Hi Everyone,
I did a few courses/books on financial modelling and feel comfortable with it but I feel my projections ability is really bad. Most analysts I work with do not do models so I can't get much feedback(they rely on others to do them) and the ones that do simply update their model with the correct data when they make a mistake projecting. It really bothers me because I want to get better at it and the books I have read don't seem to touch this area of making projections.
So far what I do is very simple, I look at historical growth rates and add a bit of my own view into that rate(if company x's revenue grows by 10% on average and I think they have a hot new product then I might make it 11% or 12%). As you can see, my approach sucks and is obviously prone to errors(those errors trickle down and make my valuation wrong as well). I know I can make a range of projections(10-12% rev.growth) but then the valuation range becomes very large as well as I project those earnings out.
I don't need your secrets but is there any tips or things I can do to get better on my own? I understand anyone who can predict earnings 100% of the time will become a billionaire in no time but I'm hoping its a skill that somehow I can improve.
learn about the company revenue drivers, and use your industry knowledge to come up with a reasonable assumption. For instance an auto company like gm has x% market share of the US market, y% in another country, US SAAR is estimated to be 14 mil 2012, ATP $28,000; so 2012 revenue for US segment = ATP X SAAR X Market share. For 2013+ come up with assumptions for price, market share, production number. Why would production go up or down (GDP growth, pent up demands, demand deferals), why would price go up or down (steeper rebates, no rebates, inflation, product mix), market share change (competition). Think that should give you enough info to figure shit out on ur own.
when projecting revenues, you can also try a bottoms-up build: at the most basic level, look into the price-points for the co's major selling items and the expected volume. use an inflation rate to help guide the increase in prices going forward. another approach for a bottoms-up build if you're looking at something like a discounter is to look at how many stores they have, how many stores they will roll out in the next couple of years, and the sales per store.
i would play with 3 scenarios when building these projections - aggressive, base, and conservative - each reflecting different macro and micro trends.
as a sanity check, look at the implied market share for the company using a top-down approach.
when projecting costs or balance sheet items, i prefer to keep things simple as a % of revenue (or for certain items, COGS/opex). i'll sometimes do 3-scenarios for something important like the items in working capital (for example, calc A/R as a % of revenue as well as using DSO) or a full-blown schedule for depreciation and capex. all this extra work results in very slight differences from a basic assumption, but it does give extra weight to your assumptions.
personally, though, always try to balance depth with simplicity otherwise you'll find yourself going crazy with so many assumptions.
good luck.
don't feel bad... all valuations are wrong.
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