Stock Valuation suggestions needed

nebben2k10's picture
Rank: Baboon | 108

Greetings fellow monkeys:

I am making a research report on a stock (not school related), in which I need to come up with a valuation for a company (specifically stock price). I am obviously going to do the legwork myself, but I am looking for ideas about how I should go about doing this.

Without building out an entire model, how should I go about doing this. Using a multiple of EBITDA standard for the industry based on the most recent EBITDA figures? Some wizardry involving industry (trailing) P/E ratios? CAPM? Can anyone illuminate me?

The most general information about this would help to point me in the right direction, so fire away.

Thanks for your help.

Comments (11)

May 3, 2011

Also interested to hear.

May 3, 2011

What type of industry? Important for the right valuation metric [s].

You might need to build at least part of the model out (income statement) to forecast and actually have your own view/see the bigger picture. This will help you look at seasonality if that's a factor for your industry. Definitely look at the comparables and growth rates, and look at the latest earnings transcripts to interpret management's tone around guidance (if they guide) and the their view on general trends in the industry. But what type of industry?

May 3, 2011

I'd start with these from easiest to more time consuming:

-Method of comparables/multiple analysis
-Asset based valuation (for asset intensive industries only)
-Divident Discount Model DDM
-Residual Earnings Model
-Abnormal Growth Valuation Model (AEGM)
-Fundamental Analysis (Reformating + Ratios)
-Forecasting (DCF, SOTP, Earnings Growth analysis)

More insight on industry would help determine best approach, these all have huge shortcomings, but all together are insightfull...time is your only concern my friend ( a good analyst with years of experience can pull all these together and can make a sound decision, for a newcomer, it may be better to focus on multiples (go through each of them extensively, and compare them to peers to get a good idea about the company)

May 3, 2011

Dude, the type of company is huge here. How the F can you even ask this without giving more insight. You should be using different valuations and models for different types of companies. Also, what type of analysis are you trying to run? Everything, I don't care what industry or type of company, comes down to inputs, so what you are looking at is HUGE!

May 3, 2011

If you're not willing to teach yourself modeling (or are too time constrained), come up with at least 5 good comparable companies to do a relative valuation. These companies should be as close as possible in business model, product mix, size, etc. Ideally they would be identical companies to your target company, but this is not possible in practice.

Come up with a mean, median, or weighted average trading multiple for your comp group. The most popular multiples are EV/EBITDA, EV/Revenue, P/E, and P/B, but it varies depending on the situation. Ideally, these are forward multiples, but trailing are fine given your situation and are readily available on Yahoo Finance.

If there is a P in the numerator, multiply the denominator from your target co. by the multiple from your comp group and divide by shares outstanding. That's your target price per share. If there is an EV in the numerator, multiply to get an implied firm value, then subtract debt and add back cash on the balance sheet. Divide by shares outstanding to get your target price per share.

If your target prices are significantly higher (lower) than your target's market price, then analyze your target and your comp group to determine whether this implies an undervaluation (overvaluation). In other words, if you believe there is a mispricing in the market, have a thesis and supporting evidence ready to justify your argument.

As you might have guessed, the multiplication, addition, and subtraction I described above could be done by a middle schooler. The value added here lies in your arguments and justification.

Learn More

Boost your resume and land a finance job by passing the FINRA SIE. 264 pages & 1981 smart flashcards written by a former 8X top Fidelity instructor. Try it for 0 bananas here.

May 3, 2011

Great responses all. Thank you for your help. I am thinking about going the relative valuation route.

Something Clever- it is a major railroad company (CSX).

May 3, 2011

There are probably only 4 good comps for that company. I will let you figure out which ones.

May 4, 2011

As far as calculating Enterprise Value, the vault finance guide gives equity value (which i take to mean market cap) + debt.

I have also read that the equity value is market cap + adjustments for stock options. is that the definition you're working from?

For enterprise value, I am using market cap + total liabilities - cash. Is this wrong?

Again, can't thank you guys (esp you buybuybuy) enough for your help.

May 4, 2011
May 4, 2011

save

May 4, 2011
Comment