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Private Equity

What are public comps and how do they work?

Find out how analysts assess the value of a business using public comps.

How do you know how much a company is worth? Analysts usually calculate the number through three types of relative and intrinsic valuation models: private comps, public comps, and discounted cash flow (DCF) analysis. Used together, these valuation methods can help investors, business owners, and transaction advisors gauge a company’s current market value and then assess whether it is under- or overvalued.

In this article, we’ll assess a company’s value, which usually involves a similar type of relative valuation model: public comps analysis. In a companion blog, we looked at how private comps—also known as M&A comps or precedent transactions—help analysts compare private companies in a similar growth stage and industry to determine a company’s value within the private markets.

What are public comps?

Public comps analysis is the valuation method used to assess a company’s market value by measuring it against a small group of other publicly traded companies. Revenue metrics such as profit margins and growth rates provide a benchmark to gauge a company’s performance in relation to a peer group. This market-based valuation offers investors and analysts a comprehensive perspective on a company’s standing.

Why consider public comps?

Overcoming the difficulty of calculating a valuation—and mitigating risk in an investment—starts with having the right level of information to be confident in your deal terms. And there’s generally more financial information available for publicly owned companies. The reason for this is simple: Private companies aren’t required to disclose the same level of detailed financial information that publicly owned businesses are.

This means public comps analysis is generally the easiest to perform because the information required to do the analysis is readily available. All it requires is that the comparable companies each have publicly traded securities—and the data (at least in the United States) is usually sound because it’s scrutinized by the US Securities and Exchange Commission as well as each company’s shareholders.

However, public comps analysis is typically best used when a minority stake in a company is being acquired or a new issuance of equity is being considered. That’s because there’s no control premium to consider, which is subjective by nature and best assessed through comparing precedent transactions.

In the latter scenario, conducting a private comps analysis using extensive private market data, including EBITDA (earnings before interest, tax, depreciation, and amortization), pre- and post-money valuations, multiples and deal sizes, becomes more important.

Private companies might offer accessibility of underlying financial details during a funding round, but these disclosures are not standardized, lack consistency, and can vary widely in scope. Consequently, valuations based on private company comps often necessitate adjustments for risk factors such as limited liquidity and the opaque nature of their financial health.

Understanding comparable company analysis

The term public comps are short for “public comparables,” which means exactly what it sounds like: publicly owned companies that are similar to the one whose value you are trying to attain.

A public comp is simply a comparison of publicly traded companies operating in a similar sector and location to the valuation company, usually with similar levels of revenue and market capitalization (aka the total value of a company’s shares of stock). Both are telling numbers that are either not always or never available, respectively, for private companies.

In practice, looking at public and private comps is similar in concept to how home appraisals work. One starts by looking at the property (read: company) to be assessed, then look for several comparable ones in the neighborhood to determine how the property for appraisal stacks up against them based on a series of defined variables.

In business valuations, those defined variables are expressed as financial multiples, averages, ratios, and benchmarks. The implied assumption is the company that’s being valued should have the same—or at least similar—multipliers as its competitors.

Common public comps valuation measures

These are the most common valuation measures used in public comps analysis:

  • Enterprise value to sales (EV/S)—compares the total value of a company (accounting for its stock shares, debt, and cash) to its annual sales. This gives analysts an idea of how much it costs to purchase the company’s sales.

  • Price to earnings (P/E)—measures a company’s current share price relative to its per-share earnings (EPS), which is calculated by taking a company’s profit divided by the outstanding shares of its stock. This allows analysts to determine the relative profitability of a company.

  • Price to book (P/B) compares market value (a company’s outstanding shares multiplied by its current market price) and book value (the value of a company’s assets) by dividing the price per share by book value per share (BVPS). A lower P/B ratio could mean the stock is undervalued or that something is fundamentally wrong with the company.

  • Price to sales (P/S) compares a company’s stock price to its revenues. This is done by dividing a company’s current stock price by its sales per share, which is calculated by dividing a company’s sales by its number of outstanding shares. This ratio lets analysts know how much investors are currently willing to pay per dollar of a company’s sales for its stock. A low ratio may indicate the stock is undervalued, while a high ratio suggests possible overvaluation.

  • Discounted cash flow (DCF) estimates a company’s intrinsic value by discounting projected future cash flows by its current value. For public companies, performing DCF involves forecasting their free cash flows over a period of up to 10 years and applying the weighted average cost of capital (WACC).

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The methodology behind public comps analysis

Public comps analysis assumes that the target company is trading in line with its peers. However, it’s important to remember that this relative valuation strategy relies on the market’s accuracy in assessing other companies, which may not always be reliable.

