Stuck. Would Appreciate Any Help.
Hey all,
Current rising junior at a semi-target looking to teach myself DCF modeling (forgive me if any of my questions are stupid. I'm leaning from scratch). I don't have any online courses at my disposal rn, so I'm just going off investopedia and youtube. I know how to calculate WACC and I understand the fundamentals of a DCF model. However, I am having trouble understanding how to actually project future revenue, future CAPEX, future D&A, and thus, future cash flows. Like I know that FCFF = EBIT(1-t) / CAPEX, but I don't know how to project this for next year, the year after, and ultimately, 5 years down the road. I'm assuming these projections are obtained from historical data, but if you average out past data, you come up with one percentage for future growth. The DCF models I have seen, have had one percentage for growth next year, another percentage for the second year, a different percentage for the third year, etc. How did they obtain these numbers? Are there services online (free?) that provide consensus projections for US companies? Even if there are, though, I'd ideally like to understand how to make these estimates myself, so I know the frameworks of the model. Would appreciate it immensely if any of you could take the time and walk me through this.
Bump
If you have the $60 to invest in Damadoran on Valuation (book) it really helps solidify the theory while also giving you the math, and helped me pad some of the knowledge from classes.
Haha yeah I'm looking at his lectures online. He's helped tremendously for everything regarding cost of capital and accounting errors. But I guess since these lectures aren't as in depth as his book, he just said to look at historical data for projecting future revenue growth, while not actually providing an example. I understand how this can be used for projecting 5 years outward if every subsequent future year has the same annual growth rate, but in many of the DCF models I've seen, it'll have say 10% growth for year 1, 11% year 2, 13% year 3, 13% year 4, 12% year 5 (different annual growth rates each future year), which is confusing me. I don't know how they obtain these numbers for each future year. And obviously, this step is imperative to estimate the future cash flows, so I can't really move on without it.
In practice we get almost always get base/management cases numbers from either management or research analysts.
bump
If you're trying to understand a dcf mechanically it doesn't matter what the growth rates are. Generally you make your own assumptions. For example, if my thesis on a company was that X segment revenue is going to increase more than the market expects because of Y reason, I would project growth rates higher than market consensus. To get baseline values either take historical growth, look at equity research estimates, or look into management guidance in 10Ks/10Qs, investor presentions, and earnings calls.
Essentially the growth rates for revenue in DCFs are generally pretty arbitrary and moreso based on your/market's view of the company. Generally, if you don't have a view on something keep it the same/historical/consensus.
For example, when I'm projecting out COGs unless management has specifically said that they anticipate COGs increases/decreases for some reason just keep it constant as a % of revenue from the past.
Hey, forgive me as I know this is a stupid question, but where do I go to find the equity research estimates (I'm currently not working at a bank btw). Also, when looking at historical data, would it be acceptable to use one growth percentage number for all future years (e.g. 8% revenue growth for future years 1-5 based on the average of the past 5 years).
I look at equity research through ThomsonOne, I get access through my school. If you go to a business school there's a pretty good chance you'll have access to ThomsonOne, CapIq or some other software/database where you can find equity research. Also it's not really a must, it only really matters if you're doing a stock pitch.
As for the 8% question I honestly can't tell you. Based on what you know about the company do you think it is reasonable for their revenue to continue growing at such a rate. Look up overall industry trends to get a better idea. At the end of the day mechanically it doesn't matter what the number is if you're trying to understand how a DCF works.
Is it that you don't understand the actual mechanics of the operating forecasts of a DCF model? or is it that you don't understand the theory behind why they're choosing different growth rates? My suggesetion, at least if its the former, would be to go on macabacus, download a fully built DCF model, and then try to rebuild it line by line. Once you have a strong understanding of which things are calculated and which are hard-coded, as well as just an understanding of the format of the model, you can try to deviate from it with different companies and operating assumptions. Ultimately, starting from scratch is really hard when you first start out, and a full model is very intimidating. But, if you take it line by line, anything is possible.
If it's the latter, go on libgen and download Damadoran if you don't have $60.
I would say i don’t understand the theory behind why they’re choosing different numbers. But it’s not why they’re choosing different numbers, it’s how they’re choosing different numbers, and how projecting it out 5 years. This is where I stand:
Using historical data: wouldn’t this just give u one average number that you would use for the next years? 10K/10Q: don’t companies just provide their expectations for the next year? How do you use this for the next 5 years?
So my assumption is that people just use consensus analyst estimates and equity research reports online (is this correct?) But I don’t know where to find/access these reports/estimates.
It's good that you're asking these questions, but most often analysts aren't the ones making the calls on what future projections should be.
If you lack information on future performance, you usually try to find it in ER reports, or pull the information from a service like Factset that will consolidate different ER reports findings for you (would advise against relying too heavily on Factset tho, sometimes its just not the more reliable).
As someone who doesn't currently work in a bank, you won't have access to these (unless your school provides access, which it might), and it shouldn't really matter. Ultimately, if you have a really strong grasp on the model, then you will know what to do once you're an analyst and have access to those reports
See if you can find Martin Shkreli's youtube videos. They way he breaks down finance, dcfs, and his modeling approach was fantastic, and thanks to him I learned to build fin models and learn some insightful stuff about life, which may shock many given how he behaved at times.
If you're into healthcare and you find Martin's videos, you'll have hit a goldmine because that's his bread and butter and goes into copious detail about pharma.. He does modeling on 30-40 + companies in all industries in his series..
Awesome thanks! Is it just his "Finance Lessons" series (20 videos) that you watched?
He had a lot more videos. He had like 300-400 videos. Some of them were not labeled or included in the financial series section, but were found in his videos.
Unfortunately, youtube took down his channel, so you might not be able to find all of them ; /
He had a IBM financial model video, try finding that one. That video gave m,e a revelation about financial modeling.
following. thanks.
I'm also stuck
Stuck in Beast Mode
Read the Rosenbaum & Pearl valuation book. You can find it online. Used that to teach myself modeling and you can see the practicality of each facet in depth.
Non veritatis at eum laudantium quos soluta laudantium. Neque eaque assumenda maiores sequi sed. Culpa voluptatem laudantium autem deserunt et. Enim et aut consequatur. Sit eius aliquam vitae et.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...