How is Fundamental Price multiple valuation model different from Comparable Price multiple model?

Question

Both the models calculate the same ratio, in what way is the calculation different other than the fact that Fundamental valuation model first calculates the expected P/E ratio through dividends , EPS , growth and required rate on return ,  then that expected value is compared with the actual P/E ratio and then we decide that whether firm is overvalued(if actual > expected) or under valued. So , in fundamental valuation model we don't compare the subject firm to with other firms rather we compare it to itself whereas in comparable valuation model we compare industry average to the firm's P/E(which also calculated once from the values in the balance sheet) ?

Also low multiples are associated with higher returns is this why we conclude that a firm with P/E ratio more than the industry average is over valued and vice-versa. If not , then how are low multiples associated with higher returns?

karanv_10111 · Answer

When reading from Schweser, I came across a question under the fundamental section in which Holt Industries's Dividend payout ratio , sales growth and total debt to equity was being compared to the industry average. And this is an example of Fundamental P/E ratio comparison. Why do the same thing and have two distinct types of valuation model? @Sophie

Sophie Macon · Answer

Yes, your distinction is correct @karanv_10111. Fundamentals compare the expected P/E to it's actual current P/E ratio, whist comparables compare the ratios with similar firms in the industry.

And yes, your explanation on lower multiples in comparables valuation is correct. Assuming all else is constant (and the same), a firm that has higher P/E than its industry average is considered over valued, and vice versa.