Comparable Companies Analysis

When calculating the Enterprise Value for a Comparable Companies Analysis do you use information from the 10k or 10q. Specifically, total debt, preferred stock, cash and cash equivalents, because the numbers are different on both filings.

Thank you in advance

 

Companies with higher leverage would generally be expected by investors to provide relatively higher returns on equity (in exchange for the incremental risk); as such, equity comps denote the value of a company's equity on a risk-adjusted basis.

However, if you're trying to determine the value of an entire enterprise (equity + debt), EV comps enable an investor to value a company separate from its capital structure (this is of particular importance for an LBO, since PE funds will generally overhaul a target company's balance sheet once a deal has closed).

 

Here is my thought process, I want to know if I am on the wrong track:

If a company is leveraged, then its earnings is going to be risky (in addition to its operational risk) and therefore it is going to have a lower valuation (higher discount rate implies lower valuation multiple).

So suppose we are comparing equity trading comps of two companies, company A and company B and we want to see if one is undervalued/overvalued compared to the other. Assume they both have the same amount of earnings and that A has a lower P/E than B. Now this could be because of higher operational risk or because of leverage (i.e., financial risk). We cannot determine which is which by just looking at P/E. But if we look at EV/EBITDA we will get an apples to apples comparison.

Either way, I'd like to know when to use EV multiples and when to use equity multiples...

 

You are on the wrong track, but not by much.  Valuation at the enterprise level (as opposed to valuation of any one security) will nullify differences in the capital structures of each business (thus, the financial leverage of either company is irrelevant).  However, if one of the companies is inherently less risky (e.g., lower operating leverage), then the enterprise as a whole may be ascribed a greater value.

 

Long story short - EV multiples help determine the overall value of an enterprise, while equity multiples help you determine the value of equity (investors could also value a company's debt securities with similar multiples).  The relevant multiple should be determined by what it is that you are trying to value.

 
Best Response

The top players in smartphones are NOK, AAPL, RIMM, Samsung, HTC and Motorola (MMI). Not sure if Google is a great comp quite honestly since they provide an OS (Android) for smartphones and tablets.

As for valuation, sum of the parts analysis might be a pain. I suggest you stick with the basic forward mutliples based on concensus estimates for P/E, EV/EBITDA, EV/Sales. The other thing you have to think about is, does RIMM deserve a mutliple inline with peers? I would argue they don't given their lagging growth profile compared to the market. Say peers are trading at 15x CY11 EPS, while RIMM is trading at 8x. You could argue RIMM deserves to trade at a discount to peers but is still undervalued at current levels.

Hope that helps.

 

You need a better and broader comp set (as previous poster said).

then once you have a broader set of comps, you're still going to have variance between multiples. you need to think about how the businesses differ and how that could cause the multiples to differ. a better, faster growing biz is going to fairly trade at a higher multiple. Apple's growth is blowing the doors off of RIM so you can't just look at Apple's multiple and say if RIM trades for less that it's undervalued.

RIM might deserve a lower multiple than its peers. Your job is to look at the cash RIM generates, how fast that cash is going to grow, and how risky that cash flow is, and then you figure out how much lower the multiple should be. If it deserves to be 3x lower than peers and it's trading 5x lower, then you could say it's undervalued.

 

You can use Nok as it is in the same boat as RIMM, try CSCO, and MMI. You cant compare RIMM to Apple's smartphone segment, never not in ages. Also Google does not manufacture Smartphones, hence you cant compare with RIM as 80% of RIM's revenues are from devices.

I hope this helps.

 

The way I interpreted it they want to know if they should attempt to attribute a specific amount of debt to a division out of different types of debt for the parent or just use a multiple of net debt.

OP, I would stick to using percentages because you are making this way more complicated than it needs to be.

You wouldn't need to figure out the sources of debt unless you need a debt amortization schedule for an lbo or something. Depending on the company and if they do a lot of off balance sheet financing maybe it could be useful to figure this out then.

 

Say you are trying to value Company A.

Once you've found your public comps (call them companies B, C, D, and E), choose one (realistically, you should do several) metrics you want to use. Let's say TEV / EBITDA. Then you find the median, mean, mean without outliers, or whatever other measure of central tendency you want of companies B, C, D, and E.

Maybe the median of your TEV / EBITDA for the public comps was equal to 9.3x. You then want to apply this multiple to company A. If Company A has EBITDA of $40MM, your TEV of company A = $40MM * 9.3 = $372.0MM

 

Et praesentium in magnam quo esse. Incidunt eius pariatur et maxime id assumenda. Sapiente inventore voluptates cumque omnis iusto nobis voluptates.

--There are stupid questions, so think first.
 

Totam et eveniet veritatis illo dolorum ratione. Sit et quidem quod expedita. Consequatur maiores quia dignissimos.

Ipsam earum qui quos neque. Consequatur et nemo consectetur in at quae dicta. Natus dolor porro quia eaque neque.

Itaque eum cum excepturi dolores. Suscipit est saepe labore qui qui et temporibus. Quasi possimus est odio aliquid ut quia doloremque. Asperiores ut atque omnis consequatur eos tempore. Cupiditate nemo optio aliquid earum culpa velit. Nisi non enim dolorem est earum facere et voluptas. Consectetur molestiae perferendis et quos.

Omnis veritatis sunt debitis id facere quisquam a harum. Similique rerum reiciendis ut eos nihil. Amet eos deserunt consequatur ab sit.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Betsy Massar's picture
Betsy Massar
99.0
3
Secyh62's picture
Secyh62
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
DrApeman's picture
DrApeman
98.9
6
CompBanker's picture
CompBanker
98.9
7
dosk17's picture
dosk17
98.9
8
GameTheory's picture
GameTheory
98.9
9
kanon's picture
kanon
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”