Chapter 3 - Comparable Company Analysis Flashcards
The analysis of publicly-traded comparable companies (“trading comps” or “comps”) consists of:
identifying “comparable” companies and reviewing: their key valuation, operating and credit metrics to provide an indication of value for a particular company or to discern industry-wide trends
The key metrics can ___:
Vary considerably from industry to industry, and there is no perfect, consistent template that can be used for any company
Depending on the situation:
different Metrics are evaluated to form a view on a company
Valuation Metrics (7):
- EV / Revenue
- EV / EBITDA
- EV / EBIT
- EV / (EBITDA less Capex)
- Price / Earnings
- Price / CFO or LFCF
- Price / Book Value
Operating Metrics (8):
- Revenue and EBITDA growth
- EBITDA and net income margin
- Capital expenditure intensity (Capex / Revenue)
- Maintenance and growth capex
*Seasonality & cyclicality - Diversification
- Return on Equity
- Return on Invested Capital
Capital Structure Metrics (10):
- Total or Net Debt / EBITDA
- Senior Debt / EBITDA
- Debt / Capitalization
- Debt / Equity
- EBITDA / Interest
- EBITDA less Capex / Interest
- Available Credit Capacity (ACC)
- ACC / Capital Expenditures
- Dividend yield
- Payout ratio
Benefits of Comparable Company Analysis (6):
- Shortcut to a DCF analysis
- Provides a benchmark to value a company by referring to comparable public companies
- Calculates valuation multiples based on current market conditions
- Takes into account current industry trends and growth prospects
- Provides insight into key metrics for an industry
- Serves as a reliable value indicator for a minority investment
Considerations of Comparable Company Analysis (4):
- For many companies, there are few, if any, perfect comparable companies (or “pure play” comps)
- Does not account for “control premiums” nor potential synergies realized in an acquisition
- May not reflect fundamental value in a thinly traded or small capitalization stock
- Does not explain market inefficiencies
Screening for Appropriate Comps (2)
*: The key to compiling useful trading comparables is to first identify companies that are considered comparable based on the following:
Operational and Financial Factors
Operational Factors(7):
- Industry
- Products
- Distribution Channels
- Customers / Contracts
- Seasonality and Cyclicality
- Geographic Footprint
- Risk Profile
Financial Factors (5):
- Size
- Growth rate / prospects
- Profitability
- Capital expenditure profile
- Capital structure (leverage & liquidity)
There are several sources for identifying comparable companies, including (5):
- Annual reports/10 K,
- equity research reports,
- SIC code screens,
- industry publications,
The following is an example of comps that we currently use at CIBC for the following clients: What is included on the comp table?
- Description:
- Biggest Challenge
- Comp Group
Comparable Company Analysis (3)– Time Periods
- Multiple time periods are typically analyzed when reviewing valuation and operating metrics
- Forward valuation multiples are generally more important than historical valuation multiples because investors focus on and pay for future earnings
- However, historical data is usually more complete, and is often relied upon as well
5 Different types of Periods:
LFY, LTM, LFY + 1, NTM, LFY + 2
LFY:
Last Fiscal Year.
Examples: 2023 EPS & 2023 EBITDA
LTM:
- Last twelve months (Sum of the previous four quarters)
— For example, if a company recently reported Q2 2023 results, the LTM period includes Q3 2022, Q4 2022, Q1 2023 and Q2 2023
— Companies will often provide their own LTM EBITDA calculation in their public filings
Examples:
* LTM Revenue
* LTM EBITDA
* LTM Free Cash Flow
The following three time periods are pulled directly from equity research analyst forecasts or from third-party data providers such as Bloomberg, FactSet or CapitalIQ:
LFY+1, NTM, LFY+2
LFY+1:
- Forecast for the current fiscal year
Examples: - FY2024 EBITDA
- FY2024 EPS
NTM:
- Next twelve months (Sum of the next four quarters)
Examples:
* NTM Revenue
* NTM EBITDA
LFY+2:
- Forecast for the next fiscal year
Examples:
* FY2025 EBITDA
* FY2025 EPS
Canadian companies report earnings on a ____ basis (ie. every 3 months)
Quarterly
Quarterly income statement filings include the results from the ____ quarter as well as the ____ results for the current fiscal year up to that point in time (ie. if a company reports Q3 results, it will include the 3 month results as well as the full 9 month results), as well as a comparison to the prior year for both time periods
current & YTD (Year to Date)
LTM Calculation
- To calculate LTM figures at the end of Q1 2022 (or Q2 or Q3), use the following formula:
— LTM EBITDA = Year-to-Date EBITDA up to Q1 2022 (or Q2 or Q3) + 2021 EBITDA – Year-to-Date EBITDA up to Q1 2021 (or Q2 or Q3)
— The red text in the calculation above strips out the time period from the prior year that you do not need - When a company reports Q4 results, no calculation is required as the year-to-date period represents the last twelve months
LTM EBITDA (as of Q1 2022) =
YTD EBITDA up to Q1 2022 +2021 EBITDA - YTD EBITDA up to Q1 2021
Calculating LTM Revenue and EBITDA – Example (People Corporation)
LTM Revenue = Latest Annual + Current YTD Stub - Prev YTD Stub
LTM EBITDA= Latest Annual + Current YTD Stub - Prev YTD Stub
Compiling “Consensus” Estimates for Forecast Periods (ie. LFY+1, LFY+2)
- Investment bankers rely on subscriptions to third-party market data providers such as Bloomberg, FactSet or CapitalIQ to pull equity research analyst “consensus” estimates for key financial figures
Comp Output Charts from a CIBC Presentation Focused on Valuation and Leverage Metrics:
Includes:
- Company
- Market Cap.
- EV / 2020E EBITDA
- EV / 2020E EBIT
- Price / 2020E EPS
- Price / 2020E FCF1
- Net Debt2 / 2019E EBITDA
Comp Output Charts from a CIBC Presentation Focused on Operating Metrics:
Includes:
- Company
- Revenue Growth
- EBITDA Growth
- FCF1 Growth
- EBITDA Margin
- Capex Intensity
- EBITDA Less Capex Margin
Comp Output Table from a CIBC Presentation Focused on a Broad Range of Metrics:
- Share Price
- Market Cap
- Total EV
- EV/EBITDA
- Price/ Earnings
- Growth (19E-21E)
- EBITDA Margin
- Net Debt / 2019E EBITDA, 1) Snr. +Convts 2) Senior
The following are some important reminders when preparing comps (5):
Eliminate non-recurring items:
- Restructuring charges/one-time write offs
- Employee severance costs
- Gains or losses on the sale of assets
- Gains or losses on non-operating items (ie. hedging gains or losses)
*Read all relevant financial statement footnotes and the management discussion & analysis (MD&A) filing carefully to find these items.
Other important reminders when preparing comps (7):
–
Tax-effect any adjustments to net income as required
–
D&A may be buried in COGS or SG&A, so use the D&A values on the cash flow statement
–
Review disclosure carefully for recent M&A activity, financings or subsequent events
–
Use most recent financials to gather historical data as information is often re-stated (ie. use the 2022 annual report to pull information for 2021)
–
Review currencies as some companies report in one currency but their share price trades in another currency (ie. Boyd, New Flyer, Winpak)
–
Calendarize financials if companies have different fiscal year-end reporting periods
–
Double check all calculations….then do it again
