7/19/11

This was a question that came up for an ER interview at a BB. How can you arrive at a target price given EV/EBIDTA? What else do you need to know? Thanks!

Comments (38)

7/20/11

If you only have the multiplier, you need the actual EBITDA number. With that you can multiply out to the Enterprise Value then...

add Cash and Cash Equivalents
subtract Debt
subtract minority interest (if any, probably not relevant for interview)
subtract preferred equity (if any, probably not relevant for interview)
= Market Value of Equity

If you need a per share price, just divide your equity value by total shares outstanding.

Financial Modeling

7/20/11

get Investment Banking by Pearl and rosenbaum.

I have to return some video tapes.

7/20/11

Is there a more intuitive way of looking at the relationship between the two? The calculation outlined by Tracer makes sense but it's rather mechanical.

7/20/11

how much simpler can it get? the ev/ebitda multiple and actual ebitda will tell you enterprise value. that minus net debt is the equity value which, divided by shares outstanding, will give you the share price of the company.

7/20/11

When you take the EV/EBITDA multiple and multiply it by the EBITDA figure, essentially it's saying "this is what the company is worth in terms of its cash-generating ability from its core business (i.e. assets in place, prospects, etc.)." The adjustments that Tracer has made reflect additional things that need to be considered -- adding in cash the company has, but adjusting downward for other claims on that cash flow.

Not sure if that's what you're asking or not, but figured it'd be worth a shot.

7/22/11

Tracer gave you the method.

I'll give a more detailed explanation that might be a bit more intuitive.

-You have what you consider an appropriate EV/EBITDA figure. We will say 6.0x for this example.
-You have forecasted your financials out and see an 2012 EBITDA value of $100 in your model.
-Multiplying the 6.0x and $100 gives you $6,000 EV (EBITDA terms cancel).

Now you know your EV for 2012 based on your estimates.

Taking your modeled figures you take the $6,000 and subtract out debt (say $1,000 according to the model for 2012) and interest ($100) and add back cash and cash equivalents ($300). This results in an equity value of $5,200.

Your model also has diluted shares forecasted (based on share repurchase guidance or estimated issuance). We will say we have 52M shares outstanding in our model for 2012.

5,200/52 = $100 share price. You can then compare this to the current price or whatever you need the valuation for.

That's how you take a 2012 EV/EBITDA and get a value from it. It's mechanical in the same way that all of this stuff is mechanical. The relationship is pretty basic: Enterprise Value is the entire value of the firm. EBITDA is the gross profit. So, it's showing you how much the firm is worth in relation to what it can generate minus cost of goods. The relationship to the stock price is basically the same but you need to whack out the debt and add in the cash to get at what the Stock Market actually pays for.

It's a good multiple since it is captial structure neutral - many industries have widely varying structures and this ends up being the preferred multiple method.

11/6/13

You need EBITDA, Net Debt and Total Shares Outstanding (TSO):

1) EV/EBITDA x EBITDA = Enterprise Value (EV)

2) EV - Net Debt = Equity Value

3) Equity Value / TSO = Target Price

edit: just realised I replied to a 2 year old thread..

11/6/13

I can send you a spreadsheet laying this out based on EV comps...PM if you'd like it.

11/7/13

@sigmahatsquared i'd love to get that too if possible. I don't have enough bananas to PM you.

11/7/13

PM'd you.

11/7/13

Thanks!

Financial Modeling

11/7/13

predict growth rate of bottom line top line for 1 yr and thus share price?

maybe use a similar p/e ratio or multiple to the new higher predicted earnings to come up with a target price.

11/7/13
11/7/13
LeggoMyGekko:

equity research reports

... are you serious?

11/7/13

you cant look at your on competition to compute a target price?

is there anyway to forecast forward looking risk free rates and Beta for next years target price?

All ideas are welcome

11/7/13

come up with arbitrary target price and back into the P/E ratio to get it there

11/7/13

Looking at other ER reports is a bit true. You always look at Thompson to see if your target is in the ball park with your competitors and if it is not then you better come up with a very compelling reason why it isn't.

11/7/13

is how to get to the TARGET Price...

Im curious all ER and I bankers do it?

11/7/13

look at where you predict earnings to be, look at the comps/what kind of p/e multiples these companies have gotten in the past/where in the cycle you believe the companies are (trough vs peak, etc), and throw on a P/E ratio based on where you believe the company should be valued next to its peers (ie strongest in universe gets X P/E, middle of pack gets Y P/E, weakest gets Z P/E, etc). its more of an art than a science

11/7/13
iambateman:

its more of an art than a science

precisely. remember when that joker henry blodget had a $400 12 mo target price for netscape? this was obv skewed BC there were a plethora of other tech stocks with wildly over-inflated p/e's but it jut goes to show you that the target price is largely arbitrary.

