Nicholas Lin
b891783b23
Financial services plugins for Claude Code covering: - Equity Research - Financial Analysis (comps, DCF, LBO, 3-statements, check-deck, check-model) - Investment Banking (strip profiles, CIM, pitch decks, merger models) - Private Equity (deal screening, IC memos, portfolio monitoring) - Wealth Management
22 KiB
22 KiB
Task 3: Valuation Analysis - Detailed Workflow
This document provides step-by-step instructions for executing Task 3 (Valuation Analysis) of the anthropic-initiation-coverage skill.
Task Overview
Purpose: Perform comprehensive valuation using DCF, comparables, and precedent transactions.
Prerequisites: ⚠️ Verify before starting
- Required: Financial model from Task 2
- Projected income statements
- Projected cash flows
- Revenue and EBITDA forecasts
- DCF inputs (unlevered FCF)
⚠️ CRITICAL: DO NOT START THIS TASK UNLESS TASK 2 IS COMPLETE
This task requires the financial model from Task 2. Starting without it will result in incomplete work.
IF TASK 2 IS NOT COMPLETE: Stop immediately and inform the user that Task 2 (Financial Modeling) must be completed first. Do not attempt to proceed or create placeholder valuations.
Output: Valuation Analysis (4-6 pages + Excel tabs)
- DCF analysis with sensitivity tables
- Comparable companies analysis
- Precedent transactions (if applicable)
- Valuation football field
- Price target and recommendation
Input Verification
BEFORE STARTING - CHECK:
- Task 2 complete? (Financial model exists)
- Model file path/location known?
- Can access projected financials from model?
Required from model:
- Projected FCF (5 years)
- Revenue projections
- EBITDA projections
- Terminal year metrics
- Balance sheet data (debt, cash, shares)
IF VERIFICATION FAILS: Stop and complete Task 2 (Financial Modeling) before proceeding.
Detailed Methodology Reference
For deep dive on valuation methodologies, formulas, and theory, see: valuation-methodologies.md
This workflow document focuses on execution steps. Reference the methodology file for:
- DCF theory and formulas
- WACC calculation details
- Terminal value methods
- Comparable companies theory
- Precedent transactions theory
Step-by-Step Valuation Workflow
Step 1: Extract Data from Financial Model
From Task 2's financial model, extract:
-
Projected Financials (5 years)
- Revenue by year (2025E-2029E)
- EBITDA by year
- EBIT by year
- Tax rate
- D&A by year
- CapEx by year
- Change in NWC by year
-
Unlevered Free Cash Flow
Extract from DCF Inputs tab in financial model: 2025E 2026E 2027E 2028E 2029E EBIT $XXX $XXX $XXX $XXX $XXX × (1 - Tax Rate) = NOPAT $XXX $XXX $XXX $XXX $XXX + D&A $XXX $XXX $XXX $XXX $XXX - CapEx ($XX) ($XX) ($XX) ($XX) ($XX) - Chg in NWC ($XX) ($XX) ($XX) ($XX) ($XX) = Unlevered FCF $XXX $XXX $XXX $XXX $XXX -
Balance Sheet Data (current)
- Total debt
- Cash & equivalents
- Net debt (Debt - Cash)
- Diluted shares outstanding
-
Scenario Data
- Bull case revenue CAGR and terminal margin
- Base case revenue CAGR and terminal margin
- Bear case revenue CAGR and terminal margin
Step 2: Build DCF Analysis
A. Calculate WACC
1. Determine Risk-Free Rate
- Use 10-year Treasury yield (check current rate)
- Example: 4.0-4.5% as of late 2024
2. Determine Cost of Equity (CAPM)
Cost of Equity = Risk-Free Rate + Beta × Equity Risk Premium
Inputs:
- Risk-Free Rate: [Current 10-year Treasury, e.g., 4.2%]
- Beta: [Company beta from Bloomberg/FactSet or peer average]
- Equity Risk Premium: 5-6% (historical average)
Example:
Cost of Equity = 4.2% + 1.3 × 5.5% = 11.35%
3. Determine Cost of Debt
Cost of Debt = Current borrowing rate or implied yield on bonds
For private companies:
Cost of Debt = Risk-Free Rate + Credit Spread (based on rating)
Example:
Cost of Debt (pre-tax) = 6.5%
Cost of Debt (after-tax) = 6.5% × (1 - 25% tax rate) = 4.875%
4. Determine Capital Structure
Use market values (not book values):
Market Value of Equity (E) = Share Price × Shares Outstanding
Market Value of Debt (D) = Total Debt (use book value if bonds not traded)
Total Value (V) = E + D
Weight of Equity = E / V
Weight of Debt = D / V
Example:
E = $5,000M (90.9%)
D = $500M (9.1%)
V = $5,500M (100%)
5. Calculate WACC
WACC = (E/V × Cost of Equity) + (D/V × Cost of Debt × (1 - Tax Rate))
Example:
WACC = (90.9% × 11.35%) + (9.1% × 6.5% × (1 - 25%))
WACC = 10.32% + 0.44% = 10.76%
Round to: 10.8% for base case
B. Calculate Terminal Value
Method 1: Perpetuity Growth (Preferred)
Terminal Value = FCF(2029) × (1 + g) / (WACC - g)
Where:
- FCF(2029) = Final year unlevered FCF from model
- g = Perpetual growth rate (typically 2.0-3.0%)
- Should not exceed long-term GDP growth
- Use 2.5% as base case
Example:
FCF(2029) = $500M
g = 2.5%
WACC = 10.8%
Terminal Value = $500M × (1.025) / (0.108 - 0.025)
Terminal Value = $512.5M / 0.083 = $6,175M
Method 2: Exit Multiple (Alternative)
Terminal Value = EBITDA(2029) × Exit Multiple
Where:
- Exit Multiple = Current peer trading median (e.g., 12-15x EBITDA)
Example:
EBITDA(2029) = $800M
Exit Multiple = 13x
Terminal Value = $800M × 13x = $10,400M
Choose one method or average both.
