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This chapter focuses on equity valuation using multiples. Our basic conclusion is that multiples nearly
always have broad dispersion, which is why valuations performed using multiples may be highly debatable. We
revise the 14 most popular multiples and deal with the problem of using multiples for valuation: their dispersion.
1,200 multiples from 175 companies illustrate the dispersion of multiples of European utilities, English utilities,
European constructors, hotel companies, telecommunications, banks and Internet companies.
However, multiples are useful in a second stage of the valuation: after performing the valuation using
another method, a comparison with the multiples of comparable firms enables us to gauge the valuation performed
and identify differences between the firm valued and the firms it is compared with.
We show that PER, EBITDA and Profit after Tax (the most commonly used parameters for multiples)
were more volatile than equity value.
We also provide additional evidence of the analysts recommendations for Spanish companies: less than
15% of the recommendations are to sell.
Tables and figures are available in excel format with all calculations in:
http://web.iese.edu/PabloFernandez/Book_VaCS/valuation%20CaCS.html
1
I would like to thank Laura Reinoso and Laura Parga for their impressive work with data collection and Charlie
Porter for his wonderful help revising previous manuscripts of this chapter.
CH5- 1
Pablo Fernandez Ch5 Valuation using multiples. How do analysts reach their conclusions?
IESE Business School, University of Navarra
This chapter focuses on equity valuation using multiples. The basic conclusion is that multiples
almost always have broad dispersion, which is why valuations performed using multiples are highly
debatable.
However, multiples are useful in a second stage of the valuation: after performing the valuation
using another method, a comparison with the multiples of comparable firms enables us to gage the
valuation performed and identify differences between the firm valued and the firms it is compared
with.
Figure 1 Most widely used valuation methods Source: Morgan Stanley Dean Witter Research
PER
EV/EBITDA
Residual Income
EV/EG
DCF
P/BV
FCF
P/CE
EV/Sales
P/Sales
EV / FCF Percentage of analysts that use each method
EV / Plant
PER to Growth
0% 10% 20% 30% 40% 50%
2
Weighted by the market capitalization of the industry in which it is applied.
3
Morgan Stanley Dean Witters Report How We Value Stocks, 15 September 1999.
4
The value of the firm (E+D) is often called Enterprise Value (EV). However, the initials are also used
sometimes to indicate the value of the shares (Equity Value)
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Pablo Fernandez Ch5 Valuation using multiples. How do analysts reach their conclusions?
IESE Business School, University of Navarra
One variant of this multiple is the P/FAD (funds available for distribution).
In a firm with constant growth g, the relationship between market value and book value is:
P/BV= (ROE-g)/ (Ke-g)
This multiple is often used to value banks. Other industries that use P/BV or its derivatives are
the paper and pulp industry, real estate and insurance. One variant of this multiple for the insurance
industry is the capitalization / embedded value (shareholders equity + present value of the future cash
flows on signed insurance contracts).
6. Price to Customer
P / Customer = market capitalization / number of customers
This multiple is very commonly used to value cellular phone and Internet companies.
7. Price to units
This multiple is often used to value soft drinks and consumer product companies.
8. Price to output. This multiple is used to value cement and commodities companies.
5
Investments in existing businesses are those in businesses that the company already has. They do not include
growth-oriented investments, either for new businesses or to increase capacity.
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Pablo Fernandez Ch5 Valuation using multiples. How do analysts reach their conclusions?
IESE Business School, University of Navarra
3. Relative multiples
All of these multiples by themselves can tell us very little. They need to be placed in a context.
There are basically three relative valuations:
1. With respect to the firms own history
2. With respect to the market
3. With respect to the industry
6
If there are preferred shares and minority interests, the enterprise value is: market capitalization + preferred
shares + minority interests + net debt.
7
For a good report on the limitations of the EBITDA, see Putting EBITDA In Perspective, Moodys Investors
Service, June 2000.
8
Sometimes recurrent free cash flow is used as well. In this case, investments in existing businesses are
considered.
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Pablo Fernandez Ch5 Valuation using multiples. How do analysts reach their conclusions?
IESE Business School, University of Navarra
in section 4 that the multiples of companies operating in the same industry normally have very wide
dispersion.
Table 2 is a summary of the most commonly used multiples for valuing different industries.
