Peer screening is a crucial step in Comparable Company Analysis (Comps Valuation), a method used to value a company by comparing it to similar businesses. Identifying the right set of comparable companies ensures that the analysis is accurate, reliable, and relevant to the company being valued. A well-constructed peer group reflects similarities in size, industry, growth prospects, and risk profile.

This blog outlines the step-by-step process to perform peer screening for a Comps Valuation and highlights key factors to consider.

Peer screening involves selecting a group of companies that are similar to the target company in terms of financial, operational, and market characteristics. These peers serve as benchmarks to derive valuation multiples such as EV/EBITDA, P/E, and EV/Revenue, which are then applied to the target company to estimate its value.

Step 1: Define the Purpose of the Analysis

Understand the purpose of the valuation and the specific metrics that need to be benchmarked. Common scenarios include:

- M&A transactions

- IPO valuations

- Equity research

- Investment decision-making

Clearly defining the objective helps in identifying the relevant factors for peer selection.

Step 2: Identify the Industry and Sector

Start by identifying the industry and sector the target company operates in. Use industry classification systems like:

- GICS (Global Industry Classification Standard)

- NAICS (North American Industry Classification System)

- SIC (Standard Industrial Classification)

Step 3: Set Size Criteria

Select peers of similar size based on:

- Revenue: Companies with similar annual revenue.

- Market Capitalization: Companies with comparable market values.

- Total Assets: Particularly relevant for asset-heavy industries like real estate or manufacturing.

Step 4: Consider Geographic Relevance

Geographic factors influence growth opportunities, market dynamics, and regulatory environments. Ensure that peers operate in similar regions or markets.

Step 5: Assess Growth Rates and Profitability

Include peers with similar growth trajectories and profitability metrics. Look at:

- Revenue Growth: Historical and projected growth rates.

- EBITDA Margins: Indicates operational efficiency.

- Net Income Margins: Reflects profitability at the bottom line.

Step 6: Evaluate Risk Profiles

Ensure that peers have a similar risk profile by analyzing:

- Leverage (Debt Levels): Companies with similar debt-to-equity ratios or interest coverage.

- Volatility (Beta): Public companies with similar beta values to reflect market risk.

- Liquidity: Consider trading volumes for publicly listed peers.

Step 7: Narrow Down the Peer Group

From the initial list, refine the peer group by applying filters to eliminate outliers or irrelevant companies. Exclude companies that:

- Operate in different sub-sectors.

- Have unusual financial metrics or are undergoing significant restructuring.

- Have inconsistent data availability.

Step 8: Validate Peer Selection

Before finalizing the peer group, validate your choices by cross-referencing them with:

- Analyst Reports: Check if the selected peers are commonly referenced in industry analyses.

- Management Input: If available, confirm the peer group with the target company’s management or industry experts.

1. Financial Databases: Platforms like Bloomberg, Capital IQ, and FactSet offer industry filters, financial metrics, and market data to help dentify peers.

2. Stock Screeners: Online tools like Yahoo Finance or Google Finance allow filtering based on industry, market cap, and valuation multiples.

3. Investor Presentations: Look for competitor references in the company’s investor materials.

4. Industry Reports: Research reports often list comparable companies in a given sector.

Peer screening is the foundation of a robust Comps Valuation. By carefully selecting a relevant peer group based on industry, size, geography, growth, and risk, analysts can derive accurate and meaningful valuation multiples. Leveraging tools, databases, and industry insights ensures the peer group is both reliable and contextually appropriate, ultimately leading to more informed valuation and investment decisions.