C. Discount Cash Flows to Present Value
PV of Projected FCF = Σ [FCFt / (1 + WACC)^t] for t = 1 to 5
Example:
Year FCF Discount PV of FCF
($M) Factor ($M)
2025 $250 1/(1.108)^1 = 0.9026 $226
2026 $320 1/(1.108)^2 = 0.8147 $261
2027 $390 1/(1.108)^3 = 0.7353 $287
2028 $450 1/(1.108)^4 = 0.6636 $299
2029 $500 1/(1.108)^5 = 0.5988 $299
Total PV: $1,372M
PV of Terminal Value = Terminal Value / (1 + WACC)^5
PV of Terminal Value = $6,175M / (1.108)^5 = $6,175M × 0.5988 = $3,697M
Enterprise Value = $1,372M + $3,697M = $5,069M
D. Calculate Equity Value and Price Per Share
Enterprise Value $5,069M
- Net Debt (Debt - Cash) ($450M)
+ Non-operating Assets $0M
- Minority Interest $0M
- Preferred Stock $0M
= Equity Value $4,619M
Diluted Shares Outstanding 100M
Price Per Share = $4,619M / 100M = $46.19
Current Stock Price: $42.00
Implied Upside: 10.0%
E. DCF Sensitivity Analysis CRITICAL
Table 1: WACC vs. Terminal Growth Rate
Create 2-way sensitivity table:
Price Per Share ($) Terminal Growth Rate
WACC 1.5% 2.0% 2.5% 3.0% 3.5%
9.0% $52 $55 $59 $63 $68
9.5% $48 $51 $54 $58 $62
10.0% $45 $48 $51 $54 $57
10.5% $42 $45 $47 $50 $53
11.0% $40 $42 $44 $47 $50
11.5% $38 $40 $42 $44 $47
12.0% $36 $38 $40 $42 $44
Base Case: WACC = 10.8%, g = 2.5% → $46
Format as heatmap: Green (high values) → Yellow → Red (low values)
Table 2: Revenue CAGR vs. Terminal EBITDA Margin
Price Per Share ($) Terminal EBITDA Margin (2029E)
Revenue CAGR 28% 30% 32% 34% 36%
15% $38 $42 $46 $50 $54
20% $42 $46 $51 $56 $61
25% $46 $51 $56 $62 $68
30% $51 $56 $62 $68 $75
35% $56 $62 $68 $75 $83
Base Case: Rev CAGR = 25%, EBITDA Margin = 32% → $56
Step 3: Comparable Companies Analysis
A. Select Comparable Companies
Selection Criteria:
- Same industry/sector (primary requirement)
- Similar business model
- Comparable size (market cap, revenue)
- Similar growth profile
- Similar geographies
Identify 5-10 peer companies:
- [Peer 1] - Direct competitor
- [Peer 2] - Direct competitor
- [Peer 3] - Adjacent player
- [Peer 4] - Similar business model
- [Peer 5] - Regional competitor
- [Add 3-5 more]
Document rationale for each peer selected.
B. Gather Peer Financial Data
For each comparable, gather:
- Current stock price
- Shares outstanding (diluted)
- Market capitalization
- Total debt and cash (for EV calculation)
- Enterprise value
- LTM (Last Twelve Months) financials:
- Revenue
- EBITDA
- EBIT
- Net Income
- NTM (Next Twelve Months) consensus estimates
- Revenue growth rate
- EBITDA margin
Data sources:
- FactSet, CapitalIQ, Bloomberg (preferred)
- Company 10-Ks/10-Qs for actuals
- Consensus estimates from Yahoo Finance, Seeking Alpha (if pro tools unavailable)
C. Calculate Valuation Multiples
For each peer, calculate:
EV/Revenue (LTM) = Enterprise Value / LTM Revenue
EV/Revenue (NTM) = Enterprise Value / NTM Revenue (est.)
