If 100 of us built a model, would any two be the same?

If I asked 100 analysts on this site to do a DCF model for any given company, would any two models yield the same share price? How far off do you think any two models could be? How would we know which one was better (without the benefit of hindsight)?

 

You're asking how complex a DCF can be at the analyst skill level. The answer you're trying to ferret out is that it depends on what data you're using. I.e., if the data allotted to the 100 analysts to build the DCF consists of cash flows and an interest rate, then yes, a fuck ton of them will be identical. If the analysts can use enough data to build a regression analysis or Markov chain etc. to predict earnings, along with balance sheet and economic data, then it becomes less likely that you'll have identical models in the sample.

in it 2 win it
 
theaccountingmajor:
Let's say everyone in the experiment has a computer and 45 mins. They can look up any financial statements/earnings reports/etc available to the public. Thoughts?

There is going to be higher variance with lower time allowed. There will be lower variance with more time and also incentives.

"If you always put limits on everything you do, physical or anything else, it will spread into your work and into your life. There are no limits. There are only plateaus, and you must not stay there, you must go beyond them." - Bruce Lee
 

Some people will use perpetuity methods, others terminal value. If using terminal value, people will probably have different TV/EBITDA multiples.

People will have differences in assumptions. Will FCF grow at 2% or 3%?

Given unusual market conditions, people may assume different market risk premiums.

Not everyone will account for options and warrants.

The list of possible differences goes on and on.

"Work ethic, work ethic" - Vince Vaughn
 

If you're building a model of a public company, the deviation may not be that great as the existence of consensus gravitates analysts to certain numbers.

Even very excellent modelers will start second guessing themselves if their outputs are far from the consensus average. Now, some will revisit their assumptions and will stick with it but others will change their assumptions to get closer to consensus.

All very funny in my opinion as equity research models are not that precise. You really shouldn't be calibrating your model to a consensus of bad numbers, but that's how it goes.

 

Having completed MBA-level valuation course this past spring, I can tell you of the ~50 in the class, no one's DCF deliverable was exactly the same. For those I saw, there was a 20% band (+/- 10%) where the bulk of the models fell.

My takeaway is that there is no "right" answer in a DCF model. The value of a company is, at the end of the day, whatever a buyer is willing to pay for it. The goal of following the basic valuation process (comps, precedent transactions, DCF, LBO) is to ballpark a valuation, and learn enough to negotiate the sale price up/down -sellside vs buyside, respectively.

 

I like this question alot. Agree with others that with the similar data and lax time constraints, you'll get the same models. Otherwise they'll differ. I like the question because it highlights that modelling itself is a bit of a commodity- meaning there isn't much of a technical difference between models. This makes modellers a commodity as well. As you progress, the value added is understanding the model. This means picking the right inputs, running the right scenarios, and calculating meaningful metrics. Perhaps most importantly is conveying the model through a narrative. The narrative is not a commodity but a value added product which is difficult to build.

 
mfog:
I like this question alot. Agree with others that with the similar data and lax time constraints, you'll get the same models. Otherwise they'll differ. I like the question because it highlights that modelling itself is a bit of a commodity- meaning there isn't much of a technical difference between models. This makes modellers a commodity as well. As you progress, the value added is understanding the model. This means picking the right inputs, running the right scenarios, and calculating meaningful metrics. Perhaps most importantly is conveying the model through a narrative. The narrative is not a commodity but a value added product which is difficult to build.

This is a great insight into financial services careers in general. I spent my early career in Big4 audit, and the same was true there. Anyone can follow the procedures of doing an audit, but the value comes from experience and internalization of your clients' idosyncratic issues and advising them properly.

 

I don't know if there'd be any two the same, but if you iterated it enough, someone would write A Tale of Two Cities in Excel.

I come from down in the valley, where mister when you're young, they bring you up to do like your daddy done
 

Regarding the wisdom of crowds:

A classic demonstration of group intelligence is the jelly-beans-in-the-jar experiment, in which invariably the group’s estimate is superior to the vast majority of the individual guesses. When finance professor Jack Treynor ran the experiment in his class with a jar that held 850 beans, the group estimate was 871. Only one of the fifty-six people in the class made a better guess.

