Regressions of Multiples on Fundamentals: Market Wide
I have run the latest versions of these regressions without an intercept term. Intuitively, my argument would be that firms with zero values for all of the fundamentals (independent variables) should trade at zero multiples. It does mean, however, that the R-squared cannot be directly compared with standard regressions run with an intercept. All of the percentages are entered in decimal format. Thus, a firm with an expected growth rate of 30%, a payout ratio of 10% and a beta of 1.25 can be expected to have a PE of:
PE = 291.27 (.30) + 37.74 (.10) - 21.62 (1.25) = 64.13
Equity Multiples
PE = 117.94 g + 48.79 Payout + 8.40 Beta (R2 = 0.7315) [Details]
PEG = 0.04 Beta + 2.77 Payout - 0.9688 ln(g) (R2 = 0.7327) [Details]
PBV= 17.25 ROE - 1.42 Payout -0.92 Beta + 17.62 g (R2=.7338) [Details]
PS= 4.36 g - 0.18 Payout + 0.09 Beta + 18.64 Margin (R2=0.7138) [Details]
Firm Value Multiples
Value/Sales = 5.13 g + 0.04 (Net Cap Ex/Total Assets) + 14.02 (Operating Margin) - 1.15 Std dev (R2 = 0.7460) [Details]
V/EBITDA= 3.97 + 7.51 (Return on Capital) -0.01 (Tax Rate) + 0.24 g (R2=0.1686) [Details]
To see the more detailed output from the regression, click on 'Details'.
g = Expected growth in earnings over the next 5 years (enter as decimals, i.e., 15% is .15)
PE = Price/ Current EPS: Companies with negative earnings were eliminated from the sample
PBV = Price/ Book Value per share: Companies with negative BV were eliminated
PS = Price/ Sales per share
Payout = DPS/EPS: from most recent year; if negative, it is set to 100%. (enter as decimals)
Std Dev = Standard Deviation in the Stock Price
Beta = Betas based upon 5 years of monthly data
MGN = Net Income / Sales (enter as decimals)
ROE = Net Income / BV of Equity (enter as decimals)