Present Relative Valuation( Valuation by Comparable)
Comparable company analysis (present relative valuation) is the valuation method which involves the comparison of valuation multiples or operating metrics of publicly traded companies in the same peer group with the target company. Determination of peer groups depends on several qualitative and quantitative factors such as products, suppliers, geography, and size of the companies as well as the performance. Multiples are metrics that are used to value a company or measure a company’s performance (Walt Disney Co., 2018). Multiples include enterprise value multiples, equity value multiples, and industry-specific multiples. Enterprise value is the total firm valuation including debt and equity. It is the summation of equity and net debt of a company. Enterprise value multiples include Enterprise Value to EBITDA ratio, Enterprise Value to EBIT, and Enterprise Value to sales ratio. Equity value multiples include price per earnings ratio and price/book ratio.
For this project, the target company that will be used in the valuation is Netflix. Netflix, Inc. (NFLX) is a media-service company offering services in television programs, films, and online streaming (Time Warner Inc., 2018). The peer companies selected for this project are American media-services companies which offer same services as Netflix . The peer companies selected for this project are Time Warner, Inc. (TWX), Universal Corporation (UVV), Walt Disney (DIS), and Twenty-First Century Fox (FOXA). The multiples used for this study are the price/ earnings ratio and enterprise value/ EBITDA ratio. The following table shows the calculated multiples of Netflix, Inc. for the past three annual periods, their mean and standard deviation.
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NETFLIX |
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| Year | Stock Price | Market Cap | Enterprise Value | EBITDA | Earnings per Share | P/E | EV/EBITDA |
| 2018 | 324.2078 | 116,970,000 | 121,540,000 | 8951000 | 2.79 | 116.2035125 | 13.57837113 |
| 2017 | 165.3743 | 85,770,000 | 87,730,000 | 7169000 | 1.25 | 132.29944 | 12.23741108 |
| 2016 | 102.0304 | 50,100,000 | 56,460,000 | 5305000 | 0.43 | 237.28 | 10.64278982 |
| Mean | 161.9276508 | 12.15285734 | |||||
| Standard Deviation | 65.7514419 | 1.469616075 | |||||
Analysis of Results
The average price-earnings ratio for the past years is 161.9277 while the EV/EBITDA for the past three annual periods is 12. These values imply that the equity value of the company is 161.93 times its earnings per share while the enterprise value of the firm is 12.15 times its EBITDA (Universal Corp, 2018). I selected these two multiples because they are the most common and reliable multiples used widely by investors to value a firm. Price-earnings ratio value a firm purely based on the firm’s equity, while the EV/EBITDA ratio is based on the total equity and net debt.
Enterprise Value of Netflix and Cohorts
The table below shows the results of the standard deviations of the equity and enterprise value for Netflix and the peer companies.
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Peer Companies |
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| Company | Ticker | Stock Price | Market Cap. | Earnings per Share | Enterprise Value | EBITDA | Price Earnings Ratio | EV to EBITDA |
| Walt Disney | DIS | $114.70 | $169,559,520 | $15.90 | $190,343 | $18,422 | 7.213836 | 10.33237434 |
| Twenty-First Century Fox | FOXA | $49.10 | $90,961,184 | $2.00 | $104,240 | $6,311 | 24.55 | 16.5171922 |
| Time Warner | TWX | $98.77 | $77,269,744 | $6.73 | $97,833 | $16,872 | 14.67608 | 5.798541963 |
| Universal Pictures | UVV | $62.96 | $1,572,111 | $4.30 | $2,066 | $229 | 14.64186 | 9.021834061 |
| Mean | 15.27044 | 10.41748564 | ||||||
| Standard Deviation | 7.112606 | 4.490588236 | ||||||
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NETFLIX |
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| Year | Stock Price | Market Cap | Enterprise Value | EBITDA | Earnings per Share | P/E | EV/EBITDA | |
| 2018 | 324.2078 | 116,970,000 | 121,540,000 | 8951000 | 2.79 | 116.2035125 | 13.57837 | |
| 2017 | 165.3743 | 85,770,000 | 87,730,000 | 7169000 | 1.25 | 132.29944 | 12.23741 | |
| 2016 | 102.0304 | 50,100,000 | 56,460,000 | 5305000 | 0.43 | 237.28 | 10.64279 | |
| Mean | 161.9276508 | 12.15286 | ||||||
| Standard Deviation | 65.7514419 | 1.469616 | ||||||
Analysis of Results
The mean price earnings ratio for Netflix is 161.93 while the average for peer companies is 15.27. This means that the equity value of Netflix is higher than that of peer companies. Also, the enterprise value of Netflix is 12.15 while that of peer companies is 10.42 which show that the enterprise value of Netflix is also higher than that of peer companies (Netflix Inc., 2018). Netflix, Inc. has got a higher value than that of peers use in this study.
Lessons Learnt
This project on comparable company analysis has improved my knowledge and understanding of the company valuation. After this week’s reading and assignment, I am able to compute various multiples such as enterprise value multiples and equity value multiples. Also, I am able to compare the target company with the peer companies. Generally, I have gained a lot in this week’s assignment.
References
Netflix Inc. (2018). 2018 Form 10-K. Retrieved from https://www.last10k.com/sec-filings/nflx
Time Warner Inc. (2018). 2018 Form 10-K. Retrieved from https://www.last10k.com/sec-filings/twx
Twenty-First Century Fox Inc. (2018). 2018 Form 10-K. Retrieved from https://www.last10k.com/sec-filings/foxa
Universal Corp (2018). 2018 Form 10-K. Retrieved from https://www.last10k.com/sec-filings/uvv
Walt Disney Co. (2018). 2018 Form 10-K. Retrieved from https://www.last10k.com/sec-filings/dis
