Public Comparable Analysis (Public Comps)

 Relative Valuation Introduction:

• Instead of projecting a company's cash flows, relative valuation is to value a company based on similar companies' valuation multiples
• e.g. P/E, EV/EBITDA, EV/EBIT, etc
• This is helpful because if you know a very similar competitor to your company is trading at a 10x P/E multiple, it's likely your company should also trade at a 10x P/E multiple - or close to it.
• Public Comps is based on the data of publicly traded companie

Public Comps:

• A market-based valuation method that uses the current market value of other comparable companies to determine the implied value of the target company.

Steps to doing a Public Comps:

1. Select the appropriate set of comparable companies
• Size, geography, industry
2. Screen for financial metrics you want to use
• EV/EBITDA or PE or EV/EBIT or other metrics
• Note: different multiples are better for different industries
3. Calculate the multiples for all the companies based on their publicly accessible information
4. Apply median multiples to your company's key financial metrics to estimate its implied EV, Eq V, implied share price

Selecting an appropriate set of comparable companies:

• You want these companies to have a similar discount rate and growth rate
• Company value = cash flow / (discount rate - cash flow growth rate)
• If 2 companies are similar, investors would have the same expected rate of return, so the discount rate and growth rate for the 2 companies should be the same
• If all comps have the same discount rate and 1 company is trading at a higher multiple, its expected cash flow growth rate is higher
• Company size and stage matter; the smaller the size, the higher the risk
• You can screen for size by either Market Cap, Enterprise Value, Revenue, or EBITDA

Determine multiples to use and screen for financials:

• Common multiples:
• EV/Revenue, EV/EBIT, EV/EBITDA, P/E
• Screening:
• Enterprise Value, Equity Value, Revenue, EBIT, EBITDA, Net Income
• Use a mix of historical and projected financial metrics:
• For historical: use Last Twelve Months (LTM) / Trailing Twelve Months (TTM)
• For projected: can use equity research estimates and consensus
• We use both historical and projected financials because:
• Historical metrics are based on actual events but don't account for future growth
• Projected metrics are useful because a company's valuation depends on its future performance. But can be unreliable

Calculate metrics and multiples for all the companies

• Denominators of the multiples are both historical and projected financials
• Numerators are the company's current equity value and current enterprise value based on their current share price, shares outstanding, and most recent balance sheet

How to interpret Public Comps multiples

• Public comps are the most meaningful when growth rates and margins are similar, but the multiples are different
• This could mean that the company you're valuing is mispriced and there's an opportunity to invest and make money

Interview Questions:

1. Walk me through a public comps

• First, determine the set of appropriate comparable companies you want in your comps based on factors such as size, geography, industry, and business model
• Then, obtain their financial metrics and multiples, such as revenue, revenue growth, EBITDA, EBITDA margins, and EBITDA multiples
• Calculate a the minimum, 25th percentile, median, 75th percentile, and maximum for each valuation multiples in the set based on those multiples 
• Apply those numbers to the financial metrics of the company you're analyzing to estimate its Implied Value
• e.g. if the company you're valuing has $100 MM EBITDA and the median EBITDA multiples of a set of comps is 10x, its implied enterprise value is 1bn based on public comps
• Calculate the implied value for all other multiples to get a range of values

2. Why would 2 companies in the same industry trade at different multiples?

• Different growth rates
• Different sizes
• Different capital structures
• Different risk profiles

3. Why use median multiples rather than averages or other percentiles?

• Possibility of outliers

4. How do you factor a company’s competitive advantage into public comps valuation?

• Could use 75th percentile or even higher for the multiples rather than the Medians

5. What are flaws with Public Comps?

• Solely based on market data; your multiples may be dramatically higher or lower depending on market sentiment
• No company is 100% comparable to another
• Relies on the comparable companies being correctly priced