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Price and Value A Guide to Equity Market Valuation Metrics

:	George Calhoun
:	Price and Value A Guide to Equity Market Valuation Metrics
:	Apress
:	9781484255520
:	1
:	CHF 41.70
:

:	Einzelne Wirtschaftszweige, Branchen
:	English

:	412
:	Wasserzeichen/DRM
:	PC/MAC/eReader/Tablet
:	PDF

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.

Multip es 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.

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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)
Appl 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

George Calhoun is a professor, and founding director of the Quantitative Finance Program at the Stevens Institute of Technology. He is also is executive director of the Hanlon Financial Systems Center at Stevens, and area coordinator for the graduate and undergraduate finance programs at Stevens. George is the series editor for the Stevens Series in Quantitative Finance& Data Sciences, a book series launched in 2014 with Springer/Apress. He has a PhD from the Wharton School. George has 30 years of experience in the technology industry: in executive and board-level positions at several public companies, including as CEO, chairman of the board (two companies), and audit committee chairman (four companies). He has extensive experience in capital acquisition through public offerings (five), convertible and straight debt offerings, private placements, joint ventures, and venture capital transactions. And he is the author of three books on advanced signal processing technology and applications to the telecommunications field.

	Table of Contents	5
	About the Author	10
	About the Technical Reviewer	11
	Acknowledgments	12
	Preface	13
	Introduction	18
	Chapter 1: The Ford Dollar: The Mysterious Multiple	27
	1.1 P/E As a Measure of How Expensive a Company Is	30
	1.2 P/E As a Predictor of Future Share Price	32
	1.3 P/E As a Predictor of Future Returns	35
	1.4 The Mysterious Multiple	42
	Chapter 2: The Value Triangle	44
	2.1 Accounting Valuations: The Limitations of Book Value	45
	2.2 The Shortcomings of Financial Models	50
	2.3 The Pros and Cons of Market-Based Valuation Metrics	55
	2.3.1 Disney vs. Netflix	56
	2.3.2 Ford vs. Tesla	58
	2.4 Triangulating Intrinsic Value: The Use of Valuation Ratios	61
	2.4.1 Price-to-Book	62
	2.4.2 Return-on-Assets	63
	2.4.3 Price-to-Earnings	64
	2.5 Summary	65
	Chapter 3: Valuation Ratios	66
	3.1 Trailing P/E, or P/Ettm	67
	3.2 Forward P/E	69
	3.2.1 PER (Relative P/E)	74
	3.2.2 Normalized P/E	74
	3.2.3 Improving on P/E?	75
	3.3 Price-to-Operating Earnings	75
	3.3.1 Pro Forma Earnings	79
	3.3.2 Core Earnings	82
	3.4 Dividends	84
	3.4.1 Dividend Ratios: Significance and Trends	85
	3.5 Price-to-Sales	90
	3.6 Metrics Based on Cash Flow	99
	3.6.1 EBITDA and EV/EBITDA	100
	3.6.2 Free Cash Flow	101
	3.6.3 Do Cash Flow Metrics Improve Upon Earnings-Based Multiples?	103
	3.7 Price-to-Book	108
	3.8 Tobin s Q	111
	3.9 Return-on-Assets	113
	3.10 Adjustments to the Denominator: Cyclically Adjusted P/E (CAPE1)	115
	3.10.1 Critics and Critiques	119
	3.10.1.1 Accounting Changes	119
	3.10.1.2 Dominance of Large Losses by a Few Firms	120
	3.10.2 CAPE Performance	121
	3.10.3 CAPE: An Assessment	132
	3.11 Adjustments to the Numerator: Cash-Adjusted P/E (CAPE2)	138
	3.12 What About the PEG Ratio?	145
	3.13 Composite P/E Ratios	148
	3.14 Summary	151
	Chapter 4: Interpretations: P/E As a Dependent Variable	155
	4.1 What Does the P/E Really Measure?	156
	4.2 Firm-Level Drivers	159
	4.2.1 Growth	159
	4.2.1.1 The Case for Growth	165
	4.2.2 Profitability, and Quality	170
	4.2.2.1 Gross Profit Metrics	172
	4.2.2.2 Return on Equity	173
	4.2.2.3 The Quality Factor	177
	4.2.3 Size	180
	4.2.4 Risk and Cost of Capital	183
	4.2.5 Shareholder Return	186
	4.2.5.1 Dividends	186
	4.2.5.2 Buybacks	190
	4.2.6 Strategy and Business Model Issues	192
	4.2.6.1 Quality of Revenue	194
	4.2.6.2 The Conglomerate Discount	199
	4.2.6.3 Is there a Conglomerate Premium?	202
	4.2.6.4 Capex Intensity	205
	4.2.6.5 Excess Cash Accumulation	206
	4.2.6.6 Exposure to the Business Cycle	207
	4.2.7 Earnings Volatility	209
	4.2.8 Share Price Volatility (Beta)	212
	4.2.9 Leverage	218
	4.2.10 Accounting Issues	225
	4.2.11 Governance	226
	4.3 Sector-Level and Market-Level Drivers	231
	4.3.1 Sentiment ( Animal Spirits )	231
	4.3.1.1 The Market P/E and Animal Spirits	233
	4.3.2 Sector Discounts and Premiums	236
	4.3.3 Regulation	243
	4.3.4 Monetary Policy	246
	4.3.5 Fiscal Policy	250
	4.3.6 Inflation	252
	4.3.7 Interest Rates and Bond Yields	257
	4.3.7.1 The Fed Model	258
	4.3.7.2 The Interest Rate Level and the P/E: Is There a Sweet Spot?	260
	4.3.8 International Differences	264
	4.4 Summary	269
	Chapter 5: Applications: P/E As an Independent Variable	272
	5.1 Using Multiples to Forecast Stock Prices	273
	5.1.1 The General Case: P/E As a Contrarian Indicator	273
	5.2 Screening for Value 10	279
	5.2.1 Evidence for the Value Anomaly	280
	5.2.2 Explanations of the Value Anomaly	284
	5.2.2.1 Mean Reversion	284
	5.2.2.2 Value As a Risk Factor	286
	5.2.2.3 Value as a Delayed Response	289
	5.2.2.4 Behavioral Finance Explanations	290
	5.2.2.5 Value As a Reflection of a Learning Process	292
	5.2.2.6 The Cyclicals Exception	293
	5.2.2.7 Is Value Disappearing?	294
	5.2.3 Comparing Multiples As Value Screens	296
	5.2.3.1 Price/Book Is Ineffective	297
	5.2.3.2 Cash Flow Multiples: Mixed Results	298
	5.2.3.3 Dividend Yield vs. P/E	301
	5.2.3.4 Does CAPE Improve Performance?	302
	5.2.3.5 Market Regimes: Bull Markets Favor Growth over Value (As a Rule)	305
	5.2.3.6 Multiples and Expected Returns: Summing Up	307
	5.3 Index Construction	309
	5.4 Factor Models and Smart Beta	311
	5.4.1 The Proliferation of Factors	313
	5.4.2 Th