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Sector refers to the industry or markets in which a company operates (e.g., chemicals, consumer products, healthcare, industrials, and technology).

A company's sector can be further divided into sub-sectors, which facilitates the identification of the target's closest comparable. Within the industrials sector, for example, there are numerous sub-sectors, such as aerospace and defense, automotive, building products, metals and mining, and paper and packaging.

For companies with distinct business divisions, the segmenting of comparable companies by sub-sector may be critical for valuation. A company's sector conveys a great deal about its key drivers, risks, and opportunities.

Additional Comments:

For example, a cyclical sector such as oil & gas will have dramatically different earnings volatility than consumer staples. On the other hand, cyclical or highly fragmented sectors may present growth opportunities that are unavailable to companies in more stable or consolidated sectors.

The proper identification and classification of the target's sector and sub-sector is an essential step toward locating comparable companies.

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