Chapter 3 - Comparable Company Analysis Flashcards

1
Q

The analysis of publicly-traded comparable companies (“trading comps” or “comps”) consists of:

A

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

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2
Q

The key metrics can ___:

A

Vary considerably from industry to industry, and there is no perfect, consistent template that can be used for any company

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3
Q

Depending on the situation:

A

different Metrics are evaluated to form a view on a company

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4
Q

Valuation Metrics (7):

A
  • EV / Revenue
  • EV / EBITDA
  • EV / EBIT
  • EV / (EBITDA less Capex)
  • Price / Earnings
  • Price / CFO or LFCF
  • Price / Book Value
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5
Q

Operating Metrics (8):

A
  • 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
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6
Q

Capital Structure Metrics (10):

A
  • 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
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7
Q

Benefits of Comparable Company Analysis (6):

A
  • 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
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8
Q

Considerations of Comparable Company Analysis (4):

A
  • 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
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9
Q

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:

A

Operational and Financial Factors

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10
Q

Operational Factors(7):

A
  • Industry
  • Products
  • Distribution Channels
  • Customers / Contracts
  • Seasonality and Cyclicality
  • Geographic Footprint
  • Risk Profile
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11
Q

Financial Factors (5):

A
  • Size
  • Growth rate / prospects
  • Profitability
  • Capital expenditure profile
  • Capital structure (leverage & liquidity)
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12
Q

There are several sources for identifying comparable companies, including (5):

A
  1. Annual reports/10 K,
  2. equity research reports,
  3. SIC code screens,
  4. industry publications,
  5. google
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13
Q

The following is an example of comps that we currently use at CIBC for the following clients: What is included on the comp table?

A
  1. Description:
  2. Biggest Challenge
  3. Comp Group
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14
Q

Comparable Company Analysis (3)– Time Periods

A
  • 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
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15
Q

5 Different types of Periods:

A

LFY, LTM, LFY + 1, NTM, LFY + 2

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16
Q

LFY:

A

Last Fiscal Year.
Examples: 2023 EPS & 2023 EBITDA

17
Q

LTM:

A
  • 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

18
Q

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:

A

LFY+1, NTM, LFY+2

19
Q

LFY+1:

A
  • Forecast for the current fiscal year
    Examples:
  • FY2024 EBITDA
  • FY2024 EPS
20
Q

NTM:

A
  • Next twelve months (Sum of the next four quarters)

Examples:
* NTM Revenue
* NTM EBITDA

21
Q

LFY+2:

A
  • Forecast for the next fiscal year

Examples:
* FY2025 EBITDA
* FY2025 EPS

22
Q

Canadian companies report earnings on a ____ basis (ie. every 3 months)

23
Q

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

A

current & YTD (Year to Date)

24
Q

LTM Calculation

A
  • 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
25
LTM EBITDA (as of Q1 2022) =
YTD EBITDA up to Q1 2022 +2021 EBITDA - YTD EBITDA up to Q1 2021
26
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
27
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
28
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
29
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
30
Comp Output Table from a CIBC Presentation Focused on a Broad Range of Metrics:
1. Share Price 2. Market Cap 3. Total EV 4. EV/EBITDA 5. Price/ Earnings 6. Growth (19E-21E) 7. EBITDA Margin 8. Net Debt / 2019E EBITDA, 1) Snr. +Convts 2) Senior
31
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.
32
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