Public Comparable Analysis Flashcards
What is the main idea behind public comparable analysis?
Imply value by comparing our company with similar companies.
What information is priced into a stock?
Public information prior to the date of the stock price is priced into the stock.
What is a multiple?
A relative valuation in which the numerator is “Enterprise Value or Equity Value” and the denominator is a “value driver”
When you’re selecting your comps universe, what operations-related criteria would you be looking at?
- 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)
When you’re selecting your comps universe, what financial-related criteria would you be looking at?
- Size (Enterprise Value, Equity Value, Revenue, EBITDA)
- Growth Rate (sales, EBITDA, EPS)
- Financial Risk such as Leverage (Debt-to-EBITDA)
- Profitability (margins, returns)
What is the difference between “Criteria for Selection” vs “Criteria for Analysis”
- Criteria for Selection - helps you select comparable companies
- Criteria for Analysis - helps you analyze the differences between companies and draw conclusions.
What is a “pure play”?
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
What public filings could already contain information on comparable companies?
- Fairness opinions
- Peer group index from Proxy Statement
- Competition section (10-k)
- Equity Research
Which public sources (i.e. news, filings) could you look at in order to gain information on a company’s performance?
- 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
How do you calculate the market value of a company?
Market Value = Price x Diluted Shares Outstanding
How do you determine the number of shares outstanding for a specific company?
Check the 10-K or 10-Q
How does the treasury stock method work?
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).
Why do you need to use diluted shares outstanding?
- Some companies (like tech companies) give out TONS of stock options so w/o using diluted shares outstanding then your EPS would be incorrect.
How do you calculate enterprise value?
EV = Equity Value + Total Debt + Preferred Stock + Minority Interest - [Cash & Equivalents]
Which is usually greater:
Enterprise Value or Equity Value
Enterprise > Equity b/c companies usually have more debt than cash
What must be true for Equity Value > Enterprise Value?
company has more cash than debt
Why should you normalize for non-recurring items?
b/c the goal is to evaluate the on-going business.
How do you calculate the “Last 12 Months” performance?
Fiscal Year
+ Most recent Periods
- Period ending one year prior to most recent
Last 12 Months
Draw the illustration for calculating “Latest 12 Months”
see attached image
Why do we use LTM?
- Use most recent info
- Controls for seasonality
- Controls for different fiscal year ends
What are the two types of multiples?
- Equity Performance Multiples
- Enterprise Value Performance Multiples
When do you use equity performance multiples?
With statistics that apply ONLY to equity shareholders.
Which line on the income statment corresponds to equity holders?
AFTER interest expense, preferred dividends, & minority interest expense
When do you use enterprise value performance multiples?
For statistics that apply to ALL capital holders
What are some common “equity” multiples?
- Price / EPS
- Market Value / Net Income
- Market Value / Book Value
- PE / Growth Rate
What are some common enterprise value multiples?
- Enterprise Value / Sales
- Enterprise Value / EBITDA
- Enterprise Value / EBIT
How are forward multiples generated?
Through projections (equity research)
What are the main drivers of multiples?
- Risk
- Growth
What multiple (and its value) would indicate excessive financial risk?
A leverage ratio of > 3x
What multiple or returns would indicate excessive operational risk?
EBITDA margin
ROIC, ROA, ROE
(Margins, Returns are a good proxy for operational risk)
What metrics would you use to measure growth?
Sales Growth
EBITDA Growth
EPS Growth
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.
Is the company trading at ________(Premium, Discount)?
EV/(LTM EBITDA) of Company - 10.8x
EV/(LTM EBITDA) of Peers - 9.9x
Premium
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)
How could you infer a company’s operational risk?
EBITDA Margin - (LTM EBITDA / Revenue)
After you’ve identified your comparable companies, what would you do next?
- 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)
- 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)
- Questions to ask: What’s more important: growth, risk, margins?
[Usually growth]
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
