Valuations question...
Assume that I have two companies.
Company A and Company B.
Both have the same earnings profile and the operating value of the businesses is the same.
1 has surplus assets that dont generate operating cash flows. The other doesnt.
Why is it that the PE mulitples are the same? Wouldn't the company with surplus assets have a higher PE?
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I believe that PE is a cash flow based valuation relating market price to current EPS; assets that don't generate cash flow then by nature will have no impact on PE.
But if the market thinks that the assets could be liquidated, might the PE of the firm with the surplus assets be a little higher?
thats what i would have expected, the surplus assets have some value and thus should give the company a higher PE.
but in practice i dont think this happens since the PE multiples are calculated without consideration of the Surpus Assets....
would be interested to hear thoughts....
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