# o ldscho o lvalue .co m http://www.o ldscho o lvalue.co m/blo g/valuatio n-metho ds/ebit-multiple-valuatio n/?

so urce=rss&utm_so urce=feedburner&utm_medium=feed&utm_campaign=Feed:+OldScho o lValue+(Old+Scho o l+Value)

The Value of DELL using the EBIT Multiple Valuation Method
Written by Jae Jun fo llo w me o n Facebo o k Twitter

Written by Jae Jun follow me on Facebook Twitter Let me go through a EBIT multiple valuation method using DELL. T he link to the f ree online calculator is at the end of the article. PE multiples are thrown around a lot when talking about stocks, but there is a much better way to value stocks using multiples and that is to use EBIT multiples. Don’t get shocked. Just because I’m a value investor, it doesn’t mean I do not look at multiples. I like to concentrate on value based metrics such as P/FCF, which is a variation of P/E, and even EV/EBIT DA, but the more tools I have and understand how and when to use it, it only helps me as an investor. Seeing that most people incorrectly use multiple valuation methods, I will show you how to do it the proper way.

How People Perf orm Mult iples Valuat ion
T he All Too Common Way You may have heard this sort of analysis bef ore.

DELL is trading at a PE of 10.6x with a Forward PE of 8.7x. It’s competitors are trading between 9x to 14x. If DELL corrects their problems, it should trade at similar multiples to its competitors. Therefore DELL is worth \$18.

Problems Doing it T his Way Right away there are some f undamental f laws. I understand the importance of keeping things simple, but not so simple that it af f ects the whole underlying principle. PE is a broad metric which can vary greatly depending on adjustments to the income statement such as:

A goodwill charge can reduce earnings drastically although it doesn’t af f ect the business operation Income f rom discontinued operations can inf late PE

EBIT Mult iple Valuat ion is The Bet t er Way
You start with a normalized revenue estimate, enter a conservative, normal and aggressive operating margin to get the EBIT. T hen decide what multiplier you want against EBIT, add cash, subtract debt to get a total equity value. It is simple and it doesn’t remove everything just f or the sake of keeping it simple. What’s more, if you are looking at a company with several subsidiaries, or operating segments that do vastly dif f erent things, you can apply the EBIT method f or each segment and then add it up to get a sum of parts valuation.

Valuing DELL wit h EBIT Mult iples
Let’s jump straight into the numbers and see how this works. Numbers and assumptions I am using f or a normalized case: Over the past 5-6 years, I normalized the revenue to be \$59b A normalized operating margin of 5.3% f or a “normal” case A f air value EBIT multiple of 8x Add cash and subtract debt See the image below to see how these assumptions are used to perf orm the EBIT valuation.

(The numbers for cash and debt came from the stock analyzer spreadsheet and verified against the latest 10-K) DELL makes f or an interesting case study because there are several big investors coming up with their own valuation targets which we can ref erence. Michael Dell wants to buy out DELL at \$13.65 Carl Icahn has come out and said that he wants DELL to issue a \$9 special dividend because he values it at \$22.81 Jim Chanos has revealed that he is short DELL going into the deal citing issues with the balance sheet and cash f low. (In other words, he doesn’t think it was worth \$13.65) Although Jim Chanos has not revealed his target price, it will likely be closer to \$10 which is the lower end of the range. Michael Dell is hovering over the normalized case to get a slightly cheaper deal than the f air value. Carl Icahn is the optimistic and aggressive investor. Question now becomes who is right based on the business model? Too early to say at the moment.

Summary of t he EBIT Mult iples Met hod
As you can see, the EBIT valuation gives you a much better picture of the company and helps you take a step by step approach to valuing companies. Something that a simple multiples or rule of thumb method does not allow you to do. Go use the f ree EBIT Multiple Calculator