I recently had a call with a hedge fund manager for 'networking' purposes, which went well enough. At the end of the call, the hedgie offered to meet with me over lunch and asked me to put together a forecast for a company he covers. To do this, he suggested reading 10ks, listening to earnings calls, etc... One concern I have is that the company is a consumer products company, and my background is in TMT...
Can anyone with experience in this world provide any general guidance/feedback on this process? Advice on how to 'wow' the hedgie would also be appreciated. The HF is long/short equities, from what I understand. Thanks in advance!
Cheers,
BR
Look at his 13Fs to see if he has a position in it.
Great advice, thanks Value Sleuth.
Keep it coming... Interested in (1) key metrics for consumer products companies, (2) insight into how a hedge fund manager might look at a stock, (3) how you would forecast the company out. When I do tech deals, I try to get as granular as possible and will try to build out bottoms up based on productive sales heads, etc... Is the same approach used in consumers?
It would take forever to know "how PMs look at companies" but if you read some of the annual letters you can get some insights http://www.hedgefundletters.com/recent-letters/
Thanks F4H. I'll check it out.
Clearly, I am not expecting (or expected, for that matter) to be a whiz kid by the time I meet the investment manager, and I realize that people spend a lifetime honing this skill set. That said, I am looking for high level, general advice that might help me prep for my discussion and review...
You have the right idea - be as granular as possible in your understanding, but be able to summarize it at a high level. No idea how your PM friend thinks about stocks, but I'll give you a fundamentals-oriented view. One starting point is to try to kind of recreate the income statement in your head and compare earnings power (and cash generation, to the extent it's different) to current trading multiples. Valuation is then an easier discussion as you can try to bound reasonable outcomes given different scenarios, the state of the market, and the company's growth prospects, capital intensity, risk, etc. I'm guessing he wants you to tell him how Uyou[/u] think about a stock though....
Anyway, to forecast earnings for a generic CPG company, you'll have to look at the company's disclosures to figure out how you can build up revenue. See if you can segment it by product area and geography and think deeply about potential demand. Can you find any third-party estimates of the end markets the company's targeting? Don't just extrapolate growth rates forward or assume sales will grow with the market, but use those as inputs. Think about competition and line extensions and new product development and try to come up with a view on how market share might evolve as well. How about price and volume trends? How does pricing compare to competing products? How's the health of the channel? Does the co have the ability to take pricing? Is the company acquisitive, and what is the impact of M&A? Do sales of new products or in new markets follow any kind of predictable pattern? Is there a market penetration or channel penetration story? Just calling it a CPG company doesn't give one much to go on - pick a metric and it might matter, or maybe just sales growth is all anyone cares about if it's a younger business. Your best bet is to read a few sell-side reports and see what metrics analysts are focused on - you should absolutely form your own view of what's important, but that will be a good starting point and indication of what can drive the stock short-term.
That's all just for the top-line.
What's the outlook for each of their major cost buckets? Is there built in operating leverage off the fixed cost base as the company grows (this can be a risk too)? How are raw material sourcing costs evolving? What's their production capacity? How do they distribute products and do they have an efficient system? Can they reduce shipping costs, or do they need to build more DCs? Do they have any announced cost reduction plans for G&A? Is R&D a major expense? Advertising is usually important in CPG - what's the strategy, how does budget compare to peers, are they over- or underspending? Are ad dollars productive?
You should be able to get to some view of revenue growth and operating margin after you've thought through all that. Forecasting non-cash and non-operating expenses is pretty straightforward from there if you want to get all the way to EPS. Just a starting point - hope it helps.
No matter what you do, you'll ultimately find that all of the really obvious and even semi-obvious things that are based on public info will already be priced into the stock (assuming it's not small cap or a major corporate event didn't just happen or get announced), so that's not really going to impress anyone. Knowing what you have to do is simple, find things that sell side analysts and the market have missed, why they've missed them, why they're important, how they'll drive the company's future performance, and how you have a superior understanding of those things. Of course actually doing that is the hard part.
May the Force be with you.
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