Valuation tools survey: DCF vs Multiples
just out of curiosity, in real life, shops tend to use DCF, Multiples or a mix of both? i understand both of them have their shortcomings and that maybe especially in the Sell Side Multiples are preferred because it's much easier to give a simple answer to the client (given all the inputs a DCF requires).
so which one is it?
It depends on the sector, company, and situation. Sometimes I'll use DCF for bull/bear scenario analysis and sometimes I'll do a blended valuation using multiple methodologies. It's like asking what tool do you use from your toolbox: a high powered sand blaster or victor-style torch kit? It depends on the type of job you're trying to get done.
Replacing sand blaster and torch with hammer and screwdriver works as well.
DCFs vs Multiples (Originally Posted: 06/08/2015)
I've written an article about this here:
http://www.treetis.com/blog/2015/6/8/valuation-why-multiples-are-used-m…
I've had this discussion many times on these forums. I think there is too much importance placed on DCFs - maybe because it seems like something people in finance do. In reality, it's not used as much in equity research or at the major buy-side funds as most people might think (although this varies depending on the team and industry, of course).
What is your question?
Mainly wanted to get it out there and hear what everyone saw in their experience.
TheFamousTrader I rarely see it on the sell-side. Are you looking at a specific industry?
To be honest. It is very common on the sell-side - too common if you ask me. I'd agree that it's much rarer to see DCFs being extensively used on the buy-side, but they definitely have their place.
In general, it's a great model for sell-side analysts - tons and tons of flexibility in terms of the assumptions that go into it.
My sell-side firm exclusively uses DCF methodologies. It's conceptually and mathematically outstanding. What's your question?
You're serious?
Yes indeed. Does that seem odd to you?
Yes, please PM me your firm name so I make sure to never refer to its research. I prefer to not read the garbage out that comes from the garbage in premised on guesses of business line items and theoretical WACC calculations
Sorry that you feel that way. How do you value corporations?
Multiples and common sense. If your call comes down to a 1% change in revenues or WACC, you need to rethink your whole approach
We certainly use common sense in our modeling, too. 1% of revenue wouldn't affect our estimate at all. It's not like we apply zero analytical thinking!
Not to cast doubt on the way you do things or look at companies, but a DCF is simply a tool - it's down to the person to either be stupid (i.e. a tool) about it or actually make good use of the model. Do note that I'm not implying you're a tool, only saying it's a bit unjust to bash the DCF approach - it has its place.
Good mix of DCF/multiples at my BB. It varies by analyst and by sector.
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