Financial analysts’ use of industry specific stock valuation models

Lars Olbert

Journal of Applied Accounting Research, 2024, vol. 26, issue 6, 108-138

Abstract: Purpose - The purpose of this paper is to explore the industry-specific preferred valuation model utilised by analysts’ in determining a stock’s target price. By understanding analysts’ use of industry-specific valuation models, we can enhance our comprehension of important aspects of value creation in these sectors. Therefore, understanding the industry context is crucial for accurately assessing the value of companies within that industry and selecting the most suitable valuation model. Design/methodology/approach - The method employed in this study is content analysis, examining the output of analysts’ valuation models within 25 Global Industry Classification Standard (GICS) industry groups. I hand-collected 806 equity reports from Capital IQ, selecting the four companies with the largest market capitalization from each of the 25 industry groups. Findings - Price/Earnings (P/E) emerges as the preferred valuation model in 20 out of the 25 industry groups based on the GICS, with some exceptions. Notably, EV/EBITDA is favoured in the telecom, energy and materials sectors, while the capital goods industry primarily relies on Price/Cash flow (P/CF). In the Real Estate Investment Trusts (REITs) sector, P/AFFO (adjusted funds from operations) is the most commonly employed model. While earnings multiples remain the favoured valuation model for financial analysts, a noticeable shift away from multiperiod valuation models is evident after the first decade of the 21st century. Research limitations/implications - The findings can increase our comprehension of the interplay between valuation methodologies, industry characteristics and investment decision-making. Practical implications - It establishes a foundation for future research in this field and is anticipated to be of interest to analysts, fund managers and investors. The findings can increase our comprehension of the interplay between valuation methodologies, industry characteristics and investment decision-making. Originality/value - This paper represents the first systematic and comprehensive examination of analysts’ utilisation of industry-specific stock valuation methods across all 25 GICS industry groups.

Keywords: Financial analyst; Valuation; Industry; DCF model; P/E ratio (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jaarpp:jaar-11-2023-0365

DOI: 10.1108/JAAR-11-2023-0365

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