Valuation](https://reader035.vdocuments.net/reader035/viewer/2022081417/56816264550346895dd2ca05/html5/thumbnails/1.jpg)
MSU Student Investment Association
1
MULTIPLES: USE IN RELATIVE VALUATION
February 8th, 2012
![Page 2: Multiples: Use in Relative Valuation](https://reader035.vdocuments.net/reader035/viewer/2022081417/56816264550346895dd2ca05/html5/thumbnails/2.jpg)
MSU Student Investment Association
2
MULTIPLES OVERVIEW
• Main Uses– Relative Valuation– DCF
• Many– Price/Earnings– Price/Book– Price/Sales– Enterprise Value/EBITDA
![Page 3: Multiples: Use in Relative Valuation](https://reader035.vdocuments.net/reader035/viewer/2022081417/56816264550346895dd2ca05/html5/thumbnails/3.jpg)
MSU Student Investment Association
3
WHAT IS THE SIGNIFICANCE?
P/E P/B P/SResearch in Motion
20.00 3.50 2.00
Nokia 15.00 3.50 1.50Apple 12.99 4.73 3.33
Phone Manufacturers
Note: numbers are made up
![Page 4: Multiples: Use in Relative Valuation](https://reader035.vdocuments.net/reader035/viewer/2022081417/56816264550346895dd2ca05/html5/thumbnails/4.jpg)
MSU Student Investment Association
4
IT’S A RATIO!
AppleSupermarket Price:
$5
$5/Apple
![Page 5: Multiples: Use in Relative Valuation](https://reader035.vdocuments.net/reader035/viewer/2022081417/56816264550346895dd2ca05/html5/thumbnails/5.jpg)
MSU Student Investment Association
5
IT’S A RATIO!
CompanyPrice-to-Earnings
(P/E)
$ Dollars/$1 Earnings
Ex: P/E: 8.5x – you are paying $8.5 for $1 in earnings
![Page 6: Multiples: Use in Relative Valuation](https://reader035.vdocuments.net/reader035/viewer/2022081417/56816264550346895dd2ca05/html5/thumbnails/6.jpg)
MSU Student Investment Association
6
WHAT’S WRONG WITH THIS PICTURE?
Supermarket Prices
$2 $3 $7
![Page 7: Multiples: Use in Relative Valuation](https://reader035.vdocuments.net/reader035/viewer/2022081417/56816264550346895dd2ca05/html5/thumbnails/7.jpg)
MSU Student Investment Association
7
WHAT SHOULD HAPPEN
Supermarket Prices
$2 $3 $0
![Page 8: Multiples: Use in Relative Valuation](https://reader035.vdocuments.net/reader035/viewer/2022081417/56816264550346895dd2ca05/html5/thumbnails/8.jpg)
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
![Page 9: Multiples: Use in Relative Valuation](https://reader035.vdocuments.net/reader035/viewer/2022081417/56816264550346895dd2ca05/html5/thumbnails/9.jpg)
MSU Student Investment Association
9
WHAT SHOULD HAPPENBad 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!
![Page 10: Multiples: Use in Relative Valuation](https://reader035.vdocuments.net/reader035/viewer/2022081417/56816264550346895dd2ca05/html5/thumbnails/10.jpg)
MSU Student Investment Association
10
EXAMPLE
P/EResearch in Motion
20.00
Nokia 15.00Apple 12.99
RIMM: Bad Prospects, but trading at a higher multipleVerdict: Overvalued! Compared to Apple
Apple: Crushing it, but trading at a lower multipleVerdict: Undervalued! Compared to RIMM
Note: numbers are made up
![Page 11: Multiples: Use in Relative Valuation](https://reader035.vdocuments.net/reader035/viewer/2022081417/56816264550346895dd2ca05/html5/thumbnails/11.jpg)
MSU Student Investment Association
11
PITFALL: LOW MULTIPLE = UNDERVALUED
Understand competitive position in the industry
P/EResearch in Motion
3.89
Nokia -Apple 13.58Note: Real numbers (close: 2/8/2012)RIMM: Low P/EVerdict: Undervalued! Compared to Apple
Apple: High P/EVerdict: Overvalued! Compared to RIMM
![Page 12: Multiples: Use in Relative Valuation](https://reader035.vdocuments.net/reader035/viewer/2022081417/56816264550346895dd2ca05/html5/thumbnails/12.jpg)
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
![Page 13: Multiples: Use in Relative Valuation](https://reader035.vdocuments.net/reader035/viewer/2022081417/56816264550346895dd2ca05/html5/thumbnails/13.jpg)
MSU Student Investment Association
13
QUESTIONS?