Business Valuation Using Comparable Company Analysis - Part 2

Part 1 of our valuation series was an introduction to the multiple or comparable company analysis.  The first step to a meaningful analysis is to find a basket of publicly listed companies that can serve as comparable companies to the target company.  In this second part of our valuation series we'd like to talk about where the information and data for a comparable company analysis can be found.

In selecting sources for information, it is important to always favor the primary source over the secondary source.  For example, financial statements should always be taken directly from the company's SEC filings and not from secondary sources such as FactSet or Bloomberg.  These secondary sources often try to standardize their reporting system and it may not always be clear how certain financial items are being treated by these information providers.  However, it is always a good idea to double-check data with one or two of these service providers.

The following sources are most commonly used in the investment banking community for a comparable company analysis:

1. 10-K and 10-Q for financial data and footnotes.  These annual and quarterly reports can be found on the Edgar Archives of the SEC.
2. Real-time stock price data from services such as a Bloomberg terminal or FactSet.  These services are expensive, and other free online sources may provide a cheaper alternative.  However, Bloomberg and FactSet are excellent tools to double-check an analysis and should be preferred sources for stock price data.
3. Equity research reports from investment banks for financial forecasts.  These reports can be bought from services such as Thomson Financial's Investext.  They can cost up to USD30 or more per page to download, however they are important as forward-looking multiples are more significant than historic multiples.  Unlimited subscriptions can cost USD12,000 or more annually.  It is important to get recent reports that are not older than 6 months.  Equity research reports  typically get updated shortly after the companies report their quarterly data.

These are the most important sources to find financial information for companies.  International companies that do not report in the US typically publish their financial data on their websites.  Note that not all countries and exchanges require companies to report quarterly.  We will explain at a later time how to deal with inconsistent data and reporting.

Once the above information has been collected for the basket of comparable companies, the analyst can begin the calculation of the multiples.  In our next segment of the valuation series, we will talk about which multiples are typically used.  We will also talk about industry differences and specifics.

If you have any questions regarding the comparable company analysis, please do not hesitate to contact us at any time.

Comments

[Divya Mohanan]

I would like to congratulate the author of the blog, for explanied the valuvation is such a simple language. I happen to be working on comparable compnay analysis and would like to know if you could throw some light on the the range of multiples that are reflected in various segments. eg: IT,Steel etc