When you read analysts’ reports, you’ll often see they use multiples to value and assess the prospects of a business. But this is not our preferred method. At Montgomery, we prefer to value businesses based on their expected cash flows. After all, using multiples does not explicitly consider the revenue and margin assumptions driving the value of the business. The Montgomery Global team recently analysed a stock that was being pressured by an activist investor to split its business into two separate companies. The firm is comprised of a restaurants business, and a packaged foods business. The argument put forth was that the packaged foods business is deserving of a higher valuation multiple, and by remaining a part of the restaurants business its valuation multiple is being penalised by the market. Spinning off the packaged foods business could produce an upward multiple re-rate and unlock shareholder value.