I've been told by a couple of people (growth side, not value) that buyside analysts won't bother with DCFs anymore--instead they'll project revenue and earnings growth based on a variety of factors in a proprietary model. Is this commonplace?
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Sounds like a top.
I work at a value fund. Most people I know (myself included) just project out relevant financials, slap a multiple on whatever year you expect to exit the investment, and run a basic sensitivity. Practically, a DCF isn't useful because 1) high sensitivity to abstract inputs (growth to perpetuity, wacc, capm ,etc) 2) market value =/= implied value in the short to medium run 3) the same company can command a number of valuations at different times, even if DCF inputs have not changed. Maybe a DCF could be more applicable if a fund's holding period is more like 5+ years.
What? How is that any more “accurate”? You’re still projecting earnings, which is inherently subject to error, and you’re choosing a multiple which is no more arbitrary than a discount rate. (I hope you realize a multiple is essentially the inverse of WACC...) And if you’re using EBITDA and not cash flow for your multiple that is way worse than a DCF.
It’s fine to say you don’t do DCFs because you don’t think the incremental work adds value, but thinking you are somehow avoiding the inherent issues with a DCF by using a multiple is absurd.
I generally stick to fcf and earnings multiples given all the lease accounting changes recently, makes things easier...
Yes the multiple is just shorthand for a dcf. Didn't say one or the other was more accurate. I just prefer multiples because you can quickly get the market value of something and do it in a way that is more predictable and intuitive. As an example, it more intuitive to say company A should trade more in line with peers at B multiple if x, y, and z occur vs why growth in perpetuity in a dcf should be 1.5% vs 1.8%. Also, multiples are a market derived metric. Unlike a dcf, I'm not penciling in what the discount rate should be. I have enough experience in my sector to know what characteristics deserve what multiples. So I can say if things play out like my thesis implies, this company should trade at x multiple.
To each their own here...investments are an inherently subjective business.