Hello all. I've been experimenting with a different way to value equity lately and would like some feedback. My default valuation method is a DCF, of course. However, as we all know, there are many companies that the market values without fundamentals as the basis -- companies with particularly high P/E ratios.
To value these companies, I have been building out standard revenue projection models for the upcoming two yearly reporting periods and determine an expected EPS for the two periods. My intuition behind using two periods depends on how far into the fiscal year we currently are. So I have been determining the EPS figures for the remainder of the current year, and then the year after that.
From there, I take the net present value of the EPS for the next two yearly reporting periods. I'm not treating the NPV as an actual EPS projection -- it would be nearly double what the projection model produces. Rather, I treat the NPV as a multiple of sorts, understanding that the market is generally short-sighted, and looks a most valuations with a one-year time horizon.
With this "NPV multiple", if you will, I apply the peer median PE ratio, the product of which is my price target. I go with the peer median to account for the fact that this is a multiple, and not an actual EPS figure.
Personally, I only invest in companies that have strong fundamental support and that have an upside in my DCF -- however, I am curious about the theory behind this little head-project of mine and would love to hear criticism.
Submitted July 24, 2017 at 11:54AM by mjvblue http://ift.tt/2vT9L7E
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