Finance Comparables
Comparable Valuation Table of Contents
www.finaticsonline.com
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
www.finaticsonline.com
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
www.finaticsonline.com
Table of Contents
> >
Concept, Pros & Cons Process of Valuation
> >
Enterprise Multiples Benchmarking
>
>
LTM & Calendarization
Adjustments to Financials
>
>
Fair Value Range
Common Pitfalls
>
> >
Calculating Diluted Shares
Concept of Enterprise Value Equity Multiples
>
> >
Snapshots
Interview Questions Recommended Reading
Comparable Valuation Introduction
www.finaticsonline.com
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
>
Cons
>
>
>
>
>
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)
>
>
>
In the real world it is very difficult to find ‘comparable’ companies Myopic - Focus on quarterly results rather than the long term Fair Value