hello everyone welcome to the channel of Wallstreetmojo friends today we are
going to learn thing called comparable company analysis and this is basically a
beginners guide this is basically a part two of the equity valuation series
articles comparable comps is nothing but
identifying doing relative valuations like an expert to find the fair value of
the form the comparable comp process starts with identifying the comparable
companies then selecting the right valuation tools and finally preparing a
table that can provide easy inferences about fair valuation of the industry and
the company in this tutor we will discuss the following things I mean what
is comparable company analysis how to read them we are going to see the Box
IPOs comparable companies analysis how to identify comparable companies how do
we prepare professional comparable company analysis table and any important
adjustment in the comparable company analysis in order to fully understand
this concept you should have a reasonable knowledge of relative
valuation multiples like every by a beta PE ratio price-to-book ratio PEG ratio
etc however if you want a very quick refresher you may refer to the part 1 of
the equity valuation series that was covered under the topic of relative
valuation multiples what is exactly the comparable company analysis also it is
known as trading comps or comparable comps see comparable analysis or trading comps
can we best explain with the help of an example let's assume that you are
planning to buy a house in New York why not who doesn't like that obviously you
may search search on the many real estate brokerage website and you would
also draw comparable comparative study on the same you would compare one
apartment with another and would also try to get a sense of what they are
worth as compared to each other as you can see over here when you're comparing
apartments you would consider different attributes such as number of rooms size
of bedrooms number of bathrooms layout etc in doing so what you would notice is
that apartments with similar kind of attribute
may cost similarly in this context let us know let us now try and understand
what is comparable company analysis or comparable comps below is the basically
definition I mean that we are going to discuss which is source from the
investopedia it says that process used to evaluate the value of the company
using the metrics of other business of similar size of the same industry
comparable company analysis operates under the assumption that similar
companies will have a similar valuation multiple such as EB by ebeta analysts
will compile a list of the available statistics for the companies being
reviewed and will calculate the valuation multiples in order to compare
them from the above apartment related discussion and investopedia definition
we can draw the following inferences regarding the comparable analysis just
like comparing the apartments comparable company analysis helps you to the
compare compare different companies with similar size and industry and there have
a fair value for them instead of second that is instead of looking at the number
of beds location bathroom etc you look at relatively valuation PE multiples like
every by ebita PE p by p book value ratio etc third you infer from such
comparison regarding a company's Frye's is overvalued or undervalued
I guess this with the basic analogy we should be able to proceed and move
forward to reading the comparable company analysis how to read the
comparable company analysis table for learning to read to comparable company
analysis table or comparable comps I'll take a real-life example of boxing with
that had earlier announced its IPO we want to understand at what valuation
price point should we invest in boxing IPO shares below is the comparable
company analysis table for boxing IPO and there are broadly 5 parts to
the trading comes first the comparable information this includes company's name
ticker again be very sure what I'm saying name ticker
price ticker is a very unique symbol given to the company to identify public
listed company you may take Bloomberg Reuters tickers as well also note that
the prices that we take here are the most recent prices we make the tea table
in such a way that this prices are linked to the database where they would
get updated automatically second size of the company this includes the market
capitalization and enterprise value we normally sought the table on the basis
of the market capitalization now market capitalization also
provides us a sudo for the size of the company and the price value is the
current market based valuation of the firm now we may know we may not want to
compare a small market capitalization company with a large market
capitalization company third valuation multiple this should includes two to
three appropriate valuation tools for the comparison we should ideally show
1 year of historical multiple of and in 2 years of forward PE that for PE
multiple will be estimated choosing an appropriate valuation tool is the key to
successfully valuing the company for operating metrics
this may include fundamental ratios like revenue growth ROE etc this is the
important so that we can understand the fundamental of the company at once you
include profit margins ROE net margins leverage etc to make the comp more
meaning fifth the summary this is simple mean median low high of the above
metrics mean and median provides core insight to the fair valuation
if a company's multiple is above the mean median we tend to inform that the
