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VALUATION MULTIPLES - page 2

Discover and validate investing ideas using valuation multiples.

Should You Be Tempted To Buy Dun & Bradstreet Corporation (NYSE: DNB) Because Of Its P/E Multiple?

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Dun & Bradstreet Corporation (NYSE: DNB), an industrials business with a market capitalization of $4.3 billion, currently trades at a P/E multiple of 22.8x which is above the sector’s median multiple of 22.2x. Although this makes DNB look unattractive, investors may change their mind after reviewing the assumptions behind the P/E ratio. In the post below, I explain how to apply P/E multiples and what to watch out for.


How To Utilize Dun & Bradstreet’s PE Multiples

A multiples valuation, also known as a comparable companies analysis, determines the value of a subject company by benchmarking the subject’s financial performance against companies deemed to be similar. We can then determine if a company is undervalued or overvalued relative to its peers by comparing metrics like growth, profit margin, and valuation multiples.

P/E Ratio is a valuation metric that indicates the multiple of earnings investors are willing to pay for one share of a company:

P/E Ratio = Stock Price ÷ Earnings Per Share

The P/E 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 Dun & Bradstreet’s P/E ratio to its peer group that includes TransUnion(NYSE: TRU), Equifax, Inc. (NYSE: EFX), MSCI Inc (NYSE: MSCI) and Moody’s Corporation(NYSE: MCO).

DNB P/E Ratio vs Peers Chartsource: finbox.io Benchmarks: P/E Multiples

Since Dun & Bradstreet’s P/E ratio of 22.8x is lower than the median of its peers (30.4x), it means that investors are paying less than they should for each dollar of DNB’s earnings. As such, our analysis shows that DNB represents an undervalued stock. Furthermore, finbox.io’s P/E Ratio Model calculates a fair value of approximately $139.00 per share which implies roughly 10.0% upside.

DNB P/E Valuation Calculation

I selected a fair multiple of 25.1x in my analysis by averaging Dun & Bradstreet’s current P/E ratio with its peer group.


The P/E Ratio’s Flaws

While this approach typically provides a reasonable valuation range, it is important to understand that our conclusion rests on some important assumptions. The first being that the selected peer group actually contains companies that truly are similar to Dun & Bradstreet. The second important assumption is that the selected peer group stocks are being fairly valued by the market.

If the assumptions above do not hold to be true, then the difference in P/E ratios could be due to a variety of factors. For example, if you accidentally compare Dun & Bradstreet with higher growth companies, then its P/E multiple would naturally be lower than its peers since investors reward high growth stocks with a higher price.

DNB Net Income Growth and Margins vs Peers Tablesource: P/E model

On the other hand, if the second assumption does not hold true, Dun & Bradstreet’s lower multiple may be because our selected comparable companies are being overvalued by the market.


What To Do Next

As a current investor, you may have already conducted fundamental analysis on the company and its stock so its current undervaluation could signal a potential buying opportunity to increase your position in DNB. But keep in mind the P/E ratio’s potential flaws when applying this valuation approach. It is important to note that there are a variety of other fundamental factors that I have not taken into consideration in this article. I highly recommend that you continue your research on Dun & Bradstreet by taking a look at the following:

Valuation Metrics: what is Dun & Bradstreet’s EBITDA less CapEx multiple and how does it compare to its peers? This is a helpful multiple to analyze when comparing capital intensive businesses. View the company’s EBITDA less CapEx multiple here.

Risk Metrics: what is Dun & Bradstreet’s asset efficiency? This ratio measures the amount of cash flow that a company generates from its assets. View the company’s asset efficiency here.

Efficiency Metrics: is management becoming more or less efficient in creating value for the firm? Find out by analyzing the company’s return on invested capital ratio 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.

Is Century Aluminum Company (NASDAQ: CENX) EV / EBITDA A Signal To Sell For Investors?

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Century Aluminum Company (NASDAQ: CENX) shares currently trade at 8.6x its trailing EBITDA which is lower than the Materials sector median of 10.2x. While this makes CENX look like a stock to add to your portfolio, 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.


Century Aluminum 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 Century Aluminum’s EV / EBITDA ratio to its peer group that includes Alcoa Corporation (NYSE: AA), Aluminum Corporation of China Limited (NYSE: ACH), Constellium N.V. (NYSE: CSTM) and Kaiser Aluminum Corporation (NASDAQ: KALU).

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

Since Century Aluminum’s EBITDA multiple of 8.6x is higher than the median of its peers (7.9x), it means that investors are paying more than they should for each dollar of CENX’s EBITDA. As such, our analysis shows that CENX represents an overvalued stock. In fact, finbox.io’s EBITDA Multiples Model calculates a fair value of around $15.50 per share which implies roughly 11.0% downside.

