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2nd Post-Trading Comparables

I’ve been spending a lot of time recently on refining my technical valuation skills for technical interviews that I have coming up.

During that time I have realized how important Trading Comparables (in banker speak Comparable Company Analysis) aka Trading Comps are not only as an investment banking valuation method but also as a useful investment decision tool.

All too often, it is quite common to hear some one say “Wow, this company has 20% EBITDA margins” or “Firm A only has a P/E of 15x which is cheap”.

These statements or single data points are irrelevant in the context of investment decisions unless they are compared against similar firms or “comparable companies”.

To put it explain it more plainly, lets use a fictitious example. Say someone points out that Firm A has net income of $100 Billion and trades at P/E of 10x and asks you if you would invest in it. Thats sounds pretty good, right?

But what if I were to tell you that a Firm B existed  and has $200 Billion in net income, but only trades at a valuation of 10x earnings or a P/E of 8x.

Suddenly, that investment in Firm A doesn’t sound as good as the investment in Firm B. A lot of finance is about values in relation to other values.

By comparing these two different firms and their valuations we are doing a very basic, simple form of  Comparable Companies or Trading Comps.

In investment banking, this form of analysis is one form of analysis that is used to value a firm that is either being bought or sold.

In trading/investing, it is used to see which company is “cheaper” or “profitable” relative to another.

Now to get to the more technical aspect of it…

I will present a more technical overview here of how to do a quick comparable company analysis utilizing some excerpts from

the Investment Banking Book: Valuation, Leveraged Buyouts, and Mergers & Acquisitions by Joshua Rosenbaum and Joshua Pearl.

I have asked and received permission from the authors to use this info.

From the book:

“Comparable companies analysis is (“comparable companies” or “trading comps”) is one of the primary methodologies used for valuing a given focus company, division, business, or collection of assets (“target”). It provides a market benchmark against which a banker can establish valuation…Comparable companies has a broad range of applications, most notably for various mergers & acquisitions (M&A) situationns, initial public offerings (IPOs), restructuring, and investment decisions.

The foundation for trading comps is built upon the premise that similar companies provide a highly relevant reference point for valuing a given target due to the fact that they share key business and financial characteristics, performance drivers, and risks. Therefore, the banker can establish valuation parameters for the target by determining its relative positioning among peer companies. The core of this analysis involves selecting a universe of comparable companies for the target (“comparables universe”). These peer companies are benchmarked against one another and the target based on various financial statistics and ratios. Trading multiples are then calculated for the universe, which serve as the basis for extrapolating a valuation range for the target. The valuation range is calculated by applying the selected multiples to the target’s relevant financial statistics.”


The book points out five steps…

I. Select the Universe of Comparable Companies

-This is finding companies that are similar to your potential investment, geographically, financial profile, same industry etc

II. Locate the Necessary Financial Information

-No further explanation needed here

III. Spread Key Statistics, Ratios, and Trading Multiples

-Putting all the statistics on a spreadsheet…important to put everything in LTM (Last 12 Month terms) and adjust each company’s financials for non-recurring items so that a true apples-to-apples comparison

IV. Benchmark the Comparable Companies

-Basically do an in-depth examination of the comparble companies to find your investment’s relative ranking and closest companies.

V. Determine Valuation

-Use the comps to determine appropriate valuation for your firm/use the other firms multiples to have a discussion about whether your target investment is undervalued/overvalued on a relative basis.


This is an oversimplification of comps…but basically in theory its as easy as it sounds…comparing similar companies to determine valuation for your potential investment.

For a more in depth analysis of this form of valuation and others used on wall street, I would highly recommend this book.

I have put a basic template for a company I analyzed right here, something like this is usually sufficient for investment purposes…BYD_Comps


Oil, Coal, Uranium – Are they just fueling the fire? Or is there a story to be told?


Although Libya continues to tear itself apart and signs of unrest are spreading to Bahrain and Saudi Arabia, the world has shifted focus to the horrific post-tsunami disaster in Japan. With thousands confirmed dead and thousands more still missing, this natural disaster draws much sympathy from the U.S and its nightmarish experience from Katrina.

