9/19/12

Morning Monkeys,

I'm sure you've all been waiting with bated breath to look at some amateur's first try at an ER report. Hopefully this won't be an utter and complete waste of your time, but I somehow suspect it will be. So, for those of you kind enough to take a look at it and offer some constructive (or unconstructive) criticism and/or editing notes, let me thank you in advance.

Yesterday I posted a question about some of the funnier aspects found in an ER report and after reading everyone's experiences, I was able to make some key changes to my "report" namely, a better title. Now, is my new title funny, original, or the least bit entertaining? No, it's dumb, but hey, gotta start somewhere, right?

At any rate, I'm not kidding about the free beer if you take a look at it, but I do have a few caveats so that I'm not shelling out several thousand dollars on you hard drinking monkeys out there:

1) You need to live near me, which, sadly for most of you, is Richmond, VA. Since this site is called "Wall Street" Oasis, I suspect out of the 40-50 thousand users, this probably means there's 9 who live in this area. But, if there's a lot of response (highly unlikely given the request), maybe I'll come and park a keg in Zuccoti Park or something (assuming there's no dirty hippies in the area.)

2) In order to get said free beer, when we meet, you'll need to be prepared to discuss it constructively for, let's say, 3-8 minutes.

3) At some point in your career, someone needs to have paid you to do equity research. So, if you're some college junior at University of Richmond, stick to the comments section, it's not that I don't care what you think, it's just that I'm not willing to pay for it.

I should note, I'm actually fairly good at modeling, but most of my work is with actuarial models as opposed to financial models, so I've tried to keep the valuations simple so I don't look like a complete idiot. Also, my professional career and college coursework have all been mathematics, so my level of financial analysis knowledge is limited to what's in the CFA level 1 material (passed in June!) So, expect stupid errors.

Anyways, thanks again to everyone who takes time out of their day to take a look at this. I'm sure it's awful for a variety of reasons, but I've tried to support my conclusions the best I could. Looking forward to hearing what you think.
https://docs.google.com/open?id=0BzgRTYOUIJE5LUlXd...

Thanks monkeys!

Comments (15)

9/19/12

Just a brief comment, your report lacks 2 key elements:

1) charts/graphs. Investors only skim the top of reports and will only read full reports if they really like the intro/idea You need to grab attention in the first paragraph and have less text and more visuals.

2) Where are your forecasts? I want to see what you think the numbers will look like over the next few years. Show us your DCF model in the back as an appendix too.

I will get a copy of a JPM report and send it to you when I have a bit more time.

Other than that, good attempt, keep it up!

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9/19/12

Ok ER reports aren't lab reports. You don't have to write step by step your DCF model. Just tag on the DCF model IS/BS/CF on the appendix. Also instead of listing numbers like 2008-2011 ROE numbers u had, use tablets. Also the analysis is weak, but expected.

Last pro-tip, imagine us analyst/associates/fund managers got hundreds of these to go thru a week, so you want to present it short and sweet. don't write out list of numbers in the body of the paragraph when u can just show it. This isn't college English 101 anymore where bsing enhances grades, we hate all the extra words. If you can convert some of those sentences into charts, tablets, graphs instead it would be a lot better.

9/19/12

fucking typos in my post but won't let me edit it. Tablets = tables. etc. etc.

9/19/12

Agree with above points. Shrink the title - it takes up too much room on the front page. State upside to current price (and what current price is!).

Open Table's growing revenue? How fast? Does this translate to EPS? Is it generating cash?

Get 1 or 2 attractive graphs for the front page. Scatter the rest throughout as appropriate, or put in appendix.

Agree with the need for forecasts. Get 3Q12, 2012, and 2013. You list some attractive parts of the business (eg international expansion) but how does this impact EPS? And how do your ideas differ from consensus?

You also haven't clearly articulated how you are valuing this- PE? Cash flows? It's clear if you read the report that you are using a DCF, but say so up front. Personal preference, but I like to come up with a value some other way, then use a DCF to sanity check it. Of course, your DCF should incorporate your projections.

9/19/12

Consider this guy has no publishing software so it's pretty damn difficult to make a report look pretty in MS word.

