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VALUATION MULTIPLES - page 3

Discover and validate investing ideas using valuation multiples.

Is Sealed Air Corporation (NYSE: SEE) A Buy At This P/E Multiple?

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Sealed Air Corporation (NYSE: SEE) trades at a P/E multiple of 10.9x, which is lower than the Materials sector median of 19.4x. While this makes SEE appear like a stock to add to your portfolio, you might change your mind after gaining a better understanding of the assumptions behind the P/E ratio. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.


Understanding Valuation Multiples and the P/E Ratio

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.

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

P/E Multiple = Stock Price ÷ Earnings Per Share

The P/E ratio 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 P/E ratios, we can come to some conclusions about the stock if the ratios are different. I compare Sealed Air’s P/E multiple to those of Bemis Company, Inc. (NYSE: BMS), Sonoco Products Company(NYSE: SON), Graphic Packaging Holding Company (NYSE: GPK) and Packaging Corporation of America (NYSE: PKG) in the chart below.

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

Since Sealed Air’s P/E of 10.9x is lower than the median of its peers (21.2x), it means that investors are paying less than they should for each dollar of SEE’s earnings. As such, our analysis shows that SEE represents an undervalued stock. In fact, finbox.io’s P/E Multiple Model calculates a fair value of roughly $70.00 per share which implies approximately 57.5% upside.

SEE P/E Valuation Calculation

Note that the selected multiple of 17.2x in the analysis above was determined by averaging Sealed Air’s current P/E multiple with its peer group.


Understanding the P/E Ratio’s Limitations

Before jumping to the conclusion that Sealed Air 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 Sealed Air, 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 Sealed Air 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.

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

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


What This Means For Investors

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 SEE. 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 Sealed Air by taking a look at the following:

Valuation Metrics: how much upside do shares of Sealed Air have based on Wall Street’s consensus price target? Take a look at our analyst upside data explorer that compares the company’s upside relative to its peers.

Risk Metrics: how is Sealed Air’s financial health? Find out by viewing our financial leverage data metric which plots the dollars in total assets for each dollar of common equity over time.

Efficiency Metrics: is management becoming more or less efficient over time? Find out by analyzing the company’s asset turnover ratio which measures the dollars in revenue a company generates per dollar of assets.

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 Danaher Corporation’s (NYSE: DHR) P/E Multiple A Signal To Buy For Investors?

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Danaher Corporation (NYSE: DHR) shares currently trade at 27.1x trailing earnings which is lower than the Healthcare sector median of 35.6x. While this makes DHR 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.


Danaher 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 Danaher’s P/E ratio to its peer group that includes Thermo Fisher Scientific Inc (NYSE: TMO), Becton, Dickinson and Company (NYSE: BDX), Agilent Technologies, Inc. (NYSE: A) and Parker-Hannifin Corporation (NYSE: PH).

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

Since Danaher’s P/E of 27.1x is lower than the median of its peers (37.3x), it means that investors are paying less than they should for each dollar of DHR’s earnings. As such, our analysis shows that DHR represents an undervalued stock. In fact, finbox.io’s P/E Multiple Model calculates a fair value of roughly $122.00 per share which implies around 23.0% upside.

DHR P/E Valuation Calculation

I selected a fair multiple of 33.3x in my analysis by averaging Danaher’s current P/E ratio with its peer group.


Are Peers Really Comparable?

Before concluding that Danaher 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 Danaher, 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 Danaher 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.

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

However, if the second assumption does not hold true, Danaher’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 DHR. 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 Danaher by taking a look at the following:

Valuation Metrics: what is Danaher’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 Danaher’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 Danaher’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 Be Tempted To Buy NetEase, Inc. (NASDAQ: NTES) Because Of Its P/E Multiple?

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NetEase, Inc. (NASDAQ: NTES), an information technology firm with a market capitalization of $33.5 billion, currently trades at a P/E multiple of 28.0x which is below the sector’s median multiple of 30.1x. Although this makes NTES 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 NetEase’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 NetEase’s P/E ratio to its peer group that includes Tencent Holding Ltd.(NYSE: TCEHY), 58.com Inc. (NYSE: WUBA), Alibaba Group Holding Limited (NYSE: BABA) and Baidu, Inc. (NASDAQ: BIDU).

