Relative Valuation: Comps Flashcards
What is the purpose of using multiples?
Walk me through the process of “spreading comps”?
When applying comp multiples to a target company, when do we apply the median and not the mean?
Medians remove the distortive impact of outliers on the peer group multiple.
Should the target company being valued be included in its peer group?
Usually no, because including the target will skey the multiple towards the target’s current valuation.
Advantages of trading comps approach?
Involve public companies making data collection far more convenient
Disadvantages?
Can be difficult to find true pure-play comps
Comparison is always apples to oranges
Where do we get the data from for transaction comps approach?
Deal announcements
Annual filings or other interim filings
Financial data vendors Bloomberg, Capital IQ, FactSet
What do transaction comps tell you that trading comps do not?
What else leads to high control premiums?
Challenges with transaction comps approach?
Limited or no M&A activity means fewer available transaction comps
No recent M&A transactions - usually need within the last 5 years
What questions might we ask when putting together a transaction comps peer group?
Should two identical companies with different leverage ratios trade at different P/E multiples?
Can we use EV / Net Income as a multiple?
No - net income represents residual value flowing to shareholders; where as EV is the value of the firm’s operations to both debt and equity, so there is a mis-match
Why might one company trade at a higher multiple than another?
Better fundamentals - better growth prospects, lower WACC, more robust cash flow generation
Intuitively what does the P/E ratio mean?
How much is the market willing to pay for a dollar of this company’s earnings?
What does a high P/E ratio relative to a peer group imply?
Company has share price of 10, EPS of 2 that decreases to 1 four years later. What happens to the P/E ratio and how would you interpret the result?
Why even use trading comps for public companies, can’t we just take the market cap directly?
