in a previous article, I discussed "the book" The traditional way and to evaluate the stock, along with a few adjustments to overcome the inherent bumpiness in levels Cash flow. In this article, we will look at other common way to evaluate the securities, using statistical multiples of the company's financial metrics, such as earnings and net assets, and sales.
There are basically three statistical times that can be used in this type of analysis: price to sales (/ S P) ratio, price-to-book (P / B) ratio, and Price-to-earnings (/ E P) ratio. And use all of them in the same way to do the evaluation, so let's first describe a method and then discuss a little bit about when the use of three different complications, and then go through an example.
multi-method based on
valuation of inventory in a manner based on a simple multiple to understand, but needs some work to get the parameters. In short, the object here is to come up with a reasonable "multi-purpose" that you think that the stock should trade at a reasonable, and the prospects for a certain growth, competitive position, and so forth. In order to reach this "multi-purpose", and there are a few things you should consider:
1) What is the historical average multiple of per share (P / E ratio, the proportion of P / S, etc.)? It should at least take a period of 5 years, preferably 10 years. This gives you an idea of the multiple in both rising and falling markets.
2) What is the average multiples for competitors? How wide and contrast against the shares that are being investigated, and why?
3) Is a set of high and low values too wide or too narrow?
4) What are the future prospects for the stock? If it was better than they were in the past, and "multi-purpose" could be higher than the historical rates mode. If you were not good, it must be "multi-purpose" (less in some cases significantly) lower. Do not forget to consider the potential competition when you think about the prospects for the future!
Once you come up with a reasonable "multi-purpose", and the rest is fairly easy. First, this year's estimates take to get the revenues and / or earnings multiple and double goal against them for target market value. Then you divide, which were led by accreditation, and adjust optionally to ease on the basis of past trends and any securities repurchase announced programs. This gives you assess a "reasonable price", which you want to buy 20% or more below the margin of safety.
If this is confusing, it should, for example, later in this article helps to clear things up.
When used various complications
all of the different complications have the advantage in some cases:
/ ratio EP: P / (e) is probably the most common multi-use. However, I would like to set this to be a price-to-earnings ratio of run instead, which is defined operating profit in this case as earnings before interest and tax (EBIT - include depreciation and amortization). The reason for this is to reduce the events once skew the bottom line profit in the value of the stock from time to time. P / EBIT works well for companies profitable with relatively stable levels of sales and margins. It does * not * work at all for the loss-making companies, and works well for existing corporate assets (banks and insurance companies) or the seasonal heavy stocks.
P / B ratio: Price- to book the most useful ratio for existing corporate assets, particularly banks and insurance companies. Profits often unpredictable due to interest rate differentials, and filled with more of the assumptions of the core products and services companies in the consideration of these accounting items vague as provisions for loan losses. However, assets such as deposits and loans is relatively stable (08-09 aside), and so the book value is generally estimated it on. On the other hand, the book value does not mean much for companies "new economy" such as software and services companies, where the underlying asset is the collective mind of the staff.
P / S ratio: the price of sales ratio is useful in all areas, but perhaps the most valuable is currently loss-making companies to assess. These companies have no profits from which the use of P / E, but compared to the P / S ratio against historical norms and competitors can help give an idea of a reasonable price for the shares.
simple example
To illustrate, let's look at Lockheed Martin Corp. (LMT).
do some basic research, and we know that Lockheed Martin is a company founded with an excellent competitive position in the industry has been relatively stable, compact defense. Moreover, Lockheed has a long track record of profitability. We also know that the company is obviously not a business based on assets, so we'll go with the ratio of P / EBIT.
looking over the last 5 years of price data and profits (which takes some of the work schedule), and decides that the average ratio of P / EBIT Lockheed during that period was about 9.3. Now I see that the conditions over the past 5 years, and we see that Lockheed worked through some years strong demand for defense in 06 and 07, followed by some changes in the political big decline in the market in 08 and 09, followed by a market recovery, but problems with important F-35 program as early as this year. Because of the growth in the near term slow the expected spending in the Department of Defense, and I am a conservative theories that 8.8 is probably a reasonable "multi-purpose" to use for this stock in the near term.
once the multi-select this, find a reasonable price so easy:
2010 estimate revenue is $ 46.95 billion, which It would be an increase of 4% for the year 09. The share profit estimate is 7.27, which would be a decline of 6.5% for 09, representing a net margin of 6%. From these figures and experimental data, calculated estimate of $ 4.46 billion in 2010 (operating margin of 9.5%).
Now, I simply apply my multiple 8.8 to $ 4.6 billion for a target of $ 40.5 billion market value.
Finally, we need to divide by means of shares outstanding for the target share price. Lockheed has 38100000 currently outstanding shares, but usually buys back 2-5% per annum. I split the difference on this and take the number of shares will fall by 2.5% this year, resulting in a number 379180000. end of
$ 40.5 billion divided by 378,180,000 gives me a stock target price of $ 107 for it. Interestingly, this close to discount the value of free cash flow of $ 109. Thus, in both cases, I've used a reasonable estimate and decided that the stock looks undervalued. Using my 20% minimum "margin of safety", I would only consider buying Lockheed shares in the $ 85 and under price.
Wrapping it up
Obviously, you can plug easily price to sales or a percentage of the price to book and, using sound financial values, do not conduct a similar evaluation of multiple basis . This type of evaluation stock makes a little more sense to most people, and accounts for factors based on the market such as multiple different ranges for different industries. However, one must be cautious and consider how the future may be different from the past when estimating for "multi-purpose". Use your head and try to avoid the use of multiples that are much higher than the average historical market.
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