Upload
chloe
View
42
Download
0
Tags:
Embed Size (px)
DESCRIPTION
Modeling Income Statements. Alexander Motola, CFA. Modeling Growth Businesses. How the markets works; expectations based investing What is “Net Revenue” Overview of Modeling Approaches How does the CEO get paid? (Proxy) What does a revenue model look like? Modeling Tips Specific Examples. - PowerPoint PPT Presentation
Citation preview
Alexander Motola, 2013 1
Modeling Income StatementsAlexander Motola, CFA
Alexander Motola, 2013 2
Modeling Growth BusinessesHow the markets works;
expectations based investingWhat is “Net Revenue”Overview of Modeling
ApproachesHow does the CEO get paid?
(Proxy)What does a revenue model look
like?Modeling TipsSpecific Examples
Alexander Motola, 2013 3
How the market worksEfficient Market HypothesisThe weak form (prices on traded
assets (e.g., stocks and bonds) already reflect all past publicly available information) is true for most of the market, and is most true for the “best known” stocks
The strong form of EMH (all info is instantly priced in) is definitely NOT true; if you thought so, you wouldn’t be in this class
Alexander Motola, 2013 4
How the market works The market is expectations based “If we buy the stock today, then each
day we move forward, the headlights of the market move forward one day (let's call it). The return that I earn over the next twelve months is the difference between the market's expectations for the first twelve months relative to the expectations it will have twelve months hence. You are looking at an expectation set change one year forward.” – Bill Miller
Past data is priced in; how the market thinks about future data is not
Alexander Motola, 2013 5
How the market worksWhat does this mean for modeling
growth rates of individual companies?
If a company grow revenues 20% a year for the next 5 years, and you correctly predicted that, will you outperform the market?
Why is modeling growth rates (revenue) important?◦Revenue is the lifeblood of growth
stocks; it is also the “headliner” for the financial statements
Alexander Motola, 2013 6
What is “Net Revenue”According to InvestingAnswers.com,
“Net revenue typically refers to a company's revenue net of discounts and returns”
Therefore, what you see at the top of the income statement is a number already adjusted by management
Every other statement flows from the income statement
Only via astute analysis can you determine “discounts and returns”; sometimes it is not even possible to derive this number
Alexander Motola, 2013 7
Overview of Modeling ApproachesWhat is “the
fade”?Top DownCompany
GuidanceLinear
ExtrapolationPast
PerformanceUnit
Level/Product Level
Sequential (QoQ)
CyclicalityDeferred
Revenue, Waterfalls, etc.
The impact of Acquisitions
One Special Case: Retailers
Alexander Motola, 2013 8
Modeling: Fade (Growth Rates)In theory, all growth rates will
become asymptotic to GDP◦Rate of fade◦Time Matters – is the fade gradual, or
is there something which causes a step function (patent expiry, etc.)?
◦What does the market think, and why?Re-Acceleration is a “holy grail” for
investors, because even if the market has the direction correct, it usually is overly conservative on the magnitude
Alexander Motola, 2013 9
Modeling: Top Down Relevant GDP growth rates
◦ How fast is the company growing relative to national or global GDP?
◦ Can you use GDP growth rates by country along with revenue mix by geography?
Industry Growth Rates◦ How many players in the industry?◦ Can you look at all of them?◦ Read multiple companies’ 10-Ks, etc or
industry reports to get industry growth rates
Taking or Losing Share?
Alexander Motola, 2013 10
Modeling: Company Guidance Companies often provide short or long term
forecasts◦ Earnings Calls, Analyst Days (often webcast);
never in their SEC filings Forecasts can be meant for many different
constituencies◦ Competitors◦ Investors◦ Other Stakeholders (suppliers, employees, etc.)
No Accountability, poor accuracy Can be useful as a basis for a high end of
range boundary (companies will almost never exceed, but will often fail to achieve their forecasts)
Alexander Motola, 2013 11
Modeling: Linear Extrapolation Newton’s First Law of Motion – “An object
that is in motion will not change its velocity unless an external force acts upon it”
Analysts often do this◦ It’s easy◦ It’s “intellectually dishonest”
Continues past growth into the future, blindly◦ Ignores “the fade”◦ Some projects succeed, some fail
Sometimes, in the absence of other data, this can (but not usually) be the “best” approach; however, this can easily lead to an overestimation of future revenues.
Alexander Motola, 2013 12
Modeling: Past PerformanceA close cousin to “linear
extrapolation”Uses history as the sole guideCan be useful for understanding
the revenue cycles of deeply cyclical industries, but even those usually have some secular growth rate (higher highs, higher lows)
If this is used, 15+ years of history should be used, and the margin impact (gross margins) should also be studied (Who covers INTC?)
