A few technical questions
I am working on some stock pitches and was wondering the following:
1) Forward 2yr valuation multiples tend to be slightly lower than forward 1yr multiples as businesses typically grow yoy. I was wondering, if I am projecting a 12 month price target and want to use a median multiple of the historical range, applied to 2022 projected financials, should I use the historical forward 2yr median multiple or forward 1yr median multiple (given that my target price is for 12 months from now)?
2) In calculating the EV to get to my 12 month price target, should I use the current net debt figure or the projected net debt figure 12 months from now?
3) If a company has a convertible bond due in a few years, with an exercise price that is 25% above the current stock price, and would result in 25% equity dilution if fully exercised, how should I factor this in to my valuation projection (e.g. should I assume the 25% share count dilution for the shares outstanding count?)
1. Analysts are often slightly inconsistent with how they calculate price targets and with how they use the term "price target" (e.g., is it fair value *today* or is it fair value *today+1 year*). I wouldn't worry about this, but I would make sure you're being consistent and know what the math you are saying actually means.
2. If it is an NTM figure, you should likely use current net debt.
3. If the convert isn't in the money, then you assume it is not converted and so there is no dilution. An interesting analytical case is if you are forecasting 50% upside and so your target price is in the money even if the current stock price is not. In practice, this is an edge case that most analysts will ignore so I would not worry about this.
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