Identifying Comparables and Valuation using PB and PE Hot Topic, Inc.\'s book va

Question

Identifying Comparables and Valuation using PB and PE Hot Topic, Inc.'s book value of equity is $244 million and its forward earnings estimate per share is $0.38, or $15.7 million in total earnings. The following information is also available for Hot Topic and a peer group of companies (identied by ticker symbol) from the specialty retail sector.

EPS 5-Year Debt-to- Market Cap($ mil.) Curr PB Forward ROE Growth Rate (T4Q) (21.2)% 5.9% 11 .896 8.4% 14.4% 22.5% 27.4% 19.8% 28.5% 33.5% 28.6% 23.5% 4.6% 17.3% (11.6)% 11.8% (7.7)% (0.1)% (7.1)% 11.0% (0.7)% 16.9% Ticker Equity ent PE (FY Historical HOTT PLCE JOSB ZUMZ GYMB MW TWB CBK FINL SSI DBRN $595.1 439.5 492.5 1,126.3 1,217.0 437.4 375.7 289.2 515.0 751.6 (Prior Year) 0.00 0.00 0.00 0.00 0.00 0.11 1.02 0.00 0.00 0.20 0.28 14.7 1.9 3.2 5.7 1.5 2.5 18.5 13.0 11.8 9.2 17.4 16.3 11.9 11.4 0.7 1.5 (a) ldentify the mot reasonable set of three companies from this list to use as comparables for estimating the equity intrinsic value of Hot Topic using the market multiples approach GYMB, TWB, CBK

Explanation / Answer

Solution:

a. One reasonable solution would be to eliminate HOTT, CBK, FINL, SSI and DBRN on the basis of the negative historical earnings with growth rates. Also, we could eliminate PLCE, JOSB, ZUMZ because of leverage. MB, TWB, GYMB as three goodcomparables for Men’s Wearhouse.

b. The comparables have an average PB ratio of 1.10. Multiplying MW’s book value of $244 million by the 1.10 market multiple yields an estimate of its equity intrinsic value of $268.4 ~ $268 million.

c. The comparables have an average PE ratio of 15.20. Multiplying MW’s earnings estimate of $15.7 million by the 15.20 market multiple yields an estimate of its equity intrinsic value of $238.64 ~ $239 million

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