Valuation: Why Thoughtful Dicussion of Comparables Matter
- stevenrubis
- Mar 20, 2024
- 2 min read
Capital Markets / Investor Relations in Two Minutes or Less
Valuation: Why A Thoughtful Discussion of Comparables Matters
Valuation represents a nuanced topic for corporate executives.
Investors calculate valuation multiples and Corporates provide information and context to better understand those multiples.
How Can an Investor Value a Public Company?
Let us look at a few tools of valuation:
1. Discounted Cash Flow (DCF)
2. Relative Valuation
3. Creative Valuation Methods
While many hang their hat on the DCF, the overwhelming majority of investors conduct either a rigorous, or short-hand, version of relative valuation when analyzing a position.
Relative valuation is easy and efficient!
Why Is a Thoughtful Discussion of Comparables So Valuable?
A thoughtful discussion of comparables and the industry generates the following for executives and investors:
1. Credibility: Easiest and Fastest Way to Build Credibility with Investors
2. Relevant Information: How to calculate or what to use in a given multiple
3. Narrative Context: Key inputs and nuance used to unlock valuation discrepancies
4. Relative Valuation: Easiest and Most Widely Used Method of Valuation
A thoughtful discussion of comparables improves management credibility and provides investors relevant information and narrative context to optimize their relative valuation approach.
Why Are Management Teams Reticent to Talk About Comparables?
1. Downside Risk
2. Gentlemanly Rules
Generally speaking, companies and executives wish to avoid the appearance of calling out another company and in turn, be called out by another company.
Three Key Learnings
Investors Build a Comp Sheet
Public equity investors build a comp sheet with a particular focus on identifying and understanding the correct relative valuation multiples and price discrepancies inherent in them.
IROs Build a Football Field
Corporates build a company football field, which consists of identifying the relevant comparable companies and the key operating or asset metrics that better inform investor relative valuation.
Comps in Your Annual Proxy Statement
Every public company proxy statement lists a set of comparable companies to the company filing the proxy. These comparables are usually determined by some sort of third-party human capital management (HCM) consultant to help justify executive compensation.
Management teams often overlook or pay little attention to the companies chosen in this analysis. Selecting the right companies can further help your valuation discussion and selecting the wrong companies can make the management team look arrogant or out of touch.
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