A company can frequently be valued by comparing it to a peer group of companies. The advantage of performing a peer group comparison is that the constituent companies are normally fairly similar along their product/service lines, sizes and operating structures. This approach assigns company "value" based on the notion that assets of similar dimensions should sell at similar prices and is known as the "method of comparables."
The method of comparables involves taking a subject company's P/E, P/B, P/S, P/CF or some other multiplier and then comparing it to the mean or median multiplier for the peer group to derive a relative value. This equilibrium multiplier can then be multiplied to the subject companies per share earnings, book value, sales or cash flows to derive a fair-value estimate. The stock's market price could then be compared against this fair value estimate to determine whether the position is under- or overvalued.
For the purpose of this article we are going to use the method of comparables to assess Home Depot (HD), the U.S.' largest retail supplier of home repair, building and maintenance materials. The valuation metric we will use is the trailing 12-month P/E. We will evaluate the P/E using the mean P/E for its peer group companies as the benchmark value. Trailing P/Es for its peer group are presented in the table below.
Table: Trailing P/Es of Home Depot and Peer Group
| Company | Trailing P/E |
| Home Depot (HD) | 23.4 |
| Lowe's (LOW) | 23.4 |
| RONA (RON) | 27.0 |
| Canadian Tire (CTC.A) | 15.8 |
| Wolseley (WOSCF) | 21.3 |
| Lumber Liquidators Holdings ( 
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