Business Valuation and Investment Banking: Comparable Companies Analysis

Introduction to Comparable Companies Analysis

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Business Valuation and Investment Banking
Topic 1: Comparable Companies AnalysisContent

• Introduction to Comparable Companies Analysis (CCA)
• CCA Steps (5)
• Key Pros and Cons
• Illustrative Comps for VALUECO
• Questions and Exercises

References

• RP, Chapter 1

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Introduction to CCA

• CCA is a relative valuation method that uses valuation multiples of
  similar publicly traded companies to estimate the value of a "target"
  (company, division, business, or collection of assets)
• Widely used due to its market-based approach, reflecting current
  investor sentiment and market conditions
• Based upon the premise that similar (public) companies provide a highly
  relevant reference point for valuing a given target providing that
  companies share key business and financial characteristics,
  performance drivers, and risk.
• Comps is designed to reflect "current" valuation based on prevailing
  public market conditions and sentiment. The market value of the
  target could (should) be "tested" with DCF, aimed at calculating the
  target intrinsic value.

Comparable Companies Analysis Steps

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CCA Steps
EXHIBIT 1.1
Comparable Companies Analysis Steps
Step I. Select the Universe of Comparable Companies
Step II. Locate the Necessary Financial Information
Step III. Spread Key Statistics, Ratios, and Trading Multiples
Step IV. Benchmark the Comparable Companies
Step V. Determine Valuation