CENX EV / EBITDA Valuation Calculation

I selected a fair multiple of 8.0x in my analysis by averaging Century Aluminum’s current EV / EBITDA ratio with its peer group and sector.


Are Comps Really Comparable?

Before concluding that Century Aluminum should be banished from 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 Century Aluminum, 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 Century Aluminum with lower growth companies, then its EBITDA multiple would naturally be higher than its peers since investors reward high growth stocks with a higher price.

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

Now if the second assumption does not hold true, Century Aluminum’s higher multiple may be because firms in our peer group are being undervalued by the market.


How This Impacts Shareholders

As a shareholder, you may have already conducted fundamental analysis on the stock so its current overvaluation could signal a potential selling opportunity to reduce your exposure to CENX. 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 Century Aluminum by taking a look at the following:

Valuation Metrics: what is Century Aluminum’s free cash flow yield and how does it compare to its publicly traded peers? This metric measures the amount of free cash flow for each dollar of equity (market capitalization). Analyze the free cash flow yield here.

Risk Metrics: what is Century Aluminum’s cash ratio which is used to assess a company’s short-term liquidity. View the company’s cash ratio here.

Efficiency Metrics: return on equity is used to measure the return that a firm generates on the book value of common equity. View Century Aluminum’s return on equity 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.

Should You Sell Orbotech Ltd (NASDAQ: ORBK) At This EV / EBITDA Ratio?

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Orbotech Ltd. (NASDAQ: ORBK), an information technology firm with a market capitalization of $3.1 billion, currently trades at an EBITDA Multiple of 14.2x which is below the sector’s median multiple of 16.5x. Although this makes ORBK look attractive, investors may change their mind after reviewing the assumptions behind the EV / EBITDA ratio. In the post below, I calculate Orbotech’s fair value using an EBITDA Multiples valuation.


How To Interpret Orbotech’s EBITDA Multiple

A multiples valuation, also known as a comparable companies analysis, determines the value of a subject company by benchmarking the subject’s financial performance against companies deemed to be similar. We can then determine if a company is undervalued or overvalued relative to its peers by comparing metrics like growth, profit margin, and valuation multiples.

EV / EBITDA, also known as Enterprise Value-to-EBITDA Multiple or an EBITDA Multiple, measures the dollars in Enterprise Value for each dollar of EBITDA. Its key benefit over the P/E multiple is that it’s capital structure-neutral, and, therefore, better at comparing companies with different levels of debt. 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 Orbotech’s EV / EBITDA ratio to its peer group that includes AVX Corporation (NYSE: AVX), AU Optronics Corp (NYSE: AUO), Avnet, Inc. (NYSE: AVT) and Electro Scientific Industries, Inc. (NASDAQ: ESIO).

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

Since Orbotech’s EV / EBITDA ratio of 14.2x is higher than the median of its peers (8.7x), it means that investors are paying more than they should for each dollar of ORBK’s EBITDA. As such, our analysis shows that ORBK represents an overvalued stock. Furthermore, finbox.io’s EV / EBITDA Ratio Model calculates a fair value of roughly $42.50 per share which implies around 31.5% downside.

ORBK EV / EBITDA Valuation Calculation

I selected a fair multiple of 9.3x in my analysis by averaging Orbotech’s current EV / EBITDA ratio with its peer group and sector.


EBITDA Multiple Flaws

While this approach typically provides a reasonable valuation range, it is important to understand that our conclusion rests on some important assumptions. The first being that the selected peer group actually contains companies that truly are similar to Orbotech. The second important assumption is that the selected peer group stocks are being fairly valued by the market.

If the assumptions above do not hold to be true, then the difference in EV / EBITDA ratios could be due to a variety of factors. For example, if you accidentally compare Orbotech with lower growth companies, then its EBITDA multiple would naturally be higher than its peers since investors reward high growth stocks with a higher price.

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

Now if the second assumption does not hold true, Orbotech’s higher multiple may be because firms in our peer group are being undervalued by the market.


What To Do Next

As a current investor, you may have already conducted fundamental analysis on the company and its stock so its current overvaluation could signal a potential selling opportunity to reduce your exposure to ORBK. But keep in mind the EV / EBITDA ratio’s potential flaws when applying this valuation approach. It is important to note that there are a variety of other fundamental factors that I have not taken into consideration in this article. I highly recommend that you continue your research on Orbotech by taking a look at the following:

Valuation Metrics: what is Orbotech’s EBITDA less CapEx multiple and how does it compare to its peers? This is a helpful multiple to analyze when comparing capital intensive businesses. View the company’s EBITDA less CapEx multiple here.

