Gonna A Run A DCF, Need Ideas for Companies to Use

Hi guys,

So basically, I have to do a DCF valuation for a class and have been assigned the industrials or energy sectors. Her definition of Industrials is really broad, but it includes a variety of companies from chemicals, materials, automanufacturers, utilities, etc. and energy is energy.

What I'm looking for is ideas of companies that are not too complicated in terms of business model because this is my first time doing it that have fairly stable cash flows (too much uncertainty/variability will make it really overwhelming for my first model and lead to a lot of unnecessary mistakes), and has a chance of being undervalued. I was thinking Ford or Exxon Mobil might be interesting since they are somewhat simple (I think) in terms of models, but Ford might have crazy stuff going on with their financials and Exxon may be hard because oil is so volatile.

If anyone has suggestions, I'm especially interested in nat gas plays and energy has always been interesting for me, then let me know.

Cheers!

 

I wouldn't say o&g modeling (sans type curve analysis, complex NAV build-ups) isn't that tough. The reason for difficulty with o&g DCF (i.e. traditional forecast-ed CF based models) is the big capex requirements that many of these E&P's need to complete their drilling projects (on-top of other things). An interesting natural gas focused company to model out would be Chesapeake Energy (ticker CHK).

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Best Response
Stringer Bell:
I wouldn't say o&g modeling (sans type curve analysis, complex NAV build-ups) isn't that tough. The reason for difficulty with o&g DCF (i.e. traditional forecast-ed CF based models) is the big capex requirements that many of these E&P's need to complete their drilling projects (on-top of other things). An interesting natural gas focused company to model out would be Chesapeake Energy (ticker CHK).

If you wanted to do a decent job of it, the model would absolutely be tough... Not sure how you guys model shit but o&g is absolutely complex. I mean he could just take their financials and apply a growth rate and then wacc it but that isn't how you model o&g so it would be pointless. He isn't going to dig into all of CHK's holdings and account for JVs and risking, whether shit is economic to drill or not, or project production for fields based on type curve info, so there really isn't any point in doing an o&g model versus a standard industrial model for a company like Ford. You keep saying that o&g modeling isn't complex but apart from FIG I'd say it's one of the most complex industries to model. You probably don't do nearly the amount of work to model your production that we do though... so that could be a reason for your models not being overly complex.

 
rufiolove:
Stringer Bell:
I wouldn't say o&g modeling (sans type curve analysis, complex NAV build-ups) isn't that tough. The reason for difficulty with o&g DCF (i.e. traditional forecast-ed CF based models) is the big capex requirements that many of these E&P's need to complete their drilling projects (on-top of other things). An interesting natural gas focused company to model out would be Chesapeake Energy (ticker CHK).

If you wanted to do a decent job of it, the model would absolutely be tough... Not sure how you guys model shit but o&g is absolutely complex. I mean he could just take their financials and apply a growth rate and then wacc it but that isn't how you model o&g so it would be pointless. He isn't going to dig into all of CHK's holdings and account for JVs and risking, whether shit is economic to drill or not, or project production for fields based on type curve info, so there really isn't any point in doing an o&g model versus a standard industrial model for a company like Ford. You keep saying that o&g modeling isn't complex but apart from FIG I'd say it's one of the most complex industries to model. You probably don't do nearly the amount of work to model your production that we do though... so that could be a reason for your models not being overly complex.

I do agree with your point about Capex and that the NAV buildup / type curve analysis being difficult, but that is the majority of the added value from a valuation perspective, so other than doing that you're basically just going to find shortfalls of capital like you would when preparing a financing model. In terms of assessing a value for the company doing a standard DCF doesn't really get you all the way there, which I think we both agree on. I

You make some fair points though, don't want you to think I'm disagreeing purely for the sake of argument, just playing devil's advocate because I don't want kids to get the idea that this stuff is easy to model, there's definitely a steeper learning curve than a basic DCF, so it likely isn't the best place to start.

 

Thanks for the responses so far guys. I'll definitely take out O&G from consideration since it seems to be too much for a rookie to handle. I think I've narrowed down my choices between CAT, F, but I'm open to others still. CAT is also interesting because it still has nat gas exposure since they make engines.

Also, as a general question, what are some good books for more in-depth valuation with some of the techniques you guys mentioned above? I want to learn how to do more in-depth valuations like what you guys are saying because all I know right now is how to do a bare bones DCF (i.e. project cash flows and then discount), but I have no clue how to make good projections (right now, it's just revenue model by % of growth, which is pure bullshit) and my school hasn't been that helpful thus far.

 
Jerome Kohlberg:
Thanks for the responses so far guys. I'll definitely take out O&G from consideration since it seems to be too much for a rookie to handle. I think I've narrowed down my choices between CAT, F, but I'm open to others still. CAT is also interesting because it still has nat gas exposure since they make engines.

Also, as a general question, what are some good books for more in-depth valuation with some of the techniques you guys mentioned above? I want to learn how to do more in-depth valuations like what you guys are saying because all I know right now is how to do a bare bones DCF (i.e. project cash flows and then discount), but I have no clue how to make good projections (right now, it's just revenue model by % of growth, which is pure bullshit) and my school hasn't been that helpful thus far.

The bible (according to many) of valuation:

http://www.amazon.com/Valuation-Measuring-Managing-Companies-Finance/dp…

Ace all your PE interview questions with the WSO Private Equity Prep Pack: http://www.wallstreetoasis.com/guide/private-equity-interview-prep-questions
 
Stringer Bell][quote=Jerome Kohlberg:
Thanks for the responses so far guys. I'll definitely take out O&G from consideration since it seems to be too much for a rookie to handle. I think I've narrowed down my choices between CAT, F, but I'm open to others still. CAT is also interesting because it still has nat gas exposure since they make engines.

Also, as a general question, what are some good books for more in-depth valuation with some of the techniques you guys mentioned above? I want to learn how to do more in-depth valuations like what you guys are saying because all I know right now is how to do a bare bones DCF (i.e. project cash flows and then discount), but I have no clue how to make good projections (right now, it's just revenue model by % of growth, which is pure bullshit) and my school hasn't been that helpful thus far.

The bible (according to many) of valuation:

http://www.amazon.com/Valuation-Measuring-Managing-Companies-Finance/dp…]

I was looking at this book (currently reading it) and it seems to be less focused on the DCF type of valuations and has a lot about adjustments, etc. It's probably a bit too advanced for someone like me who only knows how to do bare bones DCFs at this point. Is there a particular book by Damodaran you guys would recommend? Basically, I need an intermediate book that is beyond explaining how to do a DCF (like I-banking by Rosenbaum was) and more about how to make projections without all the advanced adjustments (I'll look at McKinsey once I've reached intermediate proficiency).

 

I recommend finding a smaller public filer for your first attempt. Ford for example has a very complex business (because they consolidate their finance business plus just the sheer scale). I'd avoid utilities due to the challenge of hedge accounting for cash flow projections. CTB has a straight-forward business and fairly clean accounting.

Damodaran's valuation books are a great starting point.

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 
Kenny_Powers_CFA:
I recommend finding a smaller public filer for your first attempt. Ford for example has a very complex business (because they consolidate their finance business plus just the sheer scale). I'd avoid utilities due to the challenge of hedge accounting for cash flow projections. CTB has a straight-forward business and fairly clean accounting.

Damodaran's valuation books are a great starting point.

+1 for the Damodaran shout out.

Ace all your PE interview questions with the WSO Private Equity Prep Pack: http://www.wallstreetoasis.com/guide/private-equity-interview-prep-questions
 

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