Normalized earnings, why use 25x EPS?
Anyone knows why Brett uses 25x as a normal multiple? Does this only apply to hypergrowth stocks? What's the normalized multiple to use for like a CPG company or an auto maker?
Mar 04, 2023
Mar 04, 2023
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Comments ( 3 )
All other numbers look arbitrary to me. He might've just chosen a random number? I don't think there's one right multiple for an industry as different players within industry all have different growth/ margin profiles
Can compare it to similar companies, 'high quality growth' tended to trade around that level once it reached maturity when interest rates were like zero… can think about it in terms of earnings yield (inverse of PE), you can invest risk free in treasuries, what is the yield spread you would need to invest in some high quality company. Some people will do yield plus growth type calculations to get to implied TSR so 4-5% yield plus 5-10% growth gets to reasonable return vs the market - however question what yield makes sense with treasuries where they are now and 'quality' of earnings given more adjustments vs GAAP , SBC etc.
In this very illustrative example you have a company growing revenue 25% and earnings 77% by year 5 - if this was real 25x PE doesn't seem unreasonable… but can regress similar high growth companies (sales / earnings growth vs multiple) to get to implied multiple
Some will do bull / base / bear case too so could assume 25x for base, 30x for bull, 20x for bear, assume some arbitrary probabilities and get to an expect value - ultimately is all guess work so wouldn't read too much into it but general idea is spread vs risk free rate and multiple for growth vs peers
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