The points here are summarised from an interview with Bill Miller (Legg Mason) conducted by Kirk Kazanjian in his book Wizards of Wall Street.
How do you figure out what a company is worth?
- We use what we call a multifactor valuation methodology, i.e. we look at the value of the business every possible way we can.
- We use P/E, P/B, P/CF, but we adjust those numbers for the underlying economic reality.
- We do all the cross-sectional analyses of trying to figure out what the historic parameters have been (i.e. to correspond with the historic underlying economic reality).
- We do a scenario analysis of the business, by projecting cash flows out anywhere from 5 to 10 years under a variety of scenarios. One scenario would be where the current growth rate continues. Another, where the company does a lot worse. Another is where it does better. We then try to figure out what we call the “central tendency of busines value.” Each scenario analysis gives us a different number and then we see how those numbers cluster. If they all cluster around the same thing, then we have a pretty high confidence in the particular valuation range.