I've been thinking about this for a while and was hoping some more experienced people might be able to point out where I've gone right/wrong. Trying to figure out if this is more viable in the real world than DCF as a valuation and investment tool: project out company's financials for 5-10 years, and then assign a multiple to whatever is the standard industry valuation metric once they are at "normalized" earnings. Finally, calculate share price at that future date based on the whole picture of said company at that point, and add on whatever dividends were distributed. I know this ignores the cash flows up until the "multiple year" (except for dividends which would be appropriately discounted) , but isn't that more accurate in reality because (a) you won't actually receive those flows and (b) strong cash flows will improve the company's financials which will be later reflected in the multiple?
To me, this line of thinking works especially well for pair trades because almost no growth, terminal, discount rate assumptions etc are needed except the relative premium/discount at which the two companies trade.
Thoughts?
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