I recently received a very simple case interview for a tippy-top single manager (think somewhere just below, though very clearly below, the Pershing / Lone Pine tier). It was the entirety of the interview. I did not pass the interview to the next stage.
It was: how would you value the company that runs all the taxis in NYC?
The man indicated he wanted me to (1) size the market, then (2) value the company.
I'm pretty good at cases (my MF PE is heavy on the case format for interviews, given consulting genes). But here, I stumbled. I stumbled through a market sizing answer: segmenting NYC to get to population, talking about Uber competition, etc. This wasn't the best showing and I know how to get better at market sizing.
Then, I vaguely projected CFs by taking that revenue, commenting something about how they'd pay drivers like $40K p.a. and need XYZ amount to fill demand, and that was the key expense. Then something about useful life of taxis and a need for capital intensity. It was all really imprecise. I got little help from the interviewer.
Maybe I should have talked about
- The right discount rate (probably >10% given secular challenges, cyclicalty, and capital intensity, but the argument it's a good business is probably that in some cases you just need a taxi).
- Defined FCF better and more thoughtfully. Essentially constructed an income statement in the abstract. Maybe getting to net income (deducting opex for a central dispatch, which I basically neglected, so you get a better SG&A, and regarding fuel and labor and amortized depreciation as COGS). Then take that, add back D&A, think of net working capital (fuel payables cards, maybe)?
- Nailed the market sizing piece, which is prepare-able from consulting case guides
I just still don't see how I'd have thought of all of that, and put numbers to it, and gotten to a valuation in my 45 minute slot.
What did they want? How could I get better?
To improve your performance in such case interviews, it's essential to break down the problem systematically and address each component with precision. Here's a structured approach to tackle the taxi company valuation case:
1. Market Sizing
Segment the Market: - Population of NYC: Start with the total population of New York City. - Target Market: Estimate the percentage of the population that uses taxis regularly. - Frequency of Use: Determine the average number of taxi rides per user per year. - Average Fare: Calculate the average fare per ride.
Example Calculation: - NYC Population: 8 million - Target Market: 50% (4 million people) - Frequency: 100 rides per year per person - Average Fare: $20
Annual Revenue: [ \text{Annual Revenue} = \text{Target Market} \times \text{Frequency} \times \text{Average Fare} ] [ \text{Annual Revenue} = 4 \text{ million} \times 100 \times \$20 = \$8 \text{ billion} ]
2. Valuation
Project Cash Flows: - Revenue: Use the annual revenue calculated above. - Key Expenses: - Driver Salaries: Estimate the total number of drivers and their annual salaries. - Fuel Costs: Estimate based on average fuel consumption and prices. - Maintenance and Depreciation: Consider the useful life of taxis and maintenance costs. - SG&A (Selling, General, and Administrative Expenses): Include central dispatch costs and other administrative expenses.
Example Calculation: - Driver Salaries: Assume 20,000 drivers at $40,000 per year. [ \text{Driver Salaries} = 20,000 \times \$40,000 = \$800 \text{ million} ] - Fuel Costs: Assume $1 billion annually. - Maintenance and Depreciation: Assume $500 million annually. - SG&A: Assume $200 million annually.
Free Cash Flow (FCF): [ \text{FCF} = \text{Revenue} - \text{Total Expenses} ] [ \text{Total Expenses} = \$800 \text{ million} + \$1 \text{ billion} + \$500 \text{ million} + \$200 \text{ million} = \$2.5 \text{ billion} ] [ \text{FCF} = \$8 \text{ billion} - \$2.5 \text{ billion} = \$5.5 \text{ billion} ]
Discount Rate: - Given the secular challenges, cyclicality, and capital intensity, a discount rate of >10% is reasonable.
Valuation: - Use the Discounted Cash Flow (DCF) method to value the company. [ \text{DCF} = \frac{\text{FCF}}{(1 + \text{Discount Rate})^n} ] - Assume a perpetual growth rate for simplicity.
Key Points to Improve:
By following this structured approach and practicing regularly, you can improve your performance in similar case interviews.
Sources: Case study interview for MBB consulting - 24 of my best tips on how to get in, Interviewing for a SA or Analyst position? Here's what I'd want to hear as a VP., Q&A: 1st year VC analyst (~750M AUM), Advanced Professional Degree McKinsey Application Process, Case Interview - How to get a sense of a potential revenue of a new business service?
I don't know if this helps but here are some things I considered reading your post.
Did you know the largest taxi insurer in NYC is currently insolvent? And that the market for taxi insurance is highly consolidated among a handful of players?
Did you account for the cost of taxi medallions or did the exercise assume that is not part of the question?
Did you account for congestion fees and the structure of tolls and similar charges?
These are examples of business risks based on current events that you wouldn't normally discuss unless you're following the industry. Their effect could be negligible financially but could be useful during an interview to demonstrate how you think. Things like this are the kind of "following the market" items they could have been looking for if you're already competent on the technical side. Did you feel good about the technical side?
I’m not sure what you mean by technical side. If you mean the FCF / rate / valuation wrap-up side of the case study it was okay. Not great as the first half threw me off.
you’re right. I think there’s much more complexity and depth to any simple case. and they make a human, very human judgement - almost artistic - like do they like what you’ve painted for them. I just gotta get a better palette maybe
On the valuation did you just use FCF ( 1+ g) / (r -g)
There are obviously a million caveats about the actual taxi industry, but I can't imagine that is what is most important here (unless you said you covered Uber or something)
Maybe was worth exploring the whole reinvestment rate stuff, ROIC, etc. idk
Yeah bingo. I think it was re-investment and ROIC type thinking. And maybe something about unit economics + fixed cost of salaries
They may have wanted something a little more in depth to see how you think about the business / opportunity. I probably wouldn’t focus on the quantitative and might have been looking for something creative. I don’t know one thing about the taxi industry but I may have tried to hit on a few themes in the case study to demonstrate you can think, especially a fund like Lone Pine / Pershing that focuses on fundamentals first. Just some ideas that come to mind:
Take a look at a few of Pershing’s public investor presentation. No right answers to interview questions like this but it’s your thought process that matters!
SBed, great perspective. The point about creative thinking is interesting. It's reps I guess
helpful thanks
You don’t want to own the taxi company. You just want to own the medallions
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