Alexander Motola, 2013 13
Modeling: Unit LevelDifferent business units
(“segments”) have differing growth rates
Understanding the impact of the growth rates of the various segments can provide a huge advantage in determining the future direction of the total revenue growth rate
Companies usually provide a lot of disclosure around segments (and geographies)
Alexander Motola, 2013 14
Modeling: Product LevelRevenue = Price * Volume
(mostly true, there are reserves)Register data, company reported
data, Nielsen data, government data – all sources of units sold
Sell in ≠Sell through Best opportunity to reach an “out
of consensus” perspective on a stock
Alexander Motola, 2013 15
Modeling: QoQ Growth RatesQoQ is only useful if you are
modeling time periods less than a year (Quarters, Halves)
Linearity refers to how the company collects revenue within a given period (front or rear end loaded)
QoQ is very misleading for “seasonal” companies, such as retailers
QoQ is very appropriate for highly predictable, recurring style models
Alexander Motola, 2013 16
Modeling: CyclicalityCyclical business experience
dramatic changes in price and demand, with huge margin impacts
A long history of revenue (20+ years) is useful, along with an understanding of where you might be in the cycle (you must be WELL AHEAD of the cycle to make money)
You typically want to buy these when they look the worst
“This time” is NOT different 99% of the time
Alexander Motola, 2013 17
Modeling: D/R, Waterfalls, etc.Certain business have future
revenue on or off balance sheet which can increase the accuracy of any forecasts (keep in mind the delta to expectations drives the stock price)
This works best for quarterly forecasting
Focus on key drivers to predict business success
Alexander Motola, 2013 18
Modeling: AcquisitionsBusinesses can give a lot of
information about acquisitions; you can usually get enough to impute the “organic” growth rate
PEP recent 10-K, page 53 has a section called “Organic Revenue Growth” which provides a nice table showing what aspects of their growth are more repeatable than others.
Most smaller companies make you do the math or hide acquisitions
Alexander Motola, 2013 19
Modeling: Acquisitions (PEP)Will Exchange Rates be the same
in the future or move as much as they did in 2012? ForEx helped in 2011.
How integral to PEP’s strategy are ongoing acquisitions?
Alexander Motola, 2013 20
Modeling: RetailersCertain business/industry models
are unique enough to require another method of analysis (retailers, banks, smaller E&P companies)
WAG (2Q13 Results Press Release) gives us the following data: Front-end comparable sales, traffic, basket size, total sales.
“Pure” Retailers often disclose SSS, comps, new stores, square footage, etc. which will allow a fairly robust model
Alexander Motola, 2013 21
What’s in a Revenue Model?Very simple model of AMG;
includes 3 revenue segments
Alexander Motola, 2013 22
What’s in a Revenue Model?AMG’s model is pretty basic –
AUM * fee for all 3 segments, plus small adjustments for performance fees, so you need to forecast AUM (a function of market performance, marketing, and product performance) and the fee.
The last slide had the AUM; here’s the fee history
Alexander Motola, 2013 23
Modeling: TipsDifferentiate between Fact and
AssumptionReduce your key assumptions;
simpler is better and often more accurate
Forecasting is a flawed “science”; your goal is more to understand what can happen, how it can happen, and “What the market is missing”; you will not forecast an EPS number in the future
Track your performance to understand your forecasting errors
Alexander Motola, 2013 24
Price * Unit Model: HANSHansen’s (HANS) is now Monster
Beverage (MNST) – one of the biggest misses of my career
Relatively unique in that they disclose gross revenues and detailed product level information
Typically a company discloses less and less specific information as they get bigger or face slowing growth; they also change definitions, which impacts comparability
Alexander Motola, 2013 25
Price * Unit Model: HANSI chose to model HANS based on
Case Units and Gross Price per case◦Instead of picking numbers, I used
growth rates in units and $ (my estimates shown in green, blue italic represents forecasts)
◦Forecasts supported by other data (see Excel model)
Alexander Motola, 2013 26
Organic Growth: MFE (INTC) A lot of investors owned MFE because mgmt
claimed the organic growth was fairly high; I didn’t agree at high prices because I thought the organic (non-acquisition) growth was much lower. In fact, my best guess is it was 0%
Revenue Model (R166- 357) R193-243 focuses on acquisition analysis; it
shows revenue contribution from various acquired companies or combinations of acquired companies
For example, MFE bought SCUR+Reconnex+Solidcore (R208-209); look at 3Q09, if they had those companies in 2Q09, revenue growth would have been 3.6% yoy, instead of the reported +18% (R325)
Alexander Motola, 2013 27
Mix Shift: ZOLL Exciting new product is growing much faster than corporate average, becoming a bigger and
bigger part of revenue each quarter, and moving the corporate total growth rate higher (notice
how fast LifeVest grew each Q)
Zoll reported 1Q09 on 1/22/09; stock was $16.54; by 7/28/11 (3Q11 report) stock was at $69.66; if
you caught this mix shift, you made a lot of money; stock was finally acquired by Asahi Kasei on
4/23/12 for $93 as LifeVest continued to grow rapidly
Alexander Motola, 2013 28
Retail Model: CAKE
Alexander Motola, 2013 29
Waterfall Model: RNOWExcel Model R8-23; 2Q11 beat and guidanceR206-222; key metricsR280+ Revenue model
◦Segment & geography (R281-318)◦OBS backlog tracking (R320-328)◦Waterfall (R347-413)◦Deal Metrics, Beat History, D/R◦Start of tracking forex impact (R494-
520)
Alexander Motola, 2013 30
SummaryWhat’s priced in? (expectations)Modeling helps you understand
what makes the business workDifferent Techniques for Different
Business ModelsKeep things simple, estimate the
fewest variables in your forecastFit your projections to the data,
not the other way aroundFocus on what’s material