Crude Oil WTI futures have pulled back below the psychological $100 level and is settling around $97-98 with expectations that since much of Japan is no longer at operating capacity, they will not have a high demand for oil. Although these expectations are priced in correctly at this time, many are ignoring two certainties: one, Japan has every intention to rebuild, which infers they will have a need and a demand for oil and other forms of energy in order to reconstruct, two, the news media are not covering the Middle East as stringently as it was a week ago but that does not mean the uprisings and protests have stopped. I strongly believe oil will continue its uptrend and push back past the $100 level in the next 2 weeks.

Interestingly enough, Japan’s Fukushima plant explosions have caused several Western nations to reconsider their reliance on nuclear energy.  Germany has gone as far as to shut down seven of its nuclear plant operations. Germany is a country where 29% of all its electricity usage is powered by nuclear plants. This explains why the price of electricity soared in European markets and why many uranium miners have plunged. Shares of DNN, URRE, URG have tanked since Monday’s opening bell, accumulating a three day loss of roughly 40% each. I believe the markets are overreacting to the nuclear situation stemming from Japan; many plants have been operating safely for over 50 years. Furthermore, as a global entity, this world has come to rely heavily on nuclear power. 78% of France’s overall consumption of electricity comes from nuclear power plants, 60% for Belgium, and 43% for Sweden. History tells us repeatedly how dangerous nuclear power truly is, with events as heart breaking as Chernobyl and Love Canal. But history also reminds us how much we have come to need nuclear power; we have recovered from these disasters and have learned many lessons. I will contend I am long-term bullish on uranium miners such as DNN, URRE, and URG.

As investors and traders alike shy away from nuclear energy, we have seen many solar stocks pop in the past few days. But asides from all the noise traders create on the market, one source of energy that never gets old is coal. Coal is likely to see higher demand regardless of what happens to the nuclear power plants. Should nuclear power plants resume operation, coal will be driven by high demand from railroads and transportation. Should other countries follow Germany and cut nuclear operations, coal will see a spike, as electrical generators will need to burn coal to make up for the nuclear powered portion of electricity usage. PVR, a US company that owns and operates coal mines, is my pick for coal’s uptrend. With a healthy 7% dividend and the recent completion of a merger with PVG, I believe we will see PVR trading $28 within a month and a half.


DISH to Buy DBSD: Why Does Charlie Ergen Want to Own Two Bankrupt Satellite Companies

HedgeFundLIVE.com – Dish Network is currently trying to take control of bankrupt DBSD (a subsidiary of ICO Global Communications Ltd.) and Echostar is TerreStar’s largest creditor. Charlie Ergen is the founder of both Dish Networks and Echostar so why is he trying to buy these two bankrupt satellite operators. Well, the answer is in the wireless spectrum that these two companies own. DBSD and TerreStar each own 20MHz of S-band MSS spectrum. This spectrum can be used to one day build a nationwide wireless broadband network assuming the company can get the requisite waiver from the FCC of its Ancillary Terrestrial Component (ATC) Service Rule. Given that LightSquared recently received this very waiver from the FCC and, as part of the National Broadband Plan, the FCC is currently looking for ways to accelerate the terrestrial deployment of MSS band spectrum, I don’t think that this is an exceedingly difficult waiver to obtain. So, given the above, I think that Charlie Ergen plans to combine the two 20MHz blocks from each of DBSD and TerreStar to create one large 40MHz piece of wireless broadband spectrum so he can either build out a wireless broadband network or hold the spectrum and then resell it in coming years to some other company who wants it more and is willing to pay a much higher price. Why would Charlie Ergen want to build a wireless broadband network? Well, it’s because he sees the handwriting on the wall which is that his video-only satellite business has a limited future without some form of broadband internet offering to go with it or even replace it down the road as more and more of his subscribers begin to cancel their service as they realize that there are other ways to get their favorite TV shows off of the internet. Well, Phil Falcone has thrown his hat into the ring with his Dish-topping bid for DBSD from LightSquared as he sees what Charlie Ergen is up to and at best wants to prevent it and at worst wants to make it more expensive for him. So we will see what happens here but it is my belief that if Charlie doesn’t get what he wants here, then Dish’s days are numbered.


Go fix that Dish!


