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#1
12-19-2005, 02:40 PM
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How Do You All Make Revenue Forcasts?
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 [img]/images/graemlins/smile.gif[/img]. 
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#2
12-19-2005, 02:50 PM
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Re: How Do You All Make Revenue Forcasts?
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.
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#3
12-21-2005, 03:43 PM
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Re: How Do You All Make Revenue Forcasts?
[ 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. [/ QUOTE ] 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.
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#4
12-21-2005, 05:00 PM
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Re: How Do You All Make Revenue Forcasts?
[ QUOTE ]
"cash profits" are at least highly dependent on revenues [/ QUOTE ] 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)
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#5
12-21-2005, 05:31 PM
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Re: How Do You All Make Revenue Forcasts?
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.
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#6
12-21-2005, 05:53 PM
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Re: How Do You All Make Revenue Forcasts?
[ QUOTE ]
sales forecasts are most definitely part of the earnings picture [/ QUOTE ] 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.
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#7
12-21-2005, 07:40 PM
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Re: How Do You All Make Revenue Forcasts?
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.
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#8
12-22-2005, 05:30 AM
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Re: How Do You All Make Revenue Forcasts?
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.
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#9
12-22-2005, 07:52 PM
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Re: How Do You All Make Revenue Forcasts?
[ QUOTE ]
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.
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