Comparable Company Analysis – This is Part 2 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
firm. 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 article, we discuss the following –

 What is Comparable Company Analysis?

 How to read comparable company analysis table?
 Box IPO Comparable Comp Analysis
 How to identify comparable companies?
 How do we prepare a professional comparable company analysis table
 Important adjustments in Comparable Company Analysis

In order to fully understand these concepts, you should have reasonable knowledge of Relative
Valuation Multiples like EV/EBITDA, PE Ratio, Price to Book value, PEG Ratio etc. However, If
you want a quick refresher, you may refer to Part 1 of this equity valuation series that covered the
topic of Relative Valuation multiples

Recommended Courses

 Financial Analyst Prep Training

 Equity Research Modeling Course
 Complete Investment Banking Training

WHAT IS COMPARABLE COMPANY ANALYSIS?

Comparable analysis or Trading comps can be best explained with a help of an example – let’s assume
that you are planning to buy a house in New York (why not?). Obviously you may search on the many
of real estate brokerage websites and would also draw a 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.

When you are comparing apartments, you would consider different attributes such as number of
rooms, size of bedrooms, number of bathroom, layout etc. In doing so, what you would notice is
that apartments with similar kind of attributes may cost similarly!

In this context, let us now try and understand what is comparable “Company” analysis? or
Comparable comps. Below is the definition sourced from Investopedia.

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From the above apartment related discussion and investopedia definition, we can draw the
following inferences regarding comparable analysis –

1. Just like comparing the apartments, comparable company analysis helps you compare
different companies with similar size and industry and derive a fair value for them
2. Instead of looking at the number of beds, location, bathrooms etc, you look at relative
valuation multiples (like EV/EBITDA, PE, P/BV etc).
3. You infer from such comparison regarding a company’s price is over valued or under valued.

I guess with this basic analogy we should be able to proceed and move forward to reading the
comparable company analysis.

HOW TO READ COMPARABLE COMPANY ANALYSIS TABLE?

For learning to read a comparable company analysis table or Comparable Comps, I will take a real
life example, Box Inc that had earlier announced its IPO. We want to understand at what valuation
price point should we invest in Box Inc IPO shares.

Below is the comparable company analysis table for Box IPO. There are broadly 5 parts to the trading
comps table –

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 1. Company Information –
 This includes Company Name, Ticker and Price. Ticker is a unique symbol given to
the company to identify publicly listed company.
 You may take bloomberg, reuters tickers as well. Also, note that prices that we take
here are the most recent prices.
 We make the table in such a way that these prices are linked to the database where
they would get updated automatically.
2. Size of the company –
 This includes Market Capitalization and Enterprise Value.
 We normally sort the table on the basis of Market Capitalization. Market
Capitalization also provides us pseudo for the size of the company.
 Enterprise Value is the current Market based valuation of the firm.
 We may not want to compare a small market capitalization company with a large
capitalization company.
3. Valuation Multiples –
 This should include 2 to 3 appropriate valuation tools for comparison
 We should ideally show one year of historical multiple and two years of forward
multiples (estimated)
 Choosing an appropriate valuation tool is the key to successfully valuing the company.
4. Operating Metrics –
 This may include fundamental ratios like Revenue, growth, ROE, etc
 This is important so that we can understand the fundamentals of the company at once.
 You may include Profit Margins, ROE, Net Margin, Leverage etc to make this comp
more meaningful.
5. Summary –
 This is a simple mean, median, low and high of the above metrics
 Mean and Median provides core insights to the fair valuation
 If a company’s multiple is above the mean/median, we tend to infer that the company
may be
 overvalued
 Likewise, if the multiple is below the mean/median, we may infer undervalued.
 High and Low also helps us in understanding the outliers and a case to remove those
if they are too far away from the Mean/Median.

READING THE TRADING COMP / COMPARABLE COMPANY ANALYSIS – BOX IPO

Let us now look at the summary of Comparable Company analysis of Box IPO.

