Valuation of Dyson share price by using PER
Dyson is a British technology company founded in 1991 by James Dyson. It designs and manufactures home electric appliances such as vacuum cleaners, air purifiers, hairdryers, bladeless fans, heaters and lighting. It is a global company beyond the UK that has expanded to Asia, Europe, and North America. However, the company has no market stock price yet as a private company.
So, let’s use PER to estimate Dyson share price
Step 1 of Dyson valuation: Select comparable companies
You should first analyse Dyson’s business and find publicly traded companies comparable to Dyson. Briefly, Dyson is a technology company that designs, manufactures, and sells high-end home appliances. As of 2018, it had an average sales growth rate of 9% in the UK over the past five years. Most of the sales were in the form of B2C. To find publicly traded comparable companies, Yahoo equity screener was used.
Searching for Dyson’s comparable companies (Source: Yahoo Finance)
As selection criteria for finding comparable companies, the region was the UK, the market cap was over $150 million, the sector was technology, and the industry was consumer electronics, electronic components, and scientific & technical instruments. Under those conditions, a total of 10 companies were searched as follows.
Screening of Dyson comparable companies (Source: Yahoo Finance)
You could notice that subjective opinions were involved during searching for comparable companies.
- First, Yahoo stock screener was used to find the peer group.
- Second, only companies that market cap was over $150 million (large-cap) were considered comparable since Dyson was considered a large company.
- Finally, after classifying Dyson’s industry as home appliance, comparable companies were searched within the home appliance industry. However, only one company was searched for. So, electronic components, science and technology equipment were also included to select more comparable companies.
The peer group would always be different depending on each evaluator because of their different criteria for selecting comparable companies.
Step 2 of Dyson valuation: Calculate the PER of the peer group
As shown below, 10 companies were listed in order of market cap in the Excel format. Their fundamental data, including PER, were also arranged next to it.
Market data for the comparable companies (Source: Yahoo Finance)
Following the procedure below, some of the 10 companies were excluded, and PER was calculated.
- First, ITM Power and Vitec Group were excluded because they do not have PER multiple due to deficit.
- Second, companies with trailing PER multiples of more than 50 were viewed as outliers. When looking at the income statement of Renishaw, the net profit fell sharply from £92m to £0.3m, which resulted in a significant rise in its PER. Gooch & Housego’s PER also seemed to increase as the net profit decreased from £8m to £3.7m. Therefore, the two companies were also excluded from the peer group.
Excluding the four companies, the average trailing PER of the six companies is 28.8, and the forward PER is 23.6. The forward PER is lower than the trailing PER because most of the companies’ EPS is expected to grow next year.
The subjective criterion applied at this stage is that the companies with trailing PEs of more than 50 are considered outliers and excluded from the peer group.
Step 3 of Dyson valuation: Calculate Dyson’s EPS
First, you need to look at what the peers’ PER is to calculate Dyson’s EPS. They are using two types of PER, trailing PER and forward PER. If you select the forward PER of the peer group, you should apply the next year’s estimated EPS to Dyson. If using the trailing PER, you have to use the last 12 months’ EPS of Dyson. Here, we will use the trailing PER of the peer group and the trailing EPS of Dyson.
Dyson share price = Forward PER of the comparative company X Dyson’s forward EPS
Dyson share price = Trailing PER of the comparative company X Dyson Trailing EPS
As for EPS, the peer group uses diluted EPS. So, you need to use diluted EPS for Dyson, taking into account all the convertible rights of hybrid securities and stock options.
Diluted EPS = Net Profit for the Last 12 Months / Number of Diluted Shares
As of the 2018 audit report recently submitted by Dyson, the total number of outstanding shares is 2,222. Dyson had not issued equity-linked securities and did not disclose any stock options. Therefore, Dyson’s primary EPS and diluted EPS are the same. You need to add the total number of the shares that can be convertible based on the exercise price to the number of currently issued shares if the company has issued equity-linked securities such as convertible bonds, bonds with warrants, and RCPS. The same goes for stock options. Dyson’s 2018 net profit is £263.2m. When divided by 2,222 shares issued, the EPS is £118,452.
Dyson’s Trailing EPS = £263.2m / 2,222 = £118,452
Step 4 of Dyson valuation: Dyson share price
You can calculate Dyson share price by multiplying the peer group’s trailing PER of 28.8 and Dyson’s EPS of £118,452.
Dyson share price = 28.8 * £118,452 = £3,411,410
Dyson share price is estimated at around £3.4m. The value is very high due to the low number of shares issued and the enormous profit size. You can calculate the total Dyson share price by multiplying the share value by the total number of outstanding shares.
Dyson total stock value = £3,411,410 X 2,222 = £7,580,160,000
Using PER, the total Dyson share price is estimated at £7.6b. It is much larger than the market cap of all the comparable companies.