Market Multiple Valuation

The Wendy’s Company

Market Multiple Valuation – What is it? A valuation theory based on the idea that

similar assets sell at similar prices

The theory is that when firms are comparable, we can use the multiples approach to determine the value of one firm based on the value of another

Market Multiple Valuation – How is it done? Select a set of relevant summary

performance measures (e.g., earnings, sales, etc.)

Identify companies that are comparable to the target company (i.e., industry, size, etc.)

Compute the ratio of the market value to the selected performance measure for each comparable company; the average of these ratios is the market multiple

Multiply the summary performance measure for the target company by the market multiple to arrive at equity value

If this provides enterprise value, deduct net financial liabilities to arrive at equity value

Enterprise value will result if using an enterprise performance measure (e.g., EPAT or NEA)

Divide equity value by shares outstanding to determine equity value per share

Market Multiple Valuation – How is it done?

Why is it used? Advocates argue

It is relatively simple It does not rely on subjective forecasts It allows for comparability

Weaknesses of Market Multiple Valuation As you’ll see in the coming slides

There is no “right” performance measure No two companies are directly comparable

Some companies are more comparable than others Over- or under-valued comparables will distort the

valuation of the target company Estimates of value based on equity (as opposed to

enterprise) can lead to inaccurate valuation due to differerences in leverage

Wendy’s Market Multiples Companies used in comparison

Burger King McDonald’s Yum! Brands

KFC Pizza Hut Taco Bell

Wendy’s Market Multiples

Wendy’s Unique Market Multiple Theory that number of restaurants can drive

equity value Companies will open more restaurants if profitable Companies will close restaurants if not profitable

Multiple Valuations Vs. Trading Price (WEN)

Recommendation: Buy

Disparity Between Stock Price and Calculated Equity Value Possible Reasons

Improper performance measures Inaccurate valuation of comparable companies Comparable companies not actually comparable Market multiples are a poor measure of valuation

Questions?