Comparable Companies
Analysis
Educational
TMT Group with Assistance from the FIG Group
Mario Campea, Michael Liu, Steve Lo, Kevin Gryp
& Vinayak Modi
06-Nov-13
Disclaimer
The analyses and conclusions of the Western Investment Club (“WIC") contained in this presentation are based on publicly
available information. WIC recognizes that there may be confidential information in the possession of the companies discussed in
the presentation that could lead these companies to disagree with WIC’s conclusions. This presentation and the information
contained herein is not a recommendation or solicitation to buy or sell any securities.
The analyses provided may include certain statements, estimates and projections prepared with respect to, among other things,
the historical and anticipated operating performance of the companies, access to capital markets and the values of assets and
liabilities. Such statements, estimates, and projections reflect various assumptions by WIC concerning anticipated results that are
inherently subject to significant economic, competitive, and other uncertainties and contingencies and have been included solely
for illustrative purposes. No representations, express or implied, are made as to the accuracy or completeness of such statements,
estimates or projections or with respect to any other materials herein. Actual results may vary materially from the estimates and
projected results contained herein.
The sole responsibility for the content of this publication lies with the authors. Its contents do not reflect the opinion of the
University Students’ Council of the University of Western Ontario (“USC”). The USC assumes no responsibility or liability for any
error, inaccuracy, omission or comment contained in this publication or for any use that may be made of such information by the
reader.
Educational: Comparable Companies Analysis
Educational: Comparable Companies Analysis
Valuation Overview
Why do we value companies?

Valuation has a broad range of applications:
– M&A situations
• What price should Blackberry be sold at?
– Initial Public Offerings (IPOs)
• How much is Twitter worth?
– Restructuring
• How would a change in capital structure impact the value of the firm?
– Investment decisions
• Should I buy/hold/sell the stock given its current price?
• Is the company overvalued or undervalued at the moment?
Educational: Comparable Companies Analysis
Valuation Methodologies
How do we value companies?
Value
Type
Market
Comparable Companies
Analysis (Trading
Comps)
Intrinsic
Discounted Cash Flow
(DCF) Analysis
Precedent Transactions
Analysis
Theoretical Basis
Practical
Application
Educational: Comparable Companies Analysis
Valuation Methodologies
Value an apple tree…



Find a pre-existing market
Compare to the price of other apple trees being sold
Count the apples and estimate their value
Educational: Comparable Companies Analysis
Overview
Why use comparable companies in valuation?
“Similar companies provide a highly relevant reference point for valuing a
given target due to the fact that they share key business and financial
characteristics, performance drivers, and risks.”

Trying to answer “What is the value of my company compared to other
similar companies in the market?”
– Target can be public or private, but comparables will only be public companies
– Implied valuation does not reflect any premium for control
– Often difficult to identify relevant comparable companies
Educational: Comparable Companies Analysis
Selection Criteria for Comparable Companies
Basis of Comparison
Business Profile

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

Sector
Products and Services
Customers and End Markets
Distribution Channels
Geography
Financial Profile

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Size
Profitability
Growth Profile
Return on Investment
Credit
Educational: Comparable Companies Analysis
P/E Valuation Multiple
Price to Earnings (P/E) Multiple

Price to earnings (P/E) is a common multiple:
– Also known as “price multiple” or “earnings multiple”
Price per Share
Earnings per Share
Example:
•
•
•
•
Share price of $12
Earnings per share of $2
Market capitalization of $12,000,000
Net income of $2,000,000
OR
Market Capitalization
Net Income
Educational: Comparable Companies Analysis
P/E Valuation Multiple
Price to Earnings (P/E) Multiple

P/E multiples represent the price an investor is willing to pay for each dollar of
earning:
$12
$2
OR
$12,000,000
$2,000,000
Price / Earnings = 6.0x
Educational: Comparable Companies Analysis
EV/EBITDA
EV / EBITDA Multiple
Another common multiple is EV/EBITDA:

Enterprise Value
Earnings Before Interest, Taxes, Depreciation & Amortization
Using EV / EBITDA vs. P / E
•
Neutralizes the effect of capital structure:
•
EV represents all claims on the business (Common Equity + Net Debt + Preferred
+ Minority Interest)
• EBITDA accrues to both debt and equity holders since it is before interest
•
In practice, EBITDA multiples are more useful as a basis of comparison
Educational: Comparable Companies Analysis
EV/EBITDA
Other Hints & Tips
Investors prefer forward-looking metrics as opposed to trailing metrics
•
Use today’s price or enterprise value divided by projected future EPS or EBITDA
Operating metrics must reflect the performance of the ongoing business
•
•
•
Comps must be normalized for one-time expenses to value companies
Moving up the income statement provides less opportunity for distortion
Valuation and operating metrics may vary by industry
Investors can use any multiple as long as the numerator relates to the denominator
•
Would you ever see a P / EBITDA multiple? What about P / Sales?
In some cases, the denominator can be a non-financial metric
•
This is useful when trying to find a basis of comparison between companies at different stages of
growth or when financial metrics are unavailable
•
Example: EV / Monthly Active Users, EV / Page Views
Educational: Comparable Companies Analysis
Trailing vs. Forward

Trailing multiples us the current price (or EV) and compare it to historical
measure
– TTM = Trailing Twelve Months
– i.e. Trailing P/E = Current Share Price / EPS from last 12 months

Forward multiples use the current price (or EV) and compare it to future
estimates
– Forward P/E = Current Share Price / Estimated EPS for the next 12 months
• Could also be projected earnings for the next full-year fiscal period
• Usually use consensus earnings pulled from Bloomberg or Thomson ONE