Trading Multiples Output Page

4CCA: Trading Multiples Output Page
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EXHIBIT 1.2 Comparable Companies Analysis-Trading Multiples Output Page
ValueCo Corporation
Comparable Companies Analysis
($ in millions, except per share data)
Enterprise Value /
Price /
Company
Ticker
Current
Share
Price
% of
52-wk.
High
Equity
Value
Enterprise
Value
LTM
Sales
2019E
Sales
2020E
Sales
LTM
2019E
2020E
EBITDA EBITDA EBITDA
LTM
EBIT
2019E
EBIT
2020E
EBIT
Total
LTM
EBITDA Debt /
Margin EBITDA
LTM
EPS
2019E
EPS
2020E
EPS
LT
EPS
Growth
Tier I: Specialty Chemicals
BuyerCo
BUY
$70.00
91%
$9,800
$11,600
1.8x
1.7x
1.6x
8.0x
7.8x
7.3x
9.1x
8.8x
8.2x
22%
1.5x
11.5x
11.1x
10.3x
7%
Sherman Co.
SHR
40.00
76%
5,600
8,101
1.4x
1.4x
1.3x
7.7x
7.7x
7.2x
10.8x
10.7x
10.1x
18%
3.0x
11.0x
10.6x
9.7x
9%
Pearl Corp.
PRL
68.50
95%
5,172
5,856
1.4x
1.4x
1.3x
7.0x
7.0x
6.5x
9.4x
9.4x
8.7x
20%
1.8x
13.1x
12.2x
11.1x
11%
Gasparro Corp.
JDG
50.00
80%
5,000
6,750
1.4x
1.4x
1.3x
7.5x
7.1x
6.6x
9.3x
8.8x
8.2x
19%
2.1x
10.7x
9.8x
9.1x
12%
Kumra Inc.
KUM
52.50
88%
4,852
5,345
1.7x
1.7x
1.5x
8.0x
7.9x
7.4x
10.6x
10.4x
9.7x
21%
1.3x
15.8x
13.6x
11.8x
10%
Mean
Median
1.5x
1.5x
1.4x
7.7x
7.5x
7.0x
9.8x
9.6x
9.0x
20%
1.9x
12.4x
11.5x
10.4x
10%
1.4x
1.4x
1.3x
7.7x
7.7x
7.2x
9.4x
9.4x
8.7x
20%
1.8x
11.5x
11.1x
10.3x
10%
Tier II: Commodity / Diversified Chemicals
Falloon Group
FLN
$31.00
87%
$7,480
$11,254
1.0x
1.0x
0.9x
6.9x
7.0x
6.7x
10.8x
11.0x
10.5x
14%
2.5x
13.3x
12.4x
10.8x
5%
Goodson Corp.
GDS
64.00
83%
4,160
5,660
1.2x
1.2x
1.1x
7.4x
7.5x
7.2x
10.8x
11.0x
10.4x
16%
2.9x
16.1x
15.4x
13.5x
9%
Pryor Industries
PRI
79.00
88%
3,926
4,166
1.1x
1.2x
1.1x
7.3x
7.4x
7.1x
9.9x
10.1x
9.6x
15%
1.1x
14.3x
13.9x
12.7x
10%
Lanzarone Global
LNZ
32.25
95%
3,230
3,823
1.0x
1.0x
1.0x
6.6x
6.7x
6.4x
8.9x
9.0x
8.6x
16%
1.3x
11.5x
10.7x
9.7x
8%
McMenamin & Co.
MCM
33.50
80%
3,193
3,193
1.0x
0.9x
0.8x
9.0x
8.4x
7.5x
14.2x
13.1x
11.8x
11%
1.2x
22.2x
19.3x
16.8x
12%
Mean
Median
1.1x
1.1x
1.0x
7.4x
7.4x
7.0x
10.9x
10.8x
10.8x
11.0x
10.2x
10.4x
15%
1.3x
14.3x
13.9x
9%
Tier III: Small-Cap Chemicals
S. Momper & Co.
MOMP
$28.00
95%
$2,240
$2,921
1.4x
1.4x
1.2x
7.7x
7.4x
6.7x
9.9x
9.5x
8.6x
18%
2.6x
14.2x
14.4x
13.4x
5%
Adler Worldwide
ADL
10.50
80%
1,217
1,463
0.9x
1.0x
0.9x
6.0x
6.1x
5.8x
8.0x
8.1x
7.7x
16%
1.6x
11.3x
12.2x
11.3x
7%
Schachter & Sons
STM
4.50
89%
1,125
1,674
1.0x
0.9x
0.8x
7.0x
6.5x
5.7x
9.8x
9.1x
7.9x
14%
2.5x
12.2x
11.3x
10.0x
11%
Girshin Holdings
MGP
50.00
67%
1,035
1,298
0.8x
0.8x
0.7x
7.3x
6.8x
6.1x
11.5x
10.7x
9.7x
11%
1.8x
16.5x
15.6x
14.2x
8%
Crespin International
MCR
27.00
80%
872
1,222
0.8x
0.8x
0.7x
6.4x
6.0x
5.4x
9.2x
8.6x
7.7x
13%
2.1x
11.8x
11.6x
10.5x
6%
Mean
1.0x
1.0x
0.9x
6.9x
6.6x
5.9x
9.7x
9.2x
8.3x
14%
2.1x
13.2x
13.0x
11.9x
7%
Median
0.9x
0.9x
0.8x
7.0x
6.5x
5.8x
9.8x
9.1x
7.9x
14%
2.1x
12.2x
12.2x
11.3x
7%
-
-
Overall
Mean
1.2x
1.2x
1.1x
7.3x
7.2x
6.6x
10.1x
9.9x
9.2x
16%
2.0x
13.7x
12.9x
11.7x
9%
Median
1.1x
1.2x
1.1x
7.3x
7.1x
6.7x
9.9x
9.5x
8.7x
16%
1.8x
13.1x
12.2x
11.1x
9%
High
Low
1.8x
1.7x
1.6x
9.0x
8.4x
7.5x
14.2x
13.1x
11.8x
3.0x
22.2x
19.3x
16.8x
12%
0.8x
0.8x
0.7x
6.0x
6.0x
5.4x
8.0x
8.1x
7.7x
22%
11%
1.1x
10.7x
9.8x
9.1x
5%
Source: Company filings, Bloomberg, Consensus Estimates
Note: Last twelve months data based on September 30, 2019. Estimated annual financial data based on a calendar year.
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1.0x
1.0x
1.0x
7.3x
7.4x
7.1x
12.7x
12.7x
9%
14%
1.8x
15.5x
14.3x
----