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We can infer the following from the above table –

 Cloud companies are trading at an average of 9.5x EV/Sales Multiple.

 We note companies like Xero is an outlier that trades at 44x EV/Sales multiple (expected 2014
growth rate of 94%).
 Lowest EV/Sales multiple is 2.0x
 Cloud companies trade at EV/EBITDA multiple of 32x.

BOX VALUATION

 From the financial model of Box, we note that Box is EBITDA Negative so we can’t proceed
with EV/EBITDA as a valuation tool. The only multiple that is suitable for valuation
is EV/Sales.
 Since the median EV/Sales is around 7.7x and mean is around 9.5x, we may consider making
3 scenarios for valuations.
 Optimistic case of 10.0x EV/Sales, Base Case of 7.1x EV/Sales and Pessimistic Case of
5.0x EV/Sales.

Below table shows the per share price using the 3 scenarios.

 Box Inc valuation range from $15.65 (pessimistic case) to $29.38 (optimistic case)
 Most expected valuation for Box Inc using Relative Valuation is $21.40 (expected)

HOW TO IDENTIFY COMPARABLE COMPANIES

The most important element of comparable analysis is to identify the right set of comparable.
Comparing value of apple to oranges does not make any sense here. It is important to conduct a
preliminary study on comparable companies and it generally involves these 3 steps –

A) IDENTIFYING THE INDUSTRY

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  Try to zero down the industries in which the companies are classified.
 This can be tedious as different sources would give different industries for the same company
and also the industry names would be different in various sources.
 Generally the classifications 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 descriptions of the companies. E.g. For
Building materials company, the relevant keywords can be – roofing, plumbing, framing,
insulation, tiling, construction service, etc.
 Though this example is simple, however, for applying the same in real life scenario, one need
to establish the value and the value driver and make several adjustments to it.

B) UNDERSTAND THE COMPANY DESCRIPTION

 It is important to understand the business in order to select comparable companies.

 Try to find out the exact business description of the company.
 Possible sources for this in the order of preference would be:
 Company Website
 Research reports
 Company Filings (Latest 10K, Annual Report, etc.)
 Yahoo Finance
 Note: Company websites are very useful in helping to visualize the all the products and
services, but research reports and company filings provide actual segment data to give a true
business mix of the company

C) IDENTIFY KEY COMPETITORS

 Comparable companies can be identified from the following sources in the order of
preference:
 Research Reports
 Company Filings – Competition Section
 Yahoo Finance – Competitors and Industry sections
 Hoovers – Competitors and Industry sections

PROFESSIONAL COMPARABLE COMPANY ANALYSIS: A STEP-BY-STEP

APPROACH

The key to preparing the comparable company analysis or Trading comp is the arrive at the right
multiple (EV/Sales, P/E etc). Below is a sample summary Comparable comp analysis excel sheet –

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The requisite output of Company 1, Company 2, Company 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 sometimes is challenging.
Hence, we will focus primarily on correctly calculating these multiples with an in-depth example.

You can download the comparable comp excel template from here – Comparable Company Template

Key Formulas used:

 Basic Equity Value = Common Shares Outstanding * Share Price

 Diluted Equity Value = Diluted Shares Outstanding * Share Price
 Dilution from Options = Options – ( Options * Exercise Price) / Share Price
 Dilution from Convertibles = Convertible Bonds * Conversion Ratio
 Enterprise Value = Equity Value – Cash + Debt + Minority Interest + Preferred Stock

 For the dilution calculations above, the exercise price or conversion price needs to
be below the share price.

If the conversion price or the exercise price is above the Share Price, then there will be no dilution
and options will not get exercised and conversion of bonds will not take place.