Barron’s Summary March 12, 2011

· FX discussed in the cover story – cautious on the US$, saying in the future the dollar-centric model of the world will deteriorate w/other currencies (inc. the yuan and real) gaining in credibility and value.  Says investors can benefit by buying some large multinationals (like KO, IBM, and XOM) or FX brokers (like FXCM, GCAP).  Some ETFs inc. CEW (long) and UUP (short).

· HPQ – pos. comments; the stock could have upside into the $60s if new mgmt articulates a credible growth strategy to investors; HPQ’s multiple is one of the lowest in the industry; HPQ should embark on a low-cost open-source software strategy rather than compete w/ORCL and IBM by selling a me-too “stack”; Barron’s thinks HPQ should buy RHT.  Other potential software targets for HPQ include SYMC, TDC, INFA, BMC, CVLT, and TIBX.

· Santoli – this is prob. just a long-awaited stock correction vs. the start of a broader macro downdraft.  Correlations could start to break down again.  Barron’s    http://bit.ly/gF7zbA

· VC – pos. comments; the stock could be worth in the low $80s.  Barron’s  http://bit.ly/gF7zbA

· BAC – positive comments; the stock could rise 40% from present levels; earnings could be north of $2.

· Buying companies that were hit on news of Japan’s quake – pos. on TM, PRU, MFC, AFL, XL

· Hyundai – positive comments.  The co is gaining a lot of market share and the stock could have another 40% upside from here.

· Interview w/Bridgewater’s Ray Dalio – US growth could slow meaningfully at year-end due to an end to fiscal and monetary stimulus unless private-credit growth picks up.  The European debt crisis will intensify in the coming year as events get out ahead of regulators and tensions between Germany and the peripheral economies intensify.  We could see a massive FX event in the next 18 months where creditor nations revalue their currencies higher and adopt independent monetary policies (China, Brazil) while debtor countries that can print money will devalue their currencies.  Debtor countries that can’t print money will restructure their debts.  Says he has exited the US bond market on the long side and has initiated some select short positions (not just in the US but in DM markets overall).  Dalio says that currency devaluations are good for stocks, commodities, and gold.

· YHOO – nothing new in Barron’s – says that YHOO is considering monetizing its stake in Yahoo Japan; the article references comments made by mgmt over the last couple months and doesn’t contain any new information.

· SWY – somewhat cautious; notes valuation not really all that cheap.

· Meat processors discussed; no real investment opinion was offered; notes that meat markets are increasingly tight but processors also are facing higher feed costs.

· European M&A targets – C&C Group, Aggreko, DiaSorin, Eutelsat Communications are all takeout candidates.

· STX, WDC – positive comments on both following the WDC/Hitachi deal; a huge transformational transaction for the industry; gives WDC a lot of pricing power and scale.  WDC could top $40.  STX also will see better pricing power and could pick up market share from the combined WDC/Hitachi.

· Aggreko – Positive comments in Barron’s, saying the lessor of large power generators could be a takeover target, with ABB sited as the kind of firm that might be interested.

· Energy stocks – Barron’s was positive on energy stocks due to rising crude / gas prices, particularly XOM. With XOM, Barron’s highlighted buying Oct 85 calls and selling Oct 95 calls. If XOM advances to 95, investors will make 250% on their investment, with $87.86 the breakeven.

· Uranium – Barron’s says the recent slide in uranium of around 6% is the result of profit taking, not the reversal of a longer-term uptrend. Helping uranium is the fact that China barely has enough supply to meet half its current needs. Uranium also has mining restrictions in a few countries due to its use for nuclear weapons, which helps keep supply in check.

· Solars – Barron’s says that while these companies are outperforming the Nasdaq this year, they still trade at a fairly large discount to the rest of the market. FSLR (P/E of 14.9), LDK (5.3x), SPWRA (7.8x), and TSL (5.7x) were all highlighted as being undervalued. Barron’s does point out that some solars have company-specific issues, particularly ESLR, CSIQ, and STP, which range from not being profitable to not being able to each their cost of capital. Subsidy cuts in Europe could create a bit of a shakeout. Barron’s feels if that occurs, the best names would be TSL and to some extent FSLR.

