thelastcolumn.BasedontheaveragePEGratioof2.00for
thesectorandtheestimatedgrowthrateforAndresWines,
we obtain the following value for the P/E ratio for Andres.
BasedonthisadjustedP/E,AndresWineslooksovervalued
eventhoughithasalowP/Eratio.Whilethismayseemlike
an easy adjustment to resolve the problem of differences
acrossfirms,theconclusionholdsonlyifthesefirmsareof
equivalent risk.
Statistical Techniques
Subjectiveadjustmentsandmodifiedmultiplesaredifficultto
use when the relationship between multiples and the
fundamentalvariablesthatdeterminethembecomescomplex.
Therearestatisticaltechniquesthatofferpromisewhenthis
happens.Inthissection,weconsidertheadvantagesofthese
approaches and potential concerns.
Sector Regressions
Inaregression,weattempttoexplainadependentvariableby
using independent variables that we believe influence the
dependentvariable.Thismirrorswhatweareattemptingtodo
in relative valuation, where we try to explain differences
across firms on a multiple (P/E ratio, EV/EBITDA) using
fundamentalvariables(suchasrisk,growth,andcashflows).
Regressions offer three advantages over the subjective
approach: