Market Multiple Analysis
by MaestriAnother method of stock valuation is market multiple analysis, which applies a market-determined multiple to net income, earnings per share, sales, book value, or, for businesses such as cable TV or cellular telephone systems, the number of subscribers. While the discounted dividend method applies valuation concepts in a precise manner, focusing on expected cash flows, market multiple analysis is more judgmental. To illustrate the concept, suppose that a company’s forecasted earnings perfor similar publicly traded companies is 12. To estimate the company’s stock value using the market P/E multiple approach, simply multiply its $7.70 earnings per share by the market multiple of 12 to obtain the value of $7.70(12) $92.40. This is its estimated stock price per share.
Note that measures other than net income can be used in the market multiple approach. For example, another commonly used measure is earnings before interest, taxes, depreciation, and amortization (EBITDA). The EBITDA multiple is the total value of a company (the market value of equity plus debt) divided by EBITDA. This multiple is based on total value, since EBITDA measures the entire firm’s performance. Therefore, it is called an entity multiple. The EBITDA market multiple is the average EBITDA multiple for similar publicly traded companies. Multiplying a company’s EBITDA by the market multiple gives an estimate of the company’s total value. To find the company’s estimated stock price per share, subtract debt from total value, and then divide by the number of shares of stock.
As noted above, in some businesses such as cable TV and cellular telephone, an important element in the valuation process is the number of customers a company has. For example, telephone companies have been paying about $2,000 per customer when acquiring cellular operators. Managed care companies such as HMOs have applied similar logic in acquisitions, basing their valuations on the number of people insured. Some Internet companies have been valued by the number of “eyeballs,” which is the number of hits on the site.
Taken From : Five-Minute MBA – Corporate Finance
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