Weekly Challenge 8

      You have run a stock, trading at $ 28 today, through a variety of analysis. The summary results are presented below:

Approach used                    Value per share

DCF                                    $ 22

Relative valuation

PE Ratio (comparables)      $ 35: Compared to other companies in the sector

PE Ratio (market)               $ 28: Compared to other companies in the market

  1. How would you describe your results (and resolve the inconsistent conclusions) to someone who is a novice at valuation? In other words, how would you explain how a stock can be under, over and correctly valued at the same time?
  2. Assuming that all of your valuations are right, can you estimate whether and by how much the sector is misvalued?