Drivers of Stock Price vs. Valuation Multiples
It seems for some stocks investors are very focused on EPS, while for others it can be anything from EBITDA, to sales, to margins, FCF, or even # of active users. When looking at a new company, what's your framework for thinking about the main driver of a stock price?
Also how do you gauge when to use P/E, vs EV/EBITDA, EV/FCF, etc? Suppose a company grows top-line at 5-10% per year, and generates positive earnings and cash flow. When would you use P/E vs. EV/EBITDA? Would EV/EBITDA still be fair if the company didn't have debt?
From my understanding people tend to use P/E when there's earnings, EBITDA when there's no earnings, and sales when there's strong top-line growth but negative EBITDA, but I was just curious to see if anyone had any other views on this.
I think it's a combination, and it's also industry specific. A lot of industrial companies use P/E for valuation. Telecom uses FCF because these are low/negative growing companies that mainly trade off a yield basis. Dividend payout ratios are very important. Tower companies / Reits trade off of AFFO (adj funds from operations or FCF exc. growth capex and working capital) and then EBITDA. Like you mentioned, high growing companies use revenue because it's assumed FCF is negative (grow capex and working cap) and EBITDA isn't the best measure b/c you're rapidly expanding with high opex / working cap. In general, I think you can't go wrong with EBITDA in any industry and then P/E / FCF as appropriate.
On a side note, what's driving that growth is prob. most important. When a company beats P/E, a hedge fund may literally walk every line item to see where the company beat expectations. Most funds model down to EBIT as interested is assumed the same and no one cares if they beat / miss BC of taxes. They also can build sophisticated builds that incorporate macro environment / minor company comments such as 5% of EBIT beat was attributed to volume or price.
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