P/E Analysis

DEMARCHE P/E ANALYSIS HELPS YOU ANSWER THE QUESTION "IS OUR P/E MULTIPLE WHAT IT SHOULD BE?"

Our factor model research has identified the characteristics that drive P/E and quantified the impact that each has on P/E multiples. This enables us to measure your company's exposure to these factors. Armed with this information you can explain your stock's P/E relative to your competitors for capital or your peers and develop strategies for enhancing your multiple.

From the basics of valuation, we know that your company's expected earnings growth rate and its discount rate drive P/E. DeMarche provides an in-depth analysis of the factors that affect both of these areas and compares your stock to a universe of "clone" companies that closely resembles your company. (DeMarche Clones are different from your peers and are your true competitors for capital.)

FUTURE EARNINGS GROWTH
We evaluate factors that have an impact on expected future earnings growth, such as:

DeMarche P/E Analysis seeks to uncover the underlying drivers of valuation so that management can make decisions accordingly. The example below illustrates an evaluation of whether Company A has been rewarded for its high Return on Equity (ROE) relative to its DeMarche Clones. This "apples to apples" comparison to high expected earnings growth clone companies neutralizes the impact of the earnings growth variable when analyzing the impact that ROE has on P/Es.

Everything else being relatively equal, you can see in this example that the market generally rewards high ROE companies with higher P/Es (an average of 18.0). The bad news for Company A is that its P/E is only 16.5 indicating that the stock is not valued as high as it should be for this one factor.

DISCOUNT RATE
Our P/E analysis also evaluates discount rate factors. These factors contribute to the market's determination of how to discount a company's future cash flows to a present value. Some of the factors we analyze include:

Using Company A again, we evaluated the impact of Earnings Variability on the P/Es of high expected earnings growth companies. As you would expect, the market rewards low Earnings Variability companies with higher P/Es. In this case, low Earnings Variability companies had an average P/E of 16.2 compared to 15.3 for high Earnings Variability companies. This would indicate that Company A, with a P/E of 16.5, is being valued fairly for this factor.