### Regressions of Multiples on Fundamentals: Market Wide

The following regressions were run across five groupings. The first and most comprehensive set of regressions were run across all traded companies in the United States. The second set of regressions were run across all traded companies in Western Europe and the UK. The third set of regressions were run across companies in emerging markets in Asia, Eastern Europe and Latin America. The fourth set of regressions were run across just Japanese companies. The final set is across all companies globally. If a regression yielded a large negative constant, I reran the regression without the constant to reduce the problem of negative predicted values for the multiples.

Using the regressions should be pretty straightforward, if you can get the data on the independent variables for your company and stay true to decimal format. (25% gets entered as 0.25). As an example, assume that you are looking at Disney in January 2017 and decide to use the US market regression for price to book ratio. Here are the inputs:
g = The analyst estimate of earnings growth rate for the next 5 years is 14.7% (if you do not have analyst estimates, substitute your own).
Payout ratio = 20%
ROE =The return on equity last year was 13.6%
Beta =1.25
Using the PBV regression:
PBV for Disney=PBV= = 0.87 + 4.20 gEPS + 0.94 Beta + 6.00 ROE + 0.50 Payout Ratio
= 0.87 + 4.20(.147) + 0.94 (1.25) + 6.00 (.136) + 0.50 (.20) = 3.58

At its actual price to book ratio of 3.00, Disney is undervalued by about 16%.

The PEG regression uses the natural log of the expected growth rate. Thus, if your expected growth rate is 15%, you will use ln(.15) = -1.8971

Market-wide Regressions of Multiples: US Companies in January 2019

T statistics in brackets below coefficients

 Regression R2 PE = 120.80 gEPS + 23.50 Payout + 1.21 Beta         (19.87)      (32.23)            (1.17) 49.3% PEG = 1.86 + 0.02 Payout – 0.30 ln(gEPS) +0.22 Beta           (7.09) (16.80)                (2.64)           (1.28) 18.7% PBV= 0.87 + 4.20 gEPS + 0.94 Beta + 6.00 ROE + 0.50 Payout Ratio           (3.42) (3.90)    (4.59)          (13.75) (.9.41) 15.9% PS= 1.42 + 0.22 Beta + 6.20(gEPS) + 7.00 Net Margin        (8.01)     (1.38)    (9.82)       (18.43) 19.8% EV/Invested Capital= 3.99 - 0.60 g  + 5.20 ROIC –3.70 DFR                                   (39.88)   (1.74)      (18.03)     (27.28) 53.7% EV/Sales =0.79 + 6.90 g + 8.20 Operating Margin + 2.40 DFR+ 2.70 Tax rate                    (5.61)   (14.94)    (22.03)                       (10.97)     (11.89) 24.8% EV/EBITDA= 15.76 + 28.80 g - 13.10 DFR - 3.70 Tax Rate                        (32.53)    (15.45)   (12.63)         (3.67) 20.9% gEPS = Expected growth rate in EPS for next 5 years (analyst estimates) g = Expected growth rate in revenues for next 5 years (if not available, use gEPS) Payout = Dividends/Earnings ROIC = Return on capital = EBIT (1- tax rate)/ Invested Capital Operating Margin = Pre-tax Operating Income/ Sales Invested Capital = Book value of equity + Book value of debt - Cash ROE = Net Income/ Book value of Equity Tax Rate = Effective tax rate = Taxes paid/ Taxable Income DFR = Total Debt/(Total Debt + Market value of equity) RIR = Reinvestment Rate = (Cap Ex – Depreciation + Chg in WC)/ EBIT (1-t)

Market-wide Regressions of Multiples – European companies in January 2019
T statistics in brackets below coefficients

