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Training The Street > Public Comparable Analysis > Flashcards

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
Q

What are some common “equity” multiples?

A
  • Price / EPS
  • Market Value / Net Income
  • Market Value / Book Value
  • PE / Growth Rate
26
Q

What are some common enterprise value multiples?

A
  • Enterprise Value / Sales
  • Enterprise Value / EBITDA
  • Enterprise Value / EBIT
27
Q

How are forward multiples generated?

A

Through projections (equity research)

28
Q

What are the main drivers of multiples?

A
  • Risk
  • Growth
29
Q

What multiple (and its value) would indicate excessive financial risk?

A

A leverage ratio of > 3x

30
Q

What multiple or returns would indicate excessive operational risk?

A

EBITDA margin

ROIC, ROA, ROE

(Margins, Returns are a good proxy for operational risk)

31
Q

What metrics would you use to measure growth?

A

Sales Growth

EBITDA Growth

EPS Growth

32
Q

When comparing a company to its peers, what are we trying to determine?

A

Does the company trade at a premium or discount relative to its peers.

33
Q

Is the company trading at ________(Premium, Discount)?

EV/(LTM EBITDA) of Company - 10.8x

EV/(LTM EBITDA) of Peers - 9.9x

A

Premium

34
Q

To determine if a company is overpriced or underpriced, what two factors must we look at?

A

Risk (Leverage - Debt / LTM EBITDA)

Growth (5-Yr EPS Growth Rate)

35
Q

How could you infer a company’s operational risk?

A

EBITDA Margin - (LTM EBITDA / Revenue)

36
Q

After you’ve identified your comparable companies, what would you do next?

A
  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)
  1. Questions to ask: What’s more important: growth, risk, margins?

[Usually growth]

37
Q

Once we have an EBITDA multiple range, how do we calculate the price per share?

A

EBITDA multiple

x LTM EBITDA

Enterprise Value

- Net Debt

Equity Value

Then, EPS = Equity Value / Diluted Shares

38
Q
A

Training The Street (8 decks)

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