Trading Comps
"If the market is what matters, when valuing a public company, do we even
need a comps analysis? Why not just use the market cap of the company
directly to value it?" - Correct Answer • If the market was perfectly efficient, it stands to reason that it would price
individual equities
correctly rendering a comps analysis pointless.
• However, the thinking behind a comps analysis for a public company is that the market may be
efficient on average, but it can be off when pricing individual companies.
"Should I place more weight on LTM or forward multiples?" - Correct Answer • That entirely depends on the specifics
of the situation. Using historical (LTM) profits is nice
because it represents actual bird-in-hand results, and forecasts for smaller cap companies can
be hard to come by. However, LTM suffers from the problem that markets value companies off
future - not historical - profits and cash flows.
• If LTM results do not include a lot of nonrecurring items and no significant margin and growth
changes are expected over the next 2 years, LTM results can - and should - be used side-byside
with forward multiples. If these conditions are not met, forward multiples should be relied
on more heavily
"Should I use a median or mean when calculating the comps-derived
multiples" - Correct Answer • For larger peer groups, calculating relevant peer group statistic using median is
preferable to
mean calculations because it limits distortions from outliers. For smaller peer groups (less than
5) with no outliers, mean is preferable.
"What's the downside to over-reliance on comps?" - Correct Answer • Always comparing apples to oranges. Truly
comparable
companies are rare and differences are hard to account for.
Explaining value gaps between the company and its
comparable involves judgment.
• In addition, thinly traded, small capitalization or poorly
followed stocks may not reflect fundamental value. Lastly,
many people feel that the stock market is emotional and that it
sometimes fluctuates irrationally (i.e. the market can be
wrong).
"Which is a better way to value a business - DCF or comps?" - Correct Answer • They're both important. The DCF
provides an academically rigorous measure of value, BUT it
is very sensitive to assumptions which makes it easily to manipulate.
• Trading comps tell you how the market is ACTUALLY valuing similar businesses to the one you
are analyzing (i.e. real-world derived value vs. model derived value).
• Accounting changes: - Correct Answer If a company changes its accounting method for depreciation or
inventory accounting (LIFO vs. FIFO), the corresponding depreciation or cost of goods
expenses will change
• Cash and equivalent - Correct Answer • Cash and equivalents
• Marketable securities and investments
• Other non operating assets
• Discontinued operations: - Correct Answer When a company discontinues or sells off a distinct part of its
business, the income and expenses from this part of the business, as well as severance,
facility closure expenses, etc. will be recognized below net income in a separate category.
• Extraordinary items: - Correct Answer Things like losses from the expropriation of assets.
, Categorization - Correct Answer A comps analysis involves comparing multiples for multiple companies
• However, a problem emerges when the companies all have different fiscal years because in
order to compare multiples standardized against some operating metric (like revenue, EBITDA,
EBIT, or net income/EPS), they all have to be of the same timeframe.
• As a result, an adjustment is made to all companies to adjust their operating results to a
December 31 calendar year end.
Description of internet and cable companies multiples - Correct Answer • Early stage internet businesses with no
revenue and negative profitability
can value their business by looking at operating metrics like website hits or
subscribers, under the assumption that they proxy future profitability
evenly across all the companies being compared
EPS is most appropriate for - Correct Answer • Mature lifecycle companies
• Companies with positive earnings
• Companies with similar capital structures
EV / EBIT is most appropriate for - Correct Answer • Companies with positive operating income
• Service-based businesses (low capital intensive firms)
• Business with varying levels of capital intensity
EV / EBITDA defn and description - Correct Answer Enterprise value/Earnings before interest taxes depreciation &
amortization
D&A is a huge noncash expense for capital intensive businesses
• Companies can use different depreciation methods, and useful life
assumptions to equipment so D&A - a noncash accounting expense - can
significantly skew the comparison of operating profitability across two
otherwise identical firms
EV / Revenue defn and description - Correct Answer Enterprise value / Revenue
Useful for early stage, high grow companies, with limited or negative
profitability.
EV/EBIT ratio def and description - Correct Answer Enterprise value / Earnings before interest & taxes
• Isolates core operations without impact of financing decision (interest
expense) and taxes
Ev/EBITDA is most appropriate for - Correct Answer • Used to value many industries - most popular EV multiple
• Particularly useful for high capital-intensive firms within a particular
industry with similar levels of capital intensity
Ev/Revenue Most appropriate for: - Correct Answer • Businesses with negative EBITDA (High growth, young
industries)
• Businesses with similar cost structures (retailers)
Grey areas where GAAP's accounting treatment differs from the prevailing analyst treatment include - Correct Answer
Stock Based compensation expense
Amortization expense
Nonrecurring items
Gross debt - Correct Answer • Debt
• Non-controlling interests
• Preferred Stock
How are comps analyzed? - Correct Answer We don't compare absolute values but rather multiples to account for
differences in a company.
