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Valuation (Trading Comps (Calculate Statistics, Ratios, Multiples (ROI…

- - - - Sources
        
        Investor relations
        
        Earnings calls slides
        
        filings
        
        External research reports
        
        Trade Journals
      - Outcome
        
        Business Profile
        
        Sector
        
        Products and Service
        
        Customers and Markets (also referring to "housing market", "automobile market", etc.)
        
        Distribution Channels
        
        Geography (base and customers)
        
        Financial Profile
        
        Size
        
        Profitability
        
        Growth Profile
        
        Mature companies should measure EPS growth, early stage should measure EBITDA growth
        
        ROI
        
        Credit Profile
        
        Debt levels (leverage)
        
        Coverage (ability to make interest payments)
    - - Look for similar Business Profile
      - Often lists of comps are cultivated and kept up to date for certain sectors
      - Start with competitors
  - - - Consensus research estimates
      - equity research reports
      - Press releases
      - SEC filings
        
        10-K (Annual report)
        
        10-Q (Quaterly report)
        
        8-K (Current report -> material corporate event)
        
        Proxy Statement
        
        Hardly relevant, since it only discusses what shareholders are expected to vote on. May have a more recent share count
  - - - Market Valuation
        
        Equity Value (IMG 1 )
        
        Current stock price as % of 52w high
        -> If one percentage is out of line, it can indicate company (as opposed to sector/market) specific issues
        
        Fully diluted shares = in the money options + warrants + convertible securities + basic shares
        
        Treasury Stock Method for options: Take weighted avg of all itm-options and assume all are exercised. Proceeds are used to repurchase shares, so that:
        ((Current price - avg opt exerc. price)* Number of options)/Current share price) = Number of new shares
        (See Exhibit 1.7)
        
        If-Converted Method for convertible bonds: Assume all convertible debt with conversion price lower than share price is converted. Net income needs to be adjusted due to forgone interest expense
        
        Net share settlement for convertible bonds: Only the difference between conversion price
        
        Enterprise Value (IMG 2)
        
        EV = Equity Value + Debt + Preferred Stock + Non-controlling interest - Cash and Cash equivalents
      - Key Financial Data
        
        Sales
        
        Higher sales leads to scale, market share, purchasing power, lowe
        
        Gross profit
        
        = Sales - COGS
        
        expressed as % of Sales (gross profit margin)
        
        EBITDA
        
        Often used as proxy for operating cash flow
        
        EBIT
        
        Often the same as operating profit / income from operations
        
        Net income
        
        All profits available to shareholders
    - - Historical EPS growth must be adjusted for non-recurring items
      - EPS growth estimates are usually taken from consesus
    - - ROIC (return on invested capital)
        
        = NOPAT / (Average net debt + equity)
        
        Comparing ROIC with WACC shows whether capital is being used efficiently
      - ROE (return on equity)
        
        = Net Income / Avg. Shareholders Equity
      - ROA (Return on Assets)
        
        = Net Income / Avg Total Assets
      - Dividend yield
    - - Leverage
        
        Debt-to-EBITDA
        
        Can be viewed as "How many years of cash flow are needed to repay debt
        
        Debt-to-total capitalization
        
        Coverage
        
        Can be with EBIT, EBITA or EBITDA-CapEx divided by interest expense
      - Credit ratings
    - - Gross profit margin
        
        Improved through better purchasing / procurement of raw materials and more efficiencies in the production process
      - EBIT / EBITDA margin
      - Net income margin
        
        Shows overall (as opposed to operating) profitability
        
        Is affected by capital structure and tax regimes
    - - Calculate LTM data (Prior year + current stub - prior stub)
      - Calendarization of financial data (When fiscal year =/= calendar year, data must be calendarized)
      - Adjust for non-recurring items
        
        "scrubbing" / "sanitizing"
        
        Sample items
        
        restructuring cost
        
        Losses/gains on asset sales
        
        Changes in accounting principles
        
        Inventory write-offs
        
        Goodwill impairment
        
        Extinguishment of debt
        
        litigation settlements
        
        Tax adjustments
        
        Research reports often explain more reasoning behind certain non-recurring charges/gains
        
        Which items are non-recurring depends on business (pharma may consider litigation settlements as regular business)
        
        Items will need to be tax-effected if looking at net income numbers
      - Adjust for recent events
        
        M&A transactions
        
        Financing activities
        
        share repurchases
        
        stock splits
        
        conversion of convertibles
    - - P/E and Equity-Value/Net Income
        
        Mostly for mature companies
        
        Is affected by leverage
      - EV/EBITDA (more common) and EV/EBIT
        
        Very standard
      - EV/Sales
        
        Mostly just sanity check
        
        May be used for early stage tech without profits
  - - - Benchmark multiples with peer group
      - Benchmark financials with comp universe
- - - - DIH
      - DSO
      - DPO
  - - - Current capital structure may not be target
      - Needs to be benchmarked with public comps
        
        If the current capital structure is not ideal (as determined by comps), the mean or median of comps may be a better measure
    - - Easy if at target capital structure
    - - CAPM
        
        Market risk premium is often decided upon by the firm to ensure consistency. Some take returns from pre 1926 to today, others focus on more recent periods
        
        Market risk premium is between 4-8% on Wall Street
        
        Beta is often looked on on a forward basis. External resources offer this
        
        For private companies, peers need to be assessed for their beta
        
        To assure capital structure doesn't affect the beta, it needs to be "unlevered"
  - - - Most common are WACC, Exit Multiple and Perpetuity growth rate
- - - - Sources of comps
        
        Databases like SDC Platinum, Capital IQ, FactSet Mergerstat
        
        Target's M&A History for multiples paid/received
        
        Merger proxies for comps mentioned in FOs
        
        Equity research reports for target and sector
        
        Look at internal M&A databases
      - Information to gather
        
        Conditions and circumstances of transactions
        
        Market Conditions
        
        Deal Dynamics
        
        Strategic vs. fin. sponsor
        
        Strategic can generally pay more due to synergies
        
        motivation for transaction
        
        Target critical to future of acquirer?
        
        Fits great with portfolio company?
        
        Seller in hurry to get rid of non-core business for cash?
        
        friendly v. hostile
        auction v. negotiation
        
        Stock v. cash consideration
        
        Stock usually leads to lower valuation
        
        Stock
        
        Fixed exchange ratio
        
        ratio of stocks per stock is fixed (e.g. 3 shares of acquirer per 1 share of target
        
        Floating exchange ratio
        
        ratio of value per stock is fixed (e.g. 20$ worth of acquirer stock for each target stock)
    - - Proxy Statements
        
        Must be sent to shareholders prior to acquisition and contains all relevant transaction info, including FO
    - - Key multiples
        
        Enterprise Value to LTM EBITDA
        
        P/E