This topic that we have to address today is stocks and as a matter of fact, we're going to address stock valuation rather than stocks in general. The idea is to introduce a little bit the topic and to give you a general idea what this type of evaluation is all about, and then use a specific case to apply what is called valuation by multiples to a specific case, which is the case of Marriott, sort of at the beginning of this year. Then what we're going to as an extension, if you will, of valuation by multiples, we're going to talk a little bit about the PEG ratio, which is just a variation of the standard API ratio so that's where we're going in this session today. We mentioned this in passing before, but I think that it's important to remember at this point that there's a fundamental difference between price and value. When talking about market efficiency, a couple of sessions ago, we brought up this distinction and I think it's important to go back to it right now because what we're going to do, we're not going to be calculating a price. A price is something that you observe on a trading screen and as a consequence of that, what happens is that, that price is objective and that price is observable. It's observable because you can observe it on a trading screen and it's objective because you may like it or not. You may think it's too high or too low, but that's not going to change the price. The price is a number that you observe, is objective, is observable and value is completely different. Value is subjective. A value is something that you estimate and your opinion and my opinion might actually defer. That's why sometimes we call this topic stock pricing, which I always thought is a bad name. This is really stock valuation. We're not going to change the price, we're going to change the evaluation. We're going to be having different ways of thinking about how much you should pay for a share of stock. That's an important distinction and is going to come to play right now. We're going to have to come up with evaluation for a company, compare that to the market price, and then decide whether it's a good stock to buy or not to buy or maybe even to sell. Now, in terms of valuation, I think that we can put just about all methods into two boxes. Box number one would be what some people call absolute valuation, and this is basically discounted cash flow. There are different models of discounted cash flow. You can discount dividends, you can discount unlevered cash flows, levered cash flows so there's more than one, but all of them share the idea that you focus on the fundamentals of the company. You estimate how those fundamentals are going to grow over time. You discount them to the current day, and then that is your assessment of the intrinsic value of a company. You may need to make some adjustments after that, but that depends on the methodology that you're using. I think I mentioned very quickly in the introduction to this course, the reason we're not going to go into that, which is very important way of valuing a company by the way. But there are many courses on valuation that go much deeper than we can go here in this corporate finance course. Of the two ways in which we can value stocks, we're going to go with the other, and I'm not saying with this or the other is simpler. Matter of fact, I'm going to argue in a few minutes that most people think that this is a lot simpler than it really is. Multiples valuation is more complicated than a lot of people seem to think, and we'll get to that a few minutes from now. What we're going to do is what some people call relative valuation or evaluation by multiples, and we'll define with more precision what that means. But as the word indicates, it basically indicates that or suggests that you are going to be valuing a company relative to something else. That is why we call it relative valuation. Now, there's a fundamental point and it doesn't really matter here how you value a company, whether you do absolute valuation or relative valuation, whether you use DCF or you use multiples, what is important is that valuation, again, it is subjective. How much you think a company is worth depends on the method that you use, and even if we agree on the method, we may actually disagree on the inputs, what we throw in to the different expressions that we can use. That's why you may think that a company is overvalued and I may think that the company is undervalued. You have to be open to the fact that when you think about valuation, there's always going to be room for reasonable disagreement. This is the way market works. Market solves those disagreements by actually putting together all the demands of the different stocks and all the supplies of the different stocks and coming up with an equilibrium price that aggregates all those opinions from the different people that are valuing companies.
