Just started at AM, a bit lost on the valuation side

Hey guys,

As I mentioned in the title, I just recently started at a boutique AM which has 500 AUM.

After going through the FS of the company, listening to conf. calls, presentations etc. I have a hard time coming up with the right valuation - the technical side of it and how to price in certain qualitative things. For example when deciding to do multiples valuation which multiples to use, use historical, consensus, industry average and then how to apply it.

Thought you guys could recommend me something to read, look, or maybe some tutorials from which I could learn.

Anything is welcomed.

Thank you.

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Comments (12)

Jul 25, 2017

Did you not take valuation classes at school?

Give this a look:
https://www.amazon.com/Valuation-Measuring-Managin...

    • 1
Jul 25, 2017

I did, although not much. The stuff I learnt at school cant really be applied to the cases. At school they just taught us the theory, but the execution is a bit harder than it sounded like.

Thank you for the book.

Do you maybe have some excel workbooks or something from which I could learn which you could share?

Jul 25, 2017

Knowing your firms investment horizon would be helpful...
I always use forward (consensus) multiples unless there's something wonky. The FS should list peers/competitors. Global Industry Classification Standard sub industry is good if you need more comps. Try and get the cleanest number(s) for your industry and make the comps off that. For example, if you're looking at an airline, EBITDA won't do, as there are aircraft leases critical to org structure/ops. You'd need Adj EBITDA. Obviously do a DCF too. Does this company pay dividends? What's the capital structure?

Qualitative factors can be probabilistically enumerated and assigned values from 0 to 1. Just make sure you note (and can easily change) your assumptions.
You should end up with a range (between 5 and 10%), not a single number.

This is a really weird question for some who works at an AM.

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Jul 26, 2017

Valuation should be the very very last step in a proper buy-side analysis and is the culmination of everything you know about the company. If you have no idea how to value it, you probably don't understand the business yet. Having trouble forecasting margins? Then you haven't understood what drives profitability nor the competitive dynamics of the industry (and how they're changing).

At the end of the day DCFs are mostly useless, especially when you're forecasting 10 years of cash flows. It's more a way to test assumptions rather than an accurate predictor of intrinsic value. (That said, picking an industry average multiple isn't much better.) I prefer to use them as conservative scenario testers. Take what you know about the company, plug in some of your most conservative estimates, and see what comes out. If there's still a margin of safety then you can be pretty sure it's a buy.

    • 1
Jul 25, 2017

Thank you so much for the response.

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Jul 26, 2017

No problem. I've worked for some people with amazing track records whose DCFs would make a sell side analyst retch. Investing is not about your modelling skills, it's about process, judgment, and your understanding of a business. But modeling is arguably the easiest thing to "work on" when you're young and inexperienced, so it gets a lot of focus, and I get that. But whereas the sell side people seem to brag about never using a mouse, on the buy side nobody worth their salt gives a damn.

Edit: just to give you an idea of time spent, I'd say on a given company I spend 5% of my time actually doing the model. Probably less, perhaps it's 2%. And it comes right at the end.

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Jul 25, 2017
arthurdayne:

Valuation should be the very very last step in a proper buy-side analysis and is the culmination of everything you know about the company. If you have no idea how to value it, you probably don't understand the business yet. Having trouble forecasting margins? Then you haven't understood what drives profitability nor the competitive dynamics of the industry (and how they're changing).

At the end of the day DCFs are mostly useless, especially when you're forecasting 10 years of cash flows. It's more a way to test assumptions rather than an accurate predictor of intrinsic value. (That said, picking an industry average multiple isn't much better.) I prefer to use them as conservative scenario testers. Take what you know about the company, plug in some of your most conservative estimates, and see what comes out. If there's still a margin of safety then you can be pretty sure it's a buy.

This.

    • 1
Jul 29, 2017

I think that you would greatly benefit from researching a similar company (i.e. one in the same industry, or close to it?). Most investors look at relative valuation, which makes relative valuation very relevant. If you are very new to the business valuation is the hardest part!

I would say that you should know which multiples are most relevant. What do they emphasize in their quarterly releases? What does the sell-side emphasize? There is no template, no set of steadfast rules. Just read, learn, and stay open-minded.