Public Comparable Analysis Flashcards

1
Q

What is the main idea behind public comparable analysis?

A

Imply value by comparing our company with similar companies.

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2
Q

What information is priced into a stock?

A

Public information prior to the date of the stock price is priced into the stock.

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3
Q

What is a multiple?

A

A relative valuation in which the numerator is “Enterprise Value or Equity Value” and the denominator is a “value driver

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4
Q

When you’re selecting your comps universe, what operations-related criteria would you be looking at?

A
  • Companies which produce similar products (what)
  • Companies within similar industry (what)
  • Geography (where)
  • Customers (who)
  • Distribution (How product is delivered to the customer) [How]
  • Supply Chain (How the product is produced) [How]
  • Seasonality (when)
  • Cyclicality (when)
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5
Q

When you’re selecting your comps universe, what financial-related criteria would you be looking at?

A
  • Size (Enterprise Value, Equity Value, Revenue, EBITDA)
  • Growth Rate (sales, EBITDA, EPS)
  • Financial Risk such as Leverage (Debt-to-EBITDA)
  • Profitability (margins, returns)
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6
Q

What is the difference between “Criteria for Selection” vs “Criteria for Analysis”

A
  • Criteria for Selection - helps you select comparable companies
  • Criteria for Analysis - helps you analyze the differences between companies and draw conclusions.
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7
Q

What is a “pure play”?

A

A pure play is a company that focuses on only one line of business. These are different than diversified companies which have diverse product lines and sources of revenue. Pure plays have easy-to-understand cash flows and revenues, and tend to cater to a niche market

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8
Q

What public filings could already contain information on comparable companies?

A
  • Fairness opinions
  • Peer group index from Proxy Statement
  • Competition section (10-k)
  • Equity Research
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9
Q

Which public sources (i.e. news, filings) could you look at in order to gain information on a company’s performance?

A
  • News: Earnings Announcement
  • News: Earnings Call Transcript
  • News: Press Releases [Annotated Stock Chart Option]
  • Filing: 10-K [Europe: Annual Report]
  • Filing: 10-Q [Europe: Interim]
  • Stock: Share Price
  • Stock: Dividends, EPS
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10
Q

How do you calculate the market value of a company?

A

Market Value = Price x Diluted Shares Outstanding

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11
Q

How do you determine the number of shares outstanding for a specific company?

A

Check the 10-K or 10-Q

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12
Q

How does the treasury stock method work?

A

The treasury stock method computes the number of new shares that may potentially be created by unexercised in-the-money warrants and options.

This method assumes that the proceeds a company receives from an in-the-money option exercise are used to repurchase common shares in the market.

The treasury stock method must be used by a company when calculating its diluted earnings per share (EPS).

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13
Q

Why do you need to use diluted shares outstanding?

A
  • Some companies (like tech companies) give out TONS of stock options so w/o using diluted shares outstanding then your EPS would be incorrect.
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14
Q

How do you calculate enterprise value?

A

EV = Equity Value + Total Debt + Preferred Stock + Minority Interest - [Cash & Equivalents]

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15
Q

Which is usually greater:

Enterprise Value or Equity Value

A

Enterprise > Equity b/c companies usually have more debt than cash

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16
Q

What must be true for Equity Value > Enterprise Value?

A

company has more cash than debt

17
Q

Why should you normalize for non-recurring items?

A

b/c the goal is to evaluate the on-going business.

18
Q

How do you calculate the “Last 12 Months” performance?

A

Fiscal Year

+ Most recent Periods

- Period ending one year prior to most recent

Last 12 Months

19
Q

Draw the illustration for calculating “Latest 12 Months

A

see attached image

20
Q

Why do we use LTM?

A
  1. Use most recent info
  2. Controls for seasonality
  3. Controls for different fiscal year ends
21
Q

What are the two types of multiples?

A
  1. Equity Performance Multiples
  2. Enterprise Value Performance Multiples
22
Q

When do you use equity performance multiples?

A

With statistics that apply ONLY to equity shareholders.

23
Q

Which line on the income statment corresponds to equity holders?

A

AFTER interest expense, preferred dividends, & minority interest expense

24
Q

When do you use enterprise value performance multiples?

A

For statistics that apply to ALL capital holders

25
**What** are some *common* "**equity**" **multiples**?
* Price / EPS * Market Value / Net Income * Market Value / Book Value * PE / Growth Rate
26
**What** are some *common* **enterprise value** multiples?
* Enterprise Value / Sales * Enterprise Value / EBITDA * Enterprise Value / EBIT
27
**How** are **forward multiples** *generated*?
Through projections (equity research)
28
What are the **main drivers** of *multiples*?
* Risk * Growth
29
**What** _multiple_ (and its _value_) would indicate *excessive* **financial risk**?
A leverage ratio of \> 3x
30
What _multiple_ or _returns_ would indicate *excessive* **operational risk**?
EBITDA margin ROIC, ROA, ROE **(Margins, Returns are a good proxy for operational risk)**
31
What **metrics** would you use to *measure* **growth**?
**Sales** Growth **EBITDA** Growth **EPS** Growth
32
*When* **comparing** a company to its **peers**, **what** are we *trying* to **determine**?
Does the company trade at a **premium** or **discount** *relative* to its _peers_.
33
Is the company trading at \_\_\_\_\_\_\_\_(Premium, Discount)? **EV/(LTM EBITDA) of Company** - 10.8x **EV/(LTM EBITDA) of Peers** - 9.9x
Premium
34
**To determine** if a company is **overpriced** or **underpriced**, what **two factors** *must we look at*?
**Risk** (Leverage - Debt / LTM EBITDA) **Growth** (5-Yr EPS Growth Rate)
35
**How** could you *infer* a company's **operational risk**?
**EBITDA Margin** - (LTM EBITDA / Revenue)
36
**After** you've identified your **comparable companies**, what would you *do* **next**?
1. Look at **EV mutiple such as EV / LTM EBITDA** to see how the company is trading compared to its peers (Company @ 10.8x, Peers @ 9.8x) 2. Now try to **explain performance** *using* **metrics** vs peers: * Look at _projected growth_ (5-year EPS): (Company @ 14.1%, Peers 8%) * Look at _operational risk_ (EBITDA margin): * Look at _financial risk_ (Debt/EBITDA) * Look at _coverage risk_ (EBITDA/Interest) 3. Questions to ask: What's more important: growth, risk, margins? [Usually growth]
37
**Once** we have an **EBITDA** **multiple** range, **how** do we *calculate* the **price per share**?
EBITDA multiple _x LTM EBITDA_ **Enterprise Value** _- Net Debt_ **Equity Value** Then, **EPS = Equity Value / Diluted Shares**
38