 Regression R2 PE = 11.10 + 33.30 gEPS + 12.50 Payout - 1.98 Beta         (9.13)   (8.42)      (16.02)            (2.76) 21.6% PEG = 6.36 + 0.60 Payout –1.78 ln(gEPS) -0.29 Beta           (31.93) (6.09)                (25.58)           (3.08) 41.9% PBV= 1.39 + 3.30 gEPS - 0.82 Beta + 10.70 ROE +0.40 Payout Ratio           (7.33) (5.91)    (7.94)          (26.38) (4.35) 42.0% PS= 1.67 - 0.55 Beta+ 2.30 (gEPS) + 8.20 Net Margin        (12.97)    (6.65)    (5.19)       (24.62) 35.3% EV/Invested Capital= 2.18 + 1.40 g  + 7.00 ROIC –1.90 DFR                                   (28.74)   (4.61)      (29.75)     (18.83) 56.9% EV/Sales = 5.00 g + 6.30 Op. Margin + 4.50 DFR - 2.00 Tax Rate                   (9.96)    (19.22)             (31.70)        (6.75) 19.7% EV/EBITDA= 14.25 + 21.90 g - 4.40 DFR - 12.10 Tax Rate                        (32.03)    (19.22)   (5.30)         (9.67) 9.2% gEPS = Expected growth rate in EPS for next 5 years (analyst estimates) g = Expected growth rate in revenues for next 5 years (if not available, use gEPS) Payout = Dividends/Earnings ROIC = Return on capital = EBIT (1- tax rate)/ Invested Capital Operating Margin = Pre-tax Operating Income/ Sales Invested Capital = Book value of equity + Book value of debt - Cash ROE = Net Income/ Book value of Equity Tax Rate = Effective tax rate = Taxes paid/ Taxable Income DFR = Total Debt/(Total Debt + Market value of equity)( RIR = Reinvestment Rate = (Cap Ex – Depreciation + Chg in WC)/ EBIT (1-t)

Market-wide Regressions of Multiples – Japanese Companies in January 2019

T statistics in brackets below coefficients

 Regression R2 PE = 14.63+ 67.40 gEPS + 10.50 Payout - 7.14 Beta         (6.06)   (8.63)      (3.11)            (3.59) 25.4% PEG = 4.46+ 1.50 Payout – 0.95 ln(gEPS) - 0.70 Beta           (12.15) (3.23)                (7.79)           (2.67) 28.2% PBV= 1.17 + 7.30 gEPS - 1.06 Beta + 7.40 ROE           (3.26) (7.46)    (4.26)          (5.83) 28.1% PS= 0.15 - 0.80 Beta + 6.80(gEPS) + 13.20 Net Margin        (0.51) (3.47)    (7.49)       (12.74) 44.7% EV/Invested Capital= 1.27 + 1.80 g  + 8.60 ROIC –1.10 DFR                                   (11.78)   (2.96)      (18.59)     (7.28) 48.3% EV/Sales = 4.00 g+ 8.80 Operating Margin +1.70 DFR+ 0.60 Tax rate                   (5.45)    (20.39)                    (14.36)        (2.04) 63.8% EV/EBITDA= 8.66 - 0.50 DFR - 2.20 Tax Rate + 24.70 g                        (9.60)      (3.81)         (0.27)                 (5.64) 4.1% gEPS = Expected growth rate in EPS for next 5 years (analyst estimates) g = Expected growth rate in revenues for next 5 years (if not available, use gEPS) Payout = Dividends/Earnings ROIC = Return on capital = EBIT (1- tax rate)/ Invested Capital Operating Margin = Pre-tax Operating Income/ Sales Invested Capital = Book value of equity + Book value of debt - Cash ROE = Net Income/ Book value of Equity Tax Rate = Effective tax rate = Taxes paid/ Taxable Income DFR = Total Debt/(Total Debt + Market value of equity)( RIR = Reinvestment Rate = (Cap Ex – Depreciation + Chg in WC)/ EBIT (1-t)

