Hi -
as most of us go through case studies (both equity and credit) I wanted to discuss how you approach estimates in in-house case studies. Usually, candidates have between 3 to 6 hours depending on the shop to set-up model / thesis / recommendation.
One can develop a view on the asset and come up with indicators for long or short. Yet, returns materially depend on estimates one derives during the case.
- What financial items do you estimate?
- What kind of key sensitivities do you run?
- What is your strategy for forecasts given time contraint?
- Do you estimate year-on-year or simply use a mid-cycle metric (eg mid-cycle EBITDA and CF items)?
Have done a case and this was the point that challenged me most.
- Thank you
http://www.rgmadvisors.com/
A plug? Appreciate any tips.
For your projections, you want to get a sense for 1) the several different revenue drivers (volume * price * FX or rates * utilization, etc), 2) operating leverage (breakdown of fixed vs variable costs and how each of these move through the cycle), and 3) normalized earnings power (putting a mid cycle multiple on NTM EBITDA or FCF that is clearly above mid cycle is a good way to lose money in cyclical businesses ... ask yourself is there a reason why the company's earnings power is structurally higher than the 10 yr avg? ie due to consolidation, growth capex, etc).
Key here is not reinventing the wheel in a few hours, but to understand why your projections are reasonable, where you can be wrong, what your additional time would be spent focusing on, etc.
thank you - what sensitivities do you run, ie to show that an investment is even worth if abc? Get the point on granularity given time contraint. In a sense 10bps of margin should not be the dealbreaker.
I would look at EV/EBITDA if it's a levered company or P/E as well as FCF Yield to Equity, what mid cycle multiples it typically trades at, and compare that to your estimate. FCF is the biggest thing to focus on and how this trends through a cycle - the others are just imperfect proxies for it. Look at this both relative to equity and EV. I'd also look at ROIC vs its cost of capital to see if the company creates value over time.
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