I have a question on what the standard procedure should be with regards to projecting numbers for a DCF analysis past the first year or two of sales and expense estimates.
I'm currently working on a DCF for a specialty apparel company. Their sales estimates for FY2011 and 2012 are significantly above the historical average. Since the industry is cyclical, I considered using the CAGR of the company during the last business cycle (2001-2009) as a historical baseline. If I want to transition from the consensus estimates I sourced from Bloomberg for FY2011 and FY2012 toward this CAGR, how quickly should I do it? Should I smooth the transition with a linear step-down or just go straight back to the historical CAGR starting in FY2013?
Similar question for expenses and Capex as a % of sales. I'm modeling three different expense items, and the average estimates I got off Bloomberg didn't break them down into that much detail. I didn't simplify the whole thing into operating expenses because of particular projects only affecting certain of the items that are ongoing at the present time. I found the average from 2003-2010 for all of these, and stepped them down linearly from the 2010 value toward the average starting in FY2011. Is this appropriate?
If anyone might want to help by taking a look over what I've got, please let me know.
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