Stock Valuation

Chapter 10 Stock Valuation:A Second Look 313 EVALUATE If we assume that Fairview should be valued similarly to the rest of the industry, then $425 million is a reasonable estimate of its enterprise value and $34.50 is a reasonable estimate of its stock price. However, we are relying on the assumption that Fairview’s expected free cash flow growth is similar to the industry average. If that assumption is wrong, so is our valuation.
Other Multiples. Many other valuation multiples are used. Looking at the enterprise value as a multiple of sales can be useful if it is reasonable to assume the firm will maintain a similar margin in the future. For firms with substantial tangible assets, the ratio of price-to-book value of equity per share is sometimes used as a valuation multiple. Some mul-tiples are specific to an industry. In the cable TV industry, for example, analysts compare enterprise value per subscriber. Limitations of Multiples If comparable firms were identical to the firm being valued, the firms’ multiples would match precisely. Of course, firms are not identical, so the usefulness of a valuation multiple will inevitably depend on the nature of the differences between firms and the sensitivity of the multiples to these differences. Table 10.1 lists several valuation multiples, as of July 2013, for firms in the footwear industry that could be used as comparables for Nike. Also shown in the table is the aver-age for each multiple, together with the range around the average (in percentage terms). The bottom rows showing the range make it clear that the footwear industry has a lot of dispersion for all the multiples (for example, Wolverine has a price-to-book (P/B) of 4.13,
TABLE 10.1 Stock Prices and Multiples for the Footwear Industry (excluding Nike), July 2013
Name Market Capitalization (S million) Enterprise Value ($ million) P/E Price/Book Enterprise Value/Sales Enterprise Value/EBITDA Nike, Inc. 5.07 2.03 15.71 55,970 54,023 23.29 Adidas AG 23,105 23,317 32.33 3.06 1.20 11.88 Puma AG 4,330 4,085 70.56 1.96 0.96 9.34 Wolverine World Wide 2,910 3,981 37.6 4.13 1.22 9.28 Steve Madden LW. 2,320 2,140 18.4 3.68 1.74 10.70 Deckers Outdoor Corp. 2.67 1.36 8.73 1,990 1,923 16.74 Goes, Inc. 1,470 1,240 11.46 2.4 1.10 6.74 Skechers U.S.A. 1,340 1,213 67.41 1.54 0.78 18.16 WeYco Group, Inc. 301 325 16.53 1.71 1.11 9.69 R. G. Barry Corp. RockY 197 174 14.92 2.31 1.19 6.44 Brands, Inc. 113 132 12.46 0.89 0.58 6.61 Average 29.84 2.44 1.12 9.76 Maximum +136% +70% +55% 4-86% Minimum -62% -63% -48% -34%