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contend that Mr. Engstrom should have used other measures of
comparison besides P/E ratios.
We agree with petitioners that Mr. Engstrom’s guideline
companies method would have been more complete and more
persuasive if it had employed additional measures of comparison.
See Wall v. Commissioner, T.C. Memo. 2001-75. However, it is
clear that P/E ratios bear a well-recognized relationship in the
valuation of companies, Learner v. Commissioner, T.C. Memo. 1983-
122, and Mr. Engstrom’s reliance on P/E ratios was not inherently
flawed.35 Petitioners base their objections to Mr. Engstrom’s
analysis on his failure to consider certain pretax methods of
comparison such as EBIT (earnings before interest and taxes) or
35The P/E ratios of publicly held companies do not compare
to the P/E ratios of a closely held company if the companies
themselves are not comparable. Learner v. Commissioner, T.C.
Memo. 1983-122. Whether the stock price of one company with a
given earnings stream will be similar to that of another company
with the same earnings depends upon a wide variety of factors,
including management policy, management ability, past
performance, and dividend policy. Id. Although petitioners
suggest that the guideline companies do not compare to HII, we
point out that two of the four guideline companies used by Mr.
Engstrom in his analysis, Giddings & Lewis, Inc., and Monarch
Machine Tool Co., were companies used by HII to “benchmark” its
performance; three of the four guideline companies used by Mr.
Engstrom, Cincinnati Milacron, Inc., Giddings & Lewis, Inc., and
Monarch Machine Tool Co., were also used by Mr. Heebink in his
market comparable analysis; and the remaining company, Gleason
Corp., builds machines for the manufacture of gears, and its
major customers are in the automotive and truck industries. Mr.
Engstrom made appropriate adjustments to the P/E ratios from the
guideline companies to account for differences in size and net
profit margins. With these adjustments, we find the companies
selected by Mr. Engstrom comparable to HII.
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