Using valuation multiples
Seasoned investors often use valuation multiples to help them make investment decisions. PE (price-to-earnings) ratios are commonly used, especially for companies with stable earnings in the industry (NANR).
As you can see in the above graph, Monsanto’s (MON) forward PE valuation multiple has recently trended higher, and so has the price of its stock. When analysts raise their forward earnings estimates, prices rise, which will eventually adjust the PE back to its mean.
The uptick in Monsanto’s PE ratio was likely due to news of its proposed merger with Bayer earlier this year. As of December 7, 2016, Monsanto was trading at a forward PE multiple of 21.5x and a forward EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple of 13.8x.
Throughout 2016, Monsanto has traded at a median forward PE ratio of 20.4x and a median forward EV-to-EBITDA ratio of 12.7x. However, currently, Monsanto is trading above this year’s median.
This analysis is also known as a momentum indicator, in which we compare a company’s valuation multiple to its own past values. This comparison helps us determine a stock’s potential price trend in the near future.
Now let’s compare Monsanto’s valuation with its peers.