Acquirers Multiple

Research
1

I’m reading a book called The Acquirer’s Multiple which is basically an improvement on the Magic Formula.

The formula for it is: EV / Operating Earnings
The book defines Operating Earnings as:
Revenue - (Cost of Goods Sold) - (Selling, General, Admin Costs) - (Depr and Amort)

So I came up with this.
EV / (SalesTTM - CostGTTM - SGandATTM - DepAmortTTM)

The author also have a website with his latest calculations.
https://acquirersmultiple.com/screener/large-cap/

The problem is my formula does not give anything close to the listing on the authors website.
In fact I get a large number of N/A.

Am I using wrong factors in my formula?

Thanks
Tony

2

Tony, assuming you’re ranking using EV/Op inc, lower the better?

If so, if left unchecked all stocks with negative operating income will be selected, the lower (more negative) the operating income, the higher they will rank.

If you limit all stocks to operating income > 0, you should find results are much improved.

I used the R3000 universe, 30 stocks, annual rebalance.

Allow negative op income, CAGR since 1999 = 6.4%
Do not allow negative op income, CAGR, since 1999 = 16.4%

I hope that helps.

Cheers,
Ryan

3

OpIncTTM should give you what you’re looking for. Operating income is conventionally defined as sales minus cost of goods, SGandA, and depreciation and amortization. It’s also called EBIT. Technically, there’s a difference in that EBIT also includes earnings from non-operating income, but here at P123 we tend to elide the difference. See https://www.portfolio123.com/doc/doc_detail.jsp?factor=OpInc&popUpFullDesc=1

This is one of the two factors that Greenblatt used in his magic formula, the other being return on capital.

Also watch out for negative operating income. If you’re ranking stocks on EV/OpIncTTM, lower better, you’ll want to exclude stocks with OpIncTTM < 0. You can do so thusly: EV/Max(0,OpIncTTM). This will guarantee that all stocks with negative operating income get N/A. Alternatively, you could use OpIncTTM/EV with higher ranks better.

4

Just glancing through this: how is this a significant improvement over the current P123 GB which is “OpIncAftDepr(0, TTM) / EV” (higher better) ?

NB: I can see the AftDepr and would intuitively prefer to use AftDepr

Thank you

Jerome

5

One other potential source of an NA here is that we return NA when the enterprise value is negative. The idea is that EV is the price that someone would pay to acquire the company under review, and no one will pay you $10 to take that $5 bill off your hands. (Negative EV is usually a result of a huge cash hoard.)

Note that this is a good thing in this case, as you would otherwise end up with a positive Aquirer’s Multiple if a company with a negative EV also had a negative Operating Earnings. I simply point out that I don’t know what the other site is doing to prevent this happening.

Another possible source of difference is different data providers. Different providers will standardize the data in different ways. Both EV and Operating Earnings have lots of moving parts, so there is lots of room for different results.