Trading Comparables Model Template

What is a Trading Comparables Model?

A Trading Comparables Model, also known as “comps” or “public comps,” is a financial analysis tool used to value a company based on the market valuation of similar publicly traded companies. This method operates on the principle that similar businesses can serve as market benchmarks to establish a valuation range for a corporation. It takes financial metrics such as EV/EBITDA or the Price/Earnings ratio and compares a company to the sector mean and its peer group.

Trading Comparables Model Template – Key Components

Building a Trading Comps model can be done in various stages. Often it can start with a relatively large group of companies, which can then be de-selected if early analysis indicates they may not be directly relevant to the peer group for external reasons (such as companies being private and not providing sufficient details on Sales to enable further analysis).

Download the Financial Edge Trading Comparables Model Template. This will enable analysts to create a peer group comparison for the major financial metrics of EV/Sales, EV/EBITDA, and EV/EBIT.

These are the components needed to build the Excel model.

1. Comparable Companies Selection: identify companies with similar markets, growth prospects, operational drivers, and risks – ensure selected peers are as comparable as possible to the company being valued.

2. Equity and Enterprise Value Calculation: gather Market Cap data for chosen companies and also financial information to calculate Enterprise Value.

• Equity Value: Market capitalization of comparable companies.
• Enterprise Value (EV): Includes components such as net debt, equity affiliates, pensions, operating leases, non-controlling interests (NCI), and preferred stock.

3. Value Drivers Calculation: Collect the financial data to create multiples for each company.

• Common drivers include Revenues, EBIT, EBITDA, and EPS.
• Calculate these metrics for both the target company and comparables.

4. Multiples Calculation:

• Compute key multiples such as EV/EBITDA, EV/Sales, P/E ratio.
• Calculate statistics like mean, median, and range for each multiple.

5. Additional Metrics and Statistics:

• Include other relevant financial and operational metrics to provide context.

6. Valuation Range Determination:

• Interpret the output to select an appropriate valuation range for the target company.

Steps for Using the Trading Comparables Model Template

• Select Comparable Companies: identify and list public companies that closely resemble the target company in terms of business model, size, growth, and risk profile.
  • In this template we have taken data from US Pharmaceutical companies.
• Gather Financial Data: collect key financial information for the comparables, including market cap, debt, cash, and relevant income statement items.
  • The FE template shows stock price and market cap plus Revenue, EBITDA and EPS data – this can be consensus data downloaded from a provider such as Felix, Bloomberg or published or in-house estimates.
  • When gathering data, it is useful to have at least one historical year plus two forecast years for the model.

• Calculate Enterprise Value: use the equity to EV bridge to compute the enterprise value for each comparable company – the model has taken it directly from Felix.
  • this can be done separately to the model and then linked in (or drawn directly from a data provider assuming the calculation is uniform for all companies).
• Compute Value Drivers: calculate relevant financial metrics (e.g EBITDA, Revenue) for the current year and projections.
  • Make sure data is calendarized correctly as some companies may have a different year end to the peer group – it is convention to use either a calendar year-end or a rolling 12-months.

• Calculate Multiples: derive valuation multiples for each comparable company.
  • This is set up in the template to calculate three metrics for three 12-month periods:
    • EV/Sales
    • EV/EBITDA
    • Price Earnings
• Analyze Multiples: compute statistics (mean, median, range) for the multiples to understand the valuation landscape.
  • The template takes the mean average of the companies.
  • If there are any significant outliers in the data collected there could be excluded from the data – in this example, we have calculated an EV/Sales mean excluding Danaher Corporation as its multiple is significantly different to the rest of the peer group.

• • • If there are companies which can only provide historical and not forecast data for the peer group, they can be removed at this stage to ensure consistency.

• Apply Multiples to Target: use the derived multiples to estimate a valuation range for the target company
  • If an assumption has been made as to whether the stock should be trading in line, above or below the peer group mean this can be applied now.
  • Target multiples are typically used for data 1-2 years ahead – although its important to check the calendar date to understand which period the data applies to.
  • If we were using a target multiple for Abbott Labs, we could take the mean year 2 Price/Earnings of 30.1x and apply it to the year 2 EPS of $5.77
    • This would suggest a Target Price of 30.1 x $5.77 = $173.54
    • This is 51% higher than the current share price of $114.9
• Interpret Results: analyze the output, considering any specific factors that might justify a premium or discount for the target company.

What You’ll Get with the Trading Comparables Model Template

Using the trading comps model will help provide a Comprehensive Market-Based Valuation – the methodology should provide a valuation that reflects current market sentiment towards similar companies. It will also provide Peer Group Analysis and insights into how the target company compares to its peers across various metrics.

Careful creation of a peer group will refine a Valuation Range. This develops a more robust and defensible range of potential values for the target company based on market data. Finally, creating a model such as this allows for flexibility. Once the model is created it is straight-forward to update as market conditions change, or new information becomes available.

Conclusion

Peer group analysis is a widely used valuation tool to measure a company’s performance relatively to those to operate in the same sector or are the same sized-company. Creating benchmarks and analyzing which companies typically trade on a premium or a discount to the benchmark allows for deeper analysis of stock price performance. If a stock is trading below its historical ratio (such as P/E ratio) versus its peers, it may be considering an opportunity to invest in the stock. However, it may also be an indication that the company is performing less well than its peer group if its valuation ratios are falling. Correctly interpreting the data and outputs from a trading comparables model is the key to success with this analytical tool.