EV/EBITDA (LTM) = Enterprise Value / LTM EBITDA
EV/EBITDA (NTM) = Enterprise Value / NTM EBITDA (est.)
P/E (NTM) = Market Cap / NTM Net Income (est.)
D. Create Comparable Companies Table (MANDATORY FORMAT)
COMPARABLE COMPANIES ANALYSIS
Company Ticker Mkt Cap EV/Rev EV/Rev EV/EBITDA EV/EBITDA P/E Rev EBITDA
($B) LTM NTM LTM NTM NTM Growth Margin
Peer A PRA 45.2 3.5x 3.2x 15.2x 13.8x 25x 18% 23%
Peer B PRB 32.8 3.2x 2.9x 14.1x 12.5x 22x 15% 23%
Peer C PRC 28.5 2.8x 2.6x 12.8x 11.2x 20x 12% 22%
Peer D PRD 52.1 4.1x 3.7x 17.5x 15.2x 29x 22% 23%
Peer E PRE 38.9 3.6x 3.3x 15.8x 14.1x 25x 17% 23%
Peer F PRF 41.2 3.7x 3.4x 16.1x 13.9x 26x 19% 23%
Peer G PRG 35.5 3.3x 3.0x 14.5x 12.8x 23x 16% 22%
[Target] TRGT 38.0 3.4x 3.1x 14.8x 13.0x 24x 17% 23%
STATISTICAL SUMMARY
Maximum 52.1 4.1x 3.7x 17.5x 15.2x 29x 22% 23%
75th Percentile 45.2 3.7x 3.4x 16.1x 14.1x 26x 19% 23%
Median 38.9 3.5x 3.2x 15.2x 13.8x 25x 17% 23%
25th Percentile 32.8 3.2x 2.9x 14.1x 12.5x 22x 15% 22%
Minimum 28.5 2.8x 2.6x 12.8x 11.2x 20x 12% 22%
Note: Market data as of [Date]. LTM = Last Twelve Months. NTM = Next Twelve Months.
Source: FactSet, company filings, [Analyst] estimates.
CRITICAL: The statistical summary (max/75th/median/25th/min) is MANDATORY.
E. Apply Multiples to Target Company
Choose primary multiple (typically EV/EBITDA for mature companies):
Target Company NTM EBITDA = $550M (from financial model)
Apply Median Peer Multiple:
Peer Median EV/EBITDA (NTM) = 13.8x
Implied EV = $550M × 13.8x = $7,590M
Apply 25th Percentile (Conservative):
25th Percentile EV/EBITDA (NTM) = 12.5x
Implied EV = $550M × 12.5x = $6,875M
Apply 75th Percentile (Optimistic):
75th Percentile EV/EBITDA (NTM) = 14.1x
Implied EV = $550M × 14.1x = $7,755M
Valuation Range (Comps): $6,875M - $7,755M
Midpoint: $7,315M
Convert to Equity Value:
Implied EV (Median) $7,590M
- Net Debt ($450M)
= Implied Equity Value $7,140M
Shares Outstanding 100M
Implied Price/Share $71.40
Justify Premium/Discount:
- Target is growing 17% vs. peer median 17% → In-line
- Target EBITDA margin 23% vs. peer median 23% → In-line
- Target market position → [Justify premium/discount]
- Conclusion: Apply median multiple (no adjustment)
Step 4: Precedent Transactions (Optional)
Note: Only if M&A is relevant for this sector/company.
A. Identify Relevant Transactions
Search for 5-10 M&A deals:
- Same industry, last 3-5 years
- Similar size (0.5x to 2x target's size)
- Announced and closed deals
Example:
PRECEDENT TRANSACTIONS ANALYSIS
Date Target Acquirer Deal EV/Rev EV/EBITDA Premium Rationale
Value($B) LTM LTM
Q1 2024 Comp A Strategic $5.2B 4.2x 16.5x 35% Consolidation
Q3 2023 Comp B PE Firm $3.8B 3.8x 14.2x 28% Platform
Q4 2023 Comp C Strategic $4.5B 4.0x 15.8x 32% Geographic
Q2 2023 Comp D Strategic $6.1B 4.5x 17.2x 38% Strategic fit
Q1 2023 Comp E PE Firm $3.2B 3.5x 13.5x 25% Carve-out
Median 4.0x 15.8x 32%
Source: CapitalIQ, company filings, press releases.
