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












Comments

Post a Comment

Popular posts from this blog

Basic Financial Accounting: The 3 Financial Statements

Image
 Introduction: There are 3 financial statements to know:     Income Statement : details the taxes , revenues , and expenses a company incurs in a period of time     Cash Flow Statement : determines how a company manages its cash position and tracks changes over a period of time, divided into CFO (cash flows from operations), CFI (cash flows from investing), and CFF (cash flows from financing)     Balance Sheet : shows a company's assets and how it acquired them using equity and liabilities at a specific point in time
Read more

Intro to Private Credit

Intro: TLDR: private credit is any loan that isn't a bond (not publicly traded) and not issued by a bank The non-investment grade credit markets in the US and Europe have expanded threefold in size since the Global Financial Crisis (GFC), growing from $1.7 trillion to $5.1 trillion. Companies in need of debt financing can either turn to banks for a loan—which would then either hold the loan on its balance sheet or syndicate it to a group of similar investors—or they can turn to private credit.  Private Credit: loans provided by lenders other than banks. Private credit funds lend directly to companies, often without using investment banks as an intermediary. They hold the debt and collect interest, rather than sell it off in pieces to other investors like a bank would. While a PE firm buys all or some of a company, private credit firms lend money to a company directly. AKA: In private equity, you are the owner of the business, and when it comes to private credit, you should operate
Read more

Intro to Restructuring II

Recap : In the last post, we covered capital structures and some basic terminology Absolute Priority Principle: in a distressed/bankrupt situation, a company's capital structure determines the order of claims on a company's assets. This order is:  Secured Debt Unsecured Debt Subordinated Debt Mezzanine Debt Equity Bonds vs. Loans: Bonds: source of funding that can be obtained from the public and usually have a par value of $1000 Loans: obtained through bank, more restrictive covenants and not as liquid as bonds Types of secured (senior) debt: Revolver: Secured, 1st lien Corporate credit card Floating interest (LIBOR+spread) Term Loan A: Secured, 1st lien 5 Year Term Amortizing - payment schedule over time Term Loan B: May be 2nd or 1st lien 5-8 Year Term No amortization - bullet maturity (lump sum in the end) Types of unsecured (junior) debt: Mezzanine: Mix of debt and equity, e.g. convertible debt, convertible preferred stock PiK interest Reasons for Financial Distress: Bad ma
Read more