Comparable Company Analysis: Valuation & Investment Insights

Comparable company analysis, or "comps" as termed by investment bankers, is one way to learn more about the true value of a business. Looking at different valuations for comparable companies can provide good ballpark estimates for both the intrinsic and actual market value of a company.

Find Similar Characteristics

Comparable company analysis is rooted in the idea that companies with similar characteristics should have similar valuation multiples. Typically, a group of comparable companies includes companies from the same industry as the company being valued. These firms should also have similar fundamental characteristics such as revenues, net income and market size.

The Selection Process

Pick your companies. Go to any online broker or stock investment website. Yahoo! Finance and MarketWatch are two reputable sites with accurate and free information. Determine the industry for the company you are analyzing. Do a search for all companies in this industry. Now focus on other factors such as market capitalization (size), revenues or sales, net income, geography, number of employees, etc. You are looking for those companies that most closely resemble the company you wish to analyze. If valuing Walmart, for instance, you will want to look at Target, Sears, Kmart and perhaps Kohl's. Choose no more than five to eight companies.

Analysis

Create a spreadsheet for analysis. List your comparable companies down one side. Now include a list of ratios and values you want to compare. These can include price, shares outstanding or market capitalization, earnings per share (EPS), growth rate (five-year), price-to-earnings ratio (P/E), price-to-sales ratio, EV (expected value), EBITDA (earnings before interest taxes, depreciation and amortization) and anything else you want to compare. Most of this data is readily available on the websites mentioned above. The best way to get the data, however, is to do the calculations yourself using company data found in the companies' annual reports or 10-K and 10-Q. You can find these on the investor relations websites of the given company. Once you have your data, look for anomalies and adjust so they don't throw off your analysis.