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Why Two Analysts Can Value the Same Company Completely Differently

Valuation • Beginner Investing • 9 min

What this lesson is about

Same public filings, same company, same day. And two competent analysts can still publish price targets that differ by 50% or more. Here's exactly which assumptions cause that gap.

Key termsGrowth, ratediscount, ratePeer, set, selectionterminal, value, methodology

2 parts · a quick check after each · then the quiz

Part 1 of 2

You, know, that, professionals, use, comps,, a, DCF,, and, precedent, transactions, to, triangulate, a, valuation., They, also, cross-check, these, three, methods., Here’s, something, that, might, surprise, you:, even, when, two, analysts, apply, the, same, DCF, method, to, the, same, public, company, and, use, the, same, financial, statements,, their, price, targets, can, differ, by, 30%,, 50%,, or, more., Neither, analyst, has, to, be, wrong, or, dishonest, for, this, to, happen., The, difference, comes, from, a, few, specific, assumptions.

Growth, rate, is, the, biggest, driver., A, DCF, projects, cash, flows, into, the, future,, and, growth, compounds., Just, a, 2-3, percentage, point, difference, in, assumed, annual, growth, can, lead, to, a, dramatically, different, total, value, by, year, 7, or, 10, of, a, forecast., The, discount, rate, is, another, key, factor., Even, if, they, use, the, same, CAPM, formula,, analysts, can, choose, different, beta, estimates,, equity, risk, premiums,, or, views, on, the, company's, future, capital, structure., Since, the, discount, rate, compounds, against, cash, flows, like, growth, does,, even, small, differences, can, significantly, impact, the, final, number,, especially, for, a, company, with, cash, flows, that, are, far, off.

What you pay for the earningsA multiple is a number of years of profit. Move it and see how many.

Quick check

Two honest, competent analysts covering the same company from the same public filings can still reach very different valuations. What is the primary reason this happens?

Part 2 of 2

Insider, Angle:, The, third, and, fourth, factors, are, just, as, crucial., Peer, set, selection, affects, the, comps, side, of, the, analysis., Two, analysts, might, create, different,, yet, defensible,, peer, sets, for, the, same, company., This, is, especially, true, for, companies, with, business, models, that, span, multiple, categories,, resulting, in, different, comps-based, values., The, terminal, value, methodology, is, also, very, important, for, the, DCF, analysis., Terminal, value,, whether, using, the, Gordon, growth, method, or, an, exit-multiple, method,, often, accounts, for, 60-80%, or, more, of, a, DCF's, total, estimated, value., Therefore,, the, chosen, method, and, the, long-run, growth, rate, or, exit, multiple, can, matter, more, than, every, other, assumption, in, the, model, combined., If, one, analyst, uses, a, slightly, higher, growth, rate,, a, lower, discount, rate,, a, more, generous, peer, set,, and, a, more, optimistic, terminal, value,, they, can, arrive, at, a, very, different, conclusion, from, another, analyst, without, either, making, an, indefensible, choice., Published, analyst, price, targets, for, the, same, actively-covered, stock, often, show, a, wide, range, on, the, same, day., This, spread, clearly, reflects, this, dynamic.
Try, This:, Find, a, stock, with, multiple, analysts, covering, it, and, check, the, range, between, the, highest, and, lowest, published, price, targets., Based, on, what, you’ve, learned,, guess, which, of, the, four, factors—growth, rate,, discount, rate,, peer, set,, or, terminal, value, method—is, likely, driving, the, biggest, share, of, that, gap,, and, explain, why.

Quick check

Why can even a small difference in assumed annual growth rate lead to a large difference in a multi-year valuation model?

Quiz

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