Sources and Uses: How to Find and Use Information in IBD (EBITDA example)

There is a lot of emphasis on technical skills in IBD: being able to do DCF, good comps, analysis etc. But one skill that is often under used in practice is simply finding information in the most efficient way.

I thought it might be useful for people to get list sources for commonly sought high quality information, understand how certain sources calculate numbers, and pitfalls to be aware of. Because it's so universal, let's look at EBITDA in each of these sources. It's surprising how different an answer you can get if you ask "What is a company's EBITDA?" and understand why attention to detail is so important.

More than 10-k's and Q's

There is often a lot of emphasis on WSO on reading the 10-K and 10-Qs. However, I think there are a few other good sources to pull information that often get overlooked.

EBITDA isn't always broken out in a 10-x, as it is technically a non-GAAP measure. However, if it is, it's usually calculated "top down" on an unadjusted basis. If you are looking for more details on EBITDA as per the filings, you can usually find it in the 8-k.

8-K Press Release

The 8-K which is filed as part of the quarterly report often contains a lot of useful information. It includes key operational statistics (pricing trends, unit sales, etc.) and reconciliations for non-GAAP measures (like EBITDA, Adjusted EBITDA, sometimes FCF).

Adjusted EBITDA is usually reconciled from net income (closest GAAP measure). Compared to EBITDA, it is usually adjusted for stock-based comp and one-time items (restructuring charges, transaction expenses etc.) This is also important for an EV calc where you make adjustments for minority interest or equity-method investments. It is important to make sure your EBITDA metric is apples to apples with your EV metric in terms of stake holders and value.

8-K Investor Presentation

Often, the company will also file their investor presentation in a separate 8-K as well (which also includes this information). There is also very useful information from three different types of investor presentations: 1. regular course quarterly updates; 2. conferences (leveraged finance or sector based); 3. M&A transaction announcements. You can also find these in CapIQ under "Transcripts".

Regular course quarterly updates are usually great for pulling current performance and trending information (eg. Adjusted EBITDA by segment). The conference presentations are usually good for the higher level "get to know the company and industry" materials. M&A transaction announcements are usually a good place to get the information needed to pro forma for full run-rate contributions of target businesses. Remember that filings, quarterly reports and research report EBITDA as-earned and need to be adjusted for valuation purposes.

Transcripts

The first half of the transcript is usually the company reading it's 8-K out loud. However, there is usually a bit more commentary and color on specific details towards the end. It is also very helpful to read when research analysts start asking questions.

Usually a good place to get color on things like margins, why the numbers moved ("primarily due to", "offset by") and where they expect them to go.

Equity Research

Equity Research is a good place to get forward numbers. You can usually pull consolidated from a service like CapIQ/FactSet/Bloomberg etc. But like any third-party source, it is often important to look at how these numbers are built up so that you know what's being included. The most common inconsistency I've seen is pulling pre vs. post SBC. I've also seen cases where a business which was owned 50% was included by some analysts but not others.

Of course, it's important to check the deltas between individual analysts and the consensus (bullish vs. bearish analysts). Be careful about # of analysts contributing in each period. Of five analysts, maybe only four have projections out two years and the last one (the most bearish) has a third year projection. This will make your EBITDA in the third year take a huge drop because it only reflects the bearish analyst's views and his view was "damped" by the other four in the first two years.

Credit Ratings Reports

Besides their reports, S&P and Moody's will often have an excel sheet which outlines what adjustments they make to EBITDA in order to get to credit adjusted EBITDA. The most common / prominent are usually rent add-backs and Pension / OPEB.

However, it's important to make sure your starting point aligns with theirs. For example, Moody's starts their EBITDA reconciliation from pre-tax income whereas S&P goes top down from Revenue. They don't always end up with the same EBITDA and its important to reconcile and understand what is included in each. How they also treat adjustments for things like rent and pension can be very different also.

Credit ratings agencies are conservative by nature and may not give credit for "one-time" items. They also have discretion for giving credit for small acquisitions and may not pro forma EBITDA for tuck-ins. They usually will for large transformational transactions.

If you're doing a RAP or other credit work and looking at "leveragable EBITDA" (EBITDA you can get credit for from a credit perspective), there is usually no credit given for soft synergies (cross-selling, increasing purchasing power) but can be some for hard synergies (well-defined corporate headcount reduction, public company costs, lease terminations etc.)

Third Party Data Provider - CapIQ/FactSet/Bloomberg

I find there is sometimes too high a reliance on these services as a shortcut. I think it's important to check (reconcile) how EBITDA is being calculated. For example, I find CapIQ to be untrustworthy with historical EBITDA because it tries to calculate it itself using elements / line items they pull from the 10-x's. Usually misses are one-time items or if a line item is labeled differently from what they expect.