Specifically to company evaluation, the vast majority of people will be "off", and most people may come to wildly different conclusions, but each individual assessment, when pooled with the larger market of assessments, will generally create a pretty accurate representation of value.

Array
 
Most Helpful

This might be an appropriate thread to ask this question.

At one company I worked at previously, we had an M&A group with a budget in the billions (internal M&A in large tech company). I was working on some projects and happened to get a meeting with the #2 person in the company under the CEO for a project.

He later said if I needed anything, just ask. I wanted an interview to get into that M&A group. I told him this. He got it lined up for me and after that I was on my own.

Well, he lined up an interview with the head of the entire internal M&A group at the company, overseeing 2 main groups: - M&A Valuation / Modeling / Strategy type work - M&A Integration team

I had a phone interview with him and he was nice and referred me to the head of the M&A Valuation / Strategy group that I was interested in, and it was this chick (I have nothing against chick execs), but she was really hating on me from the first second I talked to her. He booked the phone interview with her or something (her boss).

First of all, she was like "How did you get this interview?" "I don't know how you got on my schedule," "please don't waste my time." Like bitchy off the bat, off the first sentence. We did a brief intro and she said something really arrogant to me like "my whole team has Ivy MBAs or M&A IB experience." I didn't think it would be that big of an issue for me to work in their models with my experience and even offered to her my time to do an internship type thing so she could see my work (which I thought was very generous). I was autonomous at the company at the time. She said the only way I could get on the team was if I valued a company to her liking.

This seemed pretty straightforward. Some instructions, financials, excel, and a time line. That's what was in my head. I've done some exercises like this for other companies. But, this was different.

She says, "I'll give you a box of papers, a pencil, and a calculator and you tell me one number, that's it. All I want is one number." I was like what? I can't use excel? She said if I was good I could just do straight math. It wasn't with a professional type voice though, she was sounding super super bitchy to me. Like a complete fuck you. The whole thing seemed like a fuck you. I wasn't even near that office, it was 90 min away. She would be my manager if I got the role and I was already questioning this relationship. In a final verbal tirade, she said call me if you think you can actually value companies and hung up on me. What the fuck?

Would you go in to do this exercise with a box and a bunch of papers and a calculator? I even asked her how many papers and she said a box/ream. I asked if they were in order/organized and she said "probably not." What is this, haze the internal applicant day?

Honestly, this phone call has messed with my head more than any other phone interview I have ever had.

I even asked for what kind of variance to her value was allowed, like plus or minus 10%. She said that she would decide after seeing my number, but had no predefined measure of success (no preset range of acceptable values, which made me skeptical - like she was going to just reject any number I give her, no matter what).

I figured this chick was ass fucking me from the beginning and never asked to calculate her box.

What would you do?

"If you always put limits on everything you do, physical or anything else, it will spread into your work and into your life. There are no limits. There are only plateaus, and you must not stay there, you must go beyond them." - Bruce Lee
 

She never wanted you from the beginning. She was setting you up to fail and protecting herself in the process. Even if you got her valuation number dead-on she would find a failure point to DQ you.

Take it as a blessing. If she's going to treat you that way before you were ever on the team, why would you want to be on it? Start looking outside and make sure you've got your current boss's reference because that's the one you want.

The poster formerly known as theAudiophile. Just turned up to 11, like the stereo.
 
K-Peezy:
She never wanted you from the beginning. She was setting you up to fail and protecting herself in the process. Even if you got her valuation number dead-on she would find a failure point to DQ you.

Take it as a blessing. If she's going to treat you that way before you were ever on the team, why would you want to be on it?

Yeah, that's what I was thinking.

K-Peezy:
Start looking outside and make sure you've got your current boss's reference because that's the one you want.

This was a prior company as stated above, about a decade ago.

"If you always put limits on everything you do, physical or anything else, it will spread into your work and into your life. There are no limits. There are only plateaus, and you must not stay there, you must go beyond them." - Bruce Lee
 

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