Beginners Guide to Valuation and Metrics By Sector

Inspired by comments from this: //www.wallstreetoasis.com/forums/basic-guide-ramping-up-on-a-company-with…

Lets just jump in.

Technology: In this space there are really two metrics that matter the most, sales growth and EPS growth. EV/Sales will be used if you are thinking about investing in growth companies (IPO valuations). To keep the post short if you’re investing in large tech it is more about EV/EBITDA (cash flow) and P/E’s, if you’re investing in growth stocks it is more about year over year sales growth and EPS growth since many do not have positive earnings.

Metrics Basis: IT spend will help tech companies, GDP is usually a driver for IT spend, changes in products impact margins (software has higher margins for example) also you should track the cost of items going into each tech product (example: if the glass on the iPhone increases by 200% that will hurt Apple margins)

(to WSO comments, software would be similar but it gets a higher multiple due to higher margins ie: gross margins are usually near 90's, this is why take out multiples for software companies would be higher than say a hardware company, better margins drive better multiples)

Consumer: This space is about sales growth, operating margin growth (look for earnings growth, P/E multiples) and returns on your assets. For the consumer segment you want to open stores with or without debt, get them cash flow positive, open more stores and repeat. So with this in mind ROA, ROE and margins become significant metrics to follow. Finally, you want to make sure your debt load is manageable.

Metrics Basis: Weather impacts consumer sales (warm weather means more people shopping), Sales/square foot is a good metric to follow (how efficient are your stores), monthly data comes out regarding sales for consumer companies and same store sales calls are also tracked religiously.

Auto/Transport: Auto: This space is also heavily focused on EBITDA and some will use metrics such as EBITDAP (the P stands for pension obligations which makes sense for a company like Ford). In addition, this space can utilize the DCF valuation as cash flow is much more predictable relative to a small medical technology stock. Transport: Similar to Auto, the focus is again on EBITDA or EBITDAR (the R stands for rent). Again this depends on the company but with a gun to your head stick with simple EBITDA metrics for both.

Metrics Basis: In this industry one key point of course is IHS Automotive data (Worldwide sales, European vs. North America etc.). In addition, when looking at the auto space one should look at the Seasonally Adjusted and Annualized Rate (referred to as the SAAR). Finally, one should remember Automotive is highly cyclical, recall the 2008 disaster so GDP growth is also a factor for auto sales.

Financials: Another large industry but key metrics here include book value, returns on assets and equity and of course loan ratios. Companies will trade on P/BV ratios and tangible book value per share will also be a key metric. The space is broad for example a REIT will see more focus on consistent dividends and of course interest rates while banks zero in on loan ratios and tangible book value and finally credit card companies track charge-offs and portfolios of loans.

Metrics: Needless to say, changes in interest rates impact bond prices and loans in general so this is always a key metric to watch. Credit companies will look for charge offs and as mentioned with REITs you are looking for stable book value and consistent dividend payments.

Medical: The medical space is tougher to value with simple metrics because if a product is approved and is a game changer (for example a cure for cancer) the stock will move triple digits within days. With that said a good way to value the firm is by valuing their product lines or using a sum of the parts analysis. If you believe product X is worth $5 per share and has a 50% chance of being approved then it would add $2.50 to your stock price. As you grow to a major medical company the DCF becomes more relevant.

Metrics: Available market is put in both metrics and valuation as the market you are attempting to penetrate will determine the value of your product, again if you can cure cancer you have addressed a major market with an extremely desirable and valuable solution. Beyond product approvals you are also looking for changes in governmental laws

Oil & Gas: In this space we again turn more to EBITDA metrics (or EBITDAX which excludes some differentiated tax issues) as we are dealing with large numbers and recurring income which allows for the use of a DCF as well. Finally for oil and gas you can use the Net Asset Value model (NAV) where you no longer assume perpetual growth and instead look at reserves moving to zero.

Metrics: Simplistically you are looking for large reserves and production of oil/gas or otherwise. In addition, changes in legislation and drilling rights/laws significantly impact your financial model. Finally, a large disaster (plants being destroyed etc.) can be major detriments to Oil and Gas.

Also attached is a quick printable tear sheet.

Feel free to post more specific ?'s will try to get you guys back over the weekend have a good Friday.

Slight update to notes due to questions via PM, if people are interested we may go through a few sector specific looks on a company basis similar to the Facebook example