Provide a relative valuation analysis for ONE of the following stocks: Google (Ticker: GOOG) Morgan Stanley (Ticker: MS) Johnson & Johnson (Ticker: JNJ) We will refer to the chosen stock as “the stock” in the questions below.
a) Use the RV (relative valuation) function in Bloomberg equity analysis to compile a peer group of 6 to 12 stocks in the same industry.
b) Compile a relative valuation table that includes the following statistics for the stock and its peers: • Five price multiples: P/E, P/B, P/S, P/CF, EV/EBIDTA • Four Fundamental factors: Five-year EPS growth, Return on Equity (ROE), Beta, Net Profit Margin (PM) • Other Information: Closing Price, Market Cap, Sales Revenue, EPS, Debt to Equity Ratio, Dividend Payout Ratio
c) Compare the P/E, P/B and P/S of the stock against the average P/E, P/B and P/S of the peer group. Discuss whether this is justified by the fundamental factors.
d) State your recommendation (Buy, Sell, Hold) on the stock based on the relative valuation analysis above.
e) Identify two major limitations of the above analysis. Suggest what and how additional information could help you make a better decision on this relative valuation case. Consider Discounted Cash Flow (DCF) analysis on the stock.
f) Which DCF model (DDM, FCFE or FCFF) would you use to value the stock? Justify your DCF model choice using historical data on the dividend payout ratio and debt to equity ratio of the stock over the last five-year period.
g) Assuming the DCF model choice from f), determine the discount rate that you will use to discount the future cash flows. Using resources from Bloomberg, explain in details how you have arrived at this discount rate estimate.