"If the market is what matters, when valuing a public company, do we even
need a comps analysis? Why not just use the market cap of the company
directly to value it?" - Correct Answer • If the market was perfectly efficient, it stands to reason that it would price
individual equities
correctly rendering a comps analysis pointless.
• However, the thinking behind a comps analysis for a public company is that the market may be
efficient on average, but it can be off when pricing individual companies.
"Should I place more weight on LTM or forward multiples?" - Correct Answer • That entirely depends on the specifics
of the situation. Using historical (LTM) profits is nice
because it represents actual bird-in-hand results, and forecasts for smaller cap companies can
be hard to come by. However, LTM suffers from the problem that markets value companies off
future - not historical - profits and cash flows.
• If LTM results do not include a lot of nonrecurring items and no significant margin and growth
changes are expected over the next 2 years, LTM results can - and should - be used side-byside
with forward multiples. If these conditions are not met, forward multiples should be relied
on more heavily
"Should I use a median or mean when calculating the comps-derived
multiples" - Correct Answer • For larger peer groups, calculating relevant peer group statistic using median is
preferable to
mean calculations because it limits distortions from outliers. For smaller peer groups (less than
5) with no outliers, mean is preferable.
"What's the downside to over-reliance on comps?" - Correct Answer • Always comparing apples to oranges. Truly
comparable
companies are rare and differences are hard to account for.
Explaining value gaps between the company and its
comparable involves judgment.
• In addition, thinly traded, small capitalization or poorly
followed stocks may not reflect fundamental value. Lastly,
many people feel that the stock market is emotional and that it
sometimes fluctuates irrationally (i.e. the market can be
wrong).
"Which is a better way to value a business - DCF or comps?" - Correct Answer • They're both important. The DCF
provides an academically rigorous measure of value, BUT it
is very sensitive to assumptions which makes it easily to manipulate.
• Trading comps tell you how the market is ACTUALLY valuing similar businesses to the one you
are analyzing (i.e. real-world derived value vs. model derived value).
• Accounting changes: - Correct Answer If a company changes its accounting method for depreciation or
inventory accounting (LIFO vs. FIFO), the corresponding depreciation or cost of goods
expenses will change
• Cash and equivalent - Correct Answer • Cash and equivalents
• Marketable securities and investments
• Other non operating assets
• Discontinued operations: - Correct Answer When a company discontinues or sells off a distinct part of its
business, the income and expenses from this part of the business, as well as severance,
facility closure expenses, etc. will be recognized below net income in a separate category.
• Extraordinary items: - Correct Answer Things like losses from the expropriation of assets.
, Categorization - Correct Answer A comps analysis involves comparing multiples for multiple companies
• However, a problem emerges when the companies all have different fiscal years because in
order to compare multiples standardized against some operating metric (like revenue, EBITDA,
EBIT, or net income/EPS), they all have to be of the same timeframe.
• As a result, an adjustment is made to all companies to adjust their operating results to a
December 31 calendar year end.
Description of internet and cable companies multiples - Correct Answer • Early stage internet businesses with no
revenue and negative profitability
can value their business by looking at operating metrics like website hits or
subscribers, under the assumption that they proxy future profitability
evenly across all the companies being compared
EPS is most appropriate for - Correct Answer • Mature lifecycle companies
• Companies with positive earnings
• Companies with similar capital structures
EV / EBIT is most appropriate for - Correct Answer • Companies with positive operating income
• Service-based businesses (low capital intensive firms)
• Business with varying levels of capital intensity
EV / EBITDA defn and description - Correct Answer Enterprise value/Earnings before interest taxes depreciation &
amortization
D&A is a huge noncash expense for capital intensive businesses
• Companies can use different depreciation methods, and useful life
assumptions to equipment so D&A - a noncash accounting expense - can
significantly skew the comparison of operating profitability across two
otherwise identical firms
EV / Revenue defn and description - Correct Answer Enterprise value / Revenue
Useful for early stage, high grow companies, with limited or negative
profitability.
EV/EBIT ratio def and description - Correct Answer Enterprise value / Earnings before interest & taxes
• Isolates core operations without impact of financing decision (interest
expense) and taxes
Ev/EBITDA is most appropriate for - Correct Answer • Used to value many industries - most popular EV multiple
• Particularly useful for high capital-intensive firms within a particular
industry with similar levels of capital intensity
Ev/Revenue Most appropriate for: - Correct Answer • Businesses with negative EBITDA (High growth, young
industries)
• Businesses with similar cost structures (retailers)
Grey areas where GAAP's accounting treatment differs from the prevailing analyst treatment include - Correct Answer
Stock Based compensation expense
Amortization expense
Nonrecurring items
Gross debt - Correct Answer • Debt
• Non-controlling interests
• Preferred Stock
How are comps analyzed? - Correct Answer We don't compare absolute values but rather multiples to account for
differences in a company.