Selecting Comparable Companies

Step 1: Universe Selection

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Step 1: Select the Universe of Comparable Companies

• The selection of the right universe of comparables companies is the
  foundation for performing CCA
• You must truly understand the target and select companies in the
  same sector, or preferably "sub-sector", with similar size (or
  correcting/calibrating the multiple for size if it is relevant)
• For target with no clear publicly trade comparables, the analyst
  seeks companies outside the target's core sector that share business
  and financial characteristics on some fundamental level.
• Medium-size manufacturer of residential window ---- > Building products
  manufactures -> Manufacturers of related building products (e.g. doors)

Step 1: Target Information Study

6Step 1. Study the Target (Info)

• Public (listed) target:
  • Filings from the Stock Exchange (10-K and 10-Q Sec filings in US)
  • Consensus research estimates
  • Equity and fixed income research reports
  • Press releases
  • Earnings call transcripts
  • Investor presentations
  • Corporate websites
• Private companies:
  • Corporate website
  • Financial Statements (if available, as in Italy, but not in many other countries)

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Key Characteristics for Comparison

7Key Characteristics of the Target for Comparison Purposes
EXHIBIT 1.3
Business and Financial Profile Framework
Business Profile
Financial Profile

• Sector
• Size
• Products and Services
• Profitability

Customers and End Markets

• Growth Profile
• Distribution Channels
• Return on Investment
• Geography
• Credit Profile
  Key idea: Companies that share core business characteristics tend to
  serve as good comparables
  Sector. Similar risks and opportunities (sub-sectors and segments)
  Product. Specialty vs. commodity
  Customers. Ideally, we look for similar customer base
  End Markets . Markets into which the company sells its products (# customers)
  Channels. Wholesale channels? Retailers? End users? Different cost structure
  Geo. U.S. vs Europe vs Asia ... Even if they have the same business models
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  Screening for Comparable Companies

  8Screen for Comparables Companies
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  • Same sources as for the Target (slide 7)
  • Initiation coverage from research report (see examples in course
    website)
  • Target's public competitors (often discussed in the annual report)
  • Standard Industrial Classification (SIC), NAICS, or other industry code
  • Senior bankers and industry experts

  Example: Initiation Coverage Research Report

  9Example of Initiation Coverage Research Report
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  Multiples' cross-check
  As a cross-check, we compare Sicily by Car with a set of listed comparable companies
  operating in the car rental market (see Appendix 3: Peers, for more details).
  Sicily by Car - Multiples comparison
  EV/EBIT
  x)
  Price
  (EUR/sh)
  Mkt Cap.
  (EUR M)
  EV/EBITDA
  FY 23E
  FY24E
  FY23E
  FY24E
  Avis Budget Group, Inc.
  203.7
  7,890
  5.2
  6.2
  5.3
  6.2
  Sixt SE
  108.5
  4,392
  6.7
  5.9
  12.7
  11.7
  Hertz Global Holdings Inc
  14.5
  4,521
  10.5
  11.6
  8.9
  9.5
  Autohellas SA
  13.2
  640
  5.4
  5.4
  10.6
  10.6
  Average
  6.9
  7.3
  9.4
  9.5
  SBC EBITDA (EUR M)
  65.4
  72.4
  52.6
  56.8
  EV (EUR M)
  454.1
  525.5
  492.6
  539.3
  SBC net cash (EUR M)
  -53.8
  -65.4
  53.8
  -65.4
  Fair value (EUR M)
  507.9
  590.9
  546.4
  604.7
  Source: Intesa Sanpaolo Research estimates and FactSet at 03/08/2023
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  Financial Information for Comparable Companies Analysis