company may be overvalued likewise if the multiple is below the mean median
remain for undervalued so high and low also helps us to understand the outliers
and the case to remove those if they are too far away from the mean and median
now reading to the trading comps or comparable company analysis of box IPO
let's let us know now look at the summary of the comparable company
analysis of IPO Box IPO the cloud companies they're basically trading at
an average of 9.5 X EV by sales multiple we note companies like
zero in an outlier trades around 44x EV by sales multiple expected 2014 growth
rate at 94% and Louis EV by sales multiple is close enough to 2 X
so the cloud companies trade at EV by beta 32 X now box valuation from the
financial model of the box we note that the box is a beta down negative so we
cannot proceed with every buyer beta as the valuation tool the only multiple
that is suitable for the valuation is EV by sales since the median EV by
sales is around 7.7 X and the mean is around close .2 in the
neighborhood of 9.5 X me we may consider
three scenarios for the evaluation optimistic that is 10 X EV by sale
base case 7.1 into EV by sales and pessimistic case of 5.0 EV
by sales now as you can see in the table that it shows the Per share price using the
three scenarios in co-valuation range from 15.65 pessimistic
case to 29.38 the optimistic is most expected
valuation for the boxing using relative valuation is 21.40
expected now how to identify the comparable companies the most important
element of the comparable analysis is to identify a right set of comparables
comparing value of Apple to oranges does not make any sense here it is important
to conduct a preliminary study on the comparable companies and it is
generally involves just three sets first identify the industry try to zero down
the industry in which the companies are classified this can be tedious as
different sources would give different industry for the same company and also
industry names would be different in various sources generally the
classification available are very broad ones and cannot be relied completely if
there is no surety about the industry classification which is the case most of
the times try to identify some keywords relevant to the business description of
the company's example building material companies like the relevant keyword can
be roofing plumping framing insulation tilling construction service and so on
and so forth though this example is simple however for applying the same in
the real life scenario one needs to establish the value in the value of the
driver makes several adjustment to it be understand the company description it is
important to understand the business in order to select the comparable company
try to find out the exact business description of the company possible
sources for in the order of preference would be comparable company website
research reports company filings latest and gay annual report etc like Yahoo
Finance note company websites are very useful in
I mean helping to visualize the all the products and service but the research
reports and company filing provide actual segment data to give a true
business mix of the company see identify the key competitors comparable company
can be identified from the following sources in the order of reference
research reports company filings that is competition section yahoo finance that
is compared industry sections and Hoover's that is
competitor and industry section now professional comparable company analysis
a step-by-step approach okay the key to preparing comparable company analysis or
trading income trading comp is it is the arrive at the right multiple that is
EV by sales PE etc so as you can see this is a particular set of company
analysis the requisite output of the company 1 2 and 3 is linked from
the input tabs company 1 company 2 company 3 respectively preparing the
comparable comp table is not difficult however correctly calculating the
requisite valuation multiple sometime is challenging hence we will focus
primarily on correctly calculating this multiple with in-depth example ok and
for the same you can either download some excel time template which is
available to you and you can practice that what are the key formulas that are
used see the basic equity value is what let's let's go and quickly calculate the
basic equity value is going to be the common shares outstanding into this
share price okay the diluted equity value is going to be
the diluted share outstanding in to share price now the diluted from the
options okay that is going to be options less the options in two x's as friends
divided by the share price resolution from the convertibles convertible bonds
into the conversion ratio the enterprise value is going to be equity value minus
cash plus debt as minority interest plus preferred stock for it for the dilution
calculation above the exercise price your conversion price needs to be below
the share price if the conversion price of the exercise rises above the share
price then there will be no dilution an option will not get exercised and
conversion of the bonds will not take place comparable company steps input
basic information input balance your information then calculate in the money
stock options calculate in the money convertible security and find the
diluted EPS calculate the LTM numbers X non recurring items calculate the equity
value and enterprise value calculate the respective multiples okay let us now
