Finance Comparables

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Comparable Valuation Table of Contents

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Table of Contents
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Concept, Pros & Cons Process of Valuation

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Enterprise Multiples Benchmarking

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LTM & Calendarization
Adjustments to Financials

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Fair Value Range
Common Pitfalls

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Calculating Diluted Shares
Concept of Enterprise Value Equity Multiples

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Snapshots
Interview Questions Recommended Reading

Comparable Valuation Introduction

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Comparables / Relative Valuation / Trading Comparables / Comps / CompCo is a method of valuing companies under which Value is derived based on a comparison of ‘Multiples’ within a set of peers under current market conditions.

Concept
The Classic Question:
Is a low P/E better or a high one? Most would say the former! However, that may not always be correct. The answer lies in a Comparable Analysis which helps figure out whether the higher P/E stock is overvalued or valued highly as a result of superior expected performance! Among other things, a Comparable Analysis aims to determine fair value based on current & expected fundamental performance, Intangibles like quality of management, brand value, market share and track record in terms of TRS – Total Return to Shareholders. Stocks trading at a higher multiple usually tick mark one or more of the above conditions

Pros
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Cons
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Captures Market Sentiment Works best in the short run (between quarterly results) Quick & easier to apply & explain than fundamental approaches like DCF More relevant when inflow/outflow of funds changes or is expected to change significantly Very popular among Investment Banks, Brokerage houses & Mutual Funds. Implying that this is one of the ways in which the majority decide fair value (for the short run)

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In the real world it is very difficult to find ‘comparable’ companies Myopic - Focus on quarterly results rather than the long term Fair Value based on peer comparison may imply that exuberance will always result in biased valuations irrespective of ‘Intrinsic value’ Many Analysts use ‘Comps’ in the down cycle while using DCF in the upturn. Indicating that Comps are likely to under value stocks when fundamentals are in the up cycle and vice-versa 1

Comparable Valuation The Process

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The process of Comparable Valuation is fairly uncomplicated. It is a mix of both art & science. The Science lies in calculations and determining which company should command a higher value while determining fair value is an art

Step 1
Identifying the Comparable Universe The Industry or Sector may not be comparable as a result of different products & markets implying different fundamental performance and hence different valuation. It is for this reason that one must look at the Sub-Sector. E.g. Industry > Metals Sector >Alloys Sub Sector > Non Ferrous Alloys

Step 2
Spreading Comps Making calculations > Margins & Ratios > Last Twelve months > Fully Diluted shares > Enterprise Value > 3yr CAGR sales & PAT Equity Multiples > P/E, PEG, P/B, P/FCFE Enterprise Multiples > EV/Sales, EV/EBITDA, EV/EBIT, EV/FCFF Sector Specific Multiples > EV/EBITDAR, EV/Ton, EV/Subscriber, EV/Plane, EV/Employee, EV/branch…

Step 3
Benchmarking Companies with Similar Sales, Market cap, Margins and other Performance Metrics must be indentified to determine ‘closest comparable’ companies and thus benchmark them against the company in question

Step 4
Determining Fair Value Benchmarking would help arrive at a range of multiples. Average & Median Multiples of such companies would help determine the fair value of the company in question while Highest & Lowest Multiples will serve to determine a range

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Comparable Valuation LTM & Calendarization
Calculating Last Twelve months (LTM)
A.k.a. Trailing Twelve Months (TTM) sometimes also referred to as Latest Twelve Months. LTM Data1 is simply calculated for the...
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