Recording-2025-03-20T23:29:17.133Z

Trading Comparables

• Also known as:

  • Analysis of selected publicly traded companies

  • Trading multiples

  • Comcos

  • Equity comps

  • Common stock comparisons

• Definition: Comparables are entities or companies that are compared for valuation purposes to assess the trading information of a company.

Valuation Techniques

• Two main categories:

  • Primary Techniques: Focus primarily on trading comparable analysis.

    • This is the main technique emphasized for pitches.

    • Other primary techniques include:

      • Discounted Cash Flow (DCF)

      • Leveraged Buyouts (LBO)

      • Acquisition Comparables

  • Secondary Techniques: Not as focused upon in this context.

Basics of Trading Comparable Analysis

• It involves comparing a company with similar companies to arrive at a relative valuation.

• Example scenario of valuation:

  • If valuing "Carrot", a suitable comparable could be "Pactiv Evergreen" as both operate in similar food packaging spaces.

• The aim is to create a benchmark for the company's value relative to its peers at a specific point in time.

• Market dynamics affect valuation; one company can be valued higher due to various competitive advantages such as market share, product quality, or growth rate.

• Key observation: Investors may undervalue a company, creating a buying opportunity.

Enterprise Value (EV)

• Definition: Total value of the company's operating assets.

• Formula:

  • EV = Market Value of the Company + Total Debt - Cash

• Rationale for subtracting cash: Cash does not contribute to operational asset value unless it is actively utilized (e.g., reinvested into the business).

Trading Multiples

• Important ratio used: Price to Earnings Ratio (P/E) which represents a trading multiple.

• General approach:

  • Value of company (or stock price) / Earnings per Share (EPS).

• Common value drivers include:

  • Net Income

  • EBITDA

  • EBIT

  • Revenue

• These drivers reflect a company’s financial performance and profitability where higher values typically justify a higher company valuation.

Example of Trading Comps

• Analyzed "Carrot" with data presented via a financial tool (e.g., Bloomberg).

• Carrot's EV was calculated at approximately $621 million, with revenue of $422 million and EBITDA of $61 million.

• EV/EBITDA calculated as:

  • EV of Carrot ($621 million) / EBITDA ($61 million) = 10.

• How this compares:

  • Pactiv Evergreen was valued at 7.6 times EBITDA, hence indicating it is cheaper than Carrot based on this multiple.

• Contextual reasoning for valuation differences: Carrot might have a higher multiple due to market share growth, better product margins, and strong customer relationships with high-profile clients.

Industry Average

• Average industry multiple for packaging companies is around 8.4 times.

• Carrot trades at a 20% premium due to its advantageous market position and growth prospects.

Valuation Metrics Dependence on Company Stage

• Different companies utilize various metrics based on their lifecycle stage:

  • Young or not profitable companies might use EBITDA or Revenue metrics instead of P/E due to lack of earnings.

  • Mature companies such as Coca-Cola are evaluated on P/E multiples since they have stable earnings and profitability metrics.

• A cautionary note on valuation: Outliers or unusual valuations should be scrutinized, for instance when a company has an inflated P/E multiple due to abnormal earnings.

Tools and Resources

• Recommendation to follow Kenji Explains video on comps for additional learning on constructing a comps model.