Valuation Methodology
Hi guys,
I've been reading through a few equity research reports and am still trying to wrap my head around valuation methodologies.
I see that for some stocks, different brokers use different methodologies to derive their target prices. For example, I've seen LinkedIn valued using DCF, EV/EBITDA target multiples, and target P/E multiples. I understand the guys using a blended DCF/(EV/EBITDA OR P/E), but I'm still scratching my head on how these guys decide to use EV/EBITDA over P/E or vice versa - also, are EV/EBITDA and P/E used specifically in any industries as a valuation standard?
Any help would be appreciated. I do understand the difference between the multiples, just wondering how these people decide which one to use.
Thanks guys.
Typically it's not one or the other; when spreading comps, EV/EBITDA, EV/Sales, and P/E are all common to have side by side.
Industry and business model is where you'll see divergent use of multiples, I.e. Industry- specific.
save yourself the trouble of reading from multiple sources buy BIWS or WSP
It really depends on the nature of the business, capital intensiveness, real estate model, type of inventory, etc. You aren't going to value a bank (P/B) the same as you would a hard-line retailer or small biotech company (P/S). The FINRA Series 86 material gives some decent guidance on this topic.
For example, let's say that you have two airlines, and one has a significantly higher cost of debt. The P/E is not comparable for these two firms despite the fact that they are direct replacements for each other. For a firm that is not profitable currently, P/S is more appropriate than P/E or E/P.
Thanks guys, understood. I've been reading through the '01 UBS valuation primer which is where some of my questions popped up. I understand when looking at comps a variety of metrics are compared, but my real question is actually regarding target prices - I know many analysts use a variety of methodologies and weight them, but I'm just confused for certain companies they select just one metric - how do you pick one over the other? Ie. why EV/EBITDA for LNKD vs. some analysts using P/E target multiples for FB? Growth can be factored into both methods. Also are there any sources to look at industry specific valuation multiples? Ie. EV/EBITDA for xx industry P/E for xx industry, etc? Thanks guys love WSO :)
Ultimately it comes down to preference. Some people like to keep go into more detail with EV/EBITDA or EV/[EBITDA-Capex] or whatever and some people think you don't really gain anything from that and keep it simple with P/E. Here's a good link with multiples. Just know that even within one industry you can have very wide ranging multiples. I've seen everything from 4x to 12x EBITDA in my group.
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/vebitda.html
ER Valuation methods (Originally Posted: 12/13/2010)
What methods do ER folk use to get to their "target price?"
Comps/DCF? How are the models different then IB?
Depends on the industry
tech
For tech it's mainly comps - P/E, EV/Sales, P/Sales, etc. We never use a DCF in my sector.
really? damn...so not much modeling.
There is modeling involved, just more with drivers which forecast future earnings.... A consumer model will project input pricing or commod prices, regional growth and many other inputs to project future line items....
so just not the standard DCF with relies on projecting out the IS, BS, etc, not in most industries atleast.....
It really just depends on your senior analyst more than anything. Some analysts are more modeling intensive than others. You typically have an IS, BS, and CFS buildout for all of your companies...a DCF is just a simple bolt on to that. In addition, you'll have plenty of industry models that you'll maintain and update on a frequent basis.
And in all honesty, people like simplicity. For comps, it's easy to see how expensive or cheap one company is in relation to the its peer group on a real-time basis.
I have read tech reports that have had DCF's in them. DCF's are easy man, just a quick and easy formula once you have all of your FCF projections. I have only summered in banking, but I would think the real learning and modelling comes from projecting out each line item on the financial statements, unless it is just a plug and chug model.
The down fall to dcf is the different assumptions that hold for the models outlay.... The cost of capital holding steady for 5 years is a stretch in many industries/sectors..... A multiples comp is easy.. The buy side does not take a buy/sell/hold on a stock from an analyst to be pure truth, banking relationships are certainly a driver. Like someone else said each analyst likes different types of models, some are big about channel checking as main input drivers while others are more fundamentals history driving line items...
shawn- plz check inbox.......
So, iI know DCF is a quick and easy tab, but you need projections for comps?
yeah, i don't really know anythign about how comps are done in the industry (spreading/scrubbing, etc)....just what i learned in school...
If you look at ER reports, they will project out all three financial statements, I believe. Shawn would know better since he works in ER in the tech space. Don't worry so much about modeling. Learn as much as you can and try to be an expert at your space and you WILL have exit opps or maybe you will like ER and stay in it for the long haul.
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