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 WICs 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

Sector
Products and Services
Customers and End Markets
Distribution Channels
Geography

Financial Profile

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 todays 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

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

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