How we value Cyclicals stocks
Model: EV/EBITDA Mid-Cycle
Cyclical companies (chemicals, oil & gas, basic resources) have earnings that swing dramatically with commodity prices and economic cycles. Valuing them on a single year's earnings is misleading: they look cheap at peaks and expensive at troughs. This model uses 7-year median EBITDA ("mid-cycle" earnings) and a 7-year median EV/EBITDA multiple to estimate what the firm is worth at a normal point in the cycle.
Why this model
Commodity/basic-material earnings swing with global prices. Using mid-cycle EBITDA normalizes across booms and busts, preventing overpayment at cyclical peaks. EV/EBITDA is preferred over P/E because it's capital-structure-neutral and not distorted by depreciation policies.
How it is calculated
Computes 7-year median EBITDA and 7-year median EV/EBITDA. Also calculates sector-normalized EBITDA (revenue x sector median margin). Uses the higher of the two EBITDA estimates. Fair Value = (Mid-Cycle EBITDA x Fair EV/EBITDA) - Net Debt.
Best suited to
Commodity producers, basic materials, chemicals, and oil & gas companies with multi-year earnings cycles.