againstnetprofitmarginsforspecialtyretailersbacksupthis
conclusion.
This regressionhas 63 observations,andthet-statisticsare
reported in brackets. The predicted price-to-salesratio for
Coach,oneofthespecialtyretailersinthegroup,whichhasa
net profit margin of 21.41%, can be estimated.
With an actual price-to-sales ratio of 7.19, Coach can be
considered to be overvalued, relativeto other firms in the
specialty retail sector.
Comparing Equity Multiples across Firms in the Market
In the preceding section, comparable firms were narrowly
definedtobeotherfirmsinthesamebusiness.Inthissection,
weconsider waysin whichwe canexpandthenumber of
comparablefirmsbylookingatanentiresectororeventhe
market. There are two advantages to this more expansive
analysis.The first is thatthe estimatesmay become more
precise as thenumber of comparable firms increases. The
second is thatan expansive analysisallows us to pinpoint
when firms in a small subgroup are being under- or
overvalued relativeto therest ofthe sectororthemarket.
Since the differences across firms will increase when we
loosenthedefinitionofcomparablefirms,wehavetoadjust
forthesedifferences.Thesimplestwayofdoingthisiswitha
multiple regression, with the equity multiples as the
dependentvariableandproxiesforrisk,growth,andpayout