Relative Value Equity Valuation Approaches

Valuing equity against comparable companies: price and enterprise value multiples, the method of comparables and of forecasted fundamentals, choosing a peer group, and trailing versus forward multiples.

1. 1. Price multiples and the method of comparablesA price multiple compares a share's price with a per-share fundamental; you can judge it against fundamentals (the justified P/E from the Gordon model) or against similar companies (the method of comparables).Video · 6 minFree14 min
2. 2. The relative valuation processRelative valuation is a disciplined five-step process: pick comparable companies, pick a multiple whose numerator and denominator belong to the same claimants, compute it consistently, read where the company sits in the peer distribution, and then apply the multiple to estimate value.12 min
3. 3. Justified multiples: forecasted fundamentals, PEG and regressionA justified multiple is the multiple a stock 'should' have; you can take it from peers or derive it from fundamentals such as ROE, growth and the cost of equity, and you can combine both ideas by adjusting multiples for growth (PEG) or regressing them on their drivers.14 min
4. 4. P/E in depth: earnings yield, PVGO and normalized earningsThe P/E tells you how much of a price is a bet on future growth; its justified value rises with growth and falls with risk, and it is only useful when the earnings in the denominator are positive, recurring and adjusted for the business cycle.14 min
5. 5. Sales, dividend, cash flow and industry-specific multiplesBeyond the P/E, analysts use sales, dividend and cash flow multiples, each with its own justified value from the constant growth model, plus industry-specific measures; each suits some companies and misleads for others.14 min
6. 6. Enterprise value multiples, asset-based valuation and choosing a modelEnterprise value prices the whole business net of its cash, so EV multiples compare companies with different capital structures; asset-based models value a company as what it owns minus what it owes; and combining models guards against the weaknesses of each.Video · 5 min15 min
7. 7. EV/EBITDA drivers and value-to-book multiplesThe justified EV/EBITDA rises with growth and falls with the cost of capital, capex and taxes; value-to-book multiples extend P/B to all capital providers; and when price-based and EV-based multiples disagree, cash, debt and non-operating income are usually why.14 min
8. 8. Choosing a peer group: industry and factor approachesThe ideal peers share the target's risk, growth and cash flow characteristics; analysts usually start from an industry classification and refine it, or group companies by statistical factors such as beta.13 min
9. 9. Current, past and forward multiples, and terminal valuesCurrent multiples can be distorted by one-off items and the cycle, past multiples show trends against a company's own history and its peers, and forward multiples are used both for comparison and to set a terminal value inside a present value model.13 min
10. 10. Integrated cases: why multiples differ, the justified P/E and comparablesA P/E gap is explained by growth, payout and risk together; the justified P/E needs normalised inputs and a sensitivity check; and a multiple judged against history and peers can give conflicting signals that call for more information.18 min