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?

Subscribe

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 - 11:14am

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

 
May 20, 2019 - 10:01am

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.

 
May 19, 2019 - 2:57pm

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 - 1:35pm

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 - 3:40am

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 - 4:32am

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

 
Jul 28, 2019 - 6:37pm
Start Discussion

Total Avg Compensation

September 2020 Investment Banking

  • Director/MD (17) $704
  • Vice President (45) $323
  • Associates (257) $228
  • 3rd+ Year Analyst (37) $203
  • 2nd Year Analyst (142) $153
  • Intern/Summer Associate (134) $141
  • 1st Year Analyst (566) $129
  • Intern/Summer Analyst (547) $82

Leaderboard See all

1
Jamoldo's picture
Jamoldo
98.3
2
LonLonMilk's picture
LonLonMilk
98.3
3
Secyh62's picture
Secyh62
98.2
4
CompBanker's picture
CompBanker
97.8
5
Addinator's picture
Addinator
97.6
6
Edifice's picture
Edifice
97.6
7
redever's picture
redever
97.6
8
frgna's picture
frgna
97.5
9
NuckFuts's picture
NuckFuts
97.5
10
bolo up's picture
bolo up
97.4