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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:
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Sales Growth |
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EBIT Growth |
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Asset Growth |
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Profit Margin |
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Return
on Equity |
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:
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Debt to Equity |
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Earnings Variability |
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Trading Range |
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Payout Ratio |
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Share
Turnover |
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 14.3 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.
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