Valuation Part 2

Stock valuation based on comparables

Comparable company analysis values a
company by reference to other publicly
traded companies with similar operating and
financial characteristics

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Relative vs. discounted valuation
Relative valuation can help find weak spots in
discounted valuations

Relative valuation is more widely received

Many discounted valuations in consulting are

often relative valuations masquerading as
discounted cash flow valuations

Main steps in relative valuation

1. Identify comparable assets and obtain
market values for these assets

2. Convert these market values into

standardized values, since the absolute
prices cannot be compared
• The process of standardizing creates price
multiples

3. Compare the standardized multiple for the

asset being analyzed to the standardized
values for your company/project
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Choosing a comp
A comparable peer group should embody the
same operational and financial attributes so
that their public trading values represent a
reasonable proxy for those of the company
under consideration

Comp characteristics
Operational Financial

 Industry/sector  Size (revenues,

 Products assets, market cap)
 Markets/geography  Margins
 Seasonality/  Growth prospects
cyclicality  Leverage (Why?)

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Multiples
Multiples are standardized values

The numerator and denominator can be on a

per-share basis or on an aggregate basis
• Obviously, don’t mix and match

Multiples …
Numerator
• Equity value: Market value of equity
• Firm value: Market value of firm (Equity + Debt)
• Enterprise value: Market value of firm’s assets
(Equity + Debt − Cash)

Denominator
• Revenues
• Earnings
• Cash-flow
• Book value of equity
Why different from the market value of equity?

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Which multiples?
Both the numerator and the denominator
should be to the same claimholders in the
firm

 If flows apply to equity holders only (e.g.

net income, book value of equity), multiples
of these flows or values should be based on
the value of the equity only

 If flows apply to all capital providers,

including debt and equity (e.g. sales, EBIT),
enterprise Value should be used
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Which multiples? …
Okay
• Price/Earnings, Price/Book value, Enterprise
value/Sales, Enterprise value/EBIT

Not okay
• Price/Sales, Enterprise value/Net income

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Which multiples? …
Even with standard metrics, certain multiples
are more relevant for some industries than
others
• Retailing: Revenue multiples
• Financial services: Price to book ratios
• For some industries, EV/EBITDA multiples are the
most common trading metric (e.g. Industrials,
Transportation, Distribution, etc.)
• Young growth firms (with current losses):
Revenue multiples
▪ What if you don’t have even revenues?

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WMT valuation (1)

Comparables

 Costco Wholesale Corporation (Nasdaq:COST)

 Target Corp. (NYSE:TGT)
 Best Buy Co., Inc. (NYSE:BBY)
 PriceSmart Inc. (Nasdaq:PSMT)
 Carrefour SA (ENXTPA:CA)
 METRO AG (DB:MEO)
 Organizacion Soriana SAB de CV (BMV:SORIANA B)

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 WMT valuation (2)
Financials Actual
Market Net Enterprise
Company Name Price Cap Debt Value Revenue EBITDA EPS

Costco Wholesale Corporation (NasdaqGS:COST) 160.02 70,373 -157 70,448 116,553 4,776 5.34
Target Corp. (NYSE:TGT) 71.84 44,257 10,792 55,049 73,909 7,411 4.51
Best Buy Co., Inc. (NYSE:BBY) 29.79 10,210 -1,708 8,502 40,114 2,217 2.42
PriceSmart Inc. (NasdaqGS:PSMT) 85.39 2,578 -58 2,519 2,803 183 2.95
Carrefour SA (ENXTPA:CA) 28.73 20,924 13,147 35,274 85,505 4,235 1.56
METRO AG (DB:MEO) 29.39 9,593 3,003 12,582 68,640 2,422 0.77
Organizacion Soriana SAB de CV (BMV:SORIANA B) 2.25 4,044 -45 3,999 6,086 409 0.12

High 160.02 70,373 13,147 70,448 116,553 7,411 5.34

Low 2.25 2,578 -1,708 2,519 2,803 183 0.12
Mean 58.20 23,140 3,568 26,910 56,230 3,093 2.52
Median 29.79 10,210 -45 12,582 68,640 2,422 2.42

Projections

Revenue EBITDA EPS

124,442 5,125 5.68

75,375 7,536 5.03
39,775 2,269 2.76
3,051 198 3.40
85,933 4,440 1.88
66,209 2,826 2.00
6,465 431 0.12

124,442 7,536 5.68

3,051 198 0.12
57,322 3,261 2.98
66,209 2,826 2.76 13

WMT valuation (3)

Multiples Actual Projections

EV/ EV/ P/E EV/ EV/ P/E
Company Name Revenue EBITDA Revenue EBITDA
Costco Wholesale Corporation (NasdaqGS:COST) 0.60 14.75 29.97 0.57 13.75 28.17
Target Corp. (NYSE:TGT) 0.74 7.43 15.93 0.73 7.31 14.28
Best Buy Co., Inc. (NYSE:BBY) 0.21 3.83 12.31 0.21 3.75 10.79
PriceSmart Inc. (NasdaqGS:PSMT) 0.90 13.78 28.95 0.83 12.69 25.11
Carrefour SA (ENXTPA:CA) 0.41 8.33 18.42 0.41 7.95 15.28
METRO AG (DB:MEO) 0.18 5.19 38.17 0.19 4.45 14.70
Organizacion Soriana SAB de CV (BMV:SORIANA B) 0.66 9.78 18.75 0.62 9.29 18.75

High 0.90 14.75 38.17 0.83 13.75 28.17

Low 0.18 3.83 12.31 0.19 3.75 10.79
Mean 0.53 9.01 23.21 0.51 8.45 18.16
Median 0.60 8.33 18.75 0.57 7.95 15.28

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WMT valuation (4)
Actual Projection
 Revenue: 484,028  Revenue: 488,108
 EBITDA: 34,727  EBITDA: 32,591
 EPS: 4.67  EPS: 4.26
Valuation Actual Projections
EV/ EV/ P/E EV/ EV/ P/E
Revenue EBITDA Revenue EBITDA
High 435,021 512,260 178.25 403,070 448,004 120.02
Low 88,721 133,169 57.49 92,753 122,104 45.98
Mean 256,731 313,014 108.40 247,888 275,511 77.34
Median 292,561 289,237 87.56 276,323 258,950 65.10

Actual Enterprise value = $239,257 m

Actual Price = $60.7 15