Table 2. Most commonly used multiples in different industries
Industry Sub-Sector Most commonly used multiples
Automobiles Manufactures P/S
Components P/CE relative and P/S
Banks P/BV
Base Materials Paper P/BV
Chemicals EV/EBITDA, EV/S, P/CE
Metals & Mining P/LFCF and EV/EBITDA
Building & Construction P/LFCF, EV/FCF, PER and EV/EBITDA
Business Services EV/EBITDA, ROCE, P/LFCF, PER and PER to growth
Capital Goods Engineering PER, EV/EBITDA and EV/S
Defence PER, EV/EBITDA and EV/S
Food, Drink & Tobacco Food Producers EV/EBITDA and EV/CE
Brewers & Pubs ROCE, PER to growth and PER relative
Alcoholic Beverages EV/EBITDA
Tobacco ROCE
Healthcare PER, PER relative to S&P and EV/EBITDA
Insurance P/AV
Leisure EV/EBITDA
Media PER relative and EV/EBITDA
Oil & Gas Integrated PER and EV/CE
Real Estate P/FAD, EV/EBITDA and P/NAV
Retail & Consumer Clothing PER relative to market and sector, EV/EBITDA
Goods Food PER relative
Luxury Goods PER, PER to growth, EV/S and EV/E to EBITDA growth
Technology Software, equipment & semiconductorsPER y PER relative
Telecoms EV/E to EBITDA growth, EV/S and P/customer
Transport Air EV/EBITDA
Travellers through road P/S
Utilities PER and P/CE
Table 3 shows the average multiple of different industries9 in the US stock market in September
2000. The total number of companies analyzed was 5,903.
4.1. Dispersion of the utilities multiples. Table 4 shows multiples used to value European utilities.
Table 5 concentrates solely on English utilities. Note the multiples wide dispersion in all cases.
4.2. Dispersion of the multiples of construction companies. Table 6 shows different multiples for
construction and building materials companies in Europe, America, Asia and Spain. Table 7
contains multiples for hotel companies
9
You can find these multiples in http://www.stern.nyu.edu/~adamodar/New_Home_Page/datafile/pedata.html
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Pablo Fernandez Ch5 Valuation using multiples. How do analysts reach their conclusions?
IESE Business School, University of Navarra
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Pablo Fernandez Ch5 Valuation using multiples. How do analysts reach their conclusions?
IESE Business School, University of Navarra
Table 5. Multiples of English utilities. September 2000. Source: Morgan Stanley Dean Witter Research.
PER P/CE Dividend yield (%) EV/EBITDA P/BV
2000 2001E 2000 2001E 2000 2001E 2000 2001E 2000
British Energy 7.4 -26.1 1.8 2.4 4.6 4.6 4.4 5.7 0.8
National Grid 25.0 29.8 17.2 14.7 2.3 2.5 11.6 11.4 4.5
National Power 12.8 14.7 7.6 8.9 3.2 3.4 8.1 10.0 3.3
PowerGen 8.9 7.4 5.7 5.1 6.2 6.8 6.9 6.3 1.9
Scottish Power 7.3 18.2 7.8 8.7 4.7 5.0 9.1 7.6 1.5
Scottish & Southern 12.3 12.4 9.0 8.9 4.9 5.1 7.5 7.6 2.9
Anglian Water 9.6 12.0 5.5 5.8 7.4 7.6 6.9 7.1 1.0
Hyder 5.2 5.0 2.1 2.2 5.6 5.9 5.9 5.2 0.6
Kelda 6.8 10.6 4.0 4.8 6.5 6.9 6.7 7.1 0.8
Pennon 7.7 11.9 5.3 6.3 7.2 5.4 6.9 7.9 1.0
Severn Trent 9.9 10.9 4.4 4.9 6.2 6.5 6.9 6.3 1.0
Thames 12.5 27.7 7.8 11.7 3.9 4.1 7.8 8.6 1.9
United Utilities 8.4 12.1 5.0 6.0 6.5 6.7 6.8 7.3 1.5
Average 10.3 11.3 6.4 7.0 5.3 5.4 7.3 7.5 1.7
Maximum 25.0 29.8 17.2 14.7 7.4 7.6 11.6 11.4 4.5
Minimum 5.2 -26.1 1.8 2.2 2.3 2.5 4.4 5.2 0.6
Table 6. Multiples of construction companies. August 2000. Source: Morgan Stanley Dean Witter Research.
PER EV/EBITDA P/CE
1999 2000E 2001E 2002E 1999 2000E 2001E 2002E 1999 2000E 2001E 2002E
CRH 17.5 14.4 13.0 12.4 10.1 7.6 7.3 7.0 10.7 8.8 8.4 8.0
Holderbank 19.5 17.1 13.7 12.2 8.7 7.6 7.0 6.5 8.9 8.2 7.1 6.6
Lafarge 15.2 12.2 11.8 10.2 7.2 5.9 5.8 5.5 6.8 6.1 6.0 5.7
Saint Gobain 18.0 11.5 9.8 8.4 5.4 4.6 4.1 3.7 8.0 5.9 5.2 4.7
Cemex 5.5 6.6 6.1 5.7 5.1 5.7 5.1 4.9 4.1 5.0 4.7 4.5
Lafarge Corporation 6.5 6.0 5.8 5.3 4.8 4.7
Martin Marietta Materials 15.8 15.0 13.0 6.7 6.2 5.6 7.9 7.2 6.6
Vulcan Materials 19.2 17.0 13.5 9.8 8.9 7.5 2.4 2.7 3.5
Siam Cement 9.6 6.6 5.6 8.5 5.7 5.1 4.9 4.1 3.2 2.6 2.3
Acciona 26.5 22.3 18.5 16.1 12.5 9.1 7.8 7.0 15.4 11.5 9.9 9.0
ACS 18.8 15.3 13.7 12.1 10.6 7.8 7.1 6.4 12.4 10.6 9.7 8.8
Dragados 14.1 13.6 10.4 9.1 7.2 6.5 5.9 5.0 9.6 9.6 8.0 7.6
FCC 11.4 11.3 11.1 10.6 5.8 5.6 5.3 5.0 6.1 5.7 5.3 5.1
Ferrovial 16.9 13.0 10.5 9.2 21.2 16.2 14.2 12.3 10.1 8.3 7.2 6.3
Average 15.3 13.0 11.2 10.6 8.9 7.3 6.6 6.2 8.2 7.1 6.5 6.2
Maximum 26.5 22.3 18.5 16.1 21.2 16.2 14.2 12.3 15.4 11.5 9.9 9.0
Minimum 5.5 6.0 5.6 5.7 5.1 4.6 4.1 3.7 2.4 2.7 2.6 2.3
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Pablo Fernandez Ch5 Valuation using multiples. How do analysts reach their conclusions?
