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Targets and valuation scenarios

A target price is a conditional conclusion: method + assumptions + horizon. Without those elements it is only a figure with the appearance of precision.

3 min read Practical guide

By the end

You will create conservative, central and optimistic targets that can be updated.

Choose method

Use multiples for comparable and stable businesses, DCF when you can model cash, sum of parts for different segments and asset value when these dominate. Contrast two methods without mechanically averaging them.

Build scenarios

Each scenario must combine internally consistent assumptions. Don't use optimistic sales with adverse margin unless you explain that relationship. Includes future equity, debt and cash.

Example

Central: sales +8%, margin 18%, 20x EPS. Adverse: 0%, 13%, 14x. Favorable: +13%, 21%, 24x. The range reveals what needs to happen.

Horizon and return

State a target date and calculate annualised return, not only upside. A 30% gain over four years is roughly 6.8% a year before dividends, very different from 30% in one year.

Update without chasing price

Review target when assumptions change, not to maintain an attractive upside. Save previous version and explain bridge: profit, multiple, debt or dilution. Separate consensus from your assessment.

Proper method.
Visible assumptions.
Horizon.
Three scenarios.
Invalidation and sources.

From data to a decision

Does the target come from a testable mechanism?

This guide cannot predict the next move on its own. It can build a conditional reading: what supports upside, what increases downside risk, and which evidence must appear before acting.

Favourable reading

Expected earnings or FCF multiplied by a reasonable valuation.

Adverse reading

It is an average without horizon, assumptions, or dispersion review.

Required confirmation

Publish bear, base, and bull cases and what moves each one.

Reasoned example

EPS 5 at 20x gives 100; if EPS falls to 4 and P/E to 16, the downside case is 64.

Applied workshop

Turn the explanation into a process

Follow these steps in order and keep the result, so you can repeat the analysis and identify what changed your decision.

  1. 1Set valuation date and horizon; a target without time cannot be assessed.
  2. 2Build internally consistent bear, base and bull cases for revenue, margin, cash and multiple.
  3. 3Document sources and calculate upside, downside and expected value without hiding the bear case.
  4. 4Update for new facts, not to chase price, and preserve previous versions.

Review questions

  • Which method produces the target?
  • What must happen in each scenario?
  • Does confidence reflect data quality?

Worked case

Bridge of a target

Previous target 60 = EPS 3 × PER 20. Results reduce EPS to 2.70 and risk contracts PER to 17: new target 45.90. The bridge shows −6 for profit and −8.10 for multiple.

A target that remains at 60 silently changing assumptions is not traceable. Save date, horizon and sources.

Decision rule

All change must be explained by variables, not adjusted to preserve potential.

Put it into practice

Build a table that explains how much of the target change comes from EPS and how much from the multiple.