...but the 2012 10K isn't out yet! whaaaa????
Haaay errbody! So, I need to have a 3-statement + DCF ready by early January for a dude than can LAUNCH my career if I impress, but the 10k statements I need to properly compute annual historical ratios and forward drivers won’t be released until Feb. So how should handle this issue and create 2012 statementa for the model? Don't want to use ER reports, especially since this may double as an IB/ER work sample in the future. I’d really appreciate feedback on this plan:
Set up 5 columns for the historical statements of 2010, 2011, and the first 3 quarters of 2012. Project the 2012 Q4 I/S by using basic growth and margin assumptions. Project the Q4 B/S using full schedules for working cap, PP&E, etc, just as I would do for a full annual projection, except in this case it’s just a quarter and it’s also “projecting the past” if you will.
Add the 2012 Q4 I/S projection to the first 3 Quarters’ actual results to get the full 2012 I/S. Use the Q4 BS as the year-end BS. Hide the 2012 Quarter columns, and leave showing the 2012 year-end statements as the most recent historical period. Then project 2013 and onward as normal.
Perhaps it’s a lot of work, but totally worth it to me, if it’s the most thorough and logical way to solve the problem…so, is it? What should be done differently? And no I don’t need a full rev/exp build, just margin assumptions for the IS. Thanks for any input!
You need to project Q4 separately. It depends on the company. Some have revenue that is seasonal and you will have to project Q4 by looking at Q4 performance in relation to Q1-Q3 performance for the past few years (pain in the ass to gather all that information). If its not seasonal then you can reliably just forecast Q4 numbers based off the preceding quarters and comparing to ER.
A lot of beginning finance students will not take any of the quarterly data into account and will project the financials for the entire year instead of just the remaining quarter(s). This is obviously less accurate because you are not directly using data from the quarterly filings (just indirectly, somewhat, through updated guidance and ER). Of course, not having to deal with quarterly data makes things much easier, so if you're just trying to do a quick model for an entry-level course it is fine.
They may also give guidance. Look at transcripts/presentations. Usually it is pretty close to actual, but still take it with a grain of salt.
Build the operating model normally, then use LTM and a specific date of entry into valuation purposes with stub years. If you really want to project a quarter you can, I just think it's more trouble than it's worth.
Don't bite off more than you can chew. It's much more impressive to balance a model than to have quarterlies and not balance correctly.
Then project 2013E, 2014E, etc.? If so, then I’m afraid that would be as tricky as the method I described. I may have misunderstood you - sorry, not very advanced or maybe just dumb ha. To me, using a full 2012 year is the most conceptually sound method but I could be wrong.
What I mean is to build it 2011, 2012, etc. with 2011 as your latest historical year. Which means you're making an educated guess for 2012 even though you have 3 quarters worth.
But when you actually value the company, you're going to come in at a stub year or LTM year. You're going to use a full 2012 year but part of it is going to be an estimate which is fine given that you're using a stub year as a starting point for valuation.
And no worries, it's hard to explain over the internet, just do a regular annual model and extrapolate starting from 2012.
Do exactly what you said you'd do in the original post, but I wouldn't treat Q4 as a historical period.
Like West Coast Rainmaker mentioned, look to see if the Company provided guidance or check where the sell-side consensus is for Q4 as a sanity check.
When you say "valuing the company as of early 2013"... what exactly do you mean?
If you are running a DCF, you should discount CFs for Q4 as they are in the future. This is referred to as the "stub period" because it's not a whole year. Discount the remaining years / terminal multiple - however you plan to do it.
I wouldn't suggest treating Q4 like a historical and having your first discount period as 2013. It's a little bit lazy and wouldn't fly if you were in IB.
Lastly, if you are valuing the company on multiples, be careful to use the same period for the Company and any peers. If you want to put a 15x multiple on the Company's 2013 EPS, that's 5 quarters out, so make sure the multiples for peers are also 5 quarters out. Or, convert all to NTM (next twelve months)
this is making my head hurt
When January rolls around, why would I keep Q4 as a future period? Q4 cash flows are from a past period; results have not been released yet, but that doesn't change the fact that, by January, Q4 will have come and gone. So if the model is being done after Q4, how can it be conceptually correct to treat Q4 as a future period?!!?
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