I find this source to be my last choice. My personal guidance is to use information that is as close to the company as possible (filings).

Good luck and happy banking. As always, SB's for any insights or helpful commentary.

Mod Note (Andy) - Throwback Tuesday, this was originally posted September 2016

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Comments (20)

Sep 11, 2016

Toronto (now NY I believe) banker always on top of the game when it comes to monkey training.

    • 2
Sep 20, 2016

Totally. Think I'm 1~2 years behind you. So much to learn from you! Thanks for the post.

Sep 20, 2016

This is when I'm glad I work with mostly private companies! Great post regardless - I always hate having to look for stuff in public filings.

    • 1
Sep 20, 2016

You can also look in peer fairness opinions.

    • 1
Sep 21, 2016

I don't have much to add except some places don't use EBITDA and they are usually foreign which presents other challenges and also @BlackHat did a baller write-up on good 10K practices you should read; http://www.wallstreetoasis.com/forums/anatomy-of-t...
This is not important unless you are adamant on working in PE/HF but sometimes you'll need to build out an operating model for each comp if you're looking at private companies, firms with many minority interests, spin-offs, carve outs, take privates etc...

Sometimes they might use IFRS and sometimes they just make up their own shit and the EBITDA you find on Bloomberg won't help you because it is going to be wrong.

Companies change the numbers so often I should probably include a "non-GAAP, restated earnings, cumulative GPA" on my resume and apply to HBS already.

    • 1
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Sep 21, 2016

How important is this to know when going into undergrad HF/PE straight out of college?

Sep 21, 2016
Jbiebs1996:

How important is this to know when going into undergrad HF/PE straight out of college?

Very. Any kind of role where you are managing investments puts a premium on being able to quickly locate company information. Expect this to eat up more time than the actual modeling until you get the hang of it.

    • 1
Best Response
Sep 21, 2016

CapIQ is garbage. "Untrustworthy" is an understatement.

    • 3
Mar 20, 2018

Watch your mouth.

What concert costs 45 cents? 50 Cent feat. Nickelback.

Mar 20, 2018

Credit agreements for public companies are also on EDGAR. EBITDA definition will be in there.

Moody's and S&P will always haircut adjustments. Sponsors tend to request that the figure be removed from the write up altogether.

It does tend to get messy when you are accounting for synergies and PF effects. Investor presentations are the most reliable.

    • 2
Mar 20, 2018

thank u sir bookmarked

Mar 21, 2018

One of the trickiest things to look out for is pulling historicals that have been restated. The best way to do this is to work backwards rather than forwards. Always use the numbers from the more recent 10-K. Frankly I don't even recall how many years need to be restated for which accounting changes, etc. However, I am a lot more careful with this than most people.

Another rule to be aware of has to do with restatements for stock splits (which seem to exist only to frustrate junior bankers and give senior bankers a dumb excuse to talk to a company). EPS, share count, etc. are adjusted retrospectively for stock splits. That might be helpful if you are looking for EPS growth, but it also means you must be very careful with FactSet formulas, etc. you use to pull historical prices. If you use FactSet, always use P_Price (not FG_Price) and set it to unadjusted if you are calculating offer price premiums and things of that nature when spreading precedents. If you are looking at price performance over time, then you are going to want to use split adjusted numbers, and it may be necessary to further adjust for spin-offs or even sometimes dividends where relevant.

    • 1
Mar 26, 2018

Great points. I've been burned on the restatements before and I also agree with your "work backwards rather than forwards" statement.

Side note: I f'n hate EPS. Note also that it's calculated on WANS and not FDSO which is super annoying. CapIQ has a similar "Adjusted share price" when you are trying to calculate % equity returns over a time period. Make sure you also make the right assumptions about dividends and what rate they are reinvested in (risk free or back into company equity etc.)

Mar 21, 2018

Macabacus

Mar 21, 2018

Damodaran online (his NYU page)
Mergers & Inquisitions on valuation page
The ibanker blog (guide)

- Bust

Mar 21, 2018

Street of Walls blog has good stuff, too.

- Bust

Mar 21, 2018

"Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions" by Rosenbaum and Pearl is pretty solid in my experience for a relatively in-depth understanding of the concepts.

Excel-wise, the BIWS modeling courses seem to be solid from what I've heard from friends.

Do you have any prior internship experience? It'll be difficult to break in without it unless you plan on getting an MBA and breaking in at the associate level. It's also more difficult to get into IB the older you get, and if you plan on playing your sport for 5-7 years, banks will be hard-pressed to pick you over a younger candidate.

Mar 21, 2018