9/19/12

Never, NEVER write a research report that says 'I think' or 'my opinion'. Always use "WE" or "OUR OPINION". It gives it more authority. No professional would make that error.

You give a price target without a current price. Don't make me do work. Give me the current price.

You can abbreviate millions of shares and things like that.

Calculate beta yourself. Define the timeframe you want to tell your story and use "=linest(__,__)" in excel to calc beta using the historical data.

I'm not going to opine on the stock itself and form your opinion of it. Overall, nice first try.

9/20/12
SirTradesaLot:

Never, NEVER write a research report that says 'I think' or 'my opinion'. Always use "WE" or "OUR OPINION". It gives it more authority. No professional would make that error.

You give a price target without a current price. Don't make me do work. Give me the current price.

You can abbreviate millions of shares and things like that.

Calculate beta yourself. Define the timeframe you want to tell your story and use "=linest(__,__)" in excel to calc beta using the historical data.

All of this advice and more. Maybe its just me, but because of the IB focus of WSO everyone gets way too hung up on DCFs.

Try building your own bottom up IS model and run out the line items for the next 2-3 years. (3rd year number is always a bit iffy, especially in a growthing business like OpenTable.) Buy-siders aren't going to read your report because of your valuation, they want to know your opinions on changing condititions (revenue growth, changes in GPM, SG&A leverage).

When it boils down to it, I'm much more interested in reading a sell-side report that has a big earnings divergence from consensus.

9/20/12
tiger2012:
SirTradesaLot:

Never, NEVER write a research report that says 'I think' or 'my opinion'. Always use "WE" or "OUR OPINION". It gives it more authority. No professional would make that error.

You give a price target without a current price. Don't make me do work. Give me the current price.

You can abbreviate millions of shares and things like that.

Calculate beta yourself. Define the timeframe you want to tell your story and use "=linest(__,__)" in excel to calc beta using the historical data.

All of this advice and more. Maybe its just me, but because of the IB focus of WSO everyone gets way too hung up on DCFs.

Try building your own bottom up IS model and run out the line items for the next 2-3 years. (3rd year number is always a bit iffy, especially in a growthing business like OpenTable.) Buy-siders aren't going to read your report because of your valuation, they want to know your opinions on changing condititions (revenue growth, changes in GPM, SG&A leverage).

When it boils down to it, I'm much more interested in reading a sell-side report that has a big earnings divergence from consensus.

Quick question, for a bottom up IS model, is there any particular method that is preferrable? If I can find some sort of collerlation to, let's say, interest rates, household income, etc. I could build out a stochastic model for that purpose (although, that would take a while). Or, should I just utilize some version of the NY7 on revenues and run scenarios? Or, most likely, am I over thinking this?

Thanks everyone!

"My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."

9/20/12
mikesswimn:

Quick question, for a bottom up IS model, is there any particular method that is preferrable? If I can find some sort of collerlation to, let's say, interest rates, household income, etc. I could build out a stochastic model for that purpose (although, that would take a while). Or, should I just utilize some version of the NY7 on revenues and run scenarios? Or, most likely, am I over thinking this?

Ignore that, stupid question, going to run with a (very) modified CRR method to create a bottom up IS model. Will it work out? Probably not, but should be instructive.

Thanks again to everyone!

"My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."

9/20/12

[/quote]Quick question, for a bottom up IS model, is there any particular method that is preferrable? If I can find some sort of collerlation to, let's say, interest rates, household income, etc. I could build out a stochastic model for that purpose (although, that would take a while). Or, should I just utilize some version of the NY7 on revenues and run scenarios? Or, most likely, am I over thinking this?

Thanks everyone![/quote]

Way overthinking it. I don't know much about OpenTable but I'd guess they give a number of resturant partners and machines in their filings. So revenue on a per resturant or machine basis. Costs, etc.

9/20/12
tiger2012:

Quick question, for a bottom up IS model, is there any particular method that is preferrable? If I can find some sort of collerlation to, let's say, interest rates, household income, etc. I could build out a stochastic model for that purpose (although, that would take a while). Or, should I just utilize some version of the NY7 on revenues and run scenarios? Or, most likely, am I over thinking this?