Selling Salesforce.com (CRM)

HedgeFundLIVE.com - Here is a write-up on one of the more overvalued stocks on NASDAQ. I feel that the time is now ripe to begin shorting it because of the technicals as well as recent business developments that are causing people to take a second look at its financials:


Very few stocks are more highly touted by Wall Street analysts than Salesforce. There are some good reasons for this: they are at the forefront of a hot trend in technology, they are growing their revenues at a fast clip, and they even have a .com in their name. However, at 239x trailing EPS ($0.55) and 85x consensus analysts’ non-GAAP estimates for 2012 ($1.54), we believe that the market has overstretched and assigned Salesforce a valuation that is far beyond its intrinsic worth.

Business Model

Let’s take a look at its business model. Salesforce.com sells on-demand CRM services to all kinds of businesses, two-thirds of which are in the small to mid-sized category, while enterprise makes up its remaining customers. Their most popular Enterprise edition costs $125/user every month and there are several add-ons that can be purchased for an additional fee. Revenues are growing at a rate of about 25% annually and gross margins are high, over 80%. This margin is possible because the incremental cost of supporting a new customer is very low.

If the story ended here, then Salesforce would seem like a fantastic business. However, the way that the company gains new business is deeply flawed. Salesforce pays its sales force a lot of money to sell directly to firms. These expenses deal a huge blow to their enviable gross profits, such that their operating margins fall below 10%. Moreover, a significant chunk of this compensation is stock options, which management and analysts highlight as a non-cash expense. This gives them an excuse to focus on non-GAAP earnings quarter after quarter. However, we take issue with this diversion from GAAP because it takes focus away from the creation of shareholder value and places it on some hopeful future where margins are magically high and profits are fat.

Click here for full analysis.

1st Post

HedgeFundLIVE.com — Hi my name is Daniel Esposito and I am a Rutgers Business School senior majoring in Finance and Economics.

I am on the Rutgers LIBOR Equities Desk. On this blog I will discuss trading ideas, wall street interviews, and anything finance related.

The undergraduate Rutgers team has been actively managing money for about a little under a month for now. It was difficult at first getting the logistics of managing a pool of money amongst eight students in a coordinated manner. But right now, we have pretty much streamlined our process down to 1 conference call per week with additional emails conducted through a list serve. I think its been pretty successful so far.

In order to make the fund successful and attract additional capital it is very important that we generate good, consistent returns.

So far we have initiated positions two positions, one a macro-related bet and the other a specific firm. Between the two trades currently, we are sitting on a profit, which is always a nice feeling.

Breaking into the financial services industry aka Wall Street is a very difficult thing to do. One thing that has consistently helped me out on interviews is bringing professionally made equity research reports and working them into the discussion. I will post three coversheet examples on to this blog so that any aspiring financers have something to learn off of.

Links of report coversheets are below (1,2,3), just click on them!





Wendy’s - A bargain?

HedgeFundLIVE.com — in 2008, Wendy’s merged with Triarc in a $2.28bn deal that was supposed to bring a lot synergies and cost reductions.  Now here we are with the Arby’s franchise dragging the stock lower.  Arby’s revenues have declined 17% since the incision and little to none synergies were enjoyed.  Both companies have separate headquarters and the cost reduction in SG&A has not happened.  WEN is lagging behind with the lowest margins in the industry and that is mainly due to the lack of performance in Arby’s.

Recently Management has come upfront with their decision to sell or divest the Arby’s franchise.  That will most likely happen as management is pressured by shareholders who will greatly benefit from the divestiture.  The stock ran up 7% when management explicitly said it is pursuing buyers for Arby’s in their latest Conference Call.  When that happens, shareholders will receive income from the sale in the form of reduction in debt or a per/share payout.  In addition, WEN will be left with a profitable business line that will generate around $207mm in operating profits and thus, making its valuation very attractive.  Management predicts a 15-20% growth in EBITDA in next years, but even if we use a 5% growth and a 15% WACC, we end up with a company value at over $3bn, or $7.17/share.

WEN is without a doubt a BUY now at 4.91 for the reasons described above.

By Rodrigo Polezel - Rutgers University

Barron’s Summary 3-5-11


· Santoli – positive - the upside risks in the market may be underappreciated.

· TGT – positive comments; sentiment neg and valuation cheap; could move >$60.  We definitely think so.

