Valuation Model Choice and Target Price Accuracyof Equity Research Reports of Firms from the Utilities and Energy Sector

We investigate the valuation model choice and valuation accuracy of 309 reports issued in the period of 2006 to 2009 for firms from the utilities and energy sector. We find sector specific multiples and a high frequency of use of sum of the parts analysis related to the utilities and energy sector. Our univariate analysis and multivariate analysis by means of probit and multinomial logistic regressions indicate that the DCF model (fundamental analysis) is used to value smaller firms, firms with low net debt to equity ratios , highly profitable firms and reports with relative little differences between the analysts forecast of the value of the company and the actual price. Contrary to our expectations we find that analysts use multiples valuation in bear markets and fundamental analysis in bull markets. A pair wise comparison of valuation model estimates suggest that analysts choose the right valuation model from their various valuation estimate outputs for setting the target price measured by attainability and forecast error of the valuation estimates.