Two easy questions to help select a public peer group

BVWireIssue #48-1
September 13, 2006

When it comes to identifying a peer group of public companies to use in the guideline company method, most analysts rely on data-searches by SIC (Standard Industrial Classification) or NAICS (North American Industrial Classification System) codes. The latter—which encompasses Mexican and Canadian along with U.S. data—has over 1,100 different codes, compared to the 800+ in the SIC. “The NAICS codes have a broader coverage and industries that didn’t even exist the last time the SIC was updated in 1987,” says Tim Lee, ASA, a Senior Vice President with Mercer Capital (www.mercercapital.com).

But perhaps the search is even easier. “You know, it’s funny—and it took me a few years before I realized, with the guidance of some older folks around here, that the first thing you do is ask the management team of the subject company what they do,” Lee says. “The second thing you do is ask them if they in fact peer themselves to a public company. And voila—you may have the basis for beginning your guideline company search.” Lee’s comments—along with those by Shannon Pratt and Alina Niculita, CFA (Shannon Pratt Valuations) are from BVR’s most recent telephone conference, Adjusting Multiples from Guideline Public Companies, transcripts and /or CD recordings available here.

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