Lab F-1 Relative Market Valuation
Keywords: Valuing Equity; Stock Price Valuation; Financial Statement Data
Lab Insight: When you get an appraisal of your home’s value, you use the sale of comparable
houses to get an estimate. In like manner, to get an estimate of a company’s value, you use
relative market valuation of other competitor firms.
In this lab, we will use the valuation of Walmart, Target, and Dollar General to estimate the
value of Costco.
Required:
1. Calculate the relative market valuation of Costco as of 8/31/2019, using the valuation of
comparison firms (Walmart, Target and Dollar General) on these dimensions:
a. P/B (Price-to-Book) Ratio
b. P/E (Price-to-Earnings) Ratio
c. P/S (Price-to-Sales) Ratio
Ask the Question: What is the relative market valuation of Costco as of 8/31/2019?
Master the Data:
Open Excel File Lab F-1 Data.xlsx
Here’s a screenshot of the template:
We will need to gather the appropriate information from the competitor financial statements to value
Costco. This information is available in the appendix.
Starting in Row 3, we get the information for Walmart (from the appendix). Their financial statements
are available in the appendix.
In cell A4, input the date is the fiscal year end date, which for Walmart is 1/31/19.
In cell B4, insert WMT, ticker symbol for Walmart.
In cell C4, go to the appendix page with the stock prices for each day. Insert the closing stock price as of
8/30/19.
In cell D4, go to WMT’s income statement and input the number of shares outstanding (in thousands) as
of 1/31/19.
In cell E4, go to WMT’s income statement and input total revenue (in $ thousands) as of 1/31/19.
In cell F4, go to WMT’s income statement and input the net income (in $ thousands) as of 1/31/19.
In cell G4, go to WMT’s income statement and input the basic EPS (earnings per share) (in $ thousands)
as of 1/31/19.
In cell H4, go to WMT’s balance sheet and input the total stockholders’ equity – this is also known as the
Book Value of Equity (in $ thousands) as of 1/31/19.
Check your numbers to make sure your spreadsheet has the right numbers, etc.:
In row 5, insert the appropriate numbers for Target.
In row 6, insert the appropriate numbers for Dollar General.
In row 7, insert the appropriate numbers for Costco. Note the fiscal year end is 8/31/2019.
Upon completion, your spreadsheet should appear as follows:
Perform the Analysis
Step 1:
Starting in columns J, K and L, we will compute the actual company Price-to-Book (P/B), Price-toEarnings (P/E) and Price-to-Sales Ratios.
To compute the Price-to-Book Ratio, we will divide the price per share by the book value of equity per
share. In cell J4, insert the formula, =C4/(H4/D4) as follows:
To compute the Price-to-Earnings Ratio, we will divide the price per share by the earnings per share. In
cell K4, insert the formula, =C4/G4 as follows:
To compute the Price-to-Sales Ratio, we will divide the price per share by the sales revenue per share. In
cell L4, insert the formula, =C4/(E4/D4) as follows:
Now copy cells J4:L4 to J5:L6 to arrive at the following:
To get the relative market valuation for Costco, we will use the average ratio of Walmart, Target and
Costco.
In cell G10, insert the text “Relative Values for WMT, TGT and DG”.
In cell J10, insert this formula to calculate the average P/B ratio for WMT, TGT and DG, =AVERAGE(J4:J6)
In cell K10, insert this formula to calculate the average P/E ratio for WMT, TGT and DG,
=AVERAGE(K4:K6)
In cell L10, insert this formula to calculate the average P/S ratio for WMT, TGT and DG, =AVERAGE(L4:L6)
The spreadsheet should now appear as follows:
Step 2:
We will now apply that relative valuation to come up with an estimate of Costco value.
In cell J12, insert the formula =(J10*H7)/D7 to come up with one estimate of Costco value based on the
relative P/B ratio.
In cell K12, insert the formula =K10*G7 to come up with one estimate of Costco value based on the
relative P/E ratio.
In cell L12, insert the formula =(L10*E7)/D7 to come up with one estimate of Costco value based on the
relative P/S ratio.
The completed estimate is as follows after formatting cells:
Share the Story:
The estimates of share price for Costco are inputs into a decision on the value of Costco. As of 8/31/19,
these straddle the price of Costco stock of $294.76. At this point, management can decide whether to
perform other types of analysis or to make a buy, hold, or sell decision.
Assessment:
1. Answer the multiple choice questions.
Lab F-1 Alternate
Using the same data as Lab F-1, do a relative stock valuation of Target as of 8/31/19, using the
relative market valuation of the rest of the competitors (WMT, DG, COST).
Open Excel File Lab F-1 Alt Data.xlsx
Assessment:
1. Take a screenshot of your final estimate for Target and label it “Lab F-1 Alternate
Submission.jpg”.
2. Answer the multiple choice questions.
Appendix: Financial Statement Data