Help with Writing ER Reports for Beginners (Value Investing)
Hello,
I am trying to put together a few short ER reports before I start my MSF program in the Fall and don't really know how to make it both educational and relatively basic. I have been self-studying on and off for the past 2 years. I have read a few investment books (Intelligent Investor, Security Analysis (will need to reread), One Up On Wall Street, You Can Be A Stock Market Genius, and The Most Important Thing Illuminated) and believe I have enough knowledge to put together some simple reports. I have also passed the series 7 and have taken the CFA L1, so my FRA skills, which I lacked before, have improved lately. I have also gone over some modeling courses but my understanding is weak.
I am specifically having trouble with 3 statement analysis. I believe I have the arsenal to make some moves but when I start I am overwhelmed by the amount of information and my knowledge. I don't know where to start, how to proceed, where to end. So here are some questions:
1) How can I put together a simple model given my limited amount of modeling knowedlge
2) Should I read a 10k completely first, then proceed to financials, or the other way around.
3) How should I apply valuations? Should I take some current ratios then projects the 3S and take a DCF?
4) Does anyone have a less comprehensive report that I can look at to get an example?
5) Any other tips/sources?
I know that I still have a lot to learn, especially modeling (I have a WSP subscription that I haven't used yet), but at the moment I want to apply what I have learned to see if I like it. I have been taking tests for 12 months in a row (S7, GMAT, CFA) so I am burnt out and tired of learning. I want to do a report correctly once so I can start from there. Thank you for the help.
NeverOutOfTheFight, sorry there are no responses yet. Maybe one of these topics can point you in the right direction:
Maybe one of our professional members will share their wisdom: tiffanyas pauljhpeng311 sdw1204
Fingers crossed that one of those helps you.
Any help would be appreciated. Thank you.
Anyone?
Is my question too long/redundant or am I posting at bad times?
Hey Mate,
Best way to learn I think:
1) Download a model template and pick a company and just fill it in, the one i learnt from was: macabacus.com/excel/templates/operating-model It's a bit confusing at first but you eventually work through it and once you work out one or two it becomes pretty simple.
2) When starting out, its probably easier to plug in the last 2-3 years of financials first (P&L, BS, Cashflow), ensure its all linked, then read through qualitative stuff.
3) All Models mathematically work very similar, and what seperates good to great models are dis aggregating revenue drivers so you can accurately forecast into the future.
Depends on the company, sometimes DCF is better, sometimes earning comps are better, at our firm, we generally used a blended where they are making money already, or if not, just a DCF.
Link the financial model (P&L/CF) to the DCF to get the valuation.
4) Search around, on this website and others, its easy to find some sample reports from the BB's.
Hope this helps!
Hey man,
Thank for the comment, I'll try the template. I am trying to work on one from start to finish and I know it will get simpler once I do one. After working at it for a few more days I am having trouble working on assumptions. I have been just staring at an income statement and not knowing what to do. I know how to connect everything together, but I want to make it educational. I have looked at a lot of models on WSO and online, but they all just straight line everything or use other ER sources. Also where do I look for value? Like what do you look at to spark your interest and to get you a good idea that this might be a good investment? I am working on AMC (the movie theaters) right now, if that helps. Thanks for the feedback.
Hey – this is a good start, once you understand how it all works mechanically, it becomes very easy and every model works almost the same way. The value from a model comes from how well you can forecast the inputs that affect the valuation, cashflows for DCF, or earnings for Multiples. The best way to do this is disaggregating revenue into the key streams so you can apply accurate growth assumptions on each revenue stream. You can also do this for costs, depending on the business, however, I generally just apply a consistent gross margin to calculate cogs other relatively simple assumptions for OPEX. Revenue is probably the key one for most businesses (not all). A easy starting point is to split revenue by the operating segments in the financials and then applying your own growth assumptions on them. This part of modelling becomes more ‘art’ than science. Just remember, models are never 100% accurate and analyst use it to tell a story/sense check rather than actually relying on it for valuation as its almost never right. You can generally make a model say anything you want (a small, yet reasonable change in assumption can significantly alter value) so don’t stress about getting the actual valuation spot on but focus more on the story and use the model as a sense check. I’m an associate in Australia so I don’t know anything about AMC, but assuming it’s a movie theatre chain the way I’d try and model it is this.
1) Set up 3-5 year historic model to get a good understanding of where the revenue is generated, where the largest costs are, what the margins are. 2) Build it out to the future forecast, connect to DCF, Earnings valuation 3) Once that is all working I will do some work to understand what drives the business, and split revenue as follows: a. Split revenue to revenue per theatre b. Perform some analysis on whether this is growing/declining c. Try and work out the market size – any reports on how much a nation/state/population spends on movie entertainment both at movies, tv, subscription stuff d. Work out the cinema market share e. Compare this to see if its growing (I assume its declining with growth of Netflix etc) f. Research/think about where you think it will go in the future. Eg continue to lose share to subscription tv and apply growth/decline assumptions based on that g. Other ideas: average customer spend (on ticket + food + drink), then forecast growth/loss in volume per customer going forward, whether you expect average spend to go up cause people are willing to spend more, or it will decline as people think its too expensive so cinemas need to reduce prices. h. I imagine the largest costs would be rights to movies, employee, rent, do some research on whether those would move up/down in the future (maybe they can negotiate better prices with movie companies if the industry is in perpetual decline?)
