Most effective way to explain comps in interviews
(Monkey, 39
Points)
on 1/2/13 at 7:03pm
I have a number of SA interviews coming up, and have already had a few over the phone. Everyone I've spoken with immediately asks about the public/transaction comps I ran at my current boutique internship (it's listed as one of the first entries on my resumes).
What's the most effective way to discuss this item? Should I discuss why I chose individual companies, what kinds of screens I ran? The mechanical act of creating the comps wasn't exceptionally difficult, aside from a few adjustments to get everything on the same basis time-wise. I want to show that I know what I'm doing.
I'm curious about this
I'm curious about this too.
How in depth would they grill you about something like normalization of financials (i.e. scrubbing the data)
To build on kidflash's
To build on kidflash's comment, what's the best way to explain/defend if I only ran these comps in a basic sense of the word?
Yes, I did adjust to get things on an LTM basis, but I didn't scour every financial statement to add back in non-recurring charges, and the EV figure was generated by CapIQ.
How are you choosing
How are you choosing comps-
1. Industry
2. Size
3. Geographic location
Which multiples are you looking at- name a few of the key ones - EV/EBIT, EV/EBITDA, P/E, maybe a revenue multiple
Be prepared to discuss why you would use each one or what each one represents.
I really can't imagine someone would grill you that deep into this, though who knows. I've never personally been asked about comps beyond a pretty basic level, but I also don't emphasize it to a real degree on my resume.
Appreciate the advice. So
Appreciate the advice. So basically, the depth to which it's explained in the BIWS/M&I guide would be sufficient?
Just to give you my
Just to give you my background, I worked in Equity Research over the summer so I have good experience doing plenty of comps, as well as building numerous forecasting models (fully linked IS/BS/CF/Debt Sweeps). I am by no means an expert, so take my 2 cents for what it is worth (and still in undergrad myself).
I will first say that you should NEVER put anything on your resume that you can't properly explain as your first bullet point for any experience. You are basically just opening up "Pandora's Box." I used to have a line at the bottom of my resume under the heading other training that said something along the lines of "Completed LBO/M&A class with WST". While I did do this, instead of getting basic LBO M&A questions like "what is an accretive deal vs. dilutive" I would get something along the lines of "Ok I see you have experience with LBO modeling, please walk me through how one would you run a Triangulation IRR analysis after you complete your pro-forma statements." Not fun when you really don't know how off the top of your head, and for the most part shouldn't right out of under-grad.
That being said the way I would attack that question is in a 2-3 minute summary showing that you know comps. They are most likely not as interested in telling them how to build them , as they are the most simple kind of model to build (if you can even really consider it a model).
"Well a Comparable Analysis of any kind is a way to look at similar companies within an industry or sector, and is a form of relative valuation (due to the subject company being compared to its most direct competitors). The three main styles of comps are Transaction, Fundamental and Valuation (sometime called market comps). In Transaction comps you are trying to show premiums paid for companies (normally in terms of EV/EVBITDA) to help decide what kind a premium you should pay for a similar company (or in contrast if you think a company is a takeover target and the possible upside if purchasing the stock before a deal is announced). In Fundamental Comps you are looking at current year and consensus estimates of similar companies to see what firm has the highest (or lowest) growth potential. Some items found in a fundamental Comp are stock price, shares outstanding, market cap, revenue, ebit and eps (just to name some). With Valuation comps you look trailing and forward ratios to see how the market is valuing that firm. Ratios such as EV/EBITDA, EV/Revenue, P/E, P/B, PEG, Yield are used to try and see what company may be the most under/over valued in comparison. You can do this by looking for a company that has a really low P/E in comparison to others, and see if that valuation is justified by the fundamental comps (low P/E should = low EPS growth, if for some reasons this is not the case it may be undervalued, more research is needed to fully determine this). You want all these figures apples to apples so I would personally use Calender year figures Vs. Fiscal Year."
I think this is a much better answer then telling them how to build one. It shows you understand the practical application of the Comparable Analysis. Anyone can read a interview guide to tell them how to do a calculation.
Also note that telling them that EV was computed by CapIQ is a one way ticket to no offer.
EV = Market Cap + Pref Stock + Minority Interests + (Debt - Cash) where, (Debt-Cash) = Net Debt
Why? Because this is the theoretical value of a firm if you purchased it today (with no premium). You would need to buy out the shareholders (market cap), Pref stock holders, purchase the minority interests and the debt, using the cash to pay down whatever debt you could. Another way to think of this is that cash is already accounted for in the value of the equity (market cap), so adding this would be double counting cash. Investors look at cash on hand when valuing companies, this is the rational behind this.
