I'm working on a model for a client who showed a sales growth rate of 15% Y-o-Y since last 3 years. From the 5 comparable companies, the mean of the sales growth is 8.5%. Now, to complete the fiscal year ending December 31, 2015, what rate do I choose for the remaining two quarters?
(1) Should I still take 8.5% for the remnant two quarters and complete the fiscal year end?
(2) Should I take it at 15% and then decrease it for the outer years (2016 through 2021)?
Is there a better way to do it? Help appreciated. Thanks
Why not offer them a sensitivity option with all? Maybe 15% best, 12% base, 8% worst?
Its important to look into the historical drivers for growth of your target and make implications moving forward. For example, if the historical year over year growth was driven by the launch of a new product or capital expenditures, incorporating the same % growth into your forward projections may be aggressive.
On the other hand, 15% year over year could be low if you believe the product takes time to hit the market and is a catalyst for growth for years to come. Numbers mean very little... it comes down to your rationale behind the assumptions. If the company faces little seasonality and historicals reflect as such keeping it in line at 15% wouldn't be wrong. For the outer years however, I would take the conservative approach and keep it in line with the industry average at 8% (A year over year decline as opposed to a direct jump from 15% to 8%).
StreetofBulls thank you for the explanation. I tried giving you a silver banana, but the system generated an error for me. So, I'm conveying my appreciation for your effort through this message. I'll pay a visit to this thread again and offer you the silver banana :-)
Another question.
What's the best approach to projecting a stub, especially during Q4 - the last quarter? Let's say the company's fiscal year ends on Sept 30, 2015. We're in July, 2015 (this means we're already in Q4). So, how do I project the sales for the current stub? I mean at what rate? All companies give their best shot to increase their sales to the maximum during Q4.
To give you more insight. The company launched a product in the market last quarter that boosted the sales by 30% as compared to last year's same quarter. According to the Management projection, they will achieve 50% Q4 growth (as compared to last year's same quarter). In this scenario, do you think, as a banker, I should go ahead with management projection? I'm preparing the projection from the investor stand-point.
Additionally, if it's a public company, different people have different perspective (keeping in mind the economic scenario and competition). Equity research reports, Analyst views, accredited investors stand-point are different. What should be the logical approach to convey the optimal projection? How far the sensitivity analysis help?
Explanation would help a lot.
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