Question about multiples and multiple expansion
This has been bothering me and I was wondering if someone could clarify. The two questions below might be related, or maybe I’m just mixing up the concepts in my head. Thanks in advance.
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Let’s say I’m modeling out financials for a company, and I think that growth should be 10% vs. 5% consensus growth. Separately, I know that earnings multiples (let’s say P/E) are driven by growth and risk, and since I think growth for this company should be higher than the market currently believes, I think the company should trade at a higher P/E that’s more in line with its higher-growth peers. If I apply the higher P/E multiple to the higher EPS figure, would this be double counting the growth?
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Separately, when you’re valuing a company using a multiple, mechanically there are two ways for the stock price to increase: earnings growth or multiple expansion. If I get a scenario where there’s both earnings growth and multiple expansion, I get a double benefit. But isn’t growth itself one of the reasons for multiple expansion? Or if I’m wrong and it’s not, what does cause multiple expansion?