Risk Metrics: what is Orbotech’s asset efficiency? This ratio measures the amount of cash flow that a company generates from its assets. View the company’s asset efficiency here.

Efficiency Metrics: is management becoming more or less efficient in creating value for the firm? Find out by analyzing the company’s return on invested capital ratio 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.

Sell RLJ Lodging Trust (NYSE: RLJ) Because Of Its EBITDA Multiple?

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RLJ Lodging Trust (NYSE: RLJ) trades at an EBITDA Multiple of 15.7x, which is lower than the Real Estate sector median of 18.9x. While this makes RLJ appear like a stock to add to your portfolio, you might change your mind after gaining a better understanding of the assumptions behind the EV / EBITDA ratio ratio. In this article, I will break down what an EBITDA Multiple is, how to interpret it and what to watch out for.


Understanding Valuation Multiples and EV / EBITDA

A multiples valuation, also known as a comparable companies analysis, determines the value of a subject company by benchmarking the subject’s financial performance against similar public companies (peer group). We can infer if a company is undervalued or overvalued relative to its peers by comparing metrics like growth, profit margin, and valuation multiples.

An EBITDA Multiple, also known as Enterprise Value-to-EBITDA Multiple (EV/EBITDA), 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. Furthermore, its key benefit over the P/E multiple is that it’s capital structure-neutral, and, therefore, better at comparing companies with different levels of debt. The general formula behind an EBITDA Multiples valuation model is the following:

Enterprise Value = EBITDA x Selected Multiple

An EBITDA multiple is not meant to be viewed in isolation and is only useful when comparing it to other similar companies. Since it is expected that similar companies have similar EV / EBITDA ratios, we can come to some conclusions about the stock if the ratios are different. I compare RLJ Lodging Trust’s EBITDA multiple to those of LaSalle Hotel Properties (NYSE: LHO), Sunstone Hotel Investors, Inc. (NYSE: SHO), Diamondrock Hospitality Company (NYSE: DRH) and Pebblebrook Hotel Trust (NYSE: PEB) in the chart below.

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

Since RLJ Lodging Trust’s EBITDA multiple of 15.7x is higher than the median of its peers (14.7x), it means that investors are paying more than they should for each dollar of RLJ’s EBITDA. As such, our analysis shows that RLJ represents an overvalued stock. In fact, finbox.io’s EBITDA Multiples Model calculates a fair value of roughly $21.00 per share which implies approximately 8.0% downside.

RLJ EV / EBITDA Valuation Calculation

Note that the selected multiple of 14.9x in the analysis above was determined by averaging RLJ Lodging Trust’s current EBITDA multiple with its peer group and sector.


Understanding the EV / EBITDA Ratio’s Limitations

Before jumping to the conclusion that RLJ Lodging Trust should be banished from 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 RLJ Lodging Trust, 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 RLJ Lodging Trust with lower growth companies, then its EBITDA multiple would naturally be higher than its peers since investors reward high growth stocks with a higher price.

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

Now if the second assumption does not hold true, RLJ Lodging Trust’s higher multiple may be because firms in our peer group are being undervalued by the market.


What This Means For Investors

As a shareholder, you may have already conducted fundamental analysis on the stock so its current overvaluation could signal a potential selling opportunity to reduce your exposure to RLJ. 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 RLJ Lodging Trust by taking a look at the following:

Valuation Metrics: what is RLJ Lodging Trust’s short ratio and how does it compare to its publicly traded peers? It represents the percentage of total shares outstanding that is being shorted. View the short ratio here.

Risk Metrics: how much interest coverage does RLJ Lodging Trust have? This is a ratio used to assess a firm’s ability to pay interest expenses based on operating profits (EBIT). View the company’s interest coverage here.

Efficiency Metrics: fixed asset turnover is calculated by dividing revenue by average fixed assets. View RLJ Lodging Trust’s fixed asset 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.

Tempted To Buy MGM Resorts International (NYSE: MGM) At Its Current P/E Multiple?

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MGM Resorts International (NYSE: MGM) shares currently trade at 8.6x trailing earnings which is lower than the Consumer Discretionary sector median of 19.5x. While this makes MGM look like a stock to add to your portfolio, equity investors might change their mind after taking a closer look at the assumptions behind the P/E ratio. In this article, I define how to calculate a P/E multiple and what to keep an eye out for when applying it in a comparable companies analysis.


MGM 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.

P/E Ratio is a valuation metric that indicates the multiple of earnings investors are willing to pay for one share of a company:

P/E Ratio = Stock Price ÷ Earnings Per Share

The P/E 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 MGM’s P/E ratio to its peer group that includes Las Vegas Sands Corp.(NYSE: LVS), Boyd Gaming Corporation (NYSE: BYD), Carnival Corporation (NYSE: CCL) and Hilton Worldwide Holdings Inc. (NYSE: HLT).