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

Since NetEase’s P/E ratio of 28.0x is lower than the median of its peers (48.9x), it means that investors are paying less than they should for each dollar of NTES’s earnings. As such, our analysis shows that NTES represents an undervalued stock. Furthermore, finbox.io’s P/E Ratio Model calculates a fair value of approximately $324.50 per share which implies roughly 27.5% upside.

NTES P/E Valuation Calculation

I selected a fair multiple of 35.7x in my analysis by averaging NetEase’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 NetEase. 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 NetEase 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.

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

On the other hand, if the second assumption does not hold true, NetEase’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 NTES. 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 NetEase by taking a look at the following:

Valuation Metrics: what is NetEase’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 NetEase’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 Comfort Systems USA, Inc. (NYSE: FIX) A Sell At Its Current Enterprise Multiple?

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Comfort Systems USA, Inc. (NYSE: FIX), an industrials business with a market capitalization of $1.8 billion, currently trades at a Sales Multiple of 1.0x which is below the sector’s median multiple of 1.5x. Although this makes FIX look attractive, investors may change their mind after reviewing the assumptions behind the EV / Sales ratio. In the post below, I calculate Comfort Systems USA’s fair value using a Sales Multiples valuation.


How To Interpret Comfort Systems USA’s Sales 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 / Sales, also known as Enterprise Value-to-Sales Multiple or a Sales Multiple, measures the dollars in Enterprise Value for each dollar of revenue. 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 a Sales Multiples valuation model is the following:

Enterprise Value = Revenue x Selected Multiple

The EV / Sales 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 Comfort Systems USA’s EV / Sales ratio to its peer group that includes MasTec, Inc. (NYSE: MTZ), KBR, Inc. (NYSE: KBR), Granite Construction Incorporated (NYSE: GVA) and Jacobs Engineering Group Inc. (NYSE: JEC).

FIX Sales Multiple vs Peers Chartsource: finbox.io Benchmarks: Sales Multiples

Since Comfort Systems USA’s EV / Sales ratio of 1.0x is higher than the median of its peers (0.7x), it means that investors are paying more than they should for each dollar of FIX’s revenue. As such, our analysis shows that FIX represents an overvalued stock. Furthermore, finbox.io’s EV / Sales Ratio Model calculates a fair value of $37.95 per share which implies -20.2% downside.

FIX EV / Sales Valuation Calculation

I selected a fair multiple of 0.8x in my analysis by averaging Comfort Systems USA’s current EV / Sales ratio with its peer group.


Sales 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 Comfort Systems USA. 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 / Sales ratios could be due to a variety of factors. For example, if you accidentally compare Comfort Systems USA with lower growth companies, then its sales multiple would naturally be higher than its peers since investors reward high growth stocks with a higher price. Furthermore, sales multiples are highly correlated with EBITDA margins so differences in profit margin often explain differences in valuation.

FIX revenue Growth and Margins vs Peers Tablesource: sales multiples model

Now if the second assumption does not hold true, Comfort Systems USA’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 FIX. But keep in mind the EV / Sales 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 Comfort Systems USA by taking a look at the following:

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

Risk Metrics: what is Comfort Systems USA’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 Comfort Systems USA’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.

Tempted To Sell Nucor Corporation (NYSE: NUE) At Its Current EV / Sales Ratio?

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Nucor Corporation (NYSE: NUE) trades at a Sales Multiple of 1.2x, which is lower than the Materials sector median of 1.7x. While this makes NUE 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 / Sales ratio. In this article, I will break down what a Sales Multiple is, how to interpret it and what to watch out for.


Understanding Valuation Multiples and EV / Sales

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 Sales Multiple, also known as Enterprise Value-to-Sales Multiple (EV / Sales), measures the dollars in Enterprise Value for each dollar of revenue. To determine if a company is expensive, it’s far more useful to compare EV / Sales 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 a Sales Multiples valuation model is the following:

Enterprise Value = Revenue x Selected Multiple

A sales 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 / Sales ratios, we can come to some conclusions about the stock if the ratios are different. I compare Nucor’s sales multiple to those of United States Steel Corporation (NYSE: X), Commercial Metals Company (NYSE: CMC), Freeport-McMoran, Inc. (NYSE: FCX) and AK Steel Holding Corporation (NYSE: AKS) in the chart below.

