Hedge Fund Modeling Basic - Multiples

When determining a 12-36 month price target using multiples, the convention can vary depending on the context and the specific modeling approach. Here's a breakdown based on the most helpful WSO content:

1. Calendar Year (CY) vs. Fiscal Year (FY):

   • Using CY is common when spreading public comps to standardize across companies with different fiscal year ends. This ensures consistency and comparability in your analysis.
   • If you're applying a '26E P/E multiple derived from CY comp spreads, it makes intuitive sense to use CY2026E EPS to align with the benchmark multiple. This approach maintains consistency between the multiple and the earnings figure.

2. Hedge Fund Modeling Examples:

   • In some hedge fund modeling examples, professionals use FY for 12-36 month price targets. This is often because FY aligns directly with company-reported financials, making it easier to tie back to actual company guidance and historical data.

3. Professional Practice:

   • There isn't a strict "one-size-fits-all" rule. The choice between CY and FY often depends on the specific context of the analysis, the preferences of the analyst or fund, and the availability of data.
   • For DCF models, as you noted, FY is typically used since it aligns with company reporting and facilitates a more accurate projection of cash flows.

4. Key Takeaway:

   • If your P/E multiple is based on CY comps, stick with CY EPS for consistency.
   • If you're working within a framework or example that uses FY, ensure your multiples and earnings align with FY to avoid mismatches.

Ultimately, the most important factor is maintaining consistency between the multiple and the earnings figure you're applying it to.

Sources: Biotech finance part 2: valuation methodologies and modeling considerations, Biotech finance part 2: valuation methodologies and modeling considerations, January 2016 Data Update 8: Pricing, with an end of month update, DCFs no longer necessary?, Accretion Follow-Up - Technical Question