Calhoun Price and Value

A Guide to Equity Market Valuation Metrics
1. ed
ISBN: 978-1-4842-5552-0
Verlag: Apress
Format: PDF
Kopierschutz: 1 - PDF Watermark

E-Book, Englisch, 391 Seiten

Understand how to use equity market metrics such as the price/earnings ratio (and other multiples) to value public and private enterprises. This essential book gives you the tools you need to identify and qualify investments and assess business strategy and performance.

Author George Calhoun, Founding Director of the Quantitative Finance Program at Stevens Institute of Technology, shows you how to use metrics to appraise mergers, acquisitions, and spin-offs. You will be able to shed light on financial market conditions, benchmark fair value assessments, and check and calibrate complex cash flow models.

Market multiples share a peculiar construction: they are based on an explicit apples-to-oranges comparison of market prices with accounting fundamentals, combining data derived from two very different sources and methodologies. This creates ambiguities in interpretation that can complicate the application of these metrics for the many purposes.

Multiples are thus easy to construct, but they can be difficult to interpret. The meanings of certain multiples have evolved over time, and new-and-improved versions have been introduced. The field is becoming more complex and the question of which metrics perform best can be a source of controversy.

What You Will Learn

• Know the definitions, interpretations, and applications of all major market ratios, including: price/earnings (trailing and forward), cyclically adjusted price/earnings, cash-adjusted price/earnings, EV/EBITDA, price/sales, dividend yield, and many more
• Examine the factors that drive the values of ratios from firm level (such as earnings growth, leverage, and governance) to market level (such as inflation, tax and fiscal policy, monetary policy, and international characteristics)
• Apply metrics in: investment analysis, index construction, factor models, sum-of-the-parts analysis of corporate structures, and detection of asset bubbles

Who This Book Is For

Professionals at all levels working in the finance industry, especially in fields related to investment management, trading, and investment banking who are involved with valuation and assessing and advising on corporate transactions and interpreting market trends, and university students in finance-related programs at the undergraduate and graduate levels

Autoren/Hrsg.

