"CK, Spreadsheets based on real cashflow, then running DCF model on figures? How many years do you go out? Assume you don't use 2 stage growth model but just straight growth model? Interested to hear what you include in spreadsheet? Do they also cover balance sheet & P & L, i.e. gearing ratios, margins etc or just run figures out of cashflow statement? How detailed on say WES, do you run model on each part of business or just overall results for WES? Regards Buffett PS Assume you are only plugging figures into your templates which are the same for each business? So don't distinguish between say a bank & retailer & only stick to the say numbers?"
I do pretty much what you describe. Briefly :
* I use the same template for all businesses for consistent comparison * I dont go into business segments * I use a minimum of 6 years history, and project out only 12 months (I dont like assuming too much about growth) * I update my spreadsheets every half-year * I use only balance sheet and cash flow statements * I split the balance sheet into operating and non-operating assets (eg investments etc - which I net out with cash and debt) * I calculate Free Cash Flow per share (with the usual working capital adjustments) * I calculate asset impairment (depreciation, amortisation etc) - as I need to know how much cash needs to go back into the business to keep it going * I assume a re-investment rate - ie what % is re-invested each year for the acquisition of new assets (which will contribute incrementally to revenues and profits) * I calculate ratios (free cash flow/ assets, free cash flow / revenue, revenue to assets - This is necessary to project *NEXT YEAR'S NUMBERS* I need to know whether the company meets or exceeds *MY* expectations rather than analyst expectations * I dont do a DCF, because the choice of discount rate is too arbitrary for my liking, instead I calculate a *PAYBACK* period based on the next 12 months projected Free Cash Flow per share, the faster the payback, the higher the multiple I am prepared to pay (PE if you like)
I hope that gives you a bit of a flavour of what I do, I could write a book about it, but its pretty much an adaptation of whats out there along with 20 years of thinking I have put into it.
PS. The only company where I go to the nth degree is WOW, mainly because its my largest position, and also because trying to predict WOW's revenues has became a national sport. My methods allow me to be approximately right all the time and not precisely wrong (thats a Buffettism). I need to make sure that the companies generate profits from their assets at a rate comfortably above the cost of financing those assets, they have resilient trading margins, and that the trends in the key ratios are OK, preferably improving and definetely not deteriorating.
(20min delay)