You observe a private firm (PRV) which will soon be going public in an IPO. You estimate that if last year's earnings were to be allocated across all the new IPO shares, the earnings per share would have been $3.45 a share for PRV. A very similar company (PBL) has had publically tradeded shares for several years now. PBL shares currently sell for $28.46 and it reported earnings per share of $1.86 last year. Using a Comps PE approach, what current value would you assign to the IPO shares of PRV?
The stock price of company PBL that has been publicly traded for several years is $28.46 and the reported earnings per share of the company is $1.86.
This gives is PE ratio of 28.46/1.86 = 1423/93.
The earnings per share of firm PRV that is going to go public is estimated to be $3.45 per share.
If the PE ratio of both PRV and PBL can be compared and the both have a similar comparative PE, the IPO price of PRV should be P where P/3.45 = 1423/93 or P = 51.67
The current value that can be assigned to the IPO shares of PRV is $51.67