IB - Comparable Analysis

  1. 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.
  2. 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
  3. Primary Sources of Income Statement Data : Sales, GP, EBITDA, EBIT, Net Income/EPS
    Most Recent 10-K, 10-Q, 8-K, Press Release
  4. Primary Sources of Research Estimates
    • Bloomberg Estimates
    • Refinitiv IBES
    • S&P Capital IQ Estimates
    • Thomson First Call
    • Individual Equity Research Reports
  5. Primary Sources of Balance Sheet Data : Cash Balance, Debt Balance, Shareholder's Equity
    Most recent 10-K, 10-Q, 8K, Press Release
  6. Primary Sources of Cash Flow Data - Depreciation and Amortization, Capital Expenditures
    Most recent 10-K, 10-Q, 8K, Press Release
  7. 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
  8. Primary Sources of Market Data - Share Price Data, Credit Ratings
    • Share Price Data : Financial Information Service
    • Credit Ratings : Rating Agencies' Website
  9. 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
  10. 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
  11. 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
  12. 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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IB - Comparable Analysis