n. takezawa (icu) 20021 corporate finance valuation using multiples: an introduction (...

N. Takezawa (ICU) 2002 1

Corporate 　 FinanceValuation　Using　Multiples:An　Introduction( 株価乗数、価格乗数、比較方式 )


Assets

Liability

Equity

Total　Value　=Liability　Value+Equity　Value

V　=　E　+　DE=equityD=debt

Recall　the　balance　sheet:


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.


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).


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.


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.


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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.


Industry　classification Use　of　technology Clients Firm　size


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.


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.


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.


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)


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.


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.


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).


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?


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.)


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


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.


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.

n. takezawa (icu) 20021 corporate finance valuation using multiples: an introduction (...

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