Question about multiples and multiple expansion
This has been bothering me and I was wondering if someone could clarify. The two questions below might be related, or maybe I’m just mixing up the concepts in my head. Thanks in advance.
Let’s say I’m modeling out financials for a company, and I think that growth should be 10% vs. 5% consensus growth. Separately, I know that earnings multiples (let’s say P/E) are driven by growth and risk, and since I think growth for this company should be higher than the market currently believes, I think the company should trade at a higher P/E that’s more in line with its higher-growth peers. If I apply the higher P/E multiple to the higher EPS figure, would this be double counting the growth?
Separately, when you’re valuing a company using a multiple, mechanically there are two ways for the stock price to increase: earnings growth or multiple expansion. If I get a scenario where there’s both earnings growth and multiple expansion, I get a double benefit. But isn’t growth itself one of the reasons for multiple expansion? Or if I’m wrong and it’s not, what does cause multiple expansion?