Calhoun, George

Inhaltsverzeichnis

1;Table of Contents;5
2;About the Author;10
3;About the Technical Reviewer;11
4;Acknowledgments;12
5;Preface;13
6;Introduction;18
7;Chapter 1: The Ford Dollar: The Mysterious Multiple;27
7.1;1.1 P/E As a Measure of How “Expensive” a Company Is;30
7.2;1.2 P/E As a Predictor of Future Share Price;32
7.3;1.3 P/E As a Predictor of Future Returns;35
7.4;1.4 The Mysterious Multiple;42
8;Chapter 2: The Value Triangle;44
8.1;2.1 Accounting Valuations: The Limitations of “Book Value”;45
8.2;2.2 The Shortcomings of Financial Models;50
8.3;2.3 The Pros and Cons of Market-Based Valuation Metrics;55
8.3.1;2.3.1 Disney vs. Netflix;56
8.3.2;2.3.2 Ford vs. Tesla;58
8.4;2.4 Triangulating Intrinsic Value: The Use of Valuation Ratios;61
8.4.1;2.4.1 Price-to-Book;62
8.4.2;2.4.2 Return-on-Assets;63
8.4.3;2.4.3 Price-to-Earnings;64
8.5;2.5 Summary;65
9;Chapter 3: Valuation Ratios;66
9.1;3.1 Trailing P/E, or P/Ettm;67
9.2;3.2 Forward P/E;69
9.2.1;3.2.1 PER (Relative P/E);74
9.2.2;3.2.2 Normalized P/E;74
9.2.3;3.2.3 Improving on P/E?;75
9.3;3.3 Price-to-Operating Earnings;75
9.3.1;3.3.1 Pro Forma Earnings;79
9.3.2;3.3.2 Core Earnings;82
9.4;3.4 Dividends;84
9.4.1;3.4.1 Dividend Ratios: Significance and Trends;85
9.5;3.5 Price-to-Sales;90
9.6;3.6 Metrics Based on Cash Flow;99
9.6.1;3.6.1 EBITDA and EV/EBITDA;100
9.6.2;3.6.2 Free Cash Flow;101
9.6.3;3.6.3 Do Cash Flow Metrics Improve Upon Earnings-Based Multiples?;103
9.7;3.7 Price-to-Book;108
9.8;3.8 Tobin’s Q;111
9.9;3.9 Return-on-Assets;113
9.10;3.10 Adjustments to the Denominator: Cyclically Adjusted P/E (CAPE1);115
9.10.1;3.10.1 Critics and Critiques;119
9.10.1.1;3.10.1.1 Accounting Changes;119
9.10.1.2;3.10.1.2 Dominance of Large Losses by a Few Firms;120
9.10.2;3.10.2 CAPE Performance;121
9.10.3;3.10.3 CAPE: An Assessment;132
9.11;3.11 Adjustments to the Numerator: Cash-Adjusted P/E (CAPE2);138
9.12;3.12 What About the PEG Ratio?;145
9.13;3.13 Composite P/E Ratios;148
9.14;3.14 Summary;151
10;Chapter 4: Interpretations: P/E As a Dependent Variable;155
10.1;4.1 What Does the P/E Really Measure?;156
10.2;4.2 Firm-Level Drivers;159
10.2.1;4.2.1 Growth;159
10.2.1.1;4.2.1.1 The Case for Growth;165
10.2.2;4.2.2 Profitability, and “Quality”;170
10.2.2.1;4.2.2.1 Gross Profit Metrics;172
10.2.2.2;4.2.2.2 Return on Equity;173
10.2.2.3;4.2.2.3 The “Quality” Factor;177
10.2.3;4.2.3 Size;180
10.2.4;4.2.4 “Risk” and Cost of Capital;183
10.2.5;4.2.5 Shareholder Return;186
10.2.5.1;4.2.5.1 Dividends;186
10.2.5.2;4.2.5.2 Buybacks;190
10.2.6;4.2.6 Strategy and Business Model Issues;192
10.2.6.1;4.2.6.1 Quality of Revenue;194
10.2.6.2;4.2.6.2 The Conglomerate Discount;199
10.2.6.3;4.2.6.3 Is there a Conglomerate Premium?;202
10.2.6.4;4.2.6.4 Capex Intensity;205
10.2.6.5;4.2.6.5 Excess Cash Accumulation;206
10.2.6.6;4.2.6.6 Exposure to the Business Cycle;207
10.2.7;4.2.7 Earnings Volatility;209
10.2.8;4.2.8 Share Price Volatility (Beta);212
10.2.9;4.2.9 Leverage;218
10.2.10;4.2.10 Accounting Issues;225
10.2.11;4.2.11 Governance;226
10.3;4.3 Sector-Level and Market-Level Drivers;231
10.3.1;4.3.1 Sentiment (“Animal Spirits”);231
10.3.1.1;4.3.1.1 The Market P/E and “Animal Spirits”;233
10.3.2;4.3.2 Sector Discounts and Premiums;236
10.3.3;4.3.3 Regulation;243
10.3.4;4.3.4 Monetary Policy;246
10.3.5;4.3.5 Fiscal Policy;250
10.3.6;4.3.6 Inflation;252
10.3.7;4.3.7 Interest Rates and Bond Yields;257
10.3.7.1;4.3.7.1 The “Fed Model”;258
10.3.7.2;4.3.7.2 The Interest Rate Level and the P/E: Is There a Sweet Spot?;260
10.3.8;4.3.8 International Differences;264
10.4;4.4 Summary;269
11;Chapter 5: Applications: P/E As an Independent Variable;272
11.1;5.1 Using Multiples to Forecast Stock Prices;273
11.1.1;5.1.1 The General Case: P/E As a Contrarian Indicator;273
