Relative analysis using market multiples?

To this point i’ve felt like i had a pretty good grip on relative analysis (be it fixed income - OAS comparison, Equity - mkt price vs fundamental/intrinsic value, Equity - expected vs required return/ROE vs r) but i kind of feel like the general interpretation using market benchmark multiples is somewhat opposite.

The prior examples listed above generally result in a cheap/undervalued stock or spread when the fair value/expected return/actual OAS is greater than the required or market price. Here however, it seems like having a lower multiple compared to the benchmark means undervalued. Is that general understanding flawed ?? I understand that undervalued is undervalued - you’re driving home at the point that you think the security is incorrectly priced, it just seems like the interpretation is different in the case of comparing subject multiple to a benchmark, no ?

Also, in the text it says when comparing mutliples for determining under/over valuation, that (say for P/E) growth and risk should be similar to the benchmark. Does this mean that you actually adjust the subject company’s multiple in order to compare or just bare in mind that they should be similar and any difference should be explained by differences in the underlying fundamentals ?? Thanks

You should differentiate between bonds and stocks

Yes, higher OAS is better.

Lower P/E is cheaper for stocks.

I don’t know what your last paragraph means, maybe post what you are referring to.

In the text, in describing the method of comparables, it says…“however, the fundamentals of the subject stock should be similar to the fundamentals of the benchmark before we can make direct comparisons and determine if over/under valued”.

The book then says, “…in order to truly determine if over/under valued, we have to make sure the stock is truly comparable to the benchmark.”

What if the subject stock isn’t comparable (higher growth, etc) !?! Does this mean we actually adjust the subject stock to be comparable with the benchmark before drawing comparions/determining if over or undervalued ? Or does it just mean that in order to compare, we must bare in mind these differences (growth, risk, etc) which might explain the differences in the subject and the benchmark multiples.

Seems like the only way you can truly compare is if two stocks share, for the most part, similar fundamentals yet one has a noticabley higher/lower mutliple, which is otherwise not explained by the underlying fundamentals and thus mispriced by the market.

then your benchmark is wrong – What if the subject stock isn’t comparable (higher growth, etc) !?

This might be silly, but isn’t it inconsistent to use P/Sales or P/EBITDA multiples given that the underlying fundamentals represent value to equity and debt holders when the numerator represents value only to equity holders ?

In addition to the above question, the book says that one disadvantage of using an EV / EBITDA multiple is that it doesn’t consider capex like FCFF does. I understand that to be true regarding the straight comparison btw EBITDA and FCFF but my question is though, isn’t capex captured in the EV portion of the EBITDA multiple ??

EV= mkt val of equity + debt, where is capex included in that?

It would seem to the extent that capex was funded via debt or through the issuance of new equity that EV would capture it. Funding capex via debt seems far more probable. Using internal generated funds would leave it out all together.