How to start a DCF/Stock Pitch
Hello all, I have recently finished a financial modelling course and would like to start to model DCFs as well as make stock pitches. Here are the current issues I am facing and hope to receive guidance on:
1. Which company do I select? There are so many companies that I do not know where to start. Does the country the company is based on matter? Should I do a blue chip stock?
2. How do I get my assumptions? The courses I do provide me with Base/Best/Worst growth rates, metrics and multiples. How do I find my assumptions for the case scenarios? How do I find the expected revenue growth rate for the forecast years?
3. Is there a way to "model answer" I can refer to cross-check my final work? I'm afraid that I may finish the model and there might be errors in the model either through wrong adjustments, miscalculations, etc. How do I know if I did the model correctly?
Please advise me as I'm lost on how to start. Thank you.
1. As far as picking a company, it doesn’t matter much. I usually say do an industry that you would like to know more about or one that you're already interested in.
2. I usually get them from public equity research (Cap IQ). Take three opinions to make your case on the best,base, and worst-case scenarios. Also, take your guess to see where your opinion stacks up and why.
3. You never know if you’re “right” unless you model prior years. An example would be if you did a DCF and at the end checked the company value that you came up with and compare it to the final year that you modeled and see how close your were (2015-2020 DCF and look at the value in 2020). If you're going to model the future, I would try to be in line with other equity research assumptions if not (which is OK you should have your own opinion anyway, just understand why you made the assumptions you did)
Ex. Maybe you think the company will have much higher growth prospects, and you believe revenue will jump in years 3-5, or because of the upcoming election, taxes will be lower/higher if a particular candidate gets elected. Those are the types of assumptions you will make, and nobody knows what will happen either way, so take your best guess.
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