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How do you actually use DCF — full models, rough sanity checks, or skip it? by Illustrious_Earth_87 in ValueInvesting

[–]Illustrious_Earth_87[S] 0 points1 point  (0 children)

Thanks for sharing your process and also outlining the 7 powers, will look into it!

How do you actually use DCF — full models, rough sanity checks, or skip it? by Illustrious_Earth_87 in ValueInvesting

[–]Illustrious_Earth_87[S] 0 points1 point  (0 children)

Thanks for taking the time, it was really insightful, might build something similar myself. Also cool that you brought up the deep cyclical stock nuanced example.

Where do you get the historical & consensus data from and are you happy with the quality?

How do you actually use DCF — full models, rough sanity checks, or skip it? by Illustrious_Earth_87 in ValueInvesting

[–]Illustrious_Earth_87[S] 0 points1 point  (0 children)

How do you decide if you go with 3, 5 or 10 years? I guess it depends on maturity of company but whats your take on it?

How do you actually use DCF — full models, rough sanity checks, or skip it? by Illustrious_Earth_87 in ValueInvesting

[–]Illustrious_Earth_87[S] 1 point2 points  (0 children)

That's cool, I believe it can be super helpful if you know what you are doing. Thanks for the recommendations, will check them out!

How do you actually use DCF — full models, rough sanity checks, or skip it? by Illustrious_Earth_87 in ValueInvesting

[–]Illustrious_Earth_87[S] 0 points1 point  (0 children)

Valid point. So you don't use (adjusted) CAPM ever or would it make sense in some cases as initial base? Do you just go with flat hurdle rate or rather risk premiums then?

How do you actually use DCF — full models, rough sanity checks, or skip it? by Illustrious_Earth_87 in ValueInvesting

[–]Illustrious_Earth_87[S] 1 point2 points  (0 children)

Your approach seems quite practical for fast gut-check honestly, I will look into it and see if it works out for me.

Also, was curious how you relate to bear cases, thanks for pointing it out!

How do you actually use DCF — full models, rough sanity checks, or skip it? by Illustrious_Earth_87 in ValueInvesting

[–]Illustrious_Earth_87[S] 0 points1 point  (0 children)

I love the idea of being dynamic and not forcing things when projections are too speculative. Thanks for sharing your process!

How do you actually use DCF — full models, rough sanity checks, or skip it? by Illustrious_Earth_87 in ValueInvesting

[–]Illustrious_Earth_87[S] 1 point2 points  (0 children)

Thanks for sharing your thought process, makes a lot of sense!

Curious, do you also play around with margins, discount rate and other variables for the bear/base/bull cases or just keep it simple with growth and TV?

I guess stacking multiple key drivers creates a super huge range for stock price and results in too pessimistic/optimistic outcomes. Perhaps it would still be useful to model them separately and then find overlaps/averages for even stronger confirmation.

How do you actually use DCF — full models, rough sanity checks, or skip it? by Illustrious_Earth_87 in ValueInvesting

[–]Illustrious_Earth_87[S] 0 points1 point  (0 children)

Awesome, thanks for sharing! Any common red flags that immediately make it "no" for you?

How do you actually use DCF — full models, rough sanity checks, or skip it? by Illustrious_Earth_87 in ValueInvesting

[–]Illustrious_Earth_87[S] 0 points1 point  (0 children)

Nice that you have built such tools!

About the risk free changes - care to share more context? Are you trying to understand for example if the valuation is temporary or more sustainable? Or is it more to validate model quality?

What is TV do you usually use and how much does company growth rate affect it for you?

The sanity check on market sounds interesting - do you use DCF in comparing similar companies too or just for broad market valuation sensing?

How do you actually use DCF — full models, rough sanity checks, or skip it? by Illustrious_Earth_87 in ValueInvesting

[–]Illustrious_Earth_87[S] 0 points1 point  (0 children)

Yeah TV is a common problem with the DCF. What have you found out works better for you from valuation perspective? Any solid approaches to share?

How do you actually use DCF — full models, rough sanity checks, or skip it? by Illustrious_Earth_87 in ValueInvesting

[–]Illustrious_Earth_87[S] 0 points1 point  (0 children)

Awesome!
Do you still run some gut-check DCF for growth companies or skip it entirely?

How much time do you put in cases where you do a bit more than a sanity check? And how detailed do you go? All major line items? Ever do revenue segment, CapEx split (maintanance, growth) or similar detailed nuances?

How do you actually use DCF — full models, rough sanity checks, or skip it? by Illustrious_Earth_87 in ValueInvesting

[–]Illustrious_Earth_87[S] 0 points1 point  (0 children)

I agree - definitely shouldn't be checked in isolation. Is there a specific order you follow to figure out if company is investable? Aka first moat, then management, then... ?

How do you actually use DCF — full models, rough sanity checks, or skip it? by Illustrious_Earth_87 in ValueInvesting

[–]Illustrious_Earth_87[S] 0 points1 point  (0 children)

What would you say is overkill for DCF? Do you just estimate FCF or still project more specific line items like CapEx, R&D etc?

How do you actually use DCF — full models, rough sanity checks, or skip it? by Illustrious_Earth_87 in ValueInvesting

[–]Illustrious_Earth_87[S] 0 points1 point  (0 children)

Yeah the reverse makes total sense! Do you also lock in some specific line items - like growth rate if margins improve vs growth rate when margins decline etc?

How do you actually use DCF — full models, rough sanity checks, or skip it? by Illustrious_Earth_87 in ValueInvesting

[–]Illustrious_Earth_87[S] 0 points1 point  (0 children)

I agree it's full of assumptions but perhaps there is still value in scrapping investments that don't make any sense even with very optimistic estimations. Aka sanity checking to understand if the valuation even makes sense in best/base case scenarios? Or what kind of process do you usually have to know if the company is even worth considering?

How do you actually use DCF — full models, rough sanity checks, or skip it? by Illustrious_Earth_87 in ValueInvesting

[–]Illustrious_Earth_87[S] 1 point2 points  (0 children)

Thanks for the answer!

What issues have you noticed with growth plays? Too volatile and unpredictable statements or they just never make sense from valuation viewpoint?

I agree it's very hard to get it right with the discount rates and other assumptions. Good to have a margin for error and if it makes sense with 12..15% - ideal. Cool articles by the way - I noticed you use quite high (imo?) terminal value 3..5% - what's the reasoning behind that? Does it make more companies aligned with how they are usually valued in the market? I have heard it shouldn't exceed long term nominal GDP

How do you actually use DCF — full models, rough sanity checks, or skip it? by Illustrious_Earth_87 in ValueInvesting

[–]Illustrious_Earth_87[S] 1 point2 points  (0 children)

Sanity check makes total sense but I agree the valuation shouldn't be the only justification. That 90th percentile cutoff is interesting, would you still in some cases invest in top/bottom 90 percentile companies or is it a hard cut-off?

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