Market-wide Regressions of Multiples – Emerging Market companies in January 2019

T statistics in brackets below coefficients

 Regression R2 PE = 14.38 + 54.80 gEPS + 5.90 Payout - 3.33 Beta         (19.98)   (22.57)      (12.06)            (10.80) 26.6% PEG = 4.26+ 0.20 Payout – 0.96 ln(gEPS) -0.16 Beta           (46.98) (4.89)                (31.79)           (6.27) 35.5% PBV= 0.89 + 3.70 gEPS - 0.43 Beta + 10.10 ROE           (8.04) (11.52)    (10.57)          (28.27) 35.8% PS= 1.79 - 0.73 Beta + 3.50 (gEPS) + 8.70 Net Margin        (18.22) (19.04)    (11.33)       (38.40) 45.6% EV/Invested Capital= 2.08 + 2.10 g  + 4.50 ROIC – 2.20 DFR                                   (45.37)   (14.08)      (26.56)     (33.22) 48.7% EV/Sales = 2.93 + 1.70 g+ 3.90 Operating Margin + 0.70 DFR- 3.80 Tax rate                    (30.20)   (2.96)    (15.36)                     (5.53)      (13.14) 7.30% EV/EBITDA= 16.55 + 22.30 g - 9.50 DFR - 16.70 Tax Rate                        (46.15)    (18.73)   (17.45)         (13.77) 15.9% gEPS = Expected growth rate in EPS for next 5 years (analyst estimates) g = Expected growth rate in revenues for next 5 years (if not available, use gEPS) Payout = Dividends/Earnings ROIC = Return on capital = EBIT (1- tax rate)/ Invested Capital Operating Margin = Pre-tax Operating Income/ Sales Invested Capital = Book value of equity + Book value of debt - Cash ROE = Net Income/ Book value of Equity Tax Rate = Effective tax rate = Taxes paid/ Taxable Income DFR = Total Debt/(Total Debt + Market value of equity)( RIR = Reinvestment Rate = (Cap Ex – Depreciation + Chg in WC)/ EBIT (1-t) WACC = Cost of capital in US dollars

Market-wide Regressions of Multiples –Global companies in January 2018

T statistics in brackets below coefficients

 Regression R2 PE = 8.25 + 91.10 gEPS + 17.00 Payout - 3.06 Beta         (12.54)   (34.88)      (40.30)          (7.84) 32.6% PEG = 1.34 + 0.47 Payout –0.72 ln(gEPS) -0.38 Beta           (16.51)    (11.90)            (24.17)           (15.81) 19.4% PBV= 2.00 + 4.30 gEPS - 0.58 Beta + 7.30 ROE           (27.35) (14.12)    (13.74)          (36.18) 23.0% PS= 1.90 - 0.69 Beta + 5.50 (gEPS) + 8.00 Net Margin        (29.40) (17.35)    (21.58)       (44.97) 28.8% EV/Invested Capital=2.75+ 0.50 g  + 6.30 ROIC – 2.60 DFR                                   (69.37)   (3.45)      (49.58)     (47.09) 49.8% EV/Sales = 1.22 + 3.90 g+ 6.20 Op. Margin + 2.10 DFR + 1.40 Tax Rate                    (18.65)   (17.92)    (34.35)             (22.11)        (10.45) 11.3% EV/EBITDA= 14.94 + 24.00 g - 8.90 DFR - 7.00 Tax Rate                        (73,58)    (30.52)   (24.32)         (13.33) 13.7% ERP = Total Equity Risk Premium for country in which company is incorporated gEPS = Expected growth rate in EPS for next 5 years (analyst estimates) g = Expected growth rate in revenues for next 5 years (if not available, use gEPS) Payout = Dividends/Earnings ROIC = Return on capital = EBIT (1- tax rate)/ Invested Capital Operating Margin = Pre-tax Operating Income/ Sales Invested Capital = Book value of equity + Book value of debt - Cash ROE = Net Income/ Book value of Equity Tax Rate = Effective tax rate = Taxes paid/ Taxable Income DFR = Total Debt/(Total Debt + Market value of equity) RIR = Reinvestment Rate = (Cap Ex – Depreciation + Chg in WC)/ EBIT (1-t) WACC = Cost of capital in US dollars