11/7/13
MDR:
iambateman:

its more of an art than a science

precisely. remember when that joker henry blodget had a $400 12 mo target price for netscape? this was obv skewed BC there were a plethora of other tech stocks with wildly over-inflated p/e's but it jut goes to show you that the target price is largely arbitrary.

Amazon, actually. Henry put the target out when he was a no-name analyst with mediocre academic credentials at Oppenheimer. Merrill's analyst put a target at half the current stock price. Merrill fired their analyst and hired Henry, making him an internet superstar.

You could reasonably argue that that one call, a $400 target price on Amazon, earned Henry $60 million, based on what Merrill paid him over the next few years. Without it, he probably would have toiled away in obscurity and for a lot less money.

You could also argue that research analysts' incentives changed after the days of Henry, Mary Meeker, and Jack Grubman. Meredith Whitney (another analyst with somewhat questionable credentials) made a similar fortune for herself by making the opposite call, showing how equity research and associated analyst incentives have changed over the years.

The goal, if you were drawing conclusions, would be tat if you are an analyst, you should be prepared to go big and go all-in. If you do it at the right time, you can become a brand unto yourself.

11/7/13

equity research reports = industry performance, growth rates, potential benefits/setbacks from change in regulation with new administration

11/7/13

LeggoMyGekko: I'm really impressed with your comments... always adding value! Why do you always have this need to sound intelligent?
Go to bed Kid!

11/7/13

In many cases ER Target Prices "represent the price level the stock should currently trade at if the market were to accept the analyst's view of the stock and if the necessary catalysts were in place to effect this change in perception within the performance horizon."(From RBS Research)

Therefore the target price is not calculate one year out, it is calculated as of today and compared to the market price of today.

11/7/13

Dividend yields play no part of PT calculations. If you have an expected return (which legally you cannot I believe due to the wording), then your PT would be moving on a daily basis. Here's another way to think about it. The purpose of a price target is to place a value to a company's equity, right? The value of that equity, in theory, should not change on a daily basis for the purpose of what you, the analyst, think a company's worth.

Anyways, here's a couple of different ways we calculate PT. In my space, companies rarely pay dividends, but even in the event that they do, we ignore them for a PT calc.

Straight P/E: $1.00 in CY11E EPS with a 20x multiple gets you a $20 PT.

P/E (ex-cash): $1.00 CY11 EPS + $2.00 cash/shr with a 20x multiple gets you a $22 PT.

In essence, PT calculations are arbitrary. You have them to indicate a direction of where you think the stock is heading and also the magnitude of that direction. One last thing, all PT calculations must be justified using current group multiples or historical multiples and an explanation on why you think the company should trade at a discount, inline, or premium to those multiples. Hope that helps you out.

11/7/13

I am a newbie so don't know much but I am constantly learning. I came across the EMH recently which might answer this.

Efficient Market Hypothesis with 3 cases: weak, semi-strong, strong-form. The strong-form EMH suggests that the market instantly reflects even hidden information - but this clearly isn't true. So it all comes down to inefficiencies in the market, and how it cannot take into account all factors even if they are predicted accurately. Add to that the amount of information that is not publicly disclosed and then the many derivatives and "bets" which disrupt the EMH even further.

I'm sorry if I am being stupid, and would appreciate anyone correcting me. :)

Being a prospective monkey I am bound to post stupid comments due to my lack of expert knowledge. I implore you to correct me harshly or constructively, and I will appreciate any learning opportunity.

11/7/13

jointhebank:
I am a newbie so don't know much but I am constantly learning. I came across the EMH recently which might answer this.

Efficient Market Hypothesis with 3 cases: weak, semi-strong, strong-form. The strong-form EMH suggests that the market instantly reflects even hidden information - but this clearly isn't true. So it all comes down to inefficiencies in the market, and how it cannot take into account all factors even if they are predicted accurately. Add to that the amount of information that is not publicly disclosed and then the many derivatives and "bets" which disrupt the EMH even further.

I'm sorry if I am being stupid, and would appreciate anyone correcting me. :)

2 things.

1) Studies suggest that the reality is leaning towards more to the semi-strong form.

2) Perfect prediction is only hypothetical. My hypothesis is that even a report has taken into account of every market factor that might affect that particular stock's price, the analyst still wouldn't be able to make the perfect estimation to the target price because the target price doesn't capture the potential market influence of the report. And the credibility of the analyst/his company might be able to reflect "how influential the report will be".