Thanks everyone![/quote]

Way overthinking it. I don't know much about OpenTable but I'd guess they give a number of resturant partners and machines in their filings. So revenue on a per resturant or machine basis. Costs, etc.[/quote]

Yes, that's precisely what they do, but surprisingly, I didn't see it in the 10K but found it in their annual shareholders report. I definitely have that data, thanks for the suggestion!

"My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."

9/20/12

Also, thanks to everyone who took a look and offered me all of this great advice. I really appreciate it.

If/when I should ever meet any of you, remind me that I owe you some drinks.

"My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."

9/21/12

oh dear! reading that was really fun.

Ok, just to warn you, I may come off a bit of an ass in this post but I think you need that more than a pat on the back. I am a hedge fund analyst, so I am part of your target audience.

Reading your report I get so many red flags on this company that there is no way I would agree on the BUY recommendation you've got unless I have to do my own research from scratch. That renders your report useless to me. I'll put the comments in bullet points to avoid writing war and peace 2. Of course what the previous posters said is very valid.

a) Target price needs to be rounded. $67.12, I mean ".12"?? You calculated what the price should to the second decimal? No..Just round it to $67.00 or $67.50 or something similar.
b) First page is awful. Where is the summary of current financials? I want to see current price, float, shares outstanding, market cap, a couple of relevant ratios, ipo price (if recent, which would matter), daily/average volume, stock price chart maybe? or EPS growth chart maybe?
c) you mention that the company has posted continuous growth _despite_ the restaurant business being seasonal. Can you explain why? I mean, unless I understand how they are able to achieve this great results I'm not going to be convinced it's legitimate.
d) Again on growth, is growth accelerating or decelarating? If the latter then that's the reason for the stock price tumbling. A lot of times investors get happy and pile on a stock that seems to have explosive growth, expecting that very explosiveness to continue. If growth starts petering out then 'they're out' as well. So, what's growth been doing in the last year? What about EPS?
e) Talking about EPS, what are their margins like and respective growth. How is OpEx following up top line margins? What about their revenue streams from existing customers, you mentioned these increased, BUT how much room for growth is there? In other words, is growth going to come from new customers or is there a good % coming in from upselling to existing ones? I need to understand where the revenue and growth is going to come from.
f) The CEO leaving is a massive clue on why the price went down. You don't address the reason he left, which is critical. These type of companies are sometimes a one-man-show where the CEO had all the vision, passion etc. to drive and execute the strategy of the company. If he was -as it seems- such a vital exec then without him where is the company going to go?
g) Acquisition in UK, did they buy cheap or expensive? You're not telling.
h) What are the main catalysts that will push the price higher? anything expected in the short/mid-term? Or is it business as usual and grow annually like clockwork? If it's so lucrative there have to be competitors, where are they? (btw, that one liner that the main competitor is 'the phone' was really-really funny! I haven't laughed at a WSO post for a long time..in a good way..but remove it cause it looks dumb). If there is no competition in such a big potential market then you need to figure out 'why?'. If there is, you're not mentioning it or you haven't done your work properly.
i) there are many-many-many other points I could make about the business but I think the above will give you some steer to start improving your analytical comprehension first and the report style/formatting/type-up second.

So, after all this criticism I also want to add that it was a decent effort from a non-professional. Decent not so much in content (due to the points I mentioned above) but it is obvious that you put some work hours in it. You're on the right track and if you really like this kind of work there are many ways you can improve, which is always a good thing. Loads to learn and a steep learning curve ahead but keep at it and it will work itself out.

Remember that if you put the time in your work then the others will be more willing to give you feedback.

9/21/12
justanother:

Ok, just to warn you, I may come off a bit of an ass in this post but I think you need that more than a pat on the back. I am a hedge fund analyst, so I am part of your target audience.

This is precisely what I'm looking for, and no, you came across as a guy who took the time to read an amateurish report and offered well reasoned suggestions and some well deserved criticism. I mean, you don't post a report on an expert community's website and expect everyone to give you an "A for Effort!" That would be inherently useless anyways.

Good looks and thanks again for reading! I really appreciate you taking the time.

P.S. The "phone is their biggest competitor" was actually from their own 10K. I too thought it was hilarious.

"My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."

9/23/12
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