jpmorgan warnns about anz first wave, page-28

DCF model is only as good as its input assumptions. Depending on what you believe about how a company will operate and how the market will unfold and thats the subject of allot of debate here, valuations can fluctuate wildly depending on what you believe about the future.

If your inputs cash flow forecasts, discount rates and perpetuity growth rates are to bullish, the fair value generated for the company won't be accurate, and it won't be useful when assessing stock prices. Following the "garbage in, garbage out" principle, if the inputs into the model are "garbage", then the output will be similar, the problem I keep highlighting here is that most of the assumptions about the market, growth rates are wildly optimistic, they are based in the context of the market over the last decade and not of the market over the next decade.

DCF only works best when there is a high degree of confidence about future cash flows, hings can get tricky when a company's operations lack what analysts call "visibility" -(lets repeat that word for emphasis VISIBILITY) that is, when it's difficult to predict sales and cost trends with any certainty.

Forecasting cash flows a few years into the future in this environment is hard enough, pushing results into eternity is nearly impossible.

Valuations are fragile in respect to assumptions about the perpetuity growth rates and discount rates. Assume a cash flow perpetuity growth rate of 4% and you get one number, cut that growth to 3%, and the ANZs fair value falls from can be cut by 30% lift the growth to 5% and the value climbs to 50%. Likewise, raising the 11% discount rate by 1% pushes the valuation down to 30%, while a 1% drop boosts the 50%

In a stable clear weather market I fully acknowledge DCF as an invaluable tool, in this market its near worthless.

So how about you guys gives us your DCF assumptions and I can show you what I mean :)