Market Valuation of XYZ Corp Relative to Competitors

Hard Equity Valuation Applications Market-based Valuation

XYZ Corporation is a mid-sized player in the fast-food industry, known for its innovative menu and aggressive marketing strategies. Analysts recognize that the company has maintained a consistent price-to-earnings (P/E) ratio of approximately 12 for the past three years. Recently, the industry has seen a significant uptick in consumer spending, leading to increased revenues for many fast-food chains. However, XYZ Corporation has been lagging behind its competitors in same-store sales growth, reporting only a 2% increase compared to the industry average of 5%.

Given these circumstances, analysts are evaluating XYZ Corporation’s valuation using a market-based approach. They compare XYZ’s P/E ratio to that of two key competitors: ABC Fast Foods, with a P/E ratio of 15, and DEF Eating Parlors, with a P/E ratio of 18. They conclude that XYZ's fair value based on its P/E relative to these peers needs to be re-evaluated.

What is the most appropriate action for the analysts to take to determine if XYZ Corporation is overvalued or undervalued based on the market-based valuation method?

Recalculate the intrinsic value of XYZ Corporation using its historical P/E ratio only.

Adjust XYZ Corporation’s P/E by applying the average P/E of its competitors to its earnings.

Analyze XYZ Corporation’s revenue growth relative to the industry before making any adjustments.

Hint

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