Running a Comparable Company Valuation Analysis

If you’re serious about doing your own stock investment research, then the number one tool at your disposal is a comparable company valuation analysis, also referred to as running “comps”.  When I used to work as a stock analyst, I would update, print, email and distribute a list of comparable companies for the industry that I followed almost every day.  Sometimes dozens of times per day.  At its most basic form, a comparable company valuation is just a list of some alternative investment ideas that includes a few valuation ratios.  By having the valuation ratios next to each other, you can quickly scan and compare the valuations of the different companies on your list.  These types of analyses work best when they compare companies in similar industries, but you can also use them to choose between investments across many sectors.  Here are some of the basics on how to set up your own stock comparative analysis.

Start by running a stock screener to figure out which stocks you want to add to your list.  You don’t have to run a stock screener.  You may already have a list of stocks that you are interested in, or you may go do your own research or read papers or magazines to get some ideas of stocks that you may be interested in.  Then, open a spreadsheet and fill the first column with the name of each company.  In the second column fill in the ticker symbol.  In the next columns, fill in the valuation metrics that you want to compare the companies with.  For example, price, earnings, growth, PEG and P/S.  Here is a sample of what your spreadsheet should look like.

To find the earnings per share estimates and the other figures, you can look at yahoo or google finance.  As you get better at stock valuation, you can also run your own numbers and use your own growth estimates.  Now, let’s look at the information we filled in on Apple, Cisco and Google, three of the most widely held growth stocks.  By looking at the comp analysis you can see that all three of the stocks are considered growth stocks.  However, they are all in different sectors.  While they could all be considered to be technology stocks, Cisco is a manufacturer, Google is a service provider, and Apple is part computer manufacturer and part service provider (iTunes).  You’ll want to keep the underlying business models in mind when you are looking at valuation metrics.


Now let’s look at the valuation metrics.  You’ll see that we added in the current and next year earnings per share estimates.  We then calculated price to earnings ratio based on current and next year estimates.  Based on P/E ratios alone, it would appear that Cisco is the stock with the lowest valuation.  After all it has a P/E of about 10 while Apple is a little higher and Google’s is nearly 50 percent higher. However, in this case it is important to also look at the PEG ratio.  In terms of PEG ratio, Apple has the best valuation, followed by Google and then Cisco.  In other words, even though Cisco is cheaper than Apple, it is not growing as fast and therefore justifies a lower valuation.  The key in finding good investment opportunities is to find stocks that are growing quickly but that do not trade at high valuations.

Also notice that we added price to sales to our comp analysis.  You’ll see that in terms of the multiple of sales, Cisco is also the cheapest, followed by Apple and Google.  However, it’s important to understand why these ratios vary.  In Google’s case, they have ultra high profit margins because they don’t manufacture products like the other two companies.  That means that they bring more of their revenue to the bottom line.  It also means that people pay more for each dollar of revenue.  Hence the higher price to sales ratio.

The example we’ve shown is very basic, and you can download it using the links below and modify it to your liking.  The more you learn about stocks and the more valuation work you do, the better you can make your comp analysis.  I’ve seen comps that have over 50 companies and over 100 columns filled in.  The key is getting the most important information into a format that you can easily look over and compare company to company.  Also, if you’re filling in the spreadsheet and using it to help you buy stocks, you’ll want to make sure you keep it updated.  As prices and company outlooks change, the valuation metrics can swing wildly, sometimes causing you to rethink your preferred investments.

Download Our Comparable Company Spreadsheet

Here is a copy of our Excel comparable company valuation spreadsheet.

Here is a copy of our OpenOffice calc comparable company valuation spreadsheet.

Use these copies of our comp analysis to get your own stock valuation tables set up.  Once you have your spreadsheet adjusted to the metrics that you like to use, it is easy to add new stocks and take out old ones that you are no longer interested in.  Also, you can make seperate sheets for different sectors.  For example, if you really like a particular oil company, it would make sense to create a seperate comp analysis with all of the oil companies in the same industry as the one you like.  Then, you can tell whether the stock you like looks good when compared to its peers.  Sometimes the stock you first thought was a great buy leads you to find another stock that is even better.

One final point.  When you are running comps, don’t ever make your buy or sell decision solely on valuation metrics.  If you do you could be buying the cheapest company because, well, its just a cheap and crappy company.  Instead, take into consideration the history of earnings performance, the effectiveness of its products or services, and how well management has been able to weather downturns in the economy.  And for help choosing which valuation metrics you want to use, check out other sections of our site, as we have detailed posts on how to calculate and compare companies using many different metrics.