So I’ve been talking about the concept of valuation a fair bit in my articles – but I reckon a few of you don’t fully grasp the concept of how companies are valued. Your text books give you some idea – but today I’ll cut the bs and show you how valuation works (in a really simple way).
The first thing that comes to mind with valuation are a few definitions:
- NPAT – net profit
- Shares outstanding – number of share on issue
- EPS – earnings per share (NPAT/Shares outstanding)
- P/E – price earnings ratio (Share price / EPS)
Let’s say for example …
- If a company makes a $10,000 profit, with 100,000 shares on issue, they would have an EPS of $0.10 per security
- If the share price was $1.00, then it would have a P/E of 10
- If the share price was $2.50, then it would have a P/E of 25
Simple right …?
Companies trade on different multiples based on their performance, past performance, sector, industry, potential growth etc.
Sectors like tech tend to trade on higher multiples due to their potential.
While sectors like retail, telecommunication services and banking tend to trade on lower multiples due to lacklustre growth and tougher business conditions.
This is why companies like A2M and TWE trade on really high P/E multiples – we have high expectations that they’re going to execute their promises and excel in China. They’ve performed in the past and we expect them to continue to do so.
While a large cap like SYD and TCL trade on 1/3 of A2M/TWE’s multiples because they’ve reached such a size where they can only deliver 1-5% growth per annum (compared to A2’s ~100%+ and TWE’s ~30%).
So why do I call companies expensive? And why aren’t low PE’s considered cheap?
Companies trade at a price that generally represents both current and future potential. If an expensive company (high expectations) suddenly disappoints in an earnings report – they will be punished significantly (like when I show a B+ to my parents). This doesn’t mean their share price won’t continue to gain traction – it just means that when the price runs up much harder than it should, you should wait for weakness rather than chasing highs.
Anyway … that was just my two cents.
SYD finished the week around -1%, broadly in line with market sentiment.
Luckily for you, there has been a fair bit of buzz for SYD this week!
While I believe this project can be HUGE for SYD, we need to recognise the fact that it is an extensive project that will come with its own set of risks. It’s going to take time, increase congestion in the short-term and perhaps require additional capital to complete. If someone tries to long SYD on the basis of this announcement – grill them.
The sheer size of SYD honestly makes further CAPEX on the airport quiet counter-intuitive for growth. The share price will definitely slowly head north with population growth, tourism etc. But I’m not that confident that the share price will gain much traction in the coming weeks.
TCL finished the week down 1.23%, again, in-line with market sentiment and the performance of other large cap utility stocks.
The feed is empty for TCL. TCL and SYD are very similar organisations – so your opinion for one should be the same for the other.
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