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What are the steps for Comparable Companies Analysis?
- 1. Select the Universe of Comparable Analysis
- 2. Locate the Necessary Financial Information
- 3. Spread Key Statistics, Ratios, and Trading Multiples
- 4. Benchmark the Comparable Companies
- 5. Determine Valuation
- More specificly..
- 1. Use Bloomberg, Capital IQ, equity research reports, Google Finance, Yahoo Finance, or Hoovers to find comps
- 2. Go to EDGAR, SEDAR, or company website
- 3. Download 3-5 years of historical data
- 4. Obtain forecast metrics from equity research, Bloomberg, Company Guidance, Google Finance (Revenue, Gross Profit, EBITDA, EBIT, Net Income)
- 5. Build a table and calculate (Market Cap, EV, all ratios, growth rates, margins, etc.
- 6. Compare the adjusted average to the company you are trying to value.
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Key Characteristics of the Target for Comparison Purposes
- Business Profile
- 1. Sector
- 2. Products and Services
- 3. Customers and End Markets
- 4. Distribution Channels
- 5. Geography
- Financial Profile
- 1. Size
- 2. Profitability
- 3. Growth Profile
- 4. Return on Investment
- 5. Credit Profile
- *Similar capital structures
- *Accounting Policies
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Primary Sources of Income Statement Data : Sales, GP, EBITDA, EBIT, Net Income/EPS
Most Recent 10-K, 10-Q, 8-K, Press Release
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Primary Sources of Research Estimates
- Bloomberg Estimates
- Refinitiv IBES
- S&P Capital IQ Estimates
- Thomson First Call
- Individual Equity Research Reports
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Primary Sources of Balance Sheet Data : Cash Balance, Debt Balance, Shareholder's Equity
Most recent 10-K, 10-Q, 8K, Press Release
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Primary Sources of Cash Flow Data - Depreciation and Amortization, Capital Expenditures
Most recent 10-K, 10-Q, 8K, Press Release
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Primary Sources of Share Data, Basic Shares Outstanding & Options and Warrants Data
Basic Shares Outstanding : 10K, 10Q, or Proxy Statement, whichever is most recent
Options and Warrants Data : 10K, or 10-Q whichever is more recent
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Primary Sources of Market Data - Share Price Data, Credit Ratings
- Share Price Data : Financial Information Service
- Credit Ratings : Rating Agencies' Website
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Key Financial Statistics and Ratios for Financial Profile
- 1. Size
- Market Valuation : Equity Value, Enterprise Value
- Key Financial Data : Sales, gross profit, EBITDA, EBIT, Net Income
2. Profitability : Gross profit, EBITDA, EBIT, and net income margins
3. Growth Profile : Historical and Estimated Growth Rates
4. Return on Investment : ROIC, ROE, ROA, and dividend yield
5. Credit Profile : Leverage Ratios, Coverage Ratios, and Credit Ratings
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What are the advantages of using a Comparable Companies Analysis?
Market-based – information used to derive valuation for the target is based on actual public market data, thereby reflecting the market's growth and risk expectations, as well as overall sentiment
Relativity – easily measurable and comparable versus other companies
Quick and convenient – valuation can be determined on the basis of a few easy-to-calculate inputs
Current – valuation is based on prevailing market data, which can be updated on a daily (or intraday) basis
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What are the disadvantages of using a Comparable Companies Analysis?
Market-based – valuation that is completely market-based can be skewed during periods of irrational exuberance or bearishness
Absence of relevant comparables “pure play” comparables may be difficult to identify or even non-existent, especially if the target operates in a niche sector, in which case the valuation implied by trading comps may be less meaningfulPotential
disconnect from cash flow – valuation based on prevailing market conditions or expectations may have significant disconnect from the valuation implied by a company's projected cash flow generation (e.g., DCF analysis)
Company-specific issues – valuation of the target is based on the valuation of other companies, which may fail to capture target-specific strengths, weaknesses, opportunities, and risks
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What is an Initiating Coverage Equity Research?
It refers to the first report published by an equity research analyst beginning coverage on a particular company.
This report often provides a comprehensive business description, sector analysis and commentary
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