11.2;5.2 Screening for “Value”10;279
11.2.1;5.2.1 Evidence for the Value Anomaly;280
11.2.2;5.2.2 Explanations of the Value Anomaly;284
11.2.2.1;5.2.2.1 Mean Reversion;284
11.2.2.2;5.2.2.2 “Value” As a “Risk Factor”;286
11.2.2.3;5.2.2.3 “Value” as a “Delayed Response”;289
11.2.2.4;5.2.2.4 Behavioral Finance Explanations;290
11.2.2.5;5.2.2.5 “Value” As a Reflection of a Learning Process;292
11.2.2.6;5.2.2.6 The “Cyclicals” Exception;293
11.2.2.7;5.2.2.7 Is “Value” Disappearing?;294
11.2.3;5.2.3 Comparing Multiples As Value Screens;296
11.2.3.1;5.2.3.1 Price/Book Is Ineffective;297
11.2.3.2;5.2.3.2 Cash Flow Multiples: Mixed Results;298
11.2.3.3;5.2.3.3 Dividend Yield vs. P/E;301
11.2.3.4;5.2.3.4 Does CAPE Improve Performance?;302
11.2.3.5;5.2.3.5 Market Regimes: Bull Markets Favor Growth over Value (As a Rule);305
11.2.3.6;5.2.3.6 Multiples and Expected Returns: Summing Up;307
11.3;5.3 Index Construction;309
11.4;5.4 Factor Models and “Smart Beta”;311
11.4.1;5.4.1 The Proliferation of Factors;313
11.4.2;5.4.2 The “Value” Cornerstone;315
11.5;5.5 Valuing Corporate Transactions;316
11.5.1;5.5.1 Deal Pricing;316
11.5.2;5.5.2 Sum-of-the-Parts Analyses (the Conglomerate Discount);319
11.6;5.6 Diagnosing Market Regimes;322
11.6.1;5.6.1 Monetary Policy Impact;323
11.6.2;5.6.2 Bubble Detection;327
11.6.3;5.6.3 Illuminating the “Fine Structure” of Market Regimes;331
11.7;5.7 Summary;337
12;Chapter 6: Assessments and Qualifications;339
12.1;6.1 The Best Metric Today (2019): The P/E;339
12.1.1;6.1.1 P/E Tends to Prevail (but Not Always), and It Only Explains So Much;341
12.1.2;6.1.2 Substituting Earnings Measures Other Than GAAP-Compliant Net Earnings Does Not Reliably Improve Performance (Yet);342
12.1.2.1;6.1.2.1 Cash Flow Multiples are Promising;342
12.1.3;6.1.3 The Performance of All Multiples Is Highly Dependent on the Market Regime;342
12.1.4;6.1.4 The Performance of Some Multiples Has Diminished Significantly over Time;343
12.1.5;6.1.5 Sensitivity Varies, but Favors P/E;343
12.1.6;6.1.6 A Future Orientation Tends to Improve Short-Term Performance, but Only So Much;344
12.1.7;6.1.7 Prediction Tends to Improve Significantly as the Holding Period Increases;345
12.1.8;6.1.8 Cash Flow Multiples Are Less Reliable;346
12.1.9;6.1.9 Averaging (Trend-Smoothing) Multiples: An Under-explored Concept;346
12.1.10;6.1.10 P/E Wins the Industry Popularity Contest;346
12.2;6.2 Shifting Definitions;348
12.2.1;6.2.1 GAAP,13 Non-GAAP, Core, and So On: The Validity Problem for “Earnings”;349
12.2.2;6.2.2 Street Earnings;350
12.2.3;6.2.3 IFRS vs. GAAP;353
12.2.4;6.2.4 Changing Accounting Standards;354
12.2.5;6.2.5 Earnings Management 1: Gaming the Numbers;356
12.2.6;6.2.6 Earnings Management 2: Buybacks and EPS Enhancement;358
12.2.7;6.2.7 Cash Dilution (“Nonoperating Financial Assets”);362
12.2.8;6.2.8 Taxes;363
12.2.9;6.2.9 The Effect of Asset-Light Business Models;365
12.2.10;6.2.10 The Effect of Alternate Growth Strategies: Acquisition vs. Internal Development;369
12.3;6.3 Problems with Price-to-Book;371
12.4;6.4 ROA: An Incomplete Picture;374
12.5;6.5 Concluding Comments: The Uncertainty Principle(s) in Finance;377
12.5.1;6.5.1 The Academic Confusion Factor;377
12.5.2;6.5.2 Reflexivity and the “Human Uncertainty Principle”;379
12.5.3;6.5.3 Fischer Black’s Proposition;382
12.5.4;6.5.4 Price-Insensitive Markets;385
13;Appendix A:A Critical Examination of Discounted Cash Flow Valuation Methods;387
13.1;The End of Book Value;387
13.2;Discounted Cash Flow Modeling: A Critical Assessment;391
13.2.1;The DCF Best Case;392
13.2.2;What Is DCF, Really?;393
13.2.3;Uncertainties, Compounded;394
13.2.4;DCF Manipulation;398
13.2.5;Is DCF Actually Used by Market Practitioners?;399
13.2.6;DCF: Assessments;400
14;Afterword:Fair Price, True Value;403
15;Index;406