MGM P/E Ratio vs Peers Chartsource: finbox.io Benchmarks: P/E Multiples

Since MGM’s P/E of 8.6x is lower than the median of its peers (17.5x), it means that investors are paying less than they should for each dollar of MGM’s earnings. As such, our analysis shows that MGM represents an undervalued stock. In fact, finbox.io’s P/E Multiple Modelcalculates a fair value of roughly $54.00 per share which implies around 77.0% upside.

MGM P/E Valuation Calculation

I selected a fair multiple of 15.2x in my analysis by averaging MGM’s current P/E ratio with its peer group.


Are Peers Really Comparable?

Before concluding that MGM 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 MGM, and

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

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

MGM Net Income Growth and Margins vs Peers Tablesource: P/E model

However, if the second assumption does not hold true, MGM’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 MGM. However, keep in mind the limitations of the P/E ratio when making investment decisions. 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 MGM by taking a look at the following:

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

Risk Metrics: what is MGM’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 MGM’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.

Does Oshkosh Corporation (NYSE: OSK) P/E Multiple Signal A Buying Opportunity?

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Oshkosh Corporation (NYSE: OSK), an industrials business with a market capitalization of $5.2 billion, currently trades at a P/E multiple of 13.3x which is below the sector’s median multiple of 22.1x. Although this makes OSK look attractive, investors may change their mind after reviewing the assumptions behind the P/E ratio. In the post below, I explain how to apply P/E multiples and what to watch out for.


How To Utilize Oshkosh’s PE Multiples

A multiples valuation, also known as a comparable companies analysis, determines the value of a subject company by benchmarking the subject’s financial performance against companies deemed to be similar. We can then determine if a company is undervalued or overvalued relative to its peers by comparing metrics like growth, profit margin, and valuation multiples.

P/E Ratio is a valuation metric that indicates the multiple of earnings investors are willing to pay for one share of a company:

P/E Ratio = Stock Price ÷ Earnings Per Share

The P/E 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 Oshkosh’s P/E ratio to its peer group that includes Terex Corporation(NYSE: TEX), AGCO Corporation (NYSE: AGCO), Navistar International Corporation (NYSE: NAV) and Manitowoc Company, Inc. (The) (NYSE: MTW).

OSK P/E Ratio vs Peers Chartsource: finbox.io Benchmarks: P/E Multiples

Since Oshkosh’s P/E ratio of 13.3x is lower than the median of its peers (24.0x), it means that investors are paying less than they should for each dollar of OSK’s earnings. As such, our analysis shows that OSK represents an undervalued stock. Furthermore, finbox.io’s P/E Ratio Model calculates a fair value of approximately $104.50 per share which implies roughly 48.5% upside.

OSK P/E Valuation Calculation

I selected a fair multiple of 19.8x in my analysis by averaging Oshkosh’s current P/E ratio with its peer group.


The P/E Ratio’s Flaws

While this approach typically provides a reasonable valuation range, it is important to understand that our conclusion rests on some important assumptions. The first being that the selected peer group actually contains companies that truly are similar to Oshkosh. The second important assumption is that the selected peer group stocks are being fairly valued by the market.

If the assumptions above do not hold to be true, then the difference in P/E ratios could be due to a variety of factors. For example, if you accidentally compare Oshkosh with higher growth companies, then its P/E multiple would naturally be lower than its peers since investors reward high growth stocks with a higher price.

OSK Net Income Growth and Margins vs Peers Tablesource: P/E model

On the other hand, if the second assumption does not hold true, Oshkosh’s lower multiple may be because our selected comparable companies are being overvalued by the market.


What To Do Next

As a current investor, you may have already conducted fundamental analysis on the company and its stock so its current undervaluation could signal a potential buying opportunity to increase your position in OSK. But keep in mind the P/E ratio’s potential flaws when applying this valuation approach. It is important to note that there are a variety of other fundamental factors that I have not taken into consideration in this article. I highly recommend that you continue your research on Oshkosh by taking a look at the following:

Valuation Metrics: how much upside do shares of Oshkosh have based on the Ben Graham Formula? Take a look at our Ben Graham Formula data explorer which also compares the company’s upside to its peers.

Risk Metrics: what is Oshkosh’s Altman Z score? It’s a famous formula used to predict the probability that a firm will go into bankruptcy within two years. View the company’s Altman Z score here.

Efficiency Metrics: how much free cash flow does Oshkosh generate as a percentage of total sales? Has it been increasing or decreasing over time? Review the firm’s free cash flow margin 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.

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