· PNC – pos. comments; stock could have 25% upside; valuation cheap and fundamentals improving.

· MET – pos. comments; the stock offering creates a buying oppy; has one of the most attractive return profiles in the industry, valuation is cheap, and the co has a lot of excess capital.

· Goldman’s Tollkeeper fund is profiled – pos. on APH, AAPL, GOOG, GOOG.

· Business intelligence software used to analyze management tone during conf calls.  Cautious comments on BBY, CSCO, NWS.

· Interview w/Muddy Waters Research founder Carson Block.  Neg. on Chinese reverse merger companies (inc. CCME).

· AAPL – the iPad 2 is nice and will sell a lot of devices, but it is still very early days in the tablet market.  Going forward, price will become much more important.  We think the Ipad2 will be an incredible seller as it is very competitively priced.

· MMI – somewhat pos. comments; sentiment towards the stock has become v negative; but it has $11/shr in cash and some innovative products.  This stock is WAY oversold and should rally soon.

· QCOM, NVDA could both benefit from the rising use of tablets.

· RIMM – pos. review of the PlayBook in Barron’s – says this is one tablet that may actually give the iPad a run for its money.  We think the Playbook will be dead in  the water.

· Jobs report provides evidence that the recovery is gaining steam; Feb could wind up being the breakout month for employment growth.

· Berkshire (BRK) – pos. comments; the stock could hit fresh highs as book value builds further.  Cash could hit $55B by years-end if Buffett doesn’t make any other deals.

· PETM – pos. comments; the stock could have more upside ahead.

· Airlines – Barron’s was positive on the space, saying that recent M&A activity and capacity cuts resemble the rail industry 10-12 years ago, which was around the time when investors warmed up to their shares. Some analysts say a drop in crude over a medium-term timeframe gives upside of 40% or more to names like AMR and DAL. AMR was highlighted as the most unpopular airline in the space due to its high leverage (which is a pos in boom times) and the fact that it never filed for bankruptcy, which means it never saw major labor cost cuts like its competitors.

· MLPs – Barron’s was positive on MLPs saying that their steady dividend distributions and tax efficiency make them an attractive investment. The article also says that MLPs are fairly valued and likes the fact that they are based on volume rather than volatile commodity prices. Stocks highlighted were PAA, MMP, EPB (EPB also received a pos mention for its natgas pipelines), EPD, and NRP (a coal land leasing company).

· JOE – Barron’s was negative on the stock, saying that a lot of its land properties are overvalued and in depressed regions. A few analysts also say that despite the removal of the company’s poison pill it is unlikely to be bought. Barron’s does note that on the positive side, the company has a solid balance sheet and its high short interest could allow for a squeeze if anything positive emerged.

· NUE – Pos mention in Barron’s for its efficiency as a steel producer.

· PX – Pos mention in Barron’s on its growth strategies in China, Brazil, and the Middle East.

· EEP – Pos mention in Barron’s as the company’s pipeline business plays a large part in US oil imports.

· Some unloved large cap stocks that could benefit – PCLN, MHS, BIDU.



Barron’s Summary Feb 19, 2011

· The king of bonds” - Jeffrey Gundlach is profiled in Barron’s – he is pretty bearish on US equities, calling for the SP500 to hit 500 in the next few years.  He foresees more downside for muni debt and is pretty cautious on the US economy.

· Housing is a lot worse than people think – using numbers by Core Logic, which claims the headline National Association of Realtors existing home sales is inflated, numbers and trends in the market are worse than expected.

· INTC – article notes that Fred Hickey has become positive on INTC, due to a cheap valuation and decent fundamentals.

· Teton Advisors CEO Nick Galluccio – interview – pos. on FNFG, QLGC, GDP, ESIO, WASH, FFIC, HXL, WWD.

· NVDA, ARMH – negative comments – investors are getting way too enthusiastic about tablet growth forecasts; both these stocks are very expensive.

· MSFT, INTC, DELL – pos. comments; all these stocks are pretty cheap and reflecting pretty dire forecasts.

· HPQ – Barron’s says the Vertica purchase by HPQ raises conflict of interest questions as HPQ’s nonexecutive chairman, Ray Lane, owned a piece of the small software firm via his involvement w/VC shop Kleiner Perkins Caufield & Byers.

