BMC-module-4-5-relative-valuation.txt

5:32 PM 8/26/2024

BMC Module 4.5: Relative Valuation


Relative Valuation
	Comparison with other companies and the overall market
		Pros: easier to understand, simple to calculate, does not demand long-term forecasts
		Cons: directional, hard to find truly comparable companies, presupposes fair valuation of other companies


Metrics:

	Dividend Yield
		Dividend yields are easier to calculate than bond yields.
		However, dividend payments are uncertain and highly variable, whereas bond payments are typically fixed.
		
		Bloomberg: DVD
			example: coca-cola steadily growing dividends

		Standard calculation: 1 year of dividends
			Dividend Yield % = $ dividend per share / $ price per share
			It is common to pay dividends twice or four times per year

	Price to Earnings ratio (P/E)

		This is the reciprocal of the Earnings Yield % = $ earnings per share / $ price per share
		Bloomberg: WEI

		BF [blended forward] P/E ratio
	
Applications of these metrics:
	Self [trend of this metric for the same company, over time]
	Peers [same metric for similar companies]
		Comps table [table of comparables]
		Companies that are comparable but are not publicly traded will not help
	Market [same metric for the overall market]



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[ total earnings ] = net income / net profit ?

Market cap is [ total earnings ] * [ P / E ratio ]
Stock price is [ total earnings ] * [ P / E ratio ] / # of shares    (this process can be aggregated for indices)
An increase in this stock price can be:
	the result of earnings growth
	the result of "multiple expansion" [increase in P / E ratio]
		"multiple contraction" is when the P / E ratio decreases

Estimating the P/E ratio is typically difficult when a company is rapidly growing.