Module II· Trading ComparablesAdvanced

Question

How do you adjust comps for cyclical position (mid-cycle comps)?

Answer

Problem

In cyclical industries (autos, steel, chemicals), EBITDA swings −50% over the cycle. The current multiple (spot EBITDA) is distorted: at the peak, EBITDA is high and the multiple looks artificially low (it seems 'cheap'). Methods:

Mid-cycle EBITDA: a 7-year average EBITDA per comp, multiple = EV / mid-cycle EBITDA.
The NTM multiple with a stable consensus forecast — often trends toward mid-cycle.
Through-the-cycle adjustment: current multiple − a cyclical adjustment factor. IB standard for cyclicals: mid-cycle multiples.

Deep diveShow more details

Pitch tip

'Comps' current EV/EBITDA appears to be 6.5x — but EBITDA is at a cyclical peak; the mid-cycle multiple is 9.2x, which we use for valuation. Failure to normalize would understate target value by 30%.'

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