How Do You All Make Revenue Forcasts?

[adios]

Out of curiosity how do you all make revenue (sales) forcasts for a company that you invest in?

From a another thread these companys were listed as undervalued I beleive:

Altria Group
American Express
Berkshire Hathaway
Bristol-Myers Squibb

In deciding to buy one of these wouldn't one have to have some idea that the revenues for these companys were going to be better than what was forcast by the market and decide that the market was being too pessimistic? In order to determine what the "market" estimates are on revenues wouldn't one have to use the estimate of analysts? Just curious /images/graemlins/smile.gif.

[buffett]

Change "revenues" to "cash profits" and you're right. This type of thinking is explored in a more in depth way in Rappaport & Mauboussin's book Expectations Investing (http://www.amazon.com/gp/product/159139127X/qid=1135018218/sr=8-1/ref=pd_bbs_1/102-5710780-0500153?n=507846&s=books&v=glance).

[adios]

[ QUOTE ]
Change "revenues" to "cash profits" and you're right. This type of thinking is explored in a more in depth way in Rappaport & Mauboussin's book Expectations Investing (http://www.amazon.com/gp/product/159139127X/qid=1135018218/sr=8-1/ref=pd_bbs_1/102-5710780-0500153?n=507846&s=books&v=glance).

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Ok but "cash profits" are at least highly dependent on revenues. Thanks for the book recommendation. Probably won't get around to reading it until after the 1st but I will get around to it.

[buffett]

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"cash profits" are at least highly dependent on revenues

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Consider Wendy's:

Year Revenues Operating Profit
1999 $1,603 $278
2000 $1,712 $267
2001 $1,819 $234
2002 $2,010 $263
2003 $2,191 $264
2004 $2,433 $272

(figures exclude Tim Horton's, Baja Fresh, and other ancillary brands, source: Trian's recent 13D)

[adios]

I understand your point but if sales went in the dumper earnings would be less. Therefore sales forecasts are most definitely part of the earnings picture. Put another way if you expected lower profit margins but forecast increased sales that resulted in flat earnings over a period of time, if the sales came in much less than anticipated, earnings would decline substantially.

[buffett]

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sales forecasts are most definitely part of the earnings picture

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Yes, but your question was regarding variant perceptions from Mr. Market. And Mr. Market, bipolar though he is, at least attempts to make his judgments based on cash flow. Revenues, assets, and other things are all variables in the equation, but in aggregate Mr. Market's regression model is most dependent on cash flow.

[adios]

But those estimates are based on perceptions of future revenues.

[BadBoyBenny]

Adios,

Typically management will publish their own forecasts you can use that information, combined with their past history of meeting, exceeding, or not meeting their forecasts as a guide. Berkshire is a tough example because it is so diverse and complex in it's sum that it would be damn near impossible to do it by looking at individual businesses. I doubt Buffet gives revenue forecasts anyway, his targets would probably deal with equity value or retained earings, not revenue. not only will this type of estimate be provded, but the 10-k will often list specific risks that mangement thinks could impact their ability to meet their estimates. Each person reading the 10-k could discount these risks differently.

Also, market pessimism may not necessarily be related to next years revenue, but instead people could mean that the market as a whole is too optimistic/pessimistic about long term trends, or extraordinary items like potential litigation.

As far as whether an individual security is undervalued, it may be that the person making the statement agrees with the market on revenue and cash flow estimates, but believes the compan yshould be worth a higher ratio to these amounts than they are.

Disclaimer -- I have no idea whether I would personally consider the stocks provided as undervalued or overvalued.

[adios]

Hi Benny,

Ok I understand your points is that a stock may be undervalued because the risks inherent in producing "earnings" are not as great as the market perceives them to be. For me a lot of companys have fairly straightforward business models but I don't have the wherewithall to predict unexpected economic growth (either negative or positive) generally speaking.

[DesertCat]

[ QUOTE ]
Out of curiosity how do you all make revenue (sales) forcasts for a company that you invest in?

From a another thread these companys were listed as undervalued I beleive:

Altria Group
American Express
Berkshire Hathaway
Bristol-Myers Squibb

In deciding to buy one of these wouldn't one have to have some idea that the revenues for these companys were going to be better than what was forcast by the market and decide that the market was being too pessimistic? In order to determine what the "market" estimates are on revenues wouldn't one have to use the estimate of analysts? Just curious /images/graemlins/smile.gif.

[/ QUOTE ]

Typically you would use the last five years of results to extrapolate. You could use anything between 3-10 years of history. To be an "intelligent investor" you wouldn't rely on analysts for estimates. You'd use your own judgement and "common sense", you'd need to know the inner mechanics and assumptions behind any forecast.

The reality is, forecasting this way usually won't give you substantially different results than the analysts in most cases (after all, usually they are doing the same thing). This is especially true with large cap stocks like you listed, they are well covered and researched. It's hard to find obvious discrepencies between price and value at those sizes. The smaller the capitalization, the fewer analysts typically cover a stock, and small enough, no analysts will cover it.

If you look hard enough you can find exceptions, and odd valuations. For example, today you can find decent steel companies trading for as little as a 4 PE. Some analyst, pointing out the risks of steel prices declining, may argue the PE ratio is reasonable. He's in effect, reflecting the market's opinion. It's up to you to use your judgement and analysis to decide if that opinion is warranted or not.

[BadBoyBenny]

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For me a lot of companys have fairly straightforward business models but I don't have the wherewithall to predict unexpected economic growth (either negative or positive) generally speaking.

[/ QUOTE ]

Nothing wrong with that. Some people think they do, and some don't it requires a certain amount of arrogance to think you can outsmart the market.

I think with large companies like the ones you listed, any decision to buy the individual security over some index or bucket of stocks in the sector, should usually be based on a really long term bet on their management\business model\strategy. Any short term bet would most likely be based on a specific major product that you believe in, or a percieved overreaction to some negative news.

FWIW I haven't bought a share in any company worth over a billion in market cap since I was a naive 21 year old. Now that I am a naive 26 year old, I feel that I can sometimes find inefficiencies in smaller securities that are watched and analyzed by less people. And my retirement money is mostly in indexes, any money I make in individual stocks will be retire really young money.

[buffett]

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it requires a certain amount of arrogance (http://www.fool.com/boringport/2000/boringport000103.htm) to think you can outsmart the market

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