Valuation Using Multiples: How Do Analysts Reach Their Conclusions?

Abstract:     
This paper focuses on equity valuation using multiples. Our basic conclusion is that multiples nearly always have broad dispersion, which is why valuations performed using multiples may be highly debatable. We revise the 14 most popular multiples and deal with the problem of using multiples for valuation: their dispersion. 1,200 multiples from 175 companies illustrate the dispersion of multiples of European utilities, English utilities, European constructors, hotel companies, telecommunications, banks and Internet companies.

We also show that PER, EBITDA and Profit after Tax (the most commonly used parameters for multiples) were more volatile than equity value during the period 1991-99.

We also provide additional evidence of the analysts' recommendations for Spanish companies: less than 15% of the recommendations are to sell.

However, multiples are useful in a second stage of the valuation: after performing the valuation using another method, a comparison with the multiples of comparable firms enables us to gauge the valuation performed and identify differences between the firm valued and the firms it is compared with.

Keywords: Multiples, Dispersion of multiples, PER, Relative multiples, Analysts' recommendations

JEL Classifications: G12, G29, G31, M21

Working Paper Series