Lesson 8 of 10 · All lessons in this module
  1. Price multiples and the method of comparablesVideo lesson
  2. The relative valuation process
  3. Justified multiples: forecasted fundamentals, PEG and regression
  4. P/E in depth: earnings yield, PVGO and normalized earnings
  5. Sales, dividend, cash flow and industry-specific multiples
  6. Enterprise value multiples, asset-based valuation and choosing a modelVideo lesson
  7. EV/EBITDA drivers and value-to-book multiples
  8. Choosing a peer group: industry and factor approaches
  9. Current, past and forward multiples, and terminal values
  10. Integrated cases: why multiples differ, the justified P/E and comparables

This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.

Lesson 8 of 10 · 13 min

Choosing a peer group: industry and factor approaches

The ideal peers share the target's risk, growth and cash flow characteristics; analysts usually start from an industry classification and refine it, or group companies by statistical factors such as beta.

In short

  • The goal is peers with similar risk, growth and cash flow characteristics; no two firms are identical.
  • Industry-based peers start from a classification system (GICS, ICB, TRBC) and are refined for size, geography, business mix, cost structure, life-cycle stage, market structure, cyclicality and outliers.
  • Challenges and fixes: concentrated industries → rely more on DCF; mixed life-cycle stages → drop firms in different phases (without over-shrinking the group); different jurisdictions → regulation and tax differences; multi-industry firms → a peer group per segment and a weighted average multiple.
  • Factor-based peers group firms by statistical risk factors, e.g. similar CAPM beta, across industries.
  • Factor approaches link directly to risk and return but risk model misspecification: relationships may not hold for other stocks or periods, and factors can underperform for long stretches.

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