Discussing our industry peer groups

This time I will discuss our industry peer groups. We use peer groups to estimate the betas and capital structures for the WACC’s as well as calculating the valuation multiples.

All the peer companies are publicly listed companies from Nordic countries that are large enough (as a proxy for size we used market capitalisation). We also have a slight preference for Finnish companies and in an ideal world, we would only have chosen Finnish companies. Also, because Finland is such a small country and we do not have enough listed companies in many industries for a robust set of companies. To get reliable estimates, we need enough peer companies for each industry.

The breadth of different companies in each industry sector varies. The pulp and paper companies resemble each other quite a lot but the companies in the technology sector vary from Nokia to much smaller technology consulting firms. Consumer goods and services is another industry grouping with companies that probably do not show up as competitors in internal strategy PowerPoint slides.

Obviously this means that the risk characteristics and growth opportunities of the companies vary within the industry sectors. This is something that really cannot be avoided as the downsides of only using a few companies for each sector would add too much uncertainty due to outliers having too much influence on the WACC’s and valuation multiples. Conducting a valuation using market data as benchmarks for some variable or estimate (and any good valuation should use this data) always involves making compromises with comparability. It is rare to find enough peer companies that are perfect in terms of comparability and that have reliable data available.

Esko Saura