### Regressions of Multiples on Fundamentals: Market Wide

The following regressions were run across four 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 final set of regressions were run across just Japanese companies.

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 Coca Cola in January 2010 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 7.4% (if you do not have analyst estimates, substitute your own).
ROE =The return on equity last year was 27.50%
Beta =0.70
Payout ratio = Dividend per share/ Earnings per share = 61%
Using the PBV regression:
PBV for Coca Cola = 0.47 + 9.72 (.074) -0.42 (.61) -0.03 (0.70) + 11.10 (.275)   = 3.96

At its actual price to book ratio of 4.85, Coca Cola is overvalued by about 20%.

Market-wide Regressions of Multiples: US Companies in January 2010

T statistics in brackets below coefficients

 Regression R2 PE = 11.96 + 55.00 gEPS -2.66 Payout + 3,.16 Beta         (15.48)   (14.12)      (4.34)            (6.57) 14.5% PEG = 0.13 Beta - 0.41 Payout – 1.05 ln(gEPS)             (1.84)    (4.64)                   (30.94) 42.4% PBV= 0.47 + 9.72 gEPS -0.42 Payout -0.03 Beta + 11.10 ROE            (3.96)   (18.70)    (5.52)     (0.50)         (46.89) 61.8% PS=   6.43 gEPS+ 0.07 Beta + 13.09 Net Margin          (18.58)     (1.93)             (51.40) 54.2% EV/Invested Capital= 1.45 + 6.66 g  + 6.37 ROIC – 2.55 (Debt/Capital)                                   (13.24)   (7.44)      (25.91)            (12.00) 56.5% EV/Sales = 0.19      + 11.93 g+ 6.40 Operating Margin – 0.93 (Debt/Capital)                    (2.14)   (15.27)    (31.71)                             (4.38) 52.6% EV/EBITDA= 8.57 + 49.87 g -5.08 (Debt/Capital) -0.83 RIR                        (20.82)    (17.62)   (10.21)         (6.97) 33.7% 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 = EBIT/ Sales Invested Capital = Book value of equity + Book value of debt - Cash ROE = Net Income/ Book value of Equity Tax Rate = Effective tax rate Debt/Capital = Debt/ (Market value of Equity + Debt) RIR = Reinvestment Rate = (Cap Ex – Depreciation + Chg in WC)/ EBIT (1-t)

Market-wide Regressions of Multiples – European companies in January 2010
T statistics in brackets below coefficients

 Regression R2 PE = 14.52 + 40.71 gEPS + 1.25 Beta         (15.20)   (13.20)      (1.52) 14.9% PBV= 2.26 +    3.50 gEPS -0.49 Beta + 6.44 ROE          (12.50)   (10.61)      (5.03)         (25.52) 46.8% PS=  1.03+ 0.83 gEPS +0.14 Beta + 7.45 Net Margin          (9.18)   (3.88)     (1.60)           (20.15) 27.5% EV/IC= 2.62       + 0.05 g+ 4.63 ROIC – 2.04 (D/C) - 1.22 t             (33.11)     (0.98)       (29.62)        (16.03) (6.97) 47.0% EV/Sales =0.97 + 5.11g +7.78 Operating Margin –1.53 t + 1.86 (D/C)                  (12.73)   (16.87)    (31.82)                    (8.71)     (12.95) 42.0% EV/EBITDA= 13.50      +11.29 g  - 12.59 t  - 5.08 (D/C) + 0.35 RIR                                          (27.92)    (6.35)       (10.9) (7.17) (3.78) 24.5% 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 = EBIT/ Sales IC =Invested Capital = Book value of equity + Book value of debt - Cash ROE = Net Income/ Book value of Equity t =Tax Rate = Effective tax rate D/C =Debt/Capital = Debt/ (Market value of Equity + Debt) RIR = Reinvestment Rate = (Cap Ex – Depreciation + Chg in WC)/ EBIT (1-t)

Market-wide Regressions of Multiples – Japanese Companies in January 2010

T statistics in brackets below coefficients

 Regression R2 PE = 15.02 + 35.23 gEPS + 0.62 Payout + 4.36 Beta         (8.81)   (6.95)        (0.34)            (2.43) 16.5% PBV= 0.90       + 0.05 gEPS   + 4.10 ROE            (7.21)   (0.32)          (10.43) 20.6% PS=  1.05 + 0.02 gEPS + 0.07 Beta + 3.72 Net Margin          (8.48)   (0.14)     (0.57)           (7.28) 10.9% EV/Invested Capital= 0.65     + 4.10 g  + 6.67  ROIC - 0.25 RIR +0.28 (D/C)                                   (5.47)   (4.21)      (18.84)       (3.30) (1.15) 63.3% EV/Sales = 0.46      + 4.45 g+ 5.55 Operating Margin + 2.67 (D/C)                    (5.16)     (6.32)    (12.46)                             (13.97) 21.5% EV/EBITDA= 9.25    + 28.55 g   -  6.21 Tax rate + 0.35 RIR                        (11.12    (7.43)      (3.05)                (0.85) 19.1% 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 Invested Capital = Book value of equity + Book value of debt - Cash ROE = Net Income/ Book value of Equity Tax Rate = Effective tax rate D/C = Debt/ (Market value of Equity + Debt) RIR = Reinvestment Rate = (Cap Ex – Depreciation + Chg in WC)/ EBIT (1-t)

Market-wide Regressions of Multiples – Emerging Market companies in January 2010

T statistics in brackets below coefficients

 Regression R2 PE = 20.07 + 37.91 gEPS -2.49 Payout -2.09 Beta         (16.94)   (12.99)         (1.88)            (2.61) 12.8% PBV= 1.02 + 2.05 gEPS + 0.42 Payout -0.19 Beta + 9.35 ROE            (6.70)   (10.78)    (2.91)           (2.30)         (22.77) 38.7% PS=  0.66 + 1.22 gEPS+ 0.62 Payout + 0.22 Beta + 12.59 Net Margin          (4.47)   (5.67)     (4.08)             (2.27)           (35.85) 50.4% EV/Invested Capital= 3.25 + 2.69 g  + 2.34 ROIC – 4.83 (Debt/Capital)                                   (45.95)   (15.43)      (11.62)            (26.40) 38.9% EV/Sales = 2.71      + 0.01 g+ 3.54 Operating Margin + 1.87 (D/C)                    (33.56)   (0.51)    (11.82)                             (7.31) 4.8% EV/EBITDA= 20.41     +40.04 g- 19.44 Tax rate      +11.12 ROIC - 14.25 (D/C)                        (35.21)    (29.16)   (10.36)                   (8.50)            (9.22) 31.6% 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 Invested Capital = Book value of equity + Book value of debt - Cash ROE = Net Income/ Book value of Equity Tax Rate = Effective tax rate Debt/Capital = Debt/ (Market value of Equity + Debt) RIR = Reinvestment Rate = (Cap Ex – Depreciation + Chg in WC)/ EBIT (1-t)