The CFAI curriculum demonstrates on how equity can be measured and valued using different model(DDM,etc). I had a few unanswered questions in terms of practical applications of these which I’m hoping anyone in the industury could help me with.
What methods do equity analysts in the industry currently use to value stock prices? How complicated/simplifed are are the models use?
Practically do you use the same concepts and formulas thought in the curriculum? If not do they vastly differ?
Do different organisations differ a lot in they way the value stocks? Or are analysts given freedom in terms of valuation methods used?
I’m M&Ain’ (but not on the buyside) and we most often rely on DCF (FCFF discounted at WACC as opposed to FCFE) and EV-based multiples (EV/EBITDA, etc.) because the goal most of the time is to estimate the company’s enterprise value. When I read equity research reports where they are focused on the stock price, they have obvious preference for market cap-based multiples (P/E, etc.) and it seems that the use of DCF is more rare (at least based on what’s disclosed in the reports, although I’m sure they use it in their workpapers).
Overall, the concepts and formulas are not vastly different but the particular choice of a valuation approach depends on the purpose and is often tied to industry practices and standards.