Help. Selection of companies for peer group

CFA General
#1

Hi

I am about to try relative valuation and ratio analysis, but I am having difficulty considering which companies belong to the peer group. From what I have read, it seems that companies are considered comparable when they are from the same industry. I have also learned that companies must have the same market.

I was looking for companies that I can compare with Home Depot. Using finviz, I found that home improvement industry included the following companies: 1 Floor & Decor (hard surface flooring and related accessories) 2 Home Depot (building materials, home improvement products, lawn and garden products) 3 Lumber Liquidators (hardwood flooring) 4 Lowe’s (building materials, home improvement products, home furnishings, garden equipment, lumber) 5 Tile Shop (stone tiles, maintenance materials)

Although they belong to the same industry, they don’t have the same products. The closest to HD is Lowe’s while the rest seems to have little to no similarity in products with HD. Is it valid to include FND, LL, & TTS to the peer group or industry average? Are there more companies to include to this peer group?

I looked into the annual report using the find function for competitors, but I didn’t find any. I have yet to try looking into equity reports on HD.

#2

There is no such thing as a perfect comp. Lowes is clearly the best fit. The other comps seem reasonable since they are pure plays in a segment of your subject company.

#3

Hi Chad

Thank you for helping me out.

I just want to clarify my understanding with more questions. I hope its not too much. :slight_smile:

  1. That doesnt mean that just because companies belong to the same industry that they share the same peer group, right?

  2. Nor does it mean that just because companies dont belong to the same industry that they ant share the same peer group, right?

  3. However, when it comes to computing for industry averages, you take into consideration only and all the companies in the same industry, am I right?

#4

Yahoo! Finance used to list a company’s primary competitors, but a cursory glance hasn’t turned up anything today; it seems that they’ve gotten rid of that (very helpful) feature.

#5

Hi S2000Magician

I havent been in this forum for sometime. Its great to see you are still here and helping others.

​​Thats too bad… It would have been useful.

Can I have your feedback on my questions above? :slight_smile: