Suppose you are doing a DCF for Verizon Company. In order to figure out the sales drivers you found the following info: • Projected Population for next 5 years growing at 6% • Projected Mobile subscribers for next 5 years growing at 4% • Projected Inter users for next five years growing at 3% • Projected internet subscribers for next 5 years growing at 2%
How would you factor these various growth rates in to your DCF. How would come up with a number which factors the projection of the things above? Will this be an average of the growth rates above? Will you take this number multiply by your sales project your assumptions a head? Your help/input will be appreciated
Depends on how intricate you want your model to be. Remember, step back for a second. Run some sensitivity on your results. For instance, if your valuation doesn't change much when you simply change the overall revenue sales growth rate (from 3-8%, let's say), then there's not really a point to doing the following, but you could in order to see things more clearly:
Perhaps in a seperate spreadsheet, break down the source of sales for Verizon. Mobile subscribers, internet users, land-line, etc. Now, use your information to project revenue streams for each segment of the business, and run some sensitivity to see how much these numbers change (for instance, if your assumption is that internet users will grow at 2% into perpetuity, and 90% of Verizon's revenues come from this segment, obviously it will have a greater impact and thus makes your assumptions here more important.
I think something like this is more like a nice appendix to your model. The main thing is overall revenue and how it changes when you alter assumptions for one of the segment's contributions.
I think the best way to go about it would be to find out what % of Verizon's revenue comes from each division (mobile, internet, etc). Then grow each division's revenue at the appropriate rate. Combine each division's revenue to get total revenue and then use the revenue numbers to find your cash flows while remembering to change variable costs and fixed costs appropriately. Remember that fixed costs are variable in the long run. I think this ignores possible changes in market share, but unless you have specific numbers on that it should be a fair assumption.
I'm just a finance grad (i.e. not a banker), but I had pretty close to a 4.0 in my finance classes...anybody else, feel free to correct me if i screwed up...
Do you guys feel that these: Projected Population for next 5 years growing at 6% • Projected Mobile subscribers for next 5 years growing at 4% • Projected Inter users for next five years growing at 3% • Projected internet subscribers for next 5 years growing at 2%
drivers are valid? Do I need to think of more Valid Drivers? In addition lets say Verizon has acquired some companies. How do i adjust the Capex and Asset Growth in to my model? Hoping to learn something from you guys.
bump
Haven't done anything for Verizon - Not a banker, more with business development side of things.
I'll add what I think would be my logic to valuing a Verizon or Telecomm firm.
Taking into account what was said above, I would look at a few things. First what region are they diversified - is it international, if so, what is the breakdown in terms of drivers and their revenue. If not, then what is their subscription divided locally in the US, i.e. are they in California, where the region might be growing faster then Missouri, how much do they dominate that market in the region then ( % of total). Next I would look at their managements plans in terms of growth and investment or cap ex. Maybe they are investing heavily into marketing and developing mobile, because they believe they can make more top line revenue and better margins from data plans now, and might take away market share from say Sprint Nextel. Revenue drivers would be next, I guess if I had to break it down, I would look at subs per driver in 3 ways, 1 is retained, next would would be completely new entrants, another would be what they could get from a competitor. After that I would look at how the overall landscape in the market/economy they are in is, this might be something like saying, well economy is going down in 2009, so ppl won't need super high speed internet, but they will again in 2010. Then you might want to look at how much the US as a whole is growing, how much population and potential consumers can grow. Also, I think knowing that the market is growing 3% is great, but in reality, if the industry is growing at 3%, doesn't mean a good estimate for the firm is average industry. You could have a new or current player come in and grow at 6%, which will throw off your estimate.
Again this is just what I think, could be totally off base, but I wouldn't just grow sub ads by 3% based on a stat you got in a research report, assuming this is a more serious analysis.
Dude, unless someone here works at a Telecomm group, they have no effin' clue what's reasonable within a presumable range (for instance, if you told me 10% growth, I wouldn't necessarily think twice about, even if it's absurd for the industry) because we don't know enough. That's your job.
Someone mentioned market share. Look into the comps here. Are they growing around the figures you've suggested? If Verizon is outgrowing them, remember obviously it won't be able to surpass them forever, otherwise you're assuming Verizon BECOMES the market.
Capex and change in NWC assumptions also depend on the industry. In some businesses, like let's say, Lemonade stands, it makes sense to grow both of these as a % of sales, ebitda, etc. If Capex is your stand and NWC is your lemons, water, whatever, then you need to grow these pretty consistently. But in Telecomm, that's not the case (or I don't think...again, this is what you need to find out).
For instance, Verizon might spend money on infrastructure for its network and for the rights to certain bandwaves every....5 years or so. Take a look at the historicals: how bumpy or smooth has reinvestment been in the past?
Your assumptions entirely revolve around users by segment (and you're missing the LEC business). On top of that you have to layer on your ARPU and churn rate assumptions. Ideally you'd delineate between the subsegments (for example on internet subs you'd consider dial-up vs DSL vs FIOS subs etc.).
Remember that regional differences among the intermediate opcos (NYNEX, NY/NJ, etc.) will have different service offerings and sub penetration - sort of the whole houses/users/subs passed concept that is commonly used with cable MSOs. That is, not all users are covered in DSL or FIOS enabled areas, and your penetration assumptions should take that into consideration. That would get you to your revenue model.
On the wireless side you have to consider voice and data, and build out for CDMA/LTE buildout and upgrade.
Don't forget to pro forma for Alltel.
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