Session 18: Deconstructing Multiples

In this session, we continued with our discussion of pricing, starting with the analytics that drive PEG, PBV, EV/EBITDA and revenue multiples. During the session, I played the role of a naive equity research analyst, using sloppy pricing to push buy recommendations on stocks in a number of sectors, based purely on the level of multiples (low PE, low PBV etc.) and asking for pushback. I The bottom line, though, is that most companies that look cheap deserve to be cheap. The key to pricing is finding a mismatch between the pricing and the fundamentals (low PE & high growth, low PBB and high ROE, low EV to Sales and high margins). It is the basis for much of equity research, and takes the form of screens. If you are interested, I have a post that expands on the notion of screening.

[Bigagoo]

Thank you professor. This is the best explanation of multiples I've ever seen.

[armitageshanks]

Where's Jackie Wang!? Jessica has kidnapped Jackie!

[pratikadangle]

Can someone help me out with the 2 stage dividend discount model for the similar example given by professor in the financial calculator using Cash Flows button ? I am trying to apply some logic but couldn't come up with a PE of 29.

[mohamedmadkour]

Can anyone advise how he got the P/E of the bond? He said 2% yield is equivalent to PE of 50, what is the logic behind it?