Modelling a commodities business--best practices?
Wondering if anyone has any tips of building an operating model used for valuation for a commodities business. Some background info on the company: top 5 producer/processor/distributor of poultry, "mature" company with strong market share in the space that it operates in.
Like with any commodities business, the price of inputs/outputs heavily influences the businesses top line and gross margin, trickling down to year end profits. Although the company has seen consistent growth in terms of volume, fluctuations in feed prices(corn, soybean meal) and chicken prices has caused inconsistent performance historically.
How do you normalize cash flows and capture the value of a company in this industry as an on-going concern? I don't see chicken as a commodity that will become obsolete in the next 10-20 years, am I right to assume a terminal growth rate of 3%?
Damodaran has a nice little piece on this.http://people.stern.nyu.edu/adamodar/pdfiles/papers/commodity.pdf
From a technical perspective, it usually makes no sense to tie cogs to revenues, as the products price is so volatile and often disconnected from input costs. Especially at businesses with high operational leverage.
Either take a consensus view of the trajectory of poultry prices (futures) or come up with your own rationale for estimating prices. Same thing with on the input cost side of things - note that a portion of COGS (overhead, etc) won't be commodity based so just plug in 2-5% or something for that.
@bigblue3908 unfortunately no futures for chicken, will account for that w/ inputs. thanks!
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