  Step II: Locating Necessary Financial Data

  Step II. Locate the Necessary Financial Information
  EXHIBIT 1.4 Summary of Financial Data Primary Sources
  Information Item
  Source
  Income Statement Data
  Sales
  Gross Profit
  EBITDA(a)
  Most recent 10-K, 10-Q, 8-K, Press Release
  EBIT
  Net Income / EPS
  Research Estimates
  Bloomberg Estimates, Refinitiv IBES, S&P
  Capital IQ Estimates, Thomson First Call,
  individual equity research reports
  Balance Sheet Data
  Cash Balance
  Debt Balance
  Most recent 10-K, 10-Q, 8-K, Press Release
  Shareholders' Equity
  Cash Flow Statement Data
  Depreciation & Amortization
  Capital Expenditures
  Most recent 10-K, 10-Q, 8-K, Press Release
  Share Data
  Basic Shares Outstanding
  10-K, 10-Q, or Proxy Statement, whichever
  is most recent
  Options and Warrants Data
  10-K or 10-Q, whichever is more recent
  Market Data
  Share Price Data
  Financial information service
  Credit Ratings
  Rating agencies' websites
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  Step III: Spreading Key Statistics, Ratios, and Trading Multiples

  Step III. Spread Key Statistics, Ratios, and Trading Multiples
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  • Size (Market Valuation and Key Financial Data)
  • Profitability (Gross Profit, EBITDA, EBIT, Net Income)
  • Growth Profile (Historical and Estimated Growth Rates)
  • Return on Investment (ROIC, ROE, ROA, Dividend Yield)
  • Credit Profile (Leverage Ratios, Coverage Ratios, Credit Ratings)
  • Calculation of Key Trading Multiples

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  Sample Comparable Company Input Page