To conduct a comparable company analysis, a firm curates a targeted group of peer companies that are the most similar to the target company in size, growth rate, and profit margins—ideally, they want to find a twin.

Key financial metrics, such as earnings, market capitalization, EBITDA, revenue, and other ratios, will be gathered for the target company and its comparable peers. Ensuring an accurate comparison also involves adjusting or normalizing financial metrics to account for one-time items or differences in capital structure, which is a crucial process step.

When assessing EBITDA, adjustments are most notably made relative to amortization, depreciation, and other non-recurring items. Amortization represents the reduction of debt paid over time, whereas depreciation estimates the decrease in the value of fixed assets within a fiscal year.

Normalized EBITDA represents operating cash flow generated by a company’s core business activities after removing the effects of irregular events and non-recurring items. After collecting key financial data, valuation multiples such as P/E, EV/EBITDA, and P/B are calculated for the comparable companies.

These multiples are then applied to the target company to estimate its valuation. For instance, if the average EV/EBITDA multiple for the comparable companies is 10x, the target company’s EBITDA is multiplied by 10 to determine its enterprise value.

Other prevalent public comp valuation methods

Outside of the standard valuation metrics listed above, analysts engage many different models to get a diverse, unbiased, and comprehensive view of valuation. In tech, for example, the PEG (Price/Earnings to Growth) ratio is often utilized to value a company’s stock price while measuring its earnings growth, offering an estimation of whether the stock is over or undervalued.

The PEG involves dividing price-to-earnings (P/E) by the annual growth rate. For example, if a company has a P/E ratio of 15 and a growth rate of 10%, its PEG ratio would be 15 divided by 10, with the growth rate converted to a decimal. This gives us a PEG ratio of approximately 1.5, which is considered somewhat high. High PEG ratios indicate that investors have high expectations for future growth, and the stock may be overpriced relative to its growth rate.

Finding the most similar company possible will help investors see the differences in growth rate and profit. If, through running a comparison, we find that our twin company is growing much faster, we can use that data to adjust and lower the trading value. On the other hand, if the comparable company is growing slower but has a significant EBITDA margin or a profit margin, its enterprise value to sales multiple is really high. All of these values can help the investor make adjustments to their price while keeping in mind the strengths and weaknesses of the company being compared.

How does PitchBook help you to run a public comps analysis?

By utilizing our accurate, timely, and detailed financial data, you can efficiently create more precise comparables, streamline your valuation procedures, and engage with suitable buyers and investors. This not only simplifies deal execution but saves you valuable time, enabling you to concentrate on your top priorities.

Further enhance your investment thesis with a long-term view of your strategy bolstered by Morningstar’s public equity research team, which provides valuations, ratings, and analyses of more than 1,500 public companies globally. Morningstar’s analysts are entirely independent and create value without trading or banking revenues. The competitive advantages or economic modes they scored are used to forecast future cash flows, which surface and illuminate investment opportunities.

These are the steps generally taken when considering public comps:

1. Creating a comps list
After a company is selected, make a list of publicly owned companies that are comparable to the one under consideration based on the following criteria:

  • Industry
  • Sector
  • Location
  • Revenue
  • Number of employees

2. Refining the list
The initial target list is then refined based on even more detailed financial information, including:

  • EV/S
  • P/E
  • P/B
  • P/S
  • Consensus estimate price
  • 52-week range price

3. Benchmark indexes
Finally, create custom peer group stock benchmarks to understand if the target company is at the top or bottom of a valuation cycle. This is typically done by creating a basket of securities to compare with the target company and comparing the peer group stock index with major indexes to identify outlying variables. This process provides a range of valuation multiples to compare to a target company—all derived from financial data readily available in the public markets.

Example of a comparable company analysis search with the PitchBook Platform

Quickly filter public comp searches by detailed metrics, including consensus estimates and forward earnings. Segment data further by trailing 12 months or calendar year. Pull your comps list into an Excel model or your own custom one.

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Use PitchBook’s consensus estimates for smarter investment decisions

Analyze a public company’s future performance using our consensus estimates found within the financials tab of any public company profile page—including historical revenue and profit data—from more than 800 contributing analysts. Our public consensus fields include EBIT, EBITDA, gross profit, capital expenditures, and funds from operations.

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Enhance your valuation workflow with our tools and research

Getting the right valuation data is crucial when comparing companies or transactions, as it can make the difference between closing a deal at the right price or missing out altogether. With the ability to efficiently run screeners based on thousands of filters, including vertical keywords, deal sizes, and types, our valuation tools enable you to find exactly what you need to make informed decisions in minutes.

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