Is Platform Specialty Products Corp (NYSE: PAH) A Buy At This Enterprise Multiple?

in VALUATION MULTIPLES by

Platform Specialty Products Corp (NYSE: PAH) shares currently trade at 11.3x its trailing EBITDA which is higher than the Materials sector median of 10.3x. While this makes PAH look like a stock to avoid or sell if you own it, equity investors might change their mind after taking a closer look at the assumptions behind the EV / EBITDA ratio. In this article, I define how to calculate an EBITDA Multiple and what to keep an eye out for when applying it in a comparable companies analysis.


Platform Specialty Comparable Companies Analysis

A comparable companies analysis, also known as a multiples valuation, determines the value of a subject company by benchmarking its financial performance against similar public companies or peers. We can conclude if a company looks undervalued or overvalued relative to its peers by comparing metrics like growth, profit margin, and valuation ratios.

Enterprise Value-to-EBITDA Multiple, also known as the EV / EBITDA ratio or an EBITDA Multiple, measures the dollars in Enterprise Value for each dollar of EBITDA. To determine if a company is expensive, it’s far more useful to compare EV / EBITDA multiples than the absolute stock price. The general formula behind an EBITDA Multiples valuation model is the following:

Enterprise Value = EBITDA x Selected Multiple

The EV / EBITDA ratio by itself is not very helpful at all. It is only useful when comparing it to other companies that are considered similar to the subject company. The basic idea is that companies with similar characteristics should trade at similar multiples, all other things being equal. Therefore, we can come to a conclusion about the stock if the ratios are different. In the chart below, I compare Platform Specialty’s EV / EBITDA ratio to its peer group that includes Axalta Coating Systems Ltd. (NYSE: AXTA), FMC Corporation (NYSE: FMC), Albemarle Corporation (NYSE: ALB) and Celanese Corporation (NYSE: CE).

PAH EBITDA Multiple vs Peers Chartsource: finbox.io Benchmarks: EBITDA Multiples

Since Platform Specialty’s EBITDA multiple of 11.3x is lower than the median of its peers (15.2x), it means that investors are paying less than they should for each dollar of PAH’s EBITDA. As such, our analysis shows that PAH represents an undervalued stock. In fact, finbox.io’s EBITDA Multiples Model calculates a fair value of around $14.00 per share which implies roughly 22.0% upside.

PAH EV / EBITDA Valuation Calculation

I selected a fair multiple of 12.3x in my analysis by averaging Platform Specialty’s current EV / EBITDA ratio with its peer group and sector.


Are Comps Really Comparable?

Before concluding that Platform Specialty should be added to your portfolio, it is important to understand that our conclusion rests on two important assumptions.

(1) the selected peer group actually contains companies that truly are similar to Platform Specialty, and

(2) the selected peer group stocks are being fairly valued by the market.

If the first assumption is not accurate, the difference in EBITDA multiples could be due to a variety of factors. For example, if you accidentally compare Platform Specialty with higher growth companies, then its EBITDA multiple would naturally be lower than its peers since investors reward high growth stocks with a higher price.

PAH EBITDA Growth and Margins vs Peers Tablesource: EBITDA multiples model

Now if the second assumption does not hold true, Platform Specialty’s lower multiple may be because firms in our peer group are being overvalued by the market.


How This Impacts Shareholders

As a shareholder, you may have already conducted fundamental analysis on the stock so its current undervaluation could signal a potential buying opportunity to increase your position in PAH. However, keep in mind the limitations of an EBITDA multiples valuation when making an investment decision. There are a variety of other fundamental factors that I have not taken into consideration in this article. If you have not done so already, I highly recommend that you complete your research on Platform Specialty by taking a look at the following:

Valuation Metrics: what is Platform Specialty’s price to book ratio and how does it compare to its peers? Analyze Price / Book here.

Risk Metrics: what is Platform Specialty’s CapEx coverage? This is the amount a company outlays for capital assets for each dollar it generates from those investments. View the company’s CapEx coverage here.

Efficiency Metrics: inventory turnover is a ratio that measures the number of times a company’s inventory is sold and replaced over the year. View Platform Specialty’s inventory turnover here.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Expertise: financial modeling, mergers & acquisitions. Andy is also a founder at finbox.io, where he’s focused on building tools that make it faster and easier for investors to do investment research. Andy’s background is in investment banking where he led the analysis on over 50 board advisory engagements involving mergers and acquisitions, fairness opinions and solvency opinions. Some of his board advisory highlights: - Sears Holdings Corp.’s $620 mm spin-off via rights offering of Sears Outlet, Hometown Stores and Sears Hardware Stores. - Cerberus Capital Management’s $3.3 bn acquisition of SUPERVALU Inc.’s New Albertsons, Inc. assets. Andy can be reached at andy@finbox.io or at +1 (516) 778-6257.

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