# Relative Valuation

Submitted By nsfi
Words 2214
Pages 9
3/14/2014

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RELATIVE VALUATION

Introduction
2

The majority of equity research reports are based on
multiples
Most analysts use relative valuation because it is safer
It is a short term strategy
Forward multiples are better then historical ones
because the price is related to expected cash flow
Relative valuations usually means that you need to:
1.
2.
3.

Come up with comparable companies
Standardize by dividing by something common to all
stocks
Compare based on certain rules of thumbs related to each
ratio that are commonly used in decision making

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3/14/2014

The four Stages in Relative Valuation
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1.

2.

3.

4.

Multiples are easy to use and easy to misuse. There are four basic steps to
using multiples wisely and for detecting misuse in the hands of others
Define the multiple
1.
Look at how it is computed (Consistency of numerator and
denominator): Example P/E vs. P/EBITDA
2.
Sometimes, the multiples with the same names can be computed
differently(uniformity of definition)
Describe the multiple : Look at the cross sectional distribution of the to
know what is median multiple
Analyze the multiple: embedded in each multiple there are key DCF
factors that are driving the multiple (i.e. DCF assumptions that you are
trying to run from)
Conclude: Only after I follow the first three steps, I can reach a conclusion.

P/E ratio - Define
4

Consistent , how much price you are willing to pay per
one unit of earnings
Make sure to use the same computation across firms:
Current EPS
 Last year’s: trailing EPS
 Expected next year → forward P/E
 Primary, diluted, partially diluted
 Before or after extraordinary items
 Measure using different accounting rules
 Etc.....

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3/14/2014

P/E- Describe (January 2008)
5

In January out of 6800…...

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