4) This is just off the top of my head, most scenarios are made up as I don’t know the industry at all but both techniques you can get a sense of a valuation, while they are both very different, so you pick the one that you think most accurately reflects the key drivers of the business. 5) In terms of what I look for value, you try and work out the model based on historic and reasonable assumptions and once you get to the current share price value you can take a look and think, ok, is there a huge huge potential for growth right now that is not factored into the current valuation? Generally companies are valued off consensus forecast, so if you have an angle that means your valuation is way above consensus but you think it will happen, that’s how you determine a stock may be undervalued.
Very informative, thank you. Just a few follow up questions if you get the time. The part about segments is a little hard for me to forecast because I don't have all the metrics that you mentioned. However the historical data shows that both their revenues and operating costs have been pretty consistent in the past 3-5 years, so I wanted to keep it conservative. The thesis that I am working on at the moment is that this company's price dipped about 60-70% in the past year or so due to the amount of debt they accumulated for acquisitions and also from competition from online movie subscriptions like Netflix/Hulu. I am trying to figure out whether this company, being the biggest in its industry, can both pay off and lower its debts while continuing to keep its operating margins the same. Being that the price dipped so much, I want to know if the price justifies buying. So I am concentrating less on revenue and more on debt. I have looked at their minimum debt schedule for coming years to see where things are headed but not sure what else can be done. What's an efficient way to proceed in this situation. Sorry for the lengthy response and thank you.
Hey – no worries at all. Understand that those metrics are hard to get and sometimes you just need to make do with what you have. I think that is the key thing about Equity Research (when you are actually working in the profession rather than just doing it leisurely to apply for a job), is that despite it being hard to get, you can source it somehow/somewhere/ or make accurate enough estimates. There were many times were my boss asked me to source stuff like this and I couldn’t, thinking there was no way I could, but then after digging and digging I found something. Another thing is, on the job you get access to management and can call them for these kind of metrics (understand you cant but just an FYI). Also, investor presentations are better than annual reports for these kinda things. Eg. I am not sure what they report but you can even like, backsolve it. Look at revenue (depending how they split), then work out on your own research how many people typically buy food, ticket etc. then just do a revenue/average spend to get average revenue per customer. Understand that it’s a bit wishy washy and definitely not 100% accurate (which is where I struggled with as I came from audit background so was use to everything being factual). I think this is what people mean when they say come up with ideas/angles that are unique. If it was easy, everyone would do it .
Regarding your actual Q) 1) Im not sure im following the part about increased competition from Netflix/hulu as I think that would have a direct impact on above (operating margins). I think with this, analysis on rate of decline and whether it will be constant and the impact on numbers/valuations is important. You can work this out via market share. (Also, I completely understand you wont go into this amount of detail for a job app, no one would expect you to, this is just what we would do if it was a company we were covering, a high level margin assumption is probably adequate for your purposes). But if you can talk about these things during interviews it shows people you can take the thinking to the next level. 2) Actually, I think all this links to whether a company can pay off their debt, them paying off debt would be dependent on: a. Cashflows from operating activities b. Cutting dividends c. Raising equity 3) If they cant do it from a based off your forecast, then they will need to do b or c. Work through your forecast, then if it looks like they cant, it can be a talking point in the interview/stock pitch. “I think they will need to either raise equity or cut dividends as their current debt levels are not sustainable”. 4) Alternatively, if based off your forecast, they will have enough cash to service the debt, your angle would be, “I think its been oversold based on its current debt levels, however, per my analysis they should be x cashflow positive, which means they can pay down y amount per annum without cutting into dividends etc.
Thanks man. I will dig deeper and see what I can find. I know what you mean about the wishy washy part, I am pretty factual myself. I appreciate the time you put into writing these lengthy responses, I will use these as notes as I continue with my research.
First Equity Research Report - Where to Get Started? (Originally Posted: 07/25/2018)
Hi all,
I've been in finance for a few years now, recently finished my MBA, and just sat for the Level II CFA exam. I'm looking to transition into an equity research role and had an informal meeting with somebody internally about a potential job opportunity. He suggested that I create 2-3 simple equity research reports/recommendations now so that they're ready in the event that the informal process I'm currently going through gets more formal. Sounds great, I'll get right on that. Except, I don't even know where to begin. You'd think between the MBA and CFA progress I'd have some clue but I've never had to write any reports in my current role and don't even know where to begin. I'm also not exactly sure what he means by simple, how simple is too simple? What level of detail is expected?
I'm even having trouble finding a company to start with, he suggested sticking to primarily US based companies for simplicity's sake but I can't possibly know if I'm going to come out the other end with a Buy or Sell and he specifically said to make sure one of them was a Buy. How should I go about getting started and what worthwhile free tutorials are out there (if any)? Any help or advice would be greatly appreciated, I've been banging my head against the wall for a long time now.
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