Chapter 1

Comparable Company Analysis

Called also as Trading Comps, is a method that gives a valuation using a focus
group or business division. So is useful to benchmark private companies.
Trading comps is based on the idea that similar companies can provide highly
relevant references due to the sharing of financial characteristics and key
business.
The methodology of this analysis is based in selecting a universe of
comparable companies for the target. Once made the selection the companies
are compared against the target based on financial statistics and ratios.
By then the comparable analysis method is this:
Imagen 1Investment Banking, Rosenbaum, Pearson

Step I
The selection of a universe for comparison is the foundation for performing
the trading comps. For this step the characteristics of the target must be
known and understood from the analyst. For this step the banker usually
consults a broad net to review as many of potential companies as possible.
Then is narrowed and defined once the analsysis is set

Step II
Once the Universe is set, the banker must locate the financial information
necessary to analyze the comparable companies and calculate financial ratios
and multiples.
Step III
Once the Financial info is located, the key ratios, multiples, statistics must be
calculated for the comparable companies such as the enterprise values and
equity values.

In this steps financial concepts must be applied for the correct valuation, like
LTM, calendarization, and adj for non-recurring items.

Step IV
Benchmarking is the core business of this step, so the banker must analyze and
compare closely the Universe vs the target company, this step serves for two
reasons, to measure the rank of the target, and also to throw away companies
from the universe that are not on the same characteristics from the Universe vs
target.

Step V
The valuation is set in this step, where the information related to ratios, and
substantial multiples are set on and compared with the target, so then the use
of means and medians is known usually for extrapolating ranges and the
highests and lowest multiples as the ceilings and floors, but then the careful
selection for the companies that get closer to the target is mere art.

Apendix
Key financial statistics and ratios:

Size: Market valuation: equity value and EV ; financial data: sales gross
profit, EBIT; etc.
Profitability: gross profit, EBIT, EBITDA, and net income margins
Growth profile: historical and estimated growth rates
ROI: ROIC ROE ROA
Credit: leverage ratios, coverage ratios

Transaction comps
This Method is likely to be considered as a Comparable company analysis, but
with a multiple-based approach. Must used when M&A transactions and helpful
to determine price value for the target. It is determined on multiples paid for
comparable companies in prior M&A transactions.
As the trading comps, this method involves the selection of a Universe of
comparable companies, and for this selection the importance of the
characteristics must be focused on the fundamental issues.
Under normal market conditions transaction comps tend to give higher
multiples than trading comps because of two reasons:

1. Buyers generally pay a control premium

2. Strategies buyers tend to realize synergies , which supports the ability to
pay higher prices.

Ilustracin 1Investment Banking , Rosenbaum, valuation pg72.

As seen the steps between the first and second method are the same but one
focuses on the market vision whereas the other focuses
But the cons are visible because of the main fact of this valuation: Time, and is
because precedent transactions may not be truly reflective of the prevailing
market conditions.
Discounted Cash Flow Analysis
This valuation method is a fundamental analysis whit the idea that the value of
the target can be derived from the present value of its projected Free cash
Flows
The valuation implied for a target by a DCF is also known as its intrinsic
value, as opposed to its market value, which serves as an important
alternative to market based valuation techniques.
Is often used when are public companies.
Its projected typically for a period of five years , but can be determined for
larger cycles, this is because there are difficulties to project accurately for
extended periods, mainly because of economic cycles; to fix this, is used a
terminal Value.

Ilustracin 2Investment Banking, Rossenbaum, Valuation pg 110.

Step I

The first step here is to learn and get rid of all possible data about the target
to be analyzed
Step II
The projection of the unlevered FCF is the Core DCF. Unlevered FCF is the cash
generated by a company after paying all cash operating expenses and
taxes. As said before, the DCF is often projected for no more than five years
Step III
The WACC is calculated, that represents the weighted average of the required
return on the invested capital. Also known as the discount rate or cost of
capital.
Step IV
The calculation of the terminal value is important because allows to know and
quantify the remaining value of the target after the projection period.
There are two methods:

Exit multiple Method

Perpetuity Growth Method

Step V
Calculate Present value and valuate

References
Rosenbaum, J., & Pearl, J. (2009). Valuation. In Investment banking. Wiley Finance.