NUE Sales Multiple vs Peers Chartsource: finbox.io Benchmarks: Sales Multiples

Since Nucor’s sales multiple of 1.2x is higher than the median of its peers (0.6x), it means that investors are paying more than they should for each dollar of NUE’s revenue. As such, our analysis shows that NUE represents an overvalued stock. In fact, finbox.io’s Sales Multiples Model calculates a fair value of approximately $54.00 per share which implies roughly -21.0% downside.

NUE EV / Sales Valuation Calculation

Note that the selected multiple of 1.0x in the analysis above was determined by averaging Nucor’s current sales multiple with its peer group.


Understanding the EV / Sales Ratio’s Limitations

Before jumping to the conclusion that Nucor 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 Nucor, and

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

If the first assumption is not accurate, the difference in sales multiples could be due to a variety of factors. For example, if you accidentally compare Nucor with lower growth companies, then its sales multiple would naturally be higher than its peers since investors reward high growth stocks with a higher price. In addition, revenue multiples are highly correlated with profit margins so differences in EBITDA margin often explain differences in valuation.

NUE revenue Growth and Margins vs Peers Tablesource: sales multiples model

Now if the second assumption does not hold true, Nucor’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 NUE. However, keep in mind the limitations of a sales 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 Nucor by taking a look at the following:

Valuation Metrics: how much upside do shares of Nucor 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 Nucor’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 Nucor 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.

Does Jacobs Engineering Group Inc (NYSE: JEC) Sales Multiple Signal A Selling Opportunity?

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Jacobs Engineering Group Inc. (NYSE: JEC) shares currently trade at 0.9x its trailing revenue which is lower than the Industrials sector median of 1.5x. While this makes JEC 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 / Sales ratio. In this article, I define how to calculate a Sales Multiple and what to keep an eye out for when applying it in a comparable companies analysis.


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

Enterprise Value = Revenue x Selected Multiple

The EV / Sales 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 Jacobs Engineering’s EV / Sales ratio to its peer group that includes AECOM (NYSE: ACM), Fluor Corporation (NYSE: FLR), MasTec, Inc. (NYSE: MTZ) and Quanta Services, Inc. (NYSE: PWR).

JEC Sales Multiple vs Peers Chartsource: finbox.io Benchmarks: Sales Multiples

Since Jacobs Engineering’s sales multiple of 0.9x is higher than the median of its peers (0.5x), it means that investors are paying more than they should for each dollar of JEC’s revenue. As such, our analysis shows that JEC represents an overvalued stock. In fact, finbox.io’s Sales Multiples Model calculates a fair value of $39.42 per share which implies -39.7% downside.

JEC EV / Sales Valuation Calculation

I selected a fair multiple of 0.6x in my analysis by averaging Jacobs Engineering’s current EV / Sales ratio with its peer group.


Are Comps Really Comparable?

Before concluding that Jacobs Engineering 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 Jacobs Engineering, and

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

If the first assumption is not accurate, the difference in sales multiples could be due to a variety of factors. For example, if you accidentally compare Jacobs Engineering with lower growth companies, then its sales multiple would naturally be higher than its peers since investors reward high growth stocks with a higher price. It’s also important to note that EV / Sales ratios are highly correlated with profit margins so differences in EBITDA margin often explain differences in valuation.

JEC revenue Growth and Margins vs Peers Tablesource: sales multiples model

Now if the second assumption does not hold true, Jacobs Engineering’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 JEC. However, keep in mind the limitations of a sales 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 Jacobs Engineering by taking a look at the following:

Valuation Metrics: how much upside do shares of Jacobs Engineering have based on Wall Street’s consensus price target? Take a look at our analyst upside data explorer that compares the company’s upside relative to its peers.

Risk Metrics: how is Jacobs Engineering’s financial health? Find out by viewing our financial leverage data metric which plots the dollars in total assets for each dollar of common equity over time.

Efficiency Metrics: is management becoming more or less efficient over time? Find out by analyzing the company’s asset turnover ratio which measures the dollars in revenue a company generates per dollar of assets.

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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