Analyzing Determinants of Multiples

Equity Valuation in R

Cliff Ang

Vice President, Compass Lexecon

The Average of Median May Not Always Be Applicable

  • Use average or median if firms are very "comparable"
  • Approaches to determine comparability:
    • Compare risk, growth, and profitability
    • Relative position historically
Equity Valuation in R

Regression-Based Approach

  • We can also use regression analysis to help us determine what the appropriate multiple is for our subject firm
  • P/B vs. ROE. P/E vs. 5-Year EPS Growth, or multiple regression
  • Less subjective to arrive at the appropriate valuation multiple
Equity Valuation in R

Example Using P/B vs. ROE

finl <- subset(midcap400, gics_sector == "Financials")

finl$roe <- finl$ltm_eps / finl$bvps

finl$p_bv <- ifelse(finl$bvps < 0, NA, finl$price / finl$bvps)

finl <- finl[complete.cases(finl), ]
Equity Valuation in R

Example Using P/B vs. ROE

Chart

  $$P/B = -0.365 + 24.37 * ROE$$ $$R-squared = 0.8462$$

Equity Valuation in R

Example Using P/B vs. ROE

reg <- lm(p_bv ~ roe, data = finl)

a <- summary(reg)$coeff[1]
a

-0.3654199

b <- summary(reg)$coeff[2]
b

24.37047
Equity Valuation in R

Assume an ROE of 10% and BVPS of $30, what is the Implied Price?

# Implied Price-to-Book
roe <- 0.10
implied_p_b <- a + b * roe
implied_p_b

2.071627

# Implied Price
bvps <- 30
implied_price <- implied_p_b * bvps
implied_price

62.14881
Equity Valuation in R

Let's practice!

Equity Valuation in R

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