Deep Dive Framework
Time to read: 4 min
Welcome to The Retail Deep Dive. So glad to have you join us! Our mission is to analyse technology and consumer discretionary companies that have exciting prospects and unpack them in a logical way for our readers.
In this issue, we will be discussing our Deep Dive framework. If you are thinking of skimming through this issue - stop! To gain maximum value from our deep dives, it is crucial that you first understand what to expect from them. A simply analogy comes to mind: when you refill a printer's ink, you have to make sure you insert the correct colour cartridge into the correct slot. The slots have an order, and that is what ensures the printer works properly. This issue tries to achieve a similar result by creating "content" slots in your mind so that when you read the deep dives (the ink cartridges), you can quickly make sense of the content and gain value from them.
Deep Dive Framework
Deep Dive is the name we give our in-depth research of public companies. We publish 1 Deep Dive per month and they follow the following structure:
Business Model
First, we break down the company's total revenue into its various segments. This is done at the beginning to allow further analysis of each business segment.
Analysis
We then compare the company's product/service with its competition to determine if the company has a competitive advantage. We split this segment into clearly defined bull and bear arguments to really draw out the pros and cons of the company's business.
Acquisitions
Next, we analyse the acquisitions to ascertain a company's future operations.
Financials
Revenue growth
EBITDA growth
Margins
FCF growth
FCF Yield
Net debt/EBITDA
To assess financials, we look at the 6 key metrics above. They give us a good overview of the company's growth, profitability and risk.
Valuation
To assess valuations, we first look at relative valuations with its peers and with the company's own historical operations. We may also use a simplified DCF model where appropriate.
Management
To assess management, we like to see high insider ownership, and clear "buy" signals from insiders.
Risks
Finally, we try to brainstorm any additional risks the company might face.
Relative Valuation Framework
In our relative valuation process, we compare the company in question with its historical operations as well as with the operations of its industry peers. The 4 things we look at are:
Revenue growth rates
EBITDA growth rates
FCF growth rates
Gross margins
From these comparisons, we determine a possible multiple the company may trade at in the future. This multiple is then used to derive the company's future market capitalisation, which in turn gives us insight into any potential upside or downside in the stock price.
On top of that, we employ a scenario analysis by deriving a "worst" case and a "best" case multiple as well. This allows us to glean a clearer picture of how the stock price may move.
Usually, a 10% weightage is given to each of the "worst" and "best" case scenarios, while an 80% weightage is given to the "normal" scenario. However, the weightage is flexible. If we have greater confidence that the "worst" case scenario would play out, a greater weightage will be assigned to that scenario.
After deriving the future market cap of the company through our scenario analysis, we apply a margin of safety of 10% to finally arrive at our target price.
Data Sources
Our figures for our financial analysis are taken directly from TIKR Terminal. This includes both historical data as well as analyst estimates.
Let's Wrap Up
To preface once again, we are a group of retail investors who are far from experts in the investment field. Nonetheless, we still wish to document our investment journey, share our insights and provide as much value in our articles where possible.
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Till next time!
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Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own due diligence or consult a financial advisor. Investing includes risks, including loss of principal.