Question

Unlike bonds, stocks do not promise any fixed stream of cash flows to the stockholder. Stocks are thus much more difficult to value because even if a company pays dividends, it is very difficult to estimate future dividend amounts with any degree of certainty.

In general, how useful would any information obtained from the industry (i.e. from industry peers) of a company be for the purpose of valuing that company?

In what situations would the information obtained from the industry peers of the company be appropriate to use in valuing a company? When would such (industry) information be inappropriate?

In the case where using industry information would be inappropriate for a company, what other information sources/methods can be considered?

Answer 1

Stocks / shares are basically parts of the company. They belong to shareholders who are part owners of the company. While there may not be always a fixed price to stocks/shares as is in the case of bonds, however a certain value can be placed on the stock of the company. This value s defined and determined by a lot of variables.

There is something call as a relative valuation approach. So basically what this approach stands to do is that it takes into consideration companies which are close competitors of the company that is being valued i.e. say company A is being valued. Thus the companies which are in the same line of business as company A would be taken into consideration. Then all the relative parameters like sales, net profit, ROIC, ROE, P/E and other variables would be considered to reach to a conclusion. The final value would be determined taking into consideration the relative valuation approach. This means that all the same variables that are considered would be taken in comparison to company A. The values would be compares and the parameters would be compared. This would essentially lead to a variable or value in comparison to say the average of the competitors. The company would then derive a value from the comparison.

It would be inappropriate to consider competitor/peer companies not in the same line of business as the company to be valued i.e. company A. This would lead to inappropriate comparison as you cannot compare apples to oranges. This would lead to inappropriate valuation.
In such cases we can rely on companies which though are different but we can value business streams separately. This would help us to take benefit of companies which are the most similar and which, though have different business lines but which have business lines also very similar to the company A. This way would be the best possible way to value company A.