Valuation by comparison: trading comps and precedent transactions
By the end of this lecture you will be able to
- Choose a peer set and spread comparable companies consistently, with LTM, calendarised and normalised figures
- Turn a range of multiples into an implied share price and defend a premium or a discount
- Value a company from precedent transactions and premiums paid, and read a football field
- Pick the right multiple for banks, insurers, REITs, commodity producers and early-stage companies, and build a sum of the parts
The quickest way to value a house is to ask what similar houses nearby sold for. Bankers do the same with companies. Relative valuation is less elegant than a DCF, but it is what markets actually do, and it is the first page of most pitch books. Today we value a company against its listed peers and against past acquisitions, bring the answers together on one chart, and learn which multiple each industry uses.
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Interview questions on this lecture
What are the main valuation methods?
Comparable companies, precedent transactions and discounted cash flow, often with an LBO analysis to show what a financial buyer could pay. Sector methods add others, such as P/NAV for miners.
Walk me through a comparable companies analysis.
Pick peers similar in business, size, geography and growth. Compute their equity and enterprise values and their LTM and forward metrics. Calculate multiples such as EV/EBITDA and P/E, take the median and a range, apply them to the target’s metrics, then bridge to equity value and divide by diluted shares.