Multiple Analyses
Multiple analyses involve the application of industry average to estimate the share price. To analyze the value of the company, we are required to compare the company performance relative to the performance of other pear companies. The pear companies are those companies in the same category classification. The selection is also based on financial performance, capital structure and company size. Considering different social, economic factors Amazon.com, Inc. (AMZN) and Walmart Inc. (WMT) were selected. The two companies are listed in the United States of America stock market. The companies also belong in the same industry.
To start with we examined the price of share price using price-earnings ratio (P/E). The assumption here is that all companies operating in the same sector will have a similar price-earnings ratio. The share price is equal to industry P/E multiplied by the EPS of the selected company.
Po = EPS X Average P/E of comparable companies (Industry) Don't use plagiarised sources.Get your custom essay just from $11/page
Po = 6.25 x 51.81 = $ 323.81
Based on the industry performance, the price of the share is $ 323.81. In doing the company valuation, we also considered P/E to growth ratio, price to sale ratio, enterprise value/EBITDA and share price/ EBITDA. The company performance of the company is based on the ratios analyzed below.
P/E to Growth
To estimate the share price using the P/E to growth ratio selected company revenue growth is multiplied by the EPS and then increase by the multiple P/E growth
Share price = 11.62% *5.53* 6.25 =$ 401.5
Price to Sales Ratio
Price per share is equal to Target Corporation (TGT) revenue multiplied by average price to sale ratio of the industry.
75356* 0.00398 = $ 300.1
The price/sale ratio uses the revenue of the company to measure the value of a stock. Companies with high revenue are considered to have a high value. Based on the P/S ratio, we can conclude that the value of the selected company is overvalued relative to the industry. The difference may be a result of over quoting revenue by the comparable companies. To overcome this problem price sale/EBITDA were used for further analysis.
Enterprise Value/EBITDA
The company value was also done using EV/EBITDA. Based on multiple or multiple analysis Target Corporation is fairly valued. Based on this approach, the company share is valued at $102.1. The price-earnings ratio ignores the different capital structure hence making it a better analysis of the company value. The share price of Target Corporation depend on it EBITDA; therefore, firms with high EBIDTA have a higher share price. EBITDA should fall at a range of 6.0 x to 18.0x. Hence Target Corporation (TGT) EV/EBIDTA of 9.86*xs indicates that the organization is fairly valued. Though, EV/EBIDTA approach is determined by the company growth rates. Companies with high growth rate are characterized by higher share prices and low operating profits. In such a scenario, the company share price is undervalued. Higher working capital means that the company operating cash flows is overstated. The company’s free cash flows have a higher relation to the company valuation as compared to EBITDA (Aspris 2013).
Share Price/EBITDA
The share price is equal to Target Corporation (TGT) EBITDA multiplied by the average of Share Price/EBITDA
6,611* 0 0.04235 = $280.0
Based on the price/ EBITDA ratio Target Corporation (TGT) has been overvalued. The method assumes that all the entities operating in the same industry is similar. This measurement is non-realistic. This assumption is untrue as different companies will have different operating profits based on the operations.
Equity value is calculated either using the discounted cash flow method or multiple ratio analysis methods. In most cases, the estimate obtained using the two approaches will differ. The value of the company is based on the market value and the book value. The market value is based on industry performance, while the book value is the actual value of the company. The book value and the market value will differ in most cases. In the case of multiple analyses, the book value and the market value of the company will vary. The market value of Target Corporation (TGT) is 125.01.
Target Corporation (TGT) does not operate in isolation, but it is part of the entire economy. Hence being part of the whole market, it is affected by the macro-economic such as Amazon.com, Inc. (AMZN) and Walmart Inc. (WMT) (Bielecki & Rutkowski,015). To remain competitive, the company may have different strategies hence affecting its performance. As a result of this, different companies in the same industry have different performance. The difference may also be a result of varying reporting standards applied by various companies. It is also good to note there may be an error in the preparation of financial statements and hence the difference.
Final Recommendation
The valuation of Target Corporation (TGT) is based on performing various valuation models, including the discount cash flow method, risk analysis model and multiple analyses. The market value of the company is $125.01. The EBITDA for all comparable companies was adjusted to reflect the non-recurring incomes and expenses of the industry. The comparison is based on two companies Amazon and Walmart. The benchmarking of the three identified peers was based on company size, capital structure, risk, growth, and profitability of the companies. The company intrinsic value of the company is $51,724.0 million, which is higher the current market value. Based on this method, it is recommended that the share of the company should be traded at $102.1. The model is limited, as it assumes that all companies will have equal output. This is not always the case. The share price is based on industry performance. The multiple/ comparable valuation depends on the accuracy of the relative valuation and the comparable market multiple. In most cases, it is difficult to achieve clarity and comparability using this model.
The best model for share valuation is a discounted free cash flow model. The model assumes that the revenue of the company will have constant growth. The return on investment is assumed to be constant. The target price estimated using this model is assumed to be more realistic as it is based on wealth maximization, unlike other models which are based on profit maximization. The discount free cash flow model also considers the time value of money.