Good luck.
Thanks for the detailed
Thanks for the detailed answer. I certainly can explain how/why I constructed the comp set; my intention in this post was to find the strongest way to explain it. I think you hit the nail on the head in terms of avoiding a simple mechanical explanation.
If you were interviewing me, would you expect me to have really specific metrics (i.e. how much debt company XYZ has) committed to memory? Or is it more important to understand why debt is added to EV? I have similar concerns in terms of share count dilution and adjustments. I understand these items but did not mechanically do them in this particular case.
BillyJean111: Thanks for the
Thanks for the detailed answer. I certainly can explain how/why I constructed the comp set; my intention in this post was to find the strongest way to explain it. I think you hit the nail on the head in terms of avoiding a simple mechanical explanation.
If you were interviewing me, would you expect me to have really specific metrics (i.e. how much debt company XYZ has) committed to memory? Or is it more important to understand why debt is added to EV? I have similar concerns in terms of share count dilution and adjustments. I understand these items but did not mechanically do them in this particular case.
Debt is added to EV because if the company were to be purchased today, who ever is purchasing the company will take on any debt held by the company pre-acquisition/merger
essentially debt is added as a way to value the company in its entirety.
Just a sophomore looking for an opportunity to start up this dream of mine.
Well I have never been asked,
Well I have never been asked, walk me through how to build a comp table. So that being said, if you really feel that you need an efficient way to say how, I would just write down how you did it over the summer on a word document and try to simplify it in a minute or two. There is no shame in saying "My boss had all the summer analysts use CapIQ to gather information, then we would re-format it in the companies templates." You are doing what your boss said.
I don't think you need to worry about about how to compute dilution (treasury stock method) perfectly. I will say understanding that there is a relationship between the average strike of the options outstanding, and the current price now is how diluted shares is computed is a good to know just in case. Def never got that question.
What I have noticed on all of my big firm interviews is that they really don't care If you know everything 100%, it's more just how you answer them, and if you can deal with the stress of the typical finance interview. Its funny how finance is a BS (Bachelor of science), but it is really more of an art with applied science techniques. Especially in Equity Research.
That being said, no one is going to ask you every fundamental metric and/or Valuation metric. At least in my experience. I have always noticed that if you can explain WHY you do something, it goes 100% further then just saying the right answer.
A good example is when I was once asked how to calculate Free Cash Flow. Anyone can read an guide and say "You take EBIT*(1-Tax rate)+D&A-Capex+/- Change in working capital = FCF."
But in my personal opinion if you say "You take EBIT (because it is profit before tax and interests, after all expenses)*(1-Tax Rate) (because of the interest tax shield investors see with debt reducing tax liabilities)+D&A(Due to it being a non-cash deduction due to accounting regulations for capitalized expenses)-Capex(what you need to maintain and/or broaden the base)+/-Changes in NWC(the amount of CASH that is currently tied up in a business)=FCF(the amount of CASH available to Shareholders/Debtholders after this period)" Is a 100x better answer.
It shows that you have put some thought into WHY you do it. If you understand why you do something, it makes the process very trivial. More of a logical expression then some math equation that you read someplace. It shows that your interested in the reasoning behind the answer, and what it actually implies; shows that you have a real passion for business finance. Not because that you want a job that pays 65K+ a year plus 10k signing bonus and other bonuses right out of school, way higher then the avg american household.
As far as specifics go for debt and what not, on banking interviews no. Most banks will work with numerous sectors, and there is now way for you to know every sectors avg Debt/Cap Ratio or Debt/Equity. If the firm your worked for over the summer focuses on one sector then you better know that sector decently well. I worked in Technology, more specifically Server and Storage OEM's. On any interview I could say what we would look at when valuing any Server/Storage Firm. The metrics that are most looked at by investors. Most importantly, why they are important to investors.
If you were interviewing for a Corp Dev team, then I would say you better research that company's industry like the back of your hand.
Again they are looking for people that have good reasoning skills. That can handle stressful situations. Sometimes you may get a question that you cant answer, and that is fine. Can you reason your way through it? Then ask the interviewer if that is the appropriate methodology? You don't know what you don't know, and you wont know until you ask.
Again just my 2 cents.