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 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? Please find two real-world companies to illustrate the two situations (i.e. one company for each situation: appropriate vs inappropriate). For each company discuss thoroughly why using industry information would be either appropriate, or inappropriate. Please provide links.

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

Answer 1

The main aspect of valuation is identification of relevent industry peer set for relative valuation and for Beta Computaion. Under Many circumstances we derive value of the company stocks with the relation to already listed stocks of relevent companies which are of generally same industry.

In the following situations it is appropriate to use the industry peer in valuing a company.

1- The companies (Peer set) should consist of similar risk return profiles.

if the peer set doesnt have similar profiles of risk and return then it is not appropriate to use.

in real life scenarios if suppose we are valueing a E-commerce company named clipkart.com then if we have Vedanta (manufacturing) and Flipkart as options to be considered for peer then it is appropriate to use Flipkart related data for valuation of clipkart.com company and it will be inappropriate to use the data of Vedanta compamny which is of completely a different sector and having different business risks.