ER Modeling questions

I'm in my second year of IB, but I am looking to switch to equity research. I was hoping someone could give me some advice and ideas on how modeling is different between the two.

For some of our startup clients, I've had to really dig into revenue drivers and other precise detail, but I usually had the management team to work with on those. In equity research, data is limited. Do you estimate revenues on a year-over-year % growth or do you have other methods?

Also, I am guessing that equity valuations are much more focused on P/E and EBITDA multiples rather than DCF, but I could be wrong. For DCF, if you do it, how would you estimate some of those rarer line items (e.g., assets held for syndication [think railcars, for example])? Those don't exactly follow trends, so I guess you could straight line if management doesn't give a forecast, but just wanted to see if anyone has other thoughts?

 

Sorry to digress but you're one of the only IB analysts I've ever heard focusing on moving to ER. What are the primary reasons it interests you vs. other exit options?

"If you want to succeed in this life, you need to understand that duty comes before rights and that responsibility precedes opportunity."
 

I work in a boutique, serving middle market clients. Don't get me wrong, I love meeting the management teams, doing the pitches and CIMs and whatnot, but all of the data room management and that kind of stuff is gruesome.

I'd like to get into Asset Management or equity research so that there is less of the "deal" work and more "pitch" work, if that makes sense. In particular, less reading legal docs, less scanning business docs, less data room management. More analysis, more research, , more pitches.

 

rarer line items ... recurring or one time? recurring then what drives the need for those line items try linking to them ... if it is one time, leave it .. if it is very small then it is insignificant, leave it .. yes you can also straight line it .. or take the average but don't anchor any cell just drag the average formula across, the average usually fluctuates like its historical numbers .. you can also keep a drop down option to change the line item's projection whenever u want

 
Best Response

I don't know much about IB modeling, but I have been working on my stock pitches. You probably want to use multiple valuation methods (so DCF and comp at least) and then triangulate your results based on your insights to arrive at a target price. Also if you have done bull / bear cases, then you should do that too and probability-weigh the fair value under your different scenarios and justify your weights.

According to James Valentine, who wrote the "best practice in equity research" book, you are better off focusing on the few items that drive the company's value and refine your assumptions on them, rather than being mechanical and do all the small adjustments that you can make, as they probably don't even make a big difference to the final firm value.

Search for "equity research" on this website, there were few industry veterans who wrote superb articles on this topic.

 

Do you estimate revenues on a year-over-year % growth or do you have other methods?

Usually driven by a detailed drivers tab, depending on the industry you come up with various metrics to forecast, i.e. users, billing, ARPU, etc.

Also, I am guessing that equity valuations are much more focused on P/E and EBITDA multiples rather than DCF, but I could be wrong. For DCF, if you do it, how would you estimate some of those rarer line items (e.g., assets held for syndication [think railcars, for example])? Those don't exactly follow trends, so I guess you could straight line if management doesn't give a forecast, but just wanted to see if anyone has other thoughts?

More mature companies are valued on P/E and EBITDA. Cash burn companies on ev/rev or a DCF. Sometimes the sell side will triangulate a multiple along with a DCF. For the rarer items you either keep it flat or make an assumption on a directional move.

 

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