Negative EPS (how to set price target)

Hi All,

I am currently prepping for an ER interview and am working on a stock pitch. I'm looking at an ER report for a small-cap growth company with negative EPS, but positive EBITDA. The report states the valuation method for setting the Price Target to be 10x 2013E EBITDA of 52mm, PT: $9. I realized to get to the $9, you divide Revenue by Shares Outstanding (63mm) to get ~$9.

I am wondering what is the methodology behind setting the Price Target to essentially Revenue per Share? Is Rev per share a good proxy for stock price, given the company has a negative EPS and is growing?

I am just trying to clarify this so I can better explain my stock pitch for the interview. Thanks in advance.

 

Note sure if I understand your question. Using EBITDA target is not the same as a revenue target since EBITDA takes into account profitability (not including CapEx and some others). The company could have tons of revenue but if it can't turn a profit, there's not much value to the stock.

Revenue would only be a good proxy if the assumption is that the company could get to a normal level (i.e. industry level) of profitability. If there is risk or lots of uncertainty to that, revenue may not be great.

I'm not an ER person but you should look into whats causing the difference between between EBITDA and net income? Is it just impairment of goodwill? Is it levered so lots of interest? Capital intensive so lots of depreciation?

 
jpat:
Note sure if I understand your question. Using EBITDA target is not the same as a revenue target since EBITDA takes into account profitability (not including CapEx and some others). The company could have tons of revenue but if it can't turn a profit, there's not much value to the stock.

Revenue would only be a good proxy if the assumption is that the company could get to a normal level (i.e. industry level) of profitability. If there is risk or lots of uncertainty to that, revenue may not be great.

I'm not an ER person but you should look into whats causing the difference between between EBITDA and net income? Is it just impairment of goodwill? Is it levered so lots of interest? Capital intensive so lots of depreciation?

My mistake I read the ER report wrong. So they are actually using an EV/EBITDA multiple of 10x 2013E EBITDA to set the Price Target at $9. So in this case, the Price Target on the stock is EV divided by diluted shares outstanding. I'm guessing they are using EV as a proxy for Equity Value? Any reason why they might be doing this?

(there is around 2.5mm debt on the bal sheet , Debt-to-equity ratio: 1.58)

 
jpat:
Note sure if I understand your question. Using EBITDA target is not the same as a revenue target since EBITDA takes into account profitability (not including CapEx and some others). The company could have tons of revenue but if it can't turn a profit, there's not much value to the stock.

Revenue would only be a good proxy if the assumption is that the company could get to a normal level (i.e. industry level) of profitability. If there is risk or lots of uncertainty to that, revenue may not be great.

I'm not an ER person but you should look into whats causing the difference between between EBITDA and net income? Is it just impairment of goodwill? Is it levered so lots of interest? Capital intensive so lots of depreciation?

I'll tell you what the difference is, ITDA and non-recurring items (goodwill impairment an example). Remember impairment testing of intangibles only happens when their own internal stress tests triger them, which is rare because companies use very favorable valuation asumptions, usually through a DCF that only get triggered during big crashes like '09. Some companies also sometimes try to shelter quasi-lived assets in intangibles (broadcasting license agreements comes to mind) instead of straightline amortizing them so make sure to always read your filings and check specific companies accounting treatments.

Also, dont be a noob. Companies do not need to be profitiable to be worth tons of money, look at AMZN.

Or you could be extra special like YELP and not generate that much revenue or ever deliver a profit and still be worth a high P/S multiple.

 
tiger2012:
jpat:
Note sure if I understand your question. Using EBITDA target is not the same as a revenue target since EBITDA takes into account profitability (not including CapEx and some others). The company could have tons of revenue but if it can't turn a profit, there's not much value to the stock.

Revenue would only be a good proxy if the assumption is that the company could get to a normal level (i.e. industry level) of profitability. If there is risk or lots of uncertainty to that, revenue may not be great.

I'm not an ER person but you should look into whats causing the difference between between EBITDA and net income? Is it just impairment of goodwill? Is it levered so lots of interest? Capital intensive so lots of depreciation?

I'll tell you what the difference is, ITDA and non-recurring items (goodwill impairment an example). Remember impairment testing of intangibles only happens when their own internal stress tests triger them, which is rare because companies use very favorable valuation asumptions, usually through a DCF that only get triggered during big crashes like '09. Some companies also sometimes try to shelter quasi-lived assets in intangibles (broadcasting license agreements comes to mind) instead of straightline amortizing them so make sure to always read your filings and check specific companies accounting treatments.

Also, dont be a noob. Companies do not need to be profitiable to be worth tons of money, look at AMZN.

Or you could be extra special like YELP and not generate that much revenue or ever deliver a profit and still be worth a high P/S multiple.

Agreed - you don't have to be profitable today. I was trying to point out that you can't haphazardly apply revenue multiples (and multiples in general) without thinking; revenue multiples tend be gross offender (you have to think about relative growth, profitability, and risk). A company like AMZN is worth a lot because the assumption is that it will be profitable in the future; it's just making lots of investments now (probably similar to the company OP is talking about) that drive down NI.

When I made the comment, was thinking of mature companies (like Kodak) that has high revenues but are on decline since its business model is past its prime or industries that struggle to be profitable (i.e. steel). Probably not relevant for OP.

 
Best Response
lifted:
Hi All,

I am currently prepping for an ER interview and am working on a stock pitch. I'm looking at an ER report for a small-cap growth company with negative EPS, but positive EBITDA. The report states the valuation method for setting the Price Target to be 10x 2013E EBITDA of 52mm, PT: $9. I realized to get to the $9, you divide Revenue by Shares Outstanding (63mm) to get ~$9.

I am wondering what is the methodology behind setting the Price Target to essentially Revenue per Share? Is Rev per share a good proxy for stock price, given the company has a negative EPS and is growing?

I am just trying to clarify this so I can better explain my stock pitch for the interview. Thanks in advance.

There is no methodology unless they used a P/S comp against basket of peers. Sounds like a bullshit small-cap Roth Capital pump piece to me anyway.

 
tiger2012:
EV= Enterprise Value= Marketcap-cash+debt. Basically what it would take to actually but the company. Is this interview for a summer role?

Hey tiger2012, thanks I think I figured it out. So the PT number makes more sense once I calculate Equity Value (Market Cap), by adding cash (59.6mm) and subtracting debt (2.5mm) from EV. Dividing by diluted shares outstanding gets me to ~9.1 price target per share.

Yes the interview is for SA.

 

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