Help with Writing ER Reports for Beginners (Value Investing)
Hello,
I am trying to put together a few short ER reports before I start my MSF program in the Fall and don't really know how to make it both educational and relatively basic. I have been self-studying on and off for the past 2 years. I have read a few investment books (Intelligent Investor, Security Analysis (will need to reread), One Up On Wall Street, You Can Be A Stock Market Genius, and The Most Important Thing Illuminated) and believe I have enough knowledge to put together some simple reports. I have also passed the series 7 and have taken the CFA L1, so my FRA skills, which I lacked before, have improved lately. I have also gone over some modeling courses but my understanding is weak.
I am specifically having trouble with 3 statement analysis. I believe I have the arsenal to make some moves but when I start I am overwhelmed by the amount of information and my knowledge. I don't know where to start, how to proceed, where to end. So here are some questions:
1) How can I put together a simple model given my limited amount of modeling knowedlge
2) Should I read a 10k completely first, then proceed to financials, or the other way around.
3) How should I apply valuations? Should I take some current ratios then projects the 3S and take a DCF?
4) Does anyone have a less comprehensive report that I can look at to get an example?
5) Any other tips/sources?
I know that I still have a lot to learn, especially modeling (I have a WSP subscription that I haven't used yet), but at the moment I want to apply what I have learned to see if I like it. I have been taking tests for 12 months in a row (S7, GMAT, CFA) so I am burnt out and tired of learning. I want to do a report correctly once so I can start from there. Thank you for the help.
Hey Mate,
Best way to learn I think:
1) Download a model template and pick a company and just fill it in, the one i learnt from was: macabacus.com/excel/templates/operating-model It's a bit confusing at first but you eventually work through it and once you work out one or two it becomes pretty simple.
2) When starting out, its probably easier to plug in the last 2-3 years of financials first (P&L, BS, Cashflow), ensure its all linked, then read through qualitative stuff.
3) All Models mathematically work very similar, and what seperates good to great models are dis aggregating revenue drivers so you can accurately forecast into the future.
Depends on the company, sometimes DCF is better, sometimes earning comps are better, at our firm, we generally used a blended where they are making money already, or if not, just a DCF.
Link the financial model (P&L/CF) to the DCF to get the valuation.
4) Search around, on this website and others, its easy to find some sample reports from the BB's.
Hope this helps!
Hey – this is a good start, once you understand how it all works mechanically, it becomes very easy and every model works almost the same way. The value from a model comes from how well you can forecast the inputs that affect the valuation, cashflows for DCF, or earnings for Multiples. The best way to do this is disaggregating revenue into the key streams so you can apply accurate growth assumptions on each revenue stream. You can also do this for costs, depending on the business, however, I generally just apply a consistent gross margin to calculate cogs other relatively simple assumptions for OPEX. Revenue is probably the key one for most businesses (not all). A easy starting point is to split revenue by the operating segments in the financials and then applying your own growth assumptions on them. This part of modelling becomes more ‘art’ than science. Just remember, models are never 100% accurate and analyst use it to tell a story/sense check rather than actually relying on it for valuation as its almost never right. You can generally make a model say anything you want (a small, yet reasonable change in assumption can significantly alter value) so don’t stress about getting the actual valuation spot on but focus more on the story and use the model as a sense check. I’m an associate in Australia so I don’t know anything about AMC, but assuming it’s a movie theatre chain the way I’d try and model it is this.
1) Set up 3-5 year historic model to get a good understanding of where the revenue is generated, where the largest costs are, what the margins are. 2) Build it out to the future forecast, connect to DCF, Earnings valuation 3) Once that is all working I will do some work to understand what drives the business, and split revenue as follows: a. Split revenue to revenue per theatre b. Perform some analysis on whether this is growing/declining c. Try and work out the market size – any reports on how much a nation/state/population spends on movie entertainment both at movies, tv, subscription stuff d. Work out the cinema market share e. Compare this to see if its growing (I assume its declining with growth of Netflix etc) f. Research/think about where you think it will go in the future. Eg continue to lose share to subscription tv and apply growth/decline assumptions based on that g. Other ideas: average customer spend (on ticket + food + drink), then forecast growth/loss in volume per customer going forward, whether you expect average spend to go up cause people are willing to spend more, or it will decline as people think its too expensive so cinemas need to reduce prices. h. I imagine the largest costs would be rights to movies, employee, rent, do some research on whether those would move up/down in the future (maybe they can negotiate better prices with movie companies if the industry is in perpetual decline?)
4) This is just off the top of my head, most scenarios are made up as I don’t know the industry at all but both techniques you can get a sense of a valuation, while they are both very different, so you pick the one that you think most accurately reflects the key drivers of the business. 5) In terms of what I look for value, you try and work out the model based on historic and reasonable assumptions and once you get to the current share price value you can take a look and think, ok, is there a huge huge potential for growth right now that is not factored into the current valuation? Generally companies are valued off consensus forecast, so if you have an angle that means your valuation is way above consensus but you think it will happen, that’s how you determine a stock may be undervalued.