Equity Valuation Flashcards
drivers of equity valuation
expected free cash flow generation, discounted at the required return
-forward looking strategy
-macro factors impacting demand
-forward looking margin profile
market risk premium
the difference between the expected return on the stock market and the risk-free rate
companies with higher betas have
a larger magnitude of loss
more susceptible to changes in the aggregate market
two things:
-quarterly dividends
-price when you sell
dividend discount model
intrinsic value over a one year time horizon
constant growth dividend discount
also known as the gordon model
assumption: dividends grow by a constant percent each year
preferred stock
-no voting rights
-not a controlling position
-scheduled dividends which must be paid out before any dividends on common stock can be paid out
-no maturity date: is outstanding as long as the company is operating
preferred stock valuation equation
Vps= annual dividend/ required rate of return
present value of growth opportunities (PVGO)
intrinsic value of stock with our current growth assumptions - intrinsic value if we assumed = growth
ratio analysis
ratio analysis is valuable as it
takes current market trends into account
ratio analysis: more attractive ratios do not necessarily imply that
the company is undervalued, or an attractive purchase
-they can be a signal that it is a more attractive buy once you understand why it has a more conservative metric
price to sales
-share price divided by sales per share
-the major issue with this, is that is ignores a company’s cost structure
-a company with a higher EBITDA margin will likely display a higher P/S than a company with a lower EBITDA margin
price to book
-share price divided by shareholders equity (GAAP) per share
-useful for capital intensive industries such as energy, manufacturing, etc.
-typically we would consider tangible equity as opposed to GAAP equity
price to earnings ratio (P/E)
share price divided by earnings per share (EPS)
higher P/E=
higher growth expectations
lower P/E=
lower growth expectations
comparing the P/E ratio of two companies in separate industries is inappropriate. why?
sources of cash flow growth:
-increases in margin
-increase in market share
-increase in aggregate market
enterprise value (EV)/ EBITDA
the most widely used metric for evaluating acquisitions
when applied to public markets, it has the exact same limitations as price to earnings
dividend yield
annual dividend / share price
high growth companies have
low dividend yield
low growth companies have
high dividend yield
efficient market hypothesis
all available information is priced into the stock market- and thus you cannot outperform the market
weak form of efficient market hypothesis
stock prices incorporate trading data such as past prices, trading volume, or short interest
-conclusion: “technical analysis” can’t generate above market risk adjusted returns
semi-strong form of efficient market hypothesis
stock prices incorporate al publicly available information
-conclusion: neither technical analysis, nor fundamental analysis can generate above market risk adjusted returns
strong form of efficient market hypothesis
stock prices incorporate all information, including material non-public information
-conclusion: no information, including material non-public information, can lead to above market risk adjusted returns
