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.
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 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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