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1、Market-Based Valuation: Price and Enterprise Value multiples1. Methods: comparables and forecasted fundamentals (based on DCF model)2. Ratios: P/E, P/B, P/S, P/CF, Dividend yield3. Pros and Cons: a) Meaningful when earning is negative?b) Popular in the investment community?c) Accounting practices ca
2、n easily distort the ratio?d) The primary determinant of investment value (how closely related to earnings)?e) Volatile and transitory?4. Calculationsa) Trailing P/E= Market price per share/EPS over pervious 12 monthsb) Leading P/E=Market price per share/EPS over next 12 months c) P/B=Market value o
3、f equity/book value of equityi. Book value of equity= Common shareholders equity= net asset preferred stockd) P/s =Market value of equity/Total Sales5. Key: estimate earningsa) Normalized earningsi. Historical average (average EPS over the most recent business cycle.ii. Average return on equity=aver
4、age ROE * current book value per shareb) Analyze the factors influence P/E: Gordan growth modeli. Justified trailing P/E= (1-b)*(1+g)/(r-g)ii. Justified leading P/E=(1-b)/(r-g)iii. Justified P/B ratio (ROE-g)/(r-g)iv. Justified P/S ratio net profit margin (E/S)*justified trailing P/Ev. Divided yield
5、: (r-g)/(1+g) Need to memorize the formulas, at least the one for justified trailing P/Ec) Othersi. P/E Regression1. Predictive power is uncertain2. Relationship between P/E and fundamental variables may change over time3. Multicollinearity is often a problem (the relationship among variables)ii. PE
6、G=P/E/G1. Stocks with lower PEG is more attractive, assuming similar risk2. Limitations a) Relationship between P/E and g is not linearb) PEG does not account for riskc) PEG does not reflect the duration of high-growth periodiii. TIC: total invested capita: includes cash and short term investment6.
7、Terminal valuea) Reflect the earning growth that a firm can sustain over the long runb) Two methods: fundamental vs multiples Justified P/E vs Benchmark P/Ei. Calculations1. Terminal value in year n = Justified (Benchmark) leading P/E ratio * forecasted earnings in year n+12. Terminal value in year
8、n = Justified (Benchmark) trailing P/E ratio * forecasted earnings in year nii. Pros and cons1. Strength of comparables: based on market data exclusively, no estimate for g, b, r2. Weakness of comparables: mispriced benchmark will transfer the error to the terminal value7. P/CFa) CF= Earnings plus n
9、oncash chargesi. Poxy1: net income + depreciation + amortizationii. Does not account for changes in net working capital and non cash revenueb) Adjusted cash flow from operationsi. Adjusted CFO = CFO + net cash interest outflow * (1-tax rate)ii. Interest expense: IFRS (operating or financing) GAAP (o
10、perating only)c) FCFE: free cash flow to equityi. FCFE=CFO FCInv (fixed capital investment) + net borrowing (issues-repayments)d) EBITDAi. For total enterprise value rather than equity valuee) Use trailing price for P/CF ratio8. EV/EBITDAa) Calculations of both parametersb) Pros and consi. Pros1. Co
11、mpare firms with different leverage2. Capital intensive businesses with high levels of depreciation and amortization3. Always positiveii. Cons1. Impacted by the change of working capital and ignore different revenue recognition2. Ignore capital expenditures apart from depreciation9. Cross-border val
12、uationa) Differences in accounting methods, cultures, risk and growth opportunities b) P/adjusted CFO and P/FCFE are least affected (accounting methods and estimates)10. Momentum indicatorsa) Relate either the market price or a fundamental variable to the time series of historical or expected valueb
13、) Indicatorsi. Earnings surprise = reported EPS Expected EPSii. Standardized unexpected earnings (SUE) = earning surprise/standard deviation of earnings surprise (the smaller the better: patterns persist)11. P/E for an indexa) Weighted harmonic mean = 1/(w1/x1+w2/x2+wn/xn)i. Wi: Weight of stock iii.
14、 Xi: PE of stock ib) Weighted harmonic mean puts more weight on smaller values. Outliers shall be taken away.Residual income valuation1. Residual income (RI), a) RI, economic profit = net income opportunity cost of capitalb) RI(t)=E(t) r* B(t-1)=(ROE-r)*B(t-1)i. E(t): expected EPS for year tii. ROE:
15、 expected return on new investmentsiii. R: required return on equityc) V0 =B0 + (RI1/(1+r) + RI2/(1+r)2+) = Current book value of equity + present value of expected future residual incomei. Difficult to estimate the RI patternii. Compare with other models: use the current book value rather than terminal value: value is recognized earlier reduced forecast errord) Single Stage Residual income valuation modeli. Assuming constant dividend and earnings growth rateii. V0=B0 + (ROE-r)* B0)/(r-g)iii. Solve for g: markets expectation of residual income growth assuming i
