Reason for Doing the Valuation
Analystsvaluebusinessesforanumberofreasons,andthe
valuationapproachusedwillvarydependingonthereason.If
youareanequityresearchanalystfollowingsteelcompanies,
yourjobdescriptionissimple.Youareaskedtofindthemost
undervaluedandovervaluedcompaniesinthesectorandnot
to take a stand on whetherthesector overall isunder- or
overvalued. You can see why multiples would be your
weaponofchoicewhenvaluingcompaniesandthiseffectis
likely to be exaggerated if the way you are judged and
rewardedisonarelativebasis(i.e.,yourrecommendations
arecomparedtothosemadebyothersteelcompanyanalysts).
However, if you are an individual investor setting money
aside for retirement or a private businessperson valuing a
businessforpurchase,youwant toestimateintrinsic value.
Consequently,discountedcashflowvaluationislikelytobe
more appropriate for our needs. Figure 18.6 presents an
overview of this analysis.
FIGURE 18.6Market Neutrality and Valuation Approaches
Beliefs about Markets