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IB - Lecture 3

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26 views17 pages

IB - Lecture 3

Uploaded by

hoang phuongthao25
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Valuation: Comparable

Companies Analysis
Lecture 3

1-1
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
2

Definition

◼ This method is also called “trading comps”


◼ Trading multiples of peer companies are used
to extrapolate valuation range for the target
◼ EV/EBITDA; P/E
◼ Reflects “current” valuation based on
prevailing market conditions and sentiment
 advantages and disadvantages?
3

Steps

◼ 1. Select the universe of comparable


companies
◼ 2. Locate the necessary financial information
◼ 3. Spread key statistics, ratios, and trading
multiples
◼ 4. Benchmark comparable companies
◼ 5. Determine valuation
4

Step 1
◼ Study the target: sources of info for public,
private company?
◼ Identify key characteristics of target:
◼ Business profile: sector, products and services,
customers and end markets, distribution channels,
and geography
◼ Financial profile: size, profitability, growth profile,
ROI, and credit profile
◼ Screen for comparable companies
5

Step 2

◼ Basis of valuation: historical performance and


expected future performance
◼ Sources of financial data: SEC filings (reports),
earnings announcements, investor
presentations, equity research reports,
consensus estimates, press releases
◼ LTM financial information is important
6

Step 3

◼ Size: market valuation (equity value, enterprise


value); sales, gross profit, EBITDA, EBIT, NI
◼ Profitability: gross profit, EBITDA, EBIT, and NI
margins
◼ Growth profile: historical and estimated growth rates
◼ ROI: ROIC, ROE, ROA, dividend yield
◼ Credit profile: leverage ratios, coverage ratios, credit
ratings
7

Calculations of some variables

◼ Fully diluted shares outstanding


◼ Enterprise value
◼ Gross profit
◼ EBITDA
◼ Gross profit margin
8

Calculations of some variables

◼ Diluted EPS growth rates:


◼ Historical growth rates
◼ Estimated future growth rates
◼ Compound annual growth rates (CAGRs)
◼ ROIC
◼ ROE
◼ ROA
◼ Implied dividend yield
9

Calculations of some variables

◼ Leverage ratio
◼ Debt-to-Total capitalization
◼ Interest coverage ratio
10

Calculation of LTM financial data

◼ LTM period: previous four quarters


◼ LTM = Prior fiscal year + Current stub – Prior stub
◼ Current stub: YTD financial data for current year
period
◼ Prior stub: YTD financial data from prior year
◼ If most recent quarter is 4th quarter of fiscal year,
is it necessary to calculate LTM financial data?
11

Adjustments for non-recurring items


◼ Described in Management discussion and analysis
(MD&A) section and financial footnotes
◼ Non-recurring, extraordinary, unusual, one-time
◼ Pre-tax and After-tax amounts when adjusting Gross
profit, EBIT, EBITDA, NI
◼ Adjustments for recent events: M&A, financing,
conversion of convertible securities, stock splits,
share repurchases
12

Calculations of key trading multiples

◼ P/E ratio = Share price / Diluted EPS


◼ Equity value-to-Net income multiple = Equity
value / NI

◼ Enterprise value-to-EBITDA multiple


◼ Enterprise value-to-EBIT multiple
◼ Enterprise value-to-Sales multiple
13

Step 4
◼ Benchmark financial statistics and ratios
◼ Compare target and comparables universe on the
basis of financial profile
◼ Understand each comparable company’s story
◼ Benchmark trading multiples
◼ Calculate mean, median, high, low of each multiple
◼ Exclude outliers, further tier comparable companies
(size, sub-sector), note trading multiples of the best
comparable companies
14

Step 5
◼ Use means and medians of the most relevant
multiple for the sector
◼ High and low multiples of comparables
universe provide further guidance
◼ Rely on multiples of the best comparables (2
or 3 companies) to select the most
appropriate range
◼ Derive an implied valuation range for target
15

Valuation implied by
◼ EV/EBITDA: LTM and expected future EBITDA
(one-year or two-year) to get implied
enterprise value
◼ P/E: LTM and expected future NI (one-year or
two-year) to get implied equity value
◼ Implied enterprise value
◼ Implied equity value
◼ Implied share price
16

Key Pros
◼ Market-based: actual public market data,
reflect market’s growth, risk expectations, and
sentiment
◼ Relativity: easily measurable and comparable
◼ Quick and convenient: a few easy-to-calculate
inputs
◼ Current: prevailing market data, can be
updated on a daily (or intraday) basis
17

Key Cons
◼ Market-based: skewed valuation in irrational
exuberance or bearishness periods
◼ Absence of relevant comparables: no “pure play”
comparables can be found, e.g., niche sector
◼ Potential disconnect from cash flow: intrinsic value
implied by projected CFs (DCF analysis)
◼ Company-specific issues: fail to capture target-
specific strengths, weaknesses, opportunities, and
risks

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