very broad topic (i know), but any recommendations to quickly get up to speed on industrials? about to start interviewing for an industrials equity analyst role. haven't worked with industrial companies historically. any help would be appreciated.
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thanks. anything more relevant to the day to day? i.e. what KPIs are looked at for XYZ sub-category of industrial, what multiples are used for valuation, etc.
DM me your email address.
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would very much appreciate if you could share them with me too, thank you! :)
Start with trying your best at supply & demand modeling for the specific product, rather than individual company modeling. Do NOT forget to look at capacity in China/Asia in sectors where import competition is dominant. Is supply increasing or decreasing relative to demand?
For company specific, just try your best to separate out volume/price and importantly model based on incremental margins (fixed cost leverage). Do NOT plug in a swag margin number when doing projections - always separately model what you think is fixed cost vs. variable cost. The results can be surprising and highly sensitive to small changes in assumptions.
Pay attention to cash flow statements i.e. Capex and movements in inventory and NWC. This can be a big deal in sucking up/releasing massive cash flows in industrials. Beware of companies with lengthening inventory days. Always value based on EBITDA-Maintenance Capex (or EBIT if clean enough) rather than just EBITDA. Have a strong rationale for how you arrived at maintenance capex (are you extrapolating from historical depreciation? management guidance? does it make sense?).
If you wanna get real brainy with it, try to calculate ROIIC (return on incremental invested capital) by sizing up what is "base" business and what is "growth" business based on historical year growth capex. If management is saying they are spending growth capex but topline is not growing, that is not growth capex. If the topline does grow, but margins are narrower, they are pursuing some growth segment that is not in their historical wheelhouse that requires a lot of cost investment that can be a good or bad thing, depends on specifics. At the end of day, are they pursuing worthwhile projects that spit out good returns?
When looking at downside valuation, always respect the trough-on-trough value as your full downside. Don't assume "normalized/mid-cycle value" is how the market will look at things. It is not that trough-on-trough is a reasonable way a private buyer will truly value a business, but the stock sure will trade there. So you have to be prepared for that if you are recommending a buy.
how do you get to a point where you know how to think like this? Were you taught to think like this or was this your intuition when thinking about the sector? Genuine question
I'm a college student right now and just trying to understand how to model out public companies and improve on my technicals. How did you get up to speed with technicals and how long do you think it usually takes to get it down pat when you were in my position and is the way I'm trying to practice a good way to go about it? Just looking for advice after reading your amazing answer LOL. Goal one day is to break into the buy-side
Not the poster but I do the same process in long only and currently recruiting for HF jobs.
There are basic finance fundamentals which is more or less the language of this business that you need to understand and can easily be self taught or taught in school (finance and valuation basics). The next part comes from experience- mainly spending lots of time looking at the stocks, looking for opportunities, building a model, and trying to understand what is driving value for a business/ stock.
With enough reps of going through 10ks and investor days and earnings calls and sell side reports and trying to find set ups you begin to see / understand what most investors are looking for, and over time your brain naturally begins to filter the insane amounts of information out there and find a process to quickly hone in 1) what drives this business 2) how do people value this business 3) what is being priced in 4) where can there be a diversion in this view/ where is there opportunity.
I recommend Brett caughran’s Twitter threads as he does an excellent job breaking down the basics.
The short answer is experience and pattern recognition- best way to get there is reading everything you can get your hands on, work on coming up with pitches, and work on building financial models
It is a continuous improvement process and that is what’s so fun about this business. Don’t fret too much on what you don’t know in college, you’re literally just getting started. Know the basic mechanics of accounting and modeling, but qualitative judgment is really an art that comes with experience and reps.
For me, I would say the 4-5 year mark is when things started clicking and I felt like I could tear apart any business and could trust my own judgment that I didn’t miss a massive key driver. But I am still learning incremental stuff every time I invest in a business and every time a new cycle turns (who knew high variable cost companies had more risk in margins in an inflationary recession). It’s just a pattern recognition built up from lot of reading filings, talking to management, talking to other sources, and importantly getting good feedback from your PM as the more experienced investor. You will get there. It doesn’t take a genius. Just put in consistent work and enjoy the process!
How do you approach modeling out fixed and variable costs for businesses when no official commentary/guidance is available?
List out all costs and do some high level guess work - usually it’s better to take each cost and guess a %fixed/%variable than to assume entirely for each. Higher fixed % costs would correspond to salaries, rent, corporate back-office/overhead. Whereas marketing or R&D always have some fixed part but will be variable to growth during the right times.
This is exactly accurate based on what ive seen at top shops
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