IESE Business School, University of Navarra
Table 9 shows multiples for cellular phone companies. Note, again, the multiples wide
dispersion.
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Pablo Fernandez Ch5 Valuation using multiples. How do analysts reach their conclusions?
IESE Business School, University of Navarra
10
More about Internet multiples can be found in chapter 23: Internet Valuations: The Case of Terra-Lycos,
http://ssrn.com/abstract=265608
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Pablo Fernandez Ch5 Valuation using multiples. How do analysts reach their conclusions?
IESE Business School, University of Navarra
Table 12. Average volatility of several parameters used for multiples. 26 Spanish companies. 1991-1999.
equity value profit after tax EBITDA dividends Book value ROE ROA PER
Average volatility 41% 49% 59% 20% 18% 4% 2% 76%
Table 14 shows the analysts recommendations for Spanish companies in the IBEX 35 index.
Note that the recommendations mostly range between holding and buying. Less than 15% of the
recommendations are to sell. On 14 February 2000, the IBEX stood at 12,458 points; by 23 October it
had fallen to 10,329 points.
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Pablo Fernandez Ch5 Valuation using multiples. How do analysts reach their conclusions?
IESE Business School, University of Navarra
Table 15. Most relevant valuation multiples by industry. Source: Harbula, Pter (2009)
Industry Valuation multiples Valuation error (mean / median)
Real estate P / BV, P / E Current 14% / 11%
Building materials EV / EBITDA, P / GCF Prospective / current 15% / 14%
Banking and insurance P / BV, P / E Current 17% / 14%
Food and beverages EV / EBITDA, P / E Prospective / current 17% / 18%
Services EV / EBIT, P / E Prospective / current 19% / 20%
Energy EV / EBITDA, EV / IC Current 21% / 17%
Technology EV / EBITDA, EV / EBIT Prospective / current 21% / 18%
Telecommunications EV / EBITDA, P / E Prospective 23% /22%
Distribution EV / EBITDA, EV / EBIT Prospective / current 25% / 28%
Manufacturing EV / EBITDA, P / FCF Prospective 31% / 27%
Construction EV / EBITDA, P / E Current 32% / 29%
Life sciences / healthcare EV / Sales, EV / EBITDA Prospective 34% / 29%
Capital goods EV / EBITDA, EV / EBIT Prospective / current 35% / 28%
Media EV / EBITDA, EV / EBIT Prospective / current 20% / 21%
References
Fernandez, Pablo (2013), Internet Valuations: The Case of Terra-Lycos, http://ssrn.com/abstract=265608
Harbula, Pter (2009), Valuation Multiples: Accuracy and Drivers Evidence from the European Stock Market, Business
Valuation Review, Vol. 28, No. 4, 2009, http://ssrn.com/abstract=1876456
Moodys Investors Service (June 2000), Putting EBITDA In Perspective.
Morgan Stanley Dean Witters, How We Value Stocks, 15 September 1999.
Welch, Ivo (2000), Herding among Security Analysts, Journal of Financial Economics, 58, pp. 369-396.
Questions
Is it true that some multiples have little dispersion?
What is the most reliable multiple?
Which multiple provides better valuations?
Please define:
Multiple PER EBITDA Price to Book Value (P/BV)
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Pablo Fernandez Ch5 Valuation using multiples. How do analysts reach their conclusions?
IESE Business School, University of Navarra
Multiples of European food retailers. December 17, 2014. Source: Societe Generale
P/E 2014e EV/EBITDAR 2014 EV/EBIT 2014
Ahold 15.1 5.8 9.6
Carrefour 15.9 6.2 10.2
Casino 17.2 7.8 10.4
Colruyt 15.6 8.6 11.0
Delhaize Group 14.0 5.9 9.7
DIA 12.4 7.7 8.9
Jeronimo Martins (JM) 14.4 9.3 11.1
Metro AG 11.9 6.2 7.8
Morrisons 14.9 8.0 14.2
Sainsburys 8.3 7.6 9.1
Tesco 17.7 6.6 14.8
MAX 17.7 9.3 14.8
min 8.3 5.8 7.8
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