2.Peergroupaverage.Analystscomparehowtheircompany
ispriced(usingamultiple)withhowthepeergroupispriced
(using the average for that multiple). Thus, a stock is
considered cheapif ittradesat 12 timesearnings and the
averageprice-earningsratioforthesectoris15.Implicitin
this approachis theassumptionthat whilecompanies may
vary widely across a sector, theaverage for the sector is
representative for a typical company.
3.Peergroupaverageadjustedfordifferences.Recognizing
thattherecanbewidedifferencesbetweenthecompanybeing
valuedand othercompanies inthecomparable firmgroup,
analysts sometimes try to control for differences between
companies. In many cases, the control is subjective: A
companywithhigherexpectedgrowththantheindustrywill
trade at a higher multiple of earnings than the industry
average buthowmuchhigheris leftunspecified. Ina few
cases, analysts explicitly try to control for differences
between companies either by adjusting the multiple being
usedorbyusingstatisticaltechniques.Asanexampleofthe
former,consider price-earnings/growth(PEG) ratios.These
ratios are computed by dividing P/E ratios by expected
growth rates, thus controlling (at least in theory) for
differences in growth and allowing analysts to compare
companieswithdifferentgrowthrates.Forstatisticalcontrols,
we canusemultiple regressions wherewe canregress the
multiplethatweareusingagainstthefundamentalsthatwe
believecause that multiple to vary across companies. The
resulting regressions can be used to estimate the value of
individualcompanies.Infact,wearguelaterinthisbookthat
statistical techniques are powerful enough to allow us to
expand the comparable firm sample to include the entire
market.