MULTIPLES: USE IN RELATIVE
VALUATION
February 8th, 2012
MSU Student Investment Association
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MULTIPLES OVERVIEW
• Main Uses
– Relative Valuation
– DCF
• Many
– Price/Earnings
– Price/Book
– Price/Sales
– Enterprise Value/EBITDA
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2
WHAT IS THE SIGNIFICANCE?
Phone Manufacturers
Research in Motion
Nokia
Apple
P/E
20.00
P/B
3.50
P/S
2.00
15.00
12.99
3.50
4.73
1.50
3.33
Note: numbers are made up
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IT’S A RATIO!
Apple
Supermarket Price: $5
$5/Apple
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IT’S A RATIO!
Company
Price-to-Earnings (P/E)
$ Dollars/$1
Earnings
Ex: P/E: 8.5x – you are paying $8.5
for $1 in earnings
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5
WHAT’S WRONG WITH THIS PICTURE?
Supermarket Prices
$2
$3
$7
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WHAT SHOULD HAPPEN
Supermarket Prices
$2
$3
$0
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WHAT’S WRONG WITH THIS PICTURE?
Bad Company
P/E: 50x
Good Company
P/E: 10x
Better Company
P/E: 12x
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WHAT SHOULD HAPPEN
Bad Company
P/E: 5x
Good Company
P/E: 10x
Better Company
P/E: 12x
A Company with worse prospects should trade at a
lower multiple!
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EXAMPLE
P/E
20.00
15.00
12.99
Research in Motion
Nokia
Apple
Note: numbers are made up
RIMM: Bad Prospects, but trading at a higher multiple
Verdict: Overvalued! Compared to Apple
Apple: Crushing it, but trading at a lower multiple
Verdict: Undervalued! Compared to RIMM
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PITFALL: LOW MULTIPLE = UNDERVALUED
Research in Motion
Nokia
Apple
P/E
3.89
13.58
Note: Real numbers (close: 2/8/2012)
RIMM: Low P/E
Verdict: Undervalued! Compared to Apple
Apple: High P/E
Verdict: Overvalued! Compared to RIMM
Understand competitive position in the industry
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IT’S ALL RELATIVE
• Low/High Multiple has no meaning without
relation
• Compare to: Industry/Competitors
– Tech: 10x P/E is considered a low multiple
– Shipping: 10x P/E is considered a high multiple
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QUESTIONS?
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