proceed step by step to understand this fully I have basically taken an example
of Robert Half international picker RHI and even though the data used here is
pretty old 2006 10k and 10-q those are the filings I'm sure it will still
to be useful for understanding the general methodology the step 1 is going
to be the input the basic information for a company the last fiscal year end
and all the details these are all the basic details that you have entered
populate this field manually and this will be calculated subsequently because
this option warrant and convertible debts will be calculated step 2 input
the latest available balance sheet information like cash total assets total
debt minority interest and preferences total equity shoulders and capital
invested so post or with the quarter one financial 0-7 filing rho announced the
acquisition of some of the small staffing companies worth of 47 million
dollar psychos ition was assumed to be financed from cash so that's why there
is a negative cash balance now step 3 calculate all the money the stock
options the over here all the details of the stock options will be given here
there is a little bit of dilution will have a dilute effect on the common
outstanding shares okay now calculate all the in the money still is therefore
in the money convertible securities for RHI does not have any convertible debt
for convertible preferred security as you can see the data so as with the
options you you only get dilution from the
convertible bonds if the company's current share price exceeds the converse
conversion price of the bond okay how you factor the convertible bonds into
enterprise value if they if the convertible bonds are in the money they
can convert to shares then you can calculate the dilution and add to the
shares outstanding if they are out of the money they cannot convert into
shares and there then you count the bonds as the debt instead so dilution of
the convertibles is equal to close enough to convertible bonds into
convertible convert conversion ratio convertible bond is equal to convertible
dollar amount divided by the par value the conversion ratio is equal to the
par value divided by conversion price and the conversion price is equal to the
par value divided by the conversion ratio now the most important that is the
step 5 calculate the LTM number that is x non-recurring items now if you are
wondering what is non recurring item then you you need to understand to all
those items which are not going to repeat and the near future which is not
going to occur in near future this is our step Faiz income statement how we
are going to calculate the Altium the latest 12 years data over here this
is the most recent period data less the period ending 1 year prior to the most
recent ok step seven is to calculate the respective multiples this was our step
six is left calculate the equity value and the enterprise value we now know
what is equity and enterprise value calculate the respective multiples okay
and those multiples that is EV by revenue EV by ebeta and EV by ebit
those all those multiples you'll be able to calculate from this
particular data okay now there are some very important adjustments that you need
to take care of while while while analyzing like item cash what is the
thing that you should not think of cash as a free gift when you buy a company it
reduces your effective price because of you get the targets in time balance
sheet as a part of the acquisition and you need to subtract from the cash okay
now there is one additional info for the cash you almost always include the short
term investment as a part of the cash a number but long term investment depends
on the liquidity and what your bank usually does second debt debt refers to
the loan that a company has taken out normally when you buy a company you are
required to refinance its debt so it's counted as one of those of the hidden
cost to make the acquisition and this taking you will have to add some
additional info on particularly all debt related to in items should be counted in
this number short-term debt long-term debt revolvers mezzanine and so on the
only exception convertible bonds which may or may not be counted it's better to
use market values for dead but if you don't have them you can just use what is
listed on the balance sheet that is book value preferred stock
preferred stock is a very similar to debt investors receive a guaranteed
dividend usually in the form of interest rate on the preferred balance and you
this particular thing you will add some additional info on the preferred stock
preferred share is listed on the liability in the shareholders equity
side of the balance sheet now next minority interest when you own more than
50% of the another company minority interest refers to the poster that you
don't own so you need to add it back to the
enterprise value because the other company's revenue and profit are
included in your own financial statements so you need to make sure that
its value is reflected in the EV and this particular thing you need to add
some additional for minority interest minority interest is listed on the
balance sheet and the liabilities are shareholders equity in most cases you
are fine listing what's in the filling but if we have market numbers you can
use them absolutely okay now this was it for comparable company analysis I hope
you have got the best of the best knowledge from here thank you everyone
for for the tutor all
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