Asset management/Buy side - How to forecast sales for a company valuation
Hello,
I have a final round with a company on the buyside coming up. I was wondering how you guys would typically (generic industry type of advice) go about forecasting future sales.
In the past this is how I would have gone about it (beware simplistic assumptions and fallacies ahead)
On a company, I did a linear regression on the net margins (that happened to be stable for a 10 y period, suggesting that the trend was at least a bit more likely to progress similarly in the future, making it somewhat okay for that sole company to do it that way imo.). From there got my net income by multiplying net margins with revenues (which were found under the same linear regression - likely to be heavily flawed here). Found my EPS. and multiplied that by the historical p/e and got my target price.
All this to say, that this is how i'd typically go about it for a generic industry. If I was trying to be a bit more fancy would perhaps look at the geographic breakdown of the company and see if I can make any forcasts with that info in combination with market share of given company in said country, and said country's growth rates. However, not too sure how I d go about it.
-> Ultimately I am looking for some insights in how to get to a fair price/target price for a stock.
Any input is much appreciated. Novice investor here and happy to learn
Thank you
Do you know what an MD&A is?
Hello mrB87m Yes, although I have never actively looked for a section called like that. Is it in the proxy statement or annual report? (investopedia says the annual report but I don't see it in the one I am looking at. Unless each company calls it a different thing) In the case of the mock company I am using, I can find info similar to that of the management discussion and analysis near the beginning on pages with headings such as Chairman's/CEO's statement. So essentially their outlook on where the business is going.
Not sure, how that would help me to get to the valuation price (I mean I understand conceptually, I am just unsure about the steps to get there)
For instance here are 3 key points of the current market landscape
, we have been capitalising on North American whisk(e)y trends"
"acquired a majority stake in x in India in July 2014, consolidating y's position as a local leader in z in this exciting growth market."
"prioritising brand investment, driving efficiencies and continuing the implementation of y's operational and governance standards across the business,
So we have three possible angles, 1 one is perhaps consolidating and potentially growing top line from N. America 2 acquisition in a fast growing economy (7 percent or so according to IMF) that will be fully consolidated in balance sheet 3 operational standards are being increased, so likely there'll be an increase in operating effiency so we could look at metrics that have to due with working capital management, cash conversion cycle, and cost structure
SO the question is, from this info, how do I get to a valuation price
Because out of the top of my head, all these variables are loosely interconnected so unless I make a function where forecasted revenues are defined as a function of these three variables influenced by coeffcients themselves (which not sure of that number/coefficient yet as i'll have to forecast it as well, Loops?) I wouldn't know where to start without making it look like a wishy washy black box.
As you can see, many questions here. What would you do
bump
Ugh, I don't even know where to start. I could write a lot about it but I think it'll be a waste of my time. So in brief:
Basically you want to drill down into what drives revenues and costs at an operational level. Much of this information will be in a company's MD&A -- sometimes it will be spelled out quite clearly in the form of tables (i.e. units shipped; sales prices/unit; operating costs by type) and sometimes it will be a little bit harder to piece together. Once you really understand how a company makes money, and can quantitatively link that to revenues and EBITDA, then you can start making intelligent projections based on qualitative disclosures in their MD&A; comments on earnings calls; competitors' disclosures, etc...
There's no "generic" way of doing this. Every company will require a different approach based on its specific market/industry, level of disclosure, etc...Like being good at anything, being good at investing requires a lot of work.
Forecasting is more an art than a science, and you shouldn't try to pin it down to an exact number. Coefficients, formulas, WTF are you talking about?
I want the last 5 minutes of my life back.
No need to be so disrespectful mrb87. If you don't want to answer because you are think you are wasting your time, then don't answer. Doing the opposite and complaining about it, makes no sense and comes across as pretty immature. Nevertheless than you for taking the time.
Also to answer your "question", A function essentially shows a relationship. as I said above above the idea of functions is a conceptual one- anything and everything can be represented via functions (cf.economics). For instance, (obviously this is not how you'd go about forecasting revenues), but revenues are essentially determined by multiple variables.
Formula as in sigma f(x) = sigma { a x1+ b x2 } + K where f(x)= f(revenues) a = coefficient or number that represents growth for a given variable X1= which could be sales growth and x2= operational costs again these are examples and it could be a totally different , as you pointed out there are qualitative disclosures and hence possible variables)
Forget about using formulas -- which will get you laughed out of a room -- and focus on understanding business.
BUMP
Also for anyone who would like to help, and that is including you too MrB87. It would really help if you could show how you would arrive to a fair value using fictional values. It doesn't need to be complicated, its really to get a sense of the rationale going behind the decisions and derivations being made.
So lets says Past revenues for t1 t2 and t3 are 10 20 30, historical P/E 19, shares outstanding a given number K,
Debt= 30 Equity= 15
The company is facing two catalysts/ just bought a new company that's going to boost revenues by 3% according to sell side analyst reports (feel free to change these values) and its going to deleverage (doesn't give us a fixed amount, management just says its on path to deleverage).
Please make any adjustments or add values as needed. Obviously the simpler the model the better (as long as the gist is there .cf parsimony principle)
Thank you so much :)
+1
look man, if a Certified User offered a high-level advice you should probably be a bit more respectful than say 'don't do it if you don't want to'. what he's telling you is how traditional investment managers that are focused on fundamental bottom-up analysis project top line on a high-level. for example, using the classic example of coca-cola, you can project out revenue by divisions (regionally and/or carbonated soft drinks/non-CSD). you can further divide that up projecting based on price and volume. as mrb87 said, it's more art than science and a lot of the nuisance that goes into modeling comes from experience. i'd recommend you take a look at some of hte WSO models.
now if you are interviewing at shops that utilize smart beta strategies (ex: DFA) or quant-heavy strategies then that's a different story. i have no familiarity with that arena so i can't speak to it.
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