11/7/13

tonydaboiii:
jointhebank:
I am a newbie so don't know much but I am constantly learning. I came across the EMH recently which might answer this.

Efficient Market Hypothesis with 3 cases: weak, semi-strong, strong-form. The strong-form EMH suggests that the market instantly reflects even hidden information - but this clearly isn't true. So it all comes down to inefficiencies in the market, and how it cannot take into account all factors even if they are predicted accurately. Add to that the amount of information that is not publicly disclosed and then the many derivatives and "bets" which disrupt the EMH even further.

I'm sorry if I am being stupid, and would appreciate anyone correcting me. :)

2 things.

1) Studies suggest that the reality is leaning towards more to the semi-strong form.

2) Perfect prediction is only hypothetical. My hypothesis is that even a report has taken into account of every market factor that might affect that particular stock's price, the analyst still wouldn't be able to make the perfect estimation to the target price because the target price doesn't capture the potential market influence of the report. And the credibility of the analyst/his company might be able to reflect "how influential the report will be".

I assume the credibility is built into how popular a certain institution's ER is? Also given how that hypothesis is very unreal - due to inefficiencies - I would assume it barely makes any effect on the performance of the stock?

This is very similar to my earlier confusion about how stocks can go up simply by overbuying (in large quantities) and then dumping it back for profits. I guess there are SEC regulations on how much you can buy before filing some form, but it essentially boils down to how the market gets back to 'equilibrium' after any external disturbance. Similar to any "event" in the stock - like death of CEO or a terrorist attack - which drops the price but recovers to pre-event levels soon after.

Being a prospective monkey I am bound to post stupid comments due to my lack of expert knowledge. I implore you to correct me harshly or constructively, and I will appreciate any learning opportunity.

11/7/13

jointhebank:
tonydaboiii:
jointhebank:
I am a newbie so don't know much but I am constantly learning. I came across the EMH recently which might answer this.

Efficient Market Hypothesis with 3 cases: weak, semi-strong, strong-form. The strong-form EMH suggests that the market instantly reflects even hidden information - but this clearly isn't true. So it all comes down to inefficiencies in the market, and how it cannot take into account all factors even if they are predicted accurately. Add to that the amount of information that is not publicly disclosed and then the many derivatives and "bets" which disrupt the EMH even further.

I'm sorry if I am being stupid, and would appreciate anyone correcting me. :)

2 things.

1) Studies suggest that the reality is leaning towards more to the semi-strong form.

2) Perfect prediction is only hypothetical. My hypothesis is that even a report has taken into account of every market factor that might affect that particular stock's price, the analyst still wouldn't be able to make the perfect estimation to the target price because the target price doesn't capture the potential market influence of the report. And the credibility of the analyst/his company might be able to reflect "how influential the report will be".

I assume the credibility is built into how popular a certain institution's ER is? Also given how that hypothesis is very unreal - due to inefficiencies - I would assume it barely makes any effect on the performance of the stock?

This is very similar to my earlier confusion about how stocks can go up simply by overbuying (in large quantities) and then dumping it back for profits. I guess there are SEC regulations on how much you can buy before filing some form, but it essentially boils down to how the market gets back to 'equilibrium' after any external disturbance. Similar to any "event" in the stock - like death of CEO or a terrorist attack - which drops the price but recovers to pre-event levels soon after.

Word. My opinion is that while in the long term the stock price would revert to a price level corresponding to the stock's fundamental value, but in short-term the effect of a research report (or think of a roadshow) would still be significant.

11/7/13

Target prices don't mean anything. Reports, ratings and price targets are not how ER analysts add value, nor seek to add value.

11/7/13

newfirstyear:
Target prices don't mean anything. Reports, ratings and price targets are not how ER analysts add value, nor seek to add value.

I see, then how do they add the values?
11/7/13

tonydaboiii:
newfirstyear:
Target prices don't mean anything. Reports, ratings and price targets are not how ER analysts add value, nor seek to add value.

I see, then how do they add the values?

1. Access to management
2. Company specific information
3. Industry reports
4. Ad hoc projects for clients
5. Gauge of sentiment

Follow me on Twitter: https://twitter.com/KarateBoy

11/7/13

I agree with newfirstyear on this one. From my limited interviews with ER teams, I gathered that their real value was in connecting investors to corp. management teams and hosting road shows, acting somewhat like a gatekeeper. I think that the research reports are more or less there to generate publicity for the ER's brokerage team, being a sort of soft-dollar freebie.

11/7/13
11/7/13
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