· Tech firms, inc. AAPL, MSFT, GOOG, CSCO, and INTC, should start paying 3% dividends.  They all have way too much cash, something investors aren’t giving them any credit for.  If INTC, one of the most capital intensive companies in tech, can pay a high dividend, than others should be able to.

· MF – pos. comments; as Corzine transforms the company, its stock price could climb to >$10.

· OMX – positive comments; the stock slumped after its earnings; but valuation is cheap and expectations are low; the results weren’t even that bad and mgmt could be conservative w/the guidance.

· LAB – one shareholder in LAB isn’t happy w/the terms of the deal and thinks the company is worth closer to $6.

· Cotton – the price may be vulnerable to a near-term correction although longer-term fundamentals remain positive.

· BioGaia – the Swedish biotech firm could become a takeover target for the likes of Nestle, DuPont, or Yakult.

· AGU – the stock could have more upside ahead – the shrs could hit prior highs of $115

· CVX – the stock could continue climbing as oil prices rise; the shrs could approach $110

· GIS: General Mills is mentioned positively by Barron’s. The article is positive on the company’s pricing power and R&D/innovation (among other things) and says that the stock could be up ~20% during the next 12 months (while also having a 3% dividend yield).

· NFLX: Netflix is mentioned cautiously by Barron’s. Barron’s had a negative call on NFLX in its Dec. 27th issue, and says, “while we have lost some (OK, a lot of) confidence in our timing, we think those concerns are still valid, and that Netflix, which fetches 53.7 times this year’s estimated earnings, could trade sharply lower in the next 12 months”

Deal and Related News Feb 16, 2011

· GENZ/SNY – the deal is formally unveiled this morning – SNY will buy GENZ for $74/shr cash + a CVR.  The deal is expected to close early in Q2:11.  The acquisition is expected to be accretive to sanofi-aventis’ Business Net earnings per share in the first year following closing, and accretive to Business Net earnings per share in the range of euro 0.75 – euro 1.00 by 2013.  CC 8amET (866) 907-5925

· FDO - filing out from Trian Group - in the filing Trian says that it has made an offer to buy FDO for $55-60/shr cash.  FDO Confirmed receipt of Trian Group’s unsolicited conditional proposal to acquire the co for $55-60/share in cash. Board will review the proposal in due course.

· Clariant AG agreed to buy private equity-owned Sued-Chemie AG in a transaction valued at 2 billion euros – Bloomberg

· JOE – Fairholme Capital will move to replace JOE’s board by written consent of the majority of the co’s shareholders.  The deal could be announced as early as Wed.  WSJ

· JOE – has adopted a shareholder rights plan that prevents any shareholder with a more than 10 percent stake in the company from increasing that position without board approval – CNBC

· DELL - CFO tells DJ that it is considering to evaluate M&A candidates, but not chip companies (there was a mention Tues on ZDNet that DELL could consider an acquisition of AMD…DELL pretty much ruling that out); DELL on the call said they have no intention of taking the company private.  On the call says their M&A going forward will look similar to their recent deals.

· MRK – the co said it had been unable to sell its Netherlands-based research unit Organon and will prob. wind up shuttering the business – Reuters

· Sam Zell considering acquisition of Chicago office building; would mark his first office acquisition in years; WSJ

· China M&A – the country’s economic planning agency said on Wed that its new rules for reviewing certain mergers and acquisitions won’t affect the country’s openness or efforts to attract foreign investors – DJ

· TLCR – this hit during trading on Tues – Reuters says that anti-trust regulators may challenge Grifols’ planned buy of TLCR on fears that the combination would reduce supplies and raise prices.  Reuters

· Telecom M&A: Orange and T-Mobile are considering merging their mobile operations in several countries. France Telecom (which owns the Orange network) and Deutsche Telekom (which owns T-Mobile network) and are considering copying the merger of their UK operations, which created “Everything Everywhere” Telegraph

· NDAQ – Barron’s recommends a few options strategies depending on whether NDAQ is either a company buyer or an acquisition target – Barron’s

· CME - on Tuesday sought to quash speculation that it may make a counter bid for NYSE Euronext – Fox Business.

· BGP – the co officially filed bankruptcy this morning – Bloomberg