When to use EPS-related vs EV-related multiple to calculate intrinsic, relative value?
I have been reviewing sample stock pitches with some professionals in the industry. One of them made a comment regarding whether the company in the pitch was an EPS story or an multiple story. I am assuming he was referring to using relative valuation in comparing either P/E or some form of EV/EBITDA or EV/Revenue multiples among the peer group. However, I used a DCF analysis and I wasn't sure which one was applicable. The company is young industry leader with high top and bottom line growth in a newer market that is disrupting a large, older industry.
I thought looking at the much-higher-than-peers P/E ratio would be a bit misleading due to earnings growth rates and potential. However, you would have the same issues with the Enterprise Value multiples as well due to the potential growth of the company. It seems like there may be a quality premium on the company.
How do you decide if a company is an EPS story vs a multiples expansion story for relative valuation?
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