Comp Sheet Target Calculations to Get Target Prices for a Stock
Published on: 2016-03-23 Last updated on: 2016-04-01
This article will cover the methods of comparable company analysis (Comp Analysis) and each method's strength and weakness. Comp analysis is typically used to find price targets for a stock of interest compared to stocks which are similar. Comp analysis is great since they valuations are typically easy to calculate, however, has drawbacks since sometimes it can be difficult to find "comparable" companies.
Here are some examples of comps and their tickers:
- McDonalds (MCD) vs Wendy's (WEN)
- Visa (V) vs Master Card (MA)
- Ford (F) vs GMC (GM)
1. Price to Earnings Ratio (P/E Ratio)The Price to Earnings ratio is one of the most common valuation methods for stocks. It is commonly calculated as Share Price divided by Earnings per Share (EPS). It can also be seen as the market cap divided by earnings. The P/E ratio can be seen as the premium you pay for a company. A low P/E means the company is a good value.
Benefits with P/E - Easy to use and calculate.
Problems with P/E - P/E is meaningless if earnings are negative, and therefore, is a bad metric for early stage tech companies, or biotech. Further, P/E can be thrown off by one time events (a large legal settlement), or differences in accounting practices.
How to get a target price from P/E?
Target Share Price = The Median P/E from Comps x Earnings per Share (EPS) for Target Stock
Or P/Share = Median P/E * EPS
2. Price to Book Ratio (P/B Ratio)The book value is the value of a company from its balance sheet, and typically excludes intangible assets and liability. A low P/B means the company is a good value.
Benefits with P/B - Typically P/B is used for capital intensive industries, like car manufacturing.
Problems with P/B - P/B often relies on historical data and can be a poor predictor of the future. It is also prone to differences in accounting styles.
How to get a target price from P/B?
Target Share Price = The Median P/B from Comps x Book Value Per Share
Or P/Share = Median P/B * B/Share
3. Price to Earnings Growth (PEG Ratio)Prospective earnings growth is typically easy to obtain and import from sites like Yahoo finance. A low PEG Ratio means the company is a good value.
Benefits with the PEG Ratio - The PEG ratio is good to value companies with high growth. This could be technology companies, or early stage companies, like Google, Apple, Paypal, etc...
Problems with the PEG Ratio - Need to rely on analysts growth estimates, and also, can be overstated for high growth companies that typically face higher risk than more stable companies.
How to get a target price from the PEG Ratio?
Target Share Price = The Median PEG Ratio from Comps divided by PEG Ratio for Target Stock times Current Price of Target Stock
Or P/Share = (Median PEG/Target PEG)*Current Price
4. Price to Sales (P/S)Price to sales is useful for companies which are not profitable, but have revenue. Further the companies are expected to be profitable, and so this measure is good for early stage companies with high potential for growth. A low P/S ratio means the company is a good value.
Benefits with Price to Sales - Price to sales is easy to calculate and good for companies which are not profitable. It is also less likely to be affected by different accounting methodologies.
Problems with Price to Sales - Usually only for broad comparisons, other wise Enterprise Value (EV) to Sales is better. EV takes out debt and cash positions which are not core to the companies valuation.
How to get a target price from the Price to Sales Ratio?
Target Share Price = The Median Price to Sales of Comp Stocks times the Current Sales per Share of the Target Stock
Or P/Share = (Median P/S)*(Price per Share/Price to Sales)
Note: Revenue and sales are not the same.