Market Multiple Valuation
The Wendy’s Company
Market Multiple Valuation – What is it? A valuation theory based on the idea that
similar assets sell at similar prices
The theory is that when firms are comparable, we can use the multiples approach to determine the value of one firm based on the value of another
Market Multiple Valuation – How is it done? Select a set of relevant summary
performance measures (e.g., earnings, sales, etc.)
Identify companies that are comparable to the target company (i.e., industry, size, etc.)
Compute the ratio of the market value to the selected performance measure for each comparable company; the average of these ratios is the market multiple
Multiply the summary performance measure for the target company by the market multiple to arrive at equity value
If this provides enterprise value, deduct net financial liabilities to arrive at equity value
Enterprise value will result if using an enterprise performance measure (e.g., EPAT or NEA)
Divide equity value by shares outstanding to determine equity value per share
Market Multiple Valuation – How is it done?
Why is it used? Advocates argue
It is relatively simple It does not rely on subjective forecasts It allows for comparability
Weaknesses of Market Multiple Valuation As you’ll see in the coming slides
There is no “right” performance measure No two companies are directly comparable
Some companies are more comparable than others Over- or under-valued comparables will distort the
valuation of the target company Estimates of value based on equity (as opposed to
enterprise) can lead to inaccurate valuation due to differerences in leverage
Wendy’s Market Multiples Companies used in comparison
Burger King McDonald’s Yum! Brands
KFC Pizza Hut Taco Bell
Wendy’s Market Multiples
Wendy’s Unique Market Multiple Theory that number of restaurants can drive
equity value Companies will open more restaurants if profitable Companies will close restaurants if not profitable
Multiple Valuations Vs. Trading Price (WEN)
Recommendation: Buy
Disparity Between Stock Price and Calculated Equity Value Possible Reasons
Improper performance measures Inaccurate valuation of comparable companies Comparable companies not actually comparable Market multiples are a poor measure of valuation
Questions?