In this tutorial, you’ll learn all about Comparable Company Analysis (CCA), also known as “Public Comps” or “Comps” – including why it works, what it tells you, and how to complete the process efficiently without access to expensive subscription services.
The basic idea is that you calculate a company’s “Implied Value” – what it should be worth – based on what other, similar companies are worth.
For example, Company A has an Enterprise Value of $1,000, with an EBITDA of $100 and, therefore, an EV / EBITDA of 10x. Other, similar companies in the market have EV / EBITDA multiples between 11x and 13x.
Therefore, Company A should also trade at an EV / EBITDA of 11x to 13x, and its Enterprise Value should be between $1,100 and $1,300.
Unlike a DCF, which is mostly based on your views of Company A and its long-term prospects, Comparable Company Analysis (“CCA”) is based on the market’s views of this industry.
It’s a supplemental methodology since its usefulness depends on how correct the market is.
To value a company with CCA, follow these steps:
Step 1: Select an appropriate set of comparable public companies.
Step 2: Determine the metrics and multiples you want to use.
Step 3: Calculate the metrics and multiples for all the companies.
Step 4: Apply the median or 25th or 75th percentile multiples from the set to your company to estimate its Implied Equity Value and Enterprise Value.
You normally screen companies by geography, industry, and financial “size,” and you aim for around 5-10 companies in the set.
An example screen would be “U.S.” for geography, “Steel Manufacturers” for industry, and “revenue between $1 billion and $20 billion” for size.
You want the companies to have similar Discount Rates and Cash Flows so that differences in the multiples come from differences in Growth Rates.
Normally, you want 1 sales-based metric and 1-2 profitability-based metrics and their corresponding multiples, over both historical and projected periods.
Examples might be Revenue, EV / Revenue, and Revenue Growth; EBITDA, EV / EBITDA, and EBITDA Growth; and Net Income, P / E, and Net Income Growth.
You calculate each company’s Equity Value and Enterprise Value first, get the historical figures from annual and quarterly reports, and get the projected figures from online sources such as Finviz or Zacks or equity research reports.
Then, you calculate the min, 25th percentile, median, 75th percentile, and max for each multiple and multiply them by the appropriate company figures (e.g., LTM EBITDA by the median LTM EV / EBITDA multiple from the comparables).
You then back into Implied Equity Value, if necessary, and divide by the share count to calculate the Implied Share Price.
Completing the Analysis Quickly and Cheaply
You can use Finviz, Zacks, or Motley Fool to find companies and basic financial information.
Search by the name of the company you’re valuing on these sites and then click through to “Industry” section to find peers.
Click through to “Financial Highlights” or “Statements” to find the projected numbers, and for EBITDA and similar metrics, make estimates by applying the projected EPS growth rate to the historical EBITDA figures to calculate projected EBITDA.
This analysis is often more complicated and time-consuming in real life because you may have to search through each company’s filings manually and look for the financials, you might have to determine whether or not an expense is non-recurring, and you may have to “calendarize” the financials if, for example, one company’s fiscal year ends on June 30th but another’s ends on September 30th.
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