Which is better for valuing a stock?
What does a lower Forward P/E when compared with the Trailing P/E
mean?
Educational: Comparable Companies Analysis
Key Factors
What drives multiples?
Growth
Risk
Margins
Educational: Comparable Companies Analysis
Live Walkthrough
Example of Valuation Metrics
Comparable Companies Analysis
Frog Productions
C eep Apples
Jim BR LPC
Jack's Barn
London Juicehouse
Price
Market
Capitalization
$30.38
$15.12
$25.01
$50.23
$80.12
$45,570
$13,608
$12,505
$10,046
$8,012
2009A
EPS
2010E
2011E
$3.21
$1.28
$2.03
$4.75
$5.34
$3.44
$1.38
$2.17
$5.04
$5.87
$3.57
$1.47
$2.37
$5.37
$6.56
Average
Median
AppleCo
$12.34
$6,787
$1.06
$1.14
$1.26
2009A
Price / EPS
2010E
2011E
'09A-'11E
EPS
Growth
9.5x
11.8x
12.3x
10.6x
15.0x
8.8x
11.0x
11.5x
10.0x
13.6x
8.5x
10.3x
10.6x
9.4x
12.2x
3.6%
4.7%
5.3%
4.2%
7.1%
11.8x
11.8x
11.0x
11.0x
10.2x
10.3x
5.0%
4.7%
11.6x
10.8x
9.8x
5.9%
Educational: Comparable Companies Analysis
Equity Value v. Enterprise Value Multiples
Equity Value Multiples (Price/metric)
Enterprise Value Multiples (EV/ metric)
Educational: Comparable Companies Analysis
Industry Specific Multiples
Common EV Multiples:
Enterprise Value /
Sector
Access Lines/Fiber Miles/Route
Miles
Telecommunications
EBITDAX
Natural Resources, Oil & Gas
EBITDAR
Casinos, Restaurants and Retail
Reserves
Metals & Mining, Natural
Resources, Oil & Gas
Square Footage
Real Estate and Retail
Educational: Comparable Companies Analysis
Industry Specific Multiples
Common Equity Multiples:
Equity Value (Price) /
Book Value (per share)
Tangible Book Value (per share)
Sector
Financial Institutions,
Homebuilders
Financial Institutions,
Biotechnology, Healthcare
Funds from Operations “FFO” (per
share)
Real Estate
Net Asset Value (NAV) (per share)
Financial Institutions, Real Estate,
Mining
Discretionary Cash Flow (per
share)
Natural Resources
TMT Specific Multiples
Revenue and User Multiples

Enterprise Value/ Revenue
–
–
–
–
Serves as a proxy for the P/E ratio
Compares the entire value of the firm to the revenues generated
Inherent limitations: ignores profitability completely
Important to look at the change in multiples over time
Many TMT companies have little to no profits in the early stage

Enterprise Value/Users
– For most such companies, users are the main driver behind revenue
• Google, Facebook, Twitter, Zynga, LinkedIn, etc.
– Forward multiples are very important
– Inherent limitation: ignores revenue generation completely
Company may lack revenues, or it may not be a sound basis for comparison
TMT Specific Multiples
Other Core Metrics

Subscriber or user growth rate
– Since users drive revenues, user growth is critical to TMT

Retention rate
– High retention rates indicate more stable revenues and cash flows
– Can indicate quality of product and distinguish fads

Time on site
– More time means more potential exposure to advertisements and products

Paying Users/ Users
– What percentage of users actually contribute to revenues

Revenue per user
– Compliments above metrics, and the EV/U multiple
TMT Specific Multiples
Case Study
Twitter and Facebook

Based on a $13.9B market cap, twitter has an EV of $14.61B
Facebook
Twitter
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
EV/Revenue: 24.4x
FY EV/Revenue: 14.6x
EV/Users: 25.0x
FY EV/Users: 18.75x
Time on site: 1 hour / month
Revenue per user: $0.55
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EV/Revenue: 15.8x
FY EV/Revenue: 14.3x
EV/Users: 102.5x
FY EV/Users: 82.0x
Time on site: 6.5 hours / month
Revenue per user: $1.41
No multiple is enough by itself, all factors must be taken into account
Educational: Comparable Companies Analysis
Precedent Transactions Overview
What is Precedent Transactions Analysis?
Theory




Trying to answer: “How much will my company sell for relative to other similar
companies that have already been sold?”
Similar to trading comparables, we can look at the prices paid in previous
acquisitions to determine to the value of a company
Using the price paid in an acquisition, we can derive implied transaction multiples
Precedent transactions usually lead to higher valuations than trading comparables:
– Control premium
– Financial vs. Strategic buyer?
Application
 Screen for transactions in the same industry, similar size, etc.
 Timing with respect to market cycles is also important
 Generally less applicable than trading comparables due to insufficient data (timing,
similarity of precedents, etc.)
Educational: Comparable Companies Analysis
Precedent Transaction Live Walkthrough
Example
Precedent Transactions Analysis
Acquirer / Target
Fuji / McIntosh
Discovery / Granny Smith
Empire / Gala
Red Delicious / Winesap
C ortland / Northern Spy
Average
Median
Transaction
Value
$10,500
$8,200
$7,540
$7,220
$5,050
Net Debt
Implied
Equity Value
LTM
Net Income
Transaction
P/ E
Multiple
$3,194
$4,872
$5,635
$4,197
$2,591
$7,306
$3,328
$1,905
$3,023
$2,459
$448
$173
$110
$180
$165
16.3x
19.2x
17.3x
16.8x
14.9x
16.9x
16.8x
Comparable Companies
Analysis
Educational
TMT Group with Assistance from the FIG Group
Mario Campea, Michael Liu, Steve Lo, Kevin Gryp
& Vinayak Modi
06-Nov-13