Two listed companies have the exact same Financial Statements, yet the P/E Multiple of company A is 2x the P/E of B. Why?

I got this question in an internship interview recently. I listed a potential recent lawsuit, the general economic differences in each respective country and a recent earnings miss by the lower valued company as possible reasons.

I personally think that these answers aren't bad, yet the interviewer literally responded with: "That answer was rather disappointing. Next one". Can you think of a reason why he said that?

Comments (27)

May 19, 2019

It might be because you said a recent earnings miss by one of the companies when he told you the financial statements between the companies are the same, meaning had the same earnings.

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May 19, 2019

I guess thats one way to look at my answer lol. Thx, didn't see that angle

May 19, 2019

Well you are missing the point.. What matters is what the market was expecting. For example two companies could have announced the same earning say 100. But if the market was expecting 120 for one company (could be due to higher growth expected) and 100 for the second. So, the financial result is the same for both but the market is likely to dislike first company for the miss and multiple will drop as a result

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May 20, 2019
artur17777:

Well you are missing the point.. What matters is what the market was expecting. For example two companies could have announced the same earning say 100. But if the market was expecting 120 for one company (could be due to higher growth expected) and 100 for the second. So, the financial result is the same for both but the market is likely to dislike first company for the miss and multiple will drop as a result

I see what you're trying to do. But if two companies have the exact same financial statements, then they should have the same growth profile.

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May 20, 2019

What if two companies are in different industries? What if the market thinks that one company has some sort of advantage which is not reflected in financial statements, such as reputation, brand name, whatever...(and that's why is exptected to have a better growth). I don't think that if two companies have excat same financials then they should have the same growth profile. So many factors matter. Give you one more example, if topline of one company has been growing at 15% annauly and topline of the second company has been growing at 5% (but it was in the business for longer). So emagine these two companies having the same financials at some point in time, but fisrt company has shown a faster growth and achieved the results of the more mature company within a much shorter period, thus might deserve a higher multiple. Obviosuly mupltiples are not just based on growth. This is just what i am thinking and not necessarilycorrect

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May 20, 2019
artur17777:

What if two companies are in different industries? What if the market thinks that one company has some sort of advantage which is not reflected in financial statements, such as reputation, brand name, whatever...(and that's why is exptected to have a better growth). I don't think that if two companies have excat same financials then they should have the same growth profile. So many factors matter. Give you one more example, if topline of one company has been growing at 15% annauly and topline of the second company has been growing at 5% (but it was in the business for longer). So emagine these two companies having the same financials at some point in time, but fisrt company has shown a faster growth and achieved the results of the more mature company within a much shorter period, thus might deserve a higher multiple. Obviosuly mupltiples are not just based on growth. This is just what i am thinking and not necessarilycorrect

If in different industries, then financial statements are not "exactly the same". Revenue is different, margins are different, metrics are different, profitability is different, balance sheet is different, cash flows are different, literally everything will be different if in different industries.

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May 19, 2019

No. Having the same financial statements doesn't preclude one from missing earnings projections while the other didn't. That said, still don't think it's the best answer.

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May 19, 2019

It's because they're in completely different industries and a high growth tech company may have a PE double that of a big box retailer

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May 19, 2019

Forgot to mention, they were in the same industries!

May 20, 2019

One could be a growing company while the other is a mature company.

May 19, 2019

All you had to say was that trump tweeted about one

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May 19, 2019

Also, two companies might have the same financial statements but can have completely different growth prospects . Thus, higher growth company might have higher P/E

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May 19, 2019

Good point

May 19, 2019

Overall I don't think that u said something wrong. Your answers are correct, but probably they lacked detail. Anyway, in my opinion there is no reason for the interviewer to say that the answer is disappointing unless you say something completely wrong

May 20, 2019

This is the correct answer. One company might have a new product or something else anticipated to increase its growth rate relative to the other company, despite identical growth rates (and margins, CF, leverage, etc.) in the past.

A theoretical earnings miss wouldn't create a PE disparity, it would only correct one that existed before, as investors would bid the stock of the company that missed down until that company's PE matched that of the nearest comp.

May 20, 2019

The answer is different growth prospects.

May 20, 2019

Assuming the question implies that only the most current financial statements are identical, could it not also be argued that perhaps one company historically issued more/less equity than the other? In that case, the current statements of cash flow are the same, but prices per share are different? bit of a noob here so don't roast me too hard if I'm wrong

May 20, 2019

Well in that case equity on the balance sheet would not be the same

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May 20, 2019

Lapse of judgement on my end. Thanks

May 20, 2019

Think most of the answers here are very markets-focussed (relative valuation multiples etc).

I would approach this by going through the drivers of a DCF. A is worth more than B when:
- Better top line growth
- Better profitability expectations
- Lower capex
- Lower NWC requirements
- Lower effective tax rate

Additionally: potential for public offer / synergy potential of such a deal

May 20, 2019

I believe your asnwer is correct but again it comes down to what the market is thinking. Like if the market is thinking that the company is going to need less capex or lower NWC needs to achieve the same growth of company B then its gonna give a higer multiple to company A

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May 20, 2019

I totally agree with you. Just saying its more than an earnings miss or just topline growth.

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May 20, 2019

I have an answer for you. This question is retarded.

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Jul 28, 2019
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Jul 29, 2019