DCF/Comps Weights...how do justifiy subjective decison?
TL;DR - tried tweaking DCF to make it more optimistic but cannot honestly justify tweaks. Resorting to arriving at target share price with DCF/Comps weight - don't know how to justify/explain my decision for 60% DCF 40% Comps. Need some guidance.
I've built a thorough DCF and comps model from scratch. The company I'm covering is split between two sectors, and has multiple revenue streams where there are some instances of publicly traded companies specializing in just that one stream.
The sector(s) in which this company is traded in has over the last two years seen dramatic upside price swings. On top of that, there have been transactions above average premium levels. With rates rising, tensions between China growing, and the U.S economy soon to becoming the longest bull run in U.S history, I believe that I am not alone that overall valuations have been teetering on the high side for some time now, and that it's hard to find a bargain these days.
I've taken careful precaution in to monitoring my growth assumptions and the inputs with my company.
The difference in the model is pretty start. The comps multiple average is about 20% above where the stock is trading, and the DCF (perpetuity) produces a share price 22% below the current share price, with sensitivity ranging 30% and 8% below the current price, respectively.
I've tried to adjust inputs like the long term growth rate, but I cannot rationally justify it being greater than the current emerging markets forecasted growth rate (4.7%). I also tried playing with the WACC to make it lower, but the driving input there is the equity market premium, which I cannot also justify being any lower than it is (or else I'm basically saying that this company has the same risk profile as a company that derives most of its revenues from the U.S - which it does not).
So, I've come to the conclusion that the best course of action is to arrive at a share price that gives weight to both the DCF and comps model. I believe that 60% DCF, 40% comps is fair - the only thing that I'm worried about is having to justify this split, and being able to write about it which at this point I'm not sure how.
Porro a quo qui praesentium ratione. Non aut praesentium culpa animi iusto est sint aut. Eum illo architecto laudantium architecto. Repellat sint nam veritatis voluptatum dolor adipisci.
Repellendus ut sed vel quaerat ex odio. Cumque sequi magni minus ducimus corporis voluptate aliquam. Architecto ratione deleniti consectetur repellat sequi. Cum adipisci odit ea aut ut sunt.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...