  Comparable Company Input Page
  EXHIBIT 1.5 Sample Comparable Company Input Page
  Company A (Nasdaq:AAA)
  Input Page
  ($ in millions, except per share data)
  General Information
  Company A
  Ticker
  AAA
  Stock Exchange
  Nasdaq
  Fiscal Year Ending
  Dec-31
  Moody's Corporate Rating
  NA
  S&P Corporate Rating
  NA
  Predicted Beta
  Marginal Tax Rate
  25.0%
  Selected Market Data
  1/1/2000
  % of 52-week High
  NA
  52-week High Price
  1/1/2000
  1/1/2000
  .
  Fully Diluted Shares Outstanding
  Equity Value
  Plus: Total Debt
  Plus: Preferred Stock
  Plus: Noncontrolling Interest
  Less: Cash and Cash Equivalents
  Enterprise Value
  Trading Multiples
  LTM
  9/30/2019
  NFY
  2019E
  NFY+1
  2020E
  NFY+2
  2021E
  EV/Sales
  NA
  NA
  NA
  NA
  Metric
  NA
  NA
  NA
  NA
  EV/EBIT
  NA
  NA
  NA
  NA
  Metric
  P/E
  NA
  NA
  NA
  NA
  Metric
  FCF Yield
  NA
  NA
  NA
  NA
  Metric
  .
  LTM Return on Investment Ratios
  Return on Invested Capital
  Return on Equity
  Return on Assets
  Implied Annual Dividend Per Share
  NA
  LTM Credit Statistics
  Debt/Total Capitalization
  Total Debt/EBITDA
  Net Debt/EBITDA
  EBITDA/Interest Expense
  (EBITDA-capex)/Interest Expense
  EBIT/Interest Expense
  Growth Rates
  Sales
  EBITDA
  FCF
  EPS
  Historical
  1-year
  . .
  .
  .
  2-year CAGR
  Estimated
  1-year
  .
  2-year CAGR
  Long-term
  NA
  Reported Income Statement
  Fiscal Year Ending December 31,
  Prior
  Stub
  9/30/2018
  Current
  Stub
  9/30/2019
  LTM
  9/30/2019
  Sales
  COGS (incl. D&A)
  Gross Profit
  SG&A
  Other Expense / (Income)
  EBIT
  Interest Expense
  Pre-tax Income
  Income Taxes
  Noncontrolling Interest
  Preferred Dividends
  Net Income
  Effective Tax Rate
  NA
  NA
  NA
  NA
  NA
  NA
  Weighted Avg. Diluted Shares
  Diluted EPS
  NA
  NA
  NA
  NA
  NA
  NA
  Adjusted Income Statement
  Reported Gross Profit
  .
  .
  .
  Non-recurring Items in COGS
  .
  .
  .
  Adj. Gross Profit
  % margin
  NA
  NA
  NA
  NA
  NA
  NA
  Reported EBIT
  Non-recurring Items in COGS
  Other Non-recurring Items
  Adjusted EBIT
  % margin
  NA
  NA
  NA
  NA
  NA
  NA
  Depreciation & Amortization
  Adjusted EBITDA
  % margin
  NA
  NA
  NA
  NA
  NA
  NA
  Reported Net Income
  Non-recurring Items in COGS
  Other Non-recurring Items
  Non-operating Non-rec. Items
  Tax Adjustment
  Adjusted Net Income
  % margin
  NA
  NA
  NA
  NA
  NA
  NA
  Adjusted Diluted EPS
  Cash Flow Statement Data
  Cash From Operations
  Capital Expenditures
  % sales
  NA
  NA
  NA
  NA
  NA ·
  NA
  Free Cash Flow
  NA
  NA
  NA
  NA
  NA
  NA
  Issue 2
  Issue 3
  .
  Issue 4
  Issue 5
  NA
  NA
  NA
  NA
  NA
  NA
  Notes
  (1) [to come]
  (2) [to come]
  (3) [to come]
  (4) [to come]
  Business Description
  [to come]
  Balance Sheet Data
  2018A
  9/30/2019
  Cash and Cash Equivalents
  Accounts Receivable
  Inventories
  Prepaids and Other Current Assets
  Total Current Assets
  .
  Property, Plant and Equipment, net
  Goodwill and Intangible Assets
  Other Assets
  Total Assets
  Accounts Payable
  Accrued Liabilities
  Other Current Liabilities
  Total Current Liabilities
  Total Debt
  Other Long-Term Liabilities
  Total Liabilities
  .
  -
  Noncontrolling Interest
  Preferred Stock
  Shareholders' Equity
  Total Liabilities and Equity
  -
  -
  Balance Check
  0.000
  0.000
  Calculation of Fully Diluted Shares Outstanding
  Basic Shares Outstanding
  Plus: Shares from In-the-Money Options
  Less: Shares Repurchased
  Net New Shares from Options
  Plus: Shares from Convertible Securities
  Fully Diluted Shares Outstanding
  Options/Warrants
  Tranche
  Number of
  Shares
  Exercise
  Price
  In-the-Money
  Shares
  Proceeds
  Tranche 1
  Tranche 2
  Tranche 3
  Tranche 4
  Tranche 5
  Total
  Convertible Securities
  Amount
  Conversion
  Price
  Conversion
  Ratio
  New
  Shares
  Issue 1
  -
  .
  % margin
  FCF / Share
  .
  ʻ
  -
  Depreciation & Amortization
  % sales
  .
  .
  Total
  .
  ʻ
  ʻ
  .
  .
  -
  .
  .
  .
  -
  .
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  You need one page for each comparable company. These files feed the output page
  13
  .
  2016A
  2017A
  2018A
  Current Price
  52-week Low Price
  Dividend Per Share (MRQ)
  .
  -
  -
  -
  EV/EBITDA
  Metric
  -
  .
  .
  *
  .
  Company Name
  1.00
  TAS
  -