Professional Documents
Culture Documents
Written by Jae Jun follow me on Facebook Twitter Let me go through a EBIT multiple valuation method using DELL. T he link to the f ree online calculator is at the end of the article. PE multiples are thrown around a lot when talking about stocks, but there is a much better way to value stocks using multiples and that is to use EBIT multiples. Dont get shocked. Just because Im a value investor, it doesnt mean I do not look at multiples. I like to concentrate on value based metrics such as P/FCF, which is a variation of P/E, and even EV/EBIT DA, but the more tools I have and understand how and when to use it, it only helps me as an investor. Seeing that most people incorrectly use multiple valuation methods, I will show you how to do it the proper way.
DELL is trading at a PE of 10.6x with a Forward PE of 8.7x. Its competitors are trading between 9x to 14x. If DELL corrects their problems, it should trade at similar multiples to its competitors. Therefore DELL is worth $18.
Problems Doing it T his Way Right away there are some f undamental f laws. I understand the importance of keeping things simple, but not so simple that it af f ects the whole underlying principle. PE is a broad metric which can vary greatly depending on adjustments to the income statement such as:
A goodwill charge can reduce earnings drastically although it doesnt af f ect the business operation Income f rom discontinued operations can inf late PE
(The numbers for cash and debt came from the stock analyzer spreadsheet and verified against the latest 10-K) DELL makes f or an interesting case study because there are several big investors coming up with their own valuation targets which we can ref erence. Michael Dell wants to buy out DELL at $13.65 Carl Icahn has come out and said that he wants DELL to issue a $9 special dividend because he values it at $22.81 Jim Chanos has revealed that he is short DELL going into the deal citing issues with the balance sheet and cash f low. (In other words, he doesnt think it was worth $13.65) Although Jim Chanos has not revealed his target price, it will likely be closer to $10 which is the lower end of the range. Michael Dell is hovering over the normalized case to get a slightly cheaper deal than the f air value. Carl Icahn is the optimistic and aggressive investor. Question now becomes who is right based on the business model? Too early to say at the moment.