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Comparable Company Analysis: How to Pick a Peer Set You Can Defend

Valuation • Beginner Investing • 8 min

What this lesson is about

"Comps" sounds simple until you actually have to pick them. The peer set you choose can swing a valuation as much as the multiple itself.

2 parts · a quick check after each · then the quiz

Part 1 of 2

"Just, find, some, comps", seems, simple, in, theory., You, pick, a, few, similar, companies,, average, their, multiples,, and, apply, that, to, the, company, you're, analyzing., But, in, reality,, the, peer, group, you, select, can, change, the, valuation, as, much, as,, or, even, more, than,, the, multiple, itself., Creating, a, defensible, set, takes, real, effort,, not, just, a, common, industry, label.

Start, broad., Look, within, the, same, sector, and, similar, size, range., Then, narrow, it, down, using, what, really, drives, value:, a, similar, business, model,, not, just, similar, products;, similar, end, markets, and, customers;, similar, growth, stage;, similar, margin, structure;, and, a, comparable, geographic, footprint., Two, companies, may, share, a, sector, classification, and, still, make, poor, comps., A, capital-light, software, company, and, a, capital-intensive, semiconductor, manufacturer, may, both, fall, under, "technology,", but, their, margins,, growth, drivers,, and, suitable, multiples, have, almost, nothing, in, common.

What you pay for the earningsA multiple is a number of years of profit. Move it and see how many.

Quick check

In comparable company analysis, what is the primary purpose of a 'peer set'?

Part 2 of 2

Insider, Angle:, Once, you, have, a, solid, peer, set,, use, the, median, multiple, instead, of, a, simple, average., A, few, comps, can, be, easily, skewed, by, one, outlier, trading, at, an, unusual, multiple, due, to, bad, news,, a, pending, acquisition,, or, a, fundamentally, different, growth, stage., The, median, is, much, less, affected, by, those, distortions., Be, careful, with, stale, peer, sets, too., A, list, from, two, years, ago, may, not, reflect, the, best, benchmarks, if, better,, more, comparable, companies, have, gone, public, since,, or, if, an, old, comp's, business, has, changed, significantly.
Try, This:, Choose, a, company, and, create, your, own, peer, set, of, 4-5, comps., For, each, one,, note, the, SPECIFIC, reason, it, belongs, on, the, list., Go, beyond, "same, industry.", Look, for, similarities, in, business, model,, growth, rate,, or, margin, profile., If, you, can't, explain, why, one, of, them, fits,, it, probably, doesn't, belong.

Quick check

Why is relying purely on a shared industry label (like 'technology') a common mistake when building a peer set?

Quiz

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