Relati v e Val u ation E QU ITY VAL U ATION IN R Cli � Ang Senior Vice President , Compass Le x econ
La w of One Price Relati v e v al u ation is based on the La w of One Price , i . e ., t w o assets that look the same m u st ha v e the price EQUITY VALUATION IN R
La w of One Price ( E x ample ) Stock S u bject Firm A B Pa y o � If Econom y Does Well 9 10 8 Pa y o � If Econom y Does Poorl y 3 4 2 Price ??? 7 5 EQUITY VALUATION IN R
The S u bject Firm ' s Price is $6 Stock S u bject Firm A B A v erage Pa y o � If Econom y Does Well 9 10 8 9 Pa y o � If Econom y Does Poorl y 3 4 2 3 Price ??? 7 5 6 EQUITY VALUATION IN R
Identif y ing Comparables Some approaches Firms w ithin same ind u str y classi � cation Competitors Filter b y risk , gro w th , and pro � tabilit y EQUITY VALUATION IN R
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Val u ation M u ltiples E QU ITY VAL U ATION IN R Cli � Ang Senior Vice President , Compass Le x econ
Price - to - Earnings Ratio One of the most common v al u ation m u ltiples u sed P / E Ratio = Market Price of Stock / Earnings Per Share ( EPS ) EPS can be historical - i . e ., last t w el v e months ( LTM ) EPS can be for w ard - looking - i . e ., ne x t t w el v e months or ne x t � scal y ear P / E Ratios are not meaningf u l w hen the EPS is negati v e EQUITY VALUATION IN R
Price - to - Book Ratio Another common v al u ation m u ltiple P / B Ratio = Market Price of Stock / Book Val u e Per Share Book Val u e can be historical - i . e ., last � scal q u arter ' s eq u it y Book Val u e can be for w ard - looking - i . e ., estimates of f u t u re book v al u e Book Val u es are u s u all y positi v e b u t there are some cases w hen book v al u es are negati v e EQUITY VALUATION IN R
Impl y ing the Price Steps in determining the Implied Price A set of comparable companies are identi � ed The appropriate metric or metrics are determined The median or a v erage v al u ation m u ltiple is selected The v al u ation m u ltiple is applied to the s u bject � rm ' s metric EQUITY VALUATION IN R
Impl y ing the Price Relati v e v al u ation generates an Implied Price Dependent on v al u ation of comparable companies EQUITY VALUATION IN R
What is the v al u e of a midcap � nancial � rm w ith BVPS of $30? finl <- subset(midcap400, gics_sector == "Financials") finl$p_bv <- ifelse(finl$bvps < 0, NA, finl$price / finl$bvps) finl <- finl[complete.cases(finl), ] avg_p_b <- mean(finl$p_bv) avg_p_b 2.688627 bvps <- 30 implied_price <- avg_p_b * bvps implied_price 80.65881 EQUITY VALUATION IN R
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Anal yz ing Determinants of M u ltiples E QU ITY VAL U ATION IN R Cli � Ang Vice President , Compass Le x econ
The A v erage of Median Ma y Not Al w a y s Be Applicable Use a v erage or median if � rms are v er y " comparable " Approaches to determine comparabilit y: Compare risk , gro w th , and pro � tabilit y Relati v e position historicall y EQUITY VALUATION IN R
Regression - Based Approach We can also u se regresison anal y sis to help u s determine w hat the appropriate m u ltiple is for o u r s u bject � rm P / B v s . ROE . P / E v s . 5- Year EPS Gro w th , or m u ltiple regression Less s u bjecti v e to arri v e at the appropriate v al u ation m u ltiple EQUITY VALUATION IN R
E x ample Using P / B v s . ROE finl <- subset(midcap400, gics_sector == "Financials") finl$roe <- finl$ltm_eps / finl$bvps finl$p_bv <- ifelse(finl$bvps < 0, NA, finl$price / finl$bvps) finl <- finl[complete.cases(finl), ] EQUITY VALUATION IN R
E x ample Using P / B v s . ROE P / B = −0.365 + 24.37 ∗ ROE R − squared = 0.8462 EQUITY VALUATION IN R
E x ample Using P / B v s . ROE reg <- lm(p_bv ~ roe, data = finl) a <- summary(reg)$coeff[1] a -0.3654199 b <- summary(reg)$coeff[2] b 24.37047 EQUITY VALUATION IN R
Ass u me an ROE of 10% and BVPS of $30, w hat is the Implied Price ? # Implied Price-to-Book roe <- 0.10 implied_p_b <- a + b * roe implied_p_b 2.071627 # Implied Price bvps <- 30 implied_price <- implied_p_b * bvps implied_price 62.14881 EQUITY VALUATION IN R
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