COMPARABLES COMPANY VALUATION STEPS:

 Input basic information

 Input Balance Sheet information
 Calculate “in the money” stock options
 Calculate “in the money” convertible securities and find the diluted EPS
 Calculate the LTM numbers (ex non-recurring items)
 Calculate the Equity Value and Enterprise Value
 Calculate the respective multiples

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Let us now proceed step-by-step to understand this fully. I have taken an example of Robert Half
International (Ticker – RHI) and even though the data used here is pretty old (2006 10K and 10Q), i
am sure it will still prove to be useful for understanding the general methodology.

STEP 1: INPUT THE BASIC INFORMATION FOR A COMPARABLE COMPANY

STEP 2: INPUT THE LATEST AVAILABLE BALANCE SHEET INFORMATION

STEP 3: CALCULATE ALL THE “IN THE MONEY” STOCK OPTIONS

Also, look at Treasury Stock Method and Restricted Stock Units

STEP 4: CALCULATE ALL THE “IN THE MONEY” CONVERTIBLE SECURITIES

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As with options, you only get dilution from convertible bonds if the company’s current share price
exceeds the conversion price of the bonds.

How You Factor Convertible Bonds Into Enterprise Value: If the convertible bonds are in‐the‐
money (they can convert to shares) then you calculate the dilution and add them to shares outstanding.
If they’re out‐of-the‐money (they cannot convert into shares) then you count the bonds as debt
instead.

 Dilution from Convertibles = Convertible Bonds * Conversion Ratio

 Convertible Bonds = Convertible Dollar Amount / Par Value
 Conversion Ratio = Par Value / Conversion Price
 Conversion Price = Par Value / Conversion Ratio

Step 5: Calculate the LTM numbers (ex non-recurring items)

(If you are wondering what are non-recurring items, then do have a look at detailed post on non
recurring items)

STEP 6: CALCULATE THE EQUITY VALUE AND ENTERPRISE VALUE

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STEP 7: CALCULATE THE RESPECTIVE MULTIPLES

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IMPORTANT ADJUSTMENTS IN COMPARABLE COMPANY ANALYSIS

Items Things to Note Add / Subtract Additional Info

Cash Think of Cash as a “free gift” Subtract You almost always include
when you buy a company – it Short‐Term Investments as part
reduces your effective price of the Cash number, but Long‐
because you get the target’s Term Investments depend on
entire Balance Sheet as part of the liquidity and what your
the acquisition. bank usually does.

Debt Debt refers to loans that a Add All debt‐related items should be
company has taken out. counted in this number – short‐
Normally when you buy a term debt, long‐term debt,
company, you’re required to revolvers, mezzanine, and so
refinance its debt, so it’s on. The only exception:
counted as one of those convertible bonds, which may
“hidden costs” to make an or may not be counted.It’s
acquisition. better to use market values for
debt, but if you don’t have them
you can just use what’s listed on
the Balance Sheet (book
values).

Preferred Preferred Stock is very similar Add Preferred Shares is listed on the
Stock to Debt – investors receive a Liabilities & Shareholders’
guaranteed dividend, usually Equity side of the Balance
in the form of an interest rate Sheet.
on the Preferred
Stock balance.

Minority When you own more than 50% Add Minority Interest is listed on the
Interest of another company, Minority Balance Sheet, under Liabilities
Interest refers to the percent or Shareholders’ Equity – in
that you DON’T own. You most cases you’re fine listing
need to add it back to what’s in the filing, but if you
Enterprise Value because the have market numbers you can
other company’s revenue and use them.
profit are included in your own
financial statements; so you

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 need to make sure its value is
reflected in EV.

You can also look at SOTP Valuation and DCF or Discounted Cash Flow approach to enhance your
knowledge in valuations.

WHAT’S NEXT?

If you learned something new from this post, please leave a comment below. Let me know what you
think. Thanks and take care.

Comparable Company Analysis Video

Useful Posts

 EV to EBIT Multiple
 P/CF Formula
 Enterprise Value to Sales Formula
 EV to EBITDA Multiple
 Price Earning Growth

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