n. takezawa (icu) 20021 corporate finance valuation using multiples: an introduction (...
TRANSCRIPT
N. Takezawa (ICU) 2002 1
Corporate FinanceValuation Using Multiples:An Introduction( 株価乗数、価格乗数、比較方式 )
N. Takezawa (ICU) 2002 2
Assets
Liability
Equity
Total Value =Liability Value+Equity Value
V = E + DE=equityD=debt
Recall the balance sheet:
N. Takezawa (ICU) 2002 3
Market Value However, we are interested in the current market value of the firm (division or project).
Thus, we need the market value of equity as opposed to the “book” value of equity.
We also need the market value of debt.
N. Takezawa (ICU) 2002 4
P/E in valuation One popular method is valuation using multiples.
The P/E ratio is often used in the Multiples valuation.
P refers to the price per share of stock. E refers to the earnings the company makes.
If the P/E multiple is 10, this means that an increase in earnings by 1 yen is associated with a price increase of 10 yen (on average).
N. Takezawa (ICU) 2002 5
Cont. Multiples is just another term for scaling.
P/E is not the only scaling or multiples variable used.
Multiples involves several steps: choosing the right sample of firms, choosing the right multiples, projections for the firm in question.
N. Takezawa (ICU) 2002 6
P/E Multiples valuation Obtain the P/E for similar firms. Firms in the same industry, for example, with similar characteristics.
Average the P/E over the selected firms. The average gives us the (average) industry P/E multiple.
Multiply the forecasted earnings per share with the industry P/E multiple to obtain a forecast of the price.
N. Takezawa (ICU) 2002 7
earnings projected is where
multiplyFinally,
ratios. above the average Then
industry. the in firm the where
. eachfor Obtain
valuedbeingFirm
valuedbeingFirmvaluedbeingFirm
E
PEE
P
E
P
nE
P
i
iE
P
AVG
n
iiAVG
i
1
1
N. Takezawa (ICU) 2002 8
Choosing the firms to average The selection criteria is very difficult to determine in practice: you need to understand the industry you are analyzing.
Outliers in general should not be included. Too few firms, then one or two companies dominate the multiple. Too many companies then the sample may no longer be representative.
N. Takezawa (ICU) 2002 9
Industry classification Use of technology Clients Firm size
N. Takezawa (ICU) 2002 10
Price EPS P/E Est. EPS Mar. 97 Mar. 98
Hitachi 1100 21 52.38 16
Matsushita 1920 36 53.33 39
Toshiba 690 19 36.31 19 (avg. P/E) 47.34
Sony 8640 105 82.28 86
Sony price = est. EPS x avg (P/E) = 86 x 47.34 = 4,071This is the estimated price for March 1998 given informationin 1997.
N. Takezawa (ICU) 2002 11
Variations: Forecasted Earnings in Multiples Use the forecasted P/E for each firm. In other words, use the estimated earnings, to obtain the average P/E. Since we are interested in the future (expectations) this is appropriate.
N. Takezawa (ICU) 2002 12
Other Multiples Multiples are not limited to P/E. Depending on the industry other multiples might be appropriate. Depending on the information you can obtain, you can probably calculate better scales.
Examples: Value/Sales, Value/EBIT, Price/number of chains, etc.
N. Takezawa (ICU) 2002 13
Firm Sales Value- Value Sales
Hitachi 11,392,500 4,126,419 2.76
Matsushita 5,970,915 6,794,852 0.88
Toshiba 4,031,798 5,265,138 0.76 (avg. value/sales) 1.46
Estimated sales for 98 is 6,100,000 (Sony), Debt = 2,482,2966,100,000 x 1.46 = 8906,000 is estimated valueEquity Value= 8,906,000 - debt = 6,423,704
6,423,704/374 = 17,175 ( #shares outstand.=374)
N. Takezawa (ICU) 2002 14
The value to sales ratio using 1997 figures for a larger setof firms is 0.97. Then, Sony’s price per share is about 9,800for 1998.
Firms include: Hitachi, Matsushita, Mitsubishi, NEC,Pioneer, Sanyo, Sharp, Toshiba.
Thanks to R. Otsuka for assistance.
N. Takezawa (ICU) 2002 15
Multiples Notice that on the numerator we always have some number which reflects the value of the company: stock price, total market equity value, total firm value (enterprise value).
Denominator: a variable which drives the business and creates value: earnings, sales, number of chain stores,etc.
N. Takezawa (ICU) 2002 16
Valuing Non-listed Firms and Divisions The Sony example is simply to illustrate the procedure involved in multiples based valuation (relative valuation).
We use “comparable” firms for valuing companies which are not listed.
To value divisions of a firm we can use “comparable” companies as well. Companies with a single line of business (same line of business as the division).
N. Takezawa (ICU) 2002 17
Recent Issues How have internet industry firms performed (financially)?
Earnings positive? Stock prices high? low? Can we use a P/E multiple? What multiples would you suggest?
N. Takezawa (ICU) 2002 18
Multiples ( 価格乗数比較方式 )
Difficult to use P/E multiples Thus, analysts moved towards price-revenue ratios. Sales is relatively large and positive.
Use non-financial data in multiples analysis as done in other industries (chain stores, hospitals, etc.)
N. Takezawa (ICU) 2002 19
Forecasting Revenues Portals (gateway to internet) Content/Community providers E-tailors (sell goods/services on internet)
Analyst forecasts uniformly underestimate revenues. Average underestimate is 11%.
Trueman, Wong, Zhang
N. Takezawa (ICU) 2002 20
Web Usage Measures Unique Visitors: number of different visitors who visit the firm’s web per month.
Pageviews: number of pages viewed by visitors per month.
Minutes: number of minutes spent on firm’s website per month.
N. Takezawa (ICU) 2002 21
Cont. For e-tailors, analyst forecast errors are correlated with all three web traffic growth measures.
Portal and content firms: analyst forecast errors correlated with unique visitor growth.
Web usage information provides additional forecast information on the margin.