Basic Guide Ramping Up On A Company With Public Information Part One

Assuming that you have access to no financial products such as FactSet, Bloomberg, CapitalIQ, Thomson or otherwise, thought it would be helpful to give a step by step guide on how to ramp up on a new company from your home computer. Using FaceBook as an example. Lets go ahead and start with the website you will most likely visit the most when you start your job on Wall Street (be it investment banking, research or otherwise).

SEC Filings at SEC.gov

The 424B: This is the best spot to start if you’re looking for a long history on the company grab the first equity raise (IPO) by simply going to this link: http://www.sec.gov/edgar/searchedgar/companysearch.html

Type in FB for the ticker then enter 424 as your filing. Note, you can search for s-1 documents as well to get a longer history, however IPO price, total raise etc. will not be shown on the cover (page 1 where the banks are shown as well). The good news is you can likely get a few more quarters of back dated information by looking at older S-1’s.

Prospectus Summary & The Offering: Here you will get a “snapshot” or quick view of the Company. Read the entire section. You should write down the key metrics they use to measure success (monthly users, daily users, reach, likes, comments, mobile vs. desktop views etc.). You’ll get a good backdrop here and you can boil down some of the key high level themes. To save you some time the basics are: 1) User Growth, 2) Activity of Users, 3) Monetization of Users. You can take a deeper dive into any company and of course there is more to the story than the three simple points, but now you have a concise understanding of the main tenants of the story.

Once the story is laid out continue reading and you’ll get an idea for how the company delivers value to its advertisers (reach, relevance, social context and engagement). More importantly as you read on you’ll come across a section that summarizes the market opportunity “According to an IDC report dated August 2011, total worldwide advertising spending in 2010 was $588 billion”. (See *Note 1)

Next as you move to the tail-end of the section you get an idea for “risks to the story”, in simple terms, things that could go wrong. Essentially the negatives would be 1) unable to monetize for advertisers, 2) stagnation in user engagement or user growth 3) privacy concerns and the usual speech on issues with being a public company. The section ends with a decent explanation of Zuck’s controlling interest as well.

In summary when you are done with this section you should know 1) the drivers of the company, 2) the addressable market or opportunity for the company, 3) the risks of owning the stock and 4) an idea of the ownership structure

Look Into Revenue Drivers: Now that you understand the basic story. You should search for measurements of these key themes within the filing. Simply put, you are looking for user activity and user growth numbers which should be provided in the filing. Go to the management’s discussion and analysis (page 48 is where it really begins) and you see they take a deeper dive into these metrics. Now you can get all of this information into excel and begin tracking monthly average users (MAUs), daily average users (DAUs), mobile MAUs and engagement levels. (See **Note 2)

Once you have the metrics down, you can start tracking the performance by geography as well. Knowing that the USA is a much more saturated market it would be smart to track growth by geographies, see page 51 and begin tracking this on a go forward basis as well. You now have Average Revenue Per User or ARPU according to the document by region.

Look for Profits: Now that you have an idea of the Company’s business model, top-line growth and revenue generation, it’s time to see how you’re making real cash from the security. Internet companies are generally valued off of EBITDA numbers so again this is different for each sector, some are simply valued off of revenue growth if they are profitless.

Jump to page 64 (quarterly breakouts) and you can now get an idea for the income statement results. Look for seasonality and profit margins (EBIT or operating income). Now that you’ve got an idea for the EBIT number on an annual basis, check the cash flow statement (page 66) and you’ve now got an idea for the EBITDA for the firm, $2B+ for 2011. Before you move on do a quick check here on the next year estimates for the company http://finance.yahoo.com/q/ae?s=FB+Analyst+Estimates. This also gives you a free glance at consensus estimates for Sales and EPS, so you can quickly calculate the sales and P/E multiples on both an LTM and Next Fiscal Year basis. (See ***Note 3)

Stop and Formulate the Elevator Pitch: At this point you have decent working knowledge of the Company and likely have some good ideas on comparable companies as well (Linked-in and Google for example) and can now come up with rough metrics for the firm and pitch the stock.

“Facebook is a ~$65B company that is looking to grow its revenue through increased advertising fees by driving both user growth and user engagement. If the company is unable to grow its user base or is unable to continue monetizing ad space the stock would likely suffer. At this point with the company trading at XXx times our 2013 EBITDA estimate we believe investors should accumulate/stay away from the stock.

Part 2 will cover building a basic model for the firm.

TL;DR: Your goal in part 1 is to know the basic story for the stock, be able to pitch it, and know some high level numbers/valuation (Sales/EBITDA/EPS) in this case.

*Note 1: This is not the same for every single sector, take a look at a Pfizer and you’ll see the focus is quite different. Here’s an example: http://www.sec.gov/Archives/edgar/data/78003/000095012309050810/y79785e…. You can also check the S-1 to confirm as this links to a debt filing.
**Note 2: Again this is not the same for all companies, for example if you were ramping up on Apple you would be breaking out line items (iPad, iPhone etc.) by revenue.
***Note 3: It should be stressed that companies are valued differently, be sure to check if your industry is valued on alternative metrics such as P/E, P/BV etc.