How do you go about modelling a company on the buy side?

Question

Prospective Monkey here. I have seen several sell-side models but never come across a buy-side model here.

Wondering how do you go about modelling a company and how do you get confidence into where the company is heading 2-3 years from now? Is the process more top-down or bottom-up?

Would love to hear how you do this?

P.S. This question is not meant for short-duration HF guys trading into names every quarter

socgen555 · Accepted Answer

Sell side models = very complicated and usually very wrong, hard to update. Buyside models = all the straightforward drivers are modeled and the analyst has a very good understanding of the levers of value creation (buyback, costs, components of growth). Every great model is simple enough that a PM could go in and understand what’s going on (excl some complex industries). Because if you need to spend too much time explaining it to your PM, probably not worth buying

HFDude1234 · Answer

For example, I don’t think our job is to update on a periodic basis a range of prices that are in a bill of goods for a component. That was not what I meant when saying building in competitive landscapes and supply chains into a company-specific model. In the end, It’s about isolating key drivers that are likely to flow through and have a meaningful change to a company or set of companies.

HFDude1234 · Answer

Buy-side models are built to stress test specific metrics and outcomes yielding a set of valuation ranges and defined risk-reward profiles. Sellside models are not set up that way and tend to be standard 3 statements without highlighting key drivers of a company. Likely no scenario analysis and if there is it’s usually your standard scenario toggles on different, usually not meaningful metrics like gross/operating margin without the underlying build-out.

BankCredit993 · Answer

How are you getting all that competitive landscape and supply chain info to flow down into the P&L? Hard to get that sort of granular info and be accurate without the internal company models besides specific companies with only a couple players in the chain giving you clear readthroughs/ readacross. I feel like that’s garbage in garbage out if you get too granular.

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How do you go about modelling a company on the buy side?

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How do you go about modelling a company on the buy side?

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