mbjones21 wrote:
I am having a little trouble understanding the difference between Price Multiple based on Fundamentals vs Price Multiples based on Comparatives. If anyone could clarify the main differences it would be greatly appreciated.
Thanks
PMs from comps are simply averages (or medians) based on what the PMs of other closely-related companies are. They’re based on the concept that similar companies should sell at similar prices.
PMs from fundamentals are based on data internal to the company - the drivers of their business like ROE, retention rates, profitability, etc…
As s2000 has said, they’re closer to absolute valuation rather than relative valuation.
Here’s an example (it’s an oversimplification, but I’ll throw it out for others to chew over).
An individual committed to investing in the retail space might use PMs from comps, since he IS going to invest in retail firms, and simply want to find the best retail investment. So, he’d compare PMs of the firms in the industry and then pick the retail firm with the “best” multiples (some combination of P/E, P/B, etc…).
An investor using fundamental PMs might conclude that the whole retail industry is overvalued (all their multiples are too high).
An investor using fundamental to the food processing