B. Apply to Target Company
Target Company LTM EBITDA = $500M
Precedent Median EV/EBITDA (LTM) = 15.8x
Implied EV (Precedent) = $500M × 15.8x = $7,900M
Note: Precedent multiples typically 10-20% higher than trading comps
due to control premium and synergies.
Step 5: Valuation Reconciliation
A. Create Valuation Summary Table
VALUATION SUMMARY
Method Low Base High Weight Weighted Value
DCF Analysis $42 $46 $51 50% $23.00
Trading Comps (NTM) $64 $71 $78 40% $28.40
Precedent Trans. $70 $79 $88 10% $7.90
-------
Weighted Average Target 100% $59.30
Rounded Price Target: $59.00
Current Price (as of [Date]): $42.00
Upside to Target: 40% ($59.00 / $42.00 - 1)
B. Determine Weighting Rationale
Typical Weighting:
- DCF: 40-60% (higher when forecasts reliable)
- Trading Comps: 25-40% (reflects market sentiment)
- Precedent Trans: 10-25% (lower unless M&A likely)
For this example:
- DCF 50%: High confidence in projections
- Comps 40%: Robust peer set
- Precedent 10%: M&A unlikely near-term
C. Create Valuation Football Field Chart
VALUATION FOOTBALL FIELD
Method Low ◄────────── Range ──────────► High
DCF Analysis $42 ▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓ $51
Trading Comps (NTM) $64 ▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓ $78
Precedent Trans. $70 ▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓ $88
↑
Current: $42
─────────────────────────────────────────────────────────
Valuation Range $42 $88
Price Target: $59 (weighted average)
Color code:
- DCF: Blue
- Trading Comps: Green
- Precedent Trans: Orange
- Vertical line at current price: Red dashed
- Vertical line at target: Black solid
D. Scenario-Based Valuations
VALUATION BY SCENARIO
Scenario Probability Revenue EBITDA DCF Comps Weighted
CAGR Margin Value Multiple Avg
Bear Case 20% 18% 28% $38 11.5x $42
Base Case 60% 25% 32% $46 13.8x $59
Bull Case 20% 32% 36% $58 16.0x $82
Expected Value (probability-weighted): $59
Step 6: Final Price Target & Recommendation
═══════════════════════════════════════════════════════════
INVESTMENT RECOMMENDATION
═══════════════════════════════════════════════════════════
Current Price: $42.00 (as of [Date])
Price Target: $59.00 (12-month)
Upside/(Downside): +40.5%
Rating: BUY / OUTPERFORM
Valuation Methodology: Based on weighted average of DCF (50%),
trading comparables (40%), and precedent
transactions (10%).
Time Horizon: 12 months
───────────────────────────────────────────────────────────
KEY INVESTMENT CATALYSTS
───────────────────────────────────────────────────────────
1. New Product Launch (Q2 2025)
- Expected to drive 15-20% revenue acceleration
- Already seeing strong pre-orders
2. Margin Expansion (FY2025-2026)
- Operating leverage from scale
- Path to 35% EBITDA margin (from current 28%)
3. Market Share Gains (Ongoing)
- Taking share from legacy competitors
- Net Promoter Score improvement
4. International Expansion (H2 2025)
- Entry into European markets
- Potential $200M incremental revenue opportunity
5. Potential M&A Target (12-18 months)
- Strategic fit for larger players
- Precedent transactions suggest 30-40% premium
───────────────────────────────────────────────────────────
KEY RISKS TO PRICE TARGET
───────────────────────────────────────────────────────────
Downside Risks:
1. Competitive Pressure (High probability, -15% impact)
- New entrant launched competing product
- Could pressure pricing and market share
2. Execution Risk (Medium probability, -10% impact)
- New product launch delays or underperformance
- Management turnover
3. Macro Slowdown (Medium probability, -20% impact)
- Economic recession would impact customer spending
- Operating leverage would reverse
4. Regulatory Risk (Low probability, -25% impact)
- Potential new regulations in key market
- Would increase compliance costs
Upside Risks:
1. M&A Bid (Low probability, +35% impact)
- Strategic acquirer pays control premium
2. Beat-and-Raise (Medium probability, +10% impact)
- Consistent outperformance vs. estimates
═══════════════════════════════════════════════════════════
Quality Standards
DCF Quality Checks
- WACC properly calculated with documented components
- Terminal value reasonable (< 70% of total enterprise value)
- Sensitivity analysis covers realistic ranges (±200-300bps for WACC, ±100bps for terminal growth)
- Unlevered FCF properly calculated from EBIT
- Enterprise to equity value bridge correct
- Share count is diluted shares, not basic
Comparables Quality Checks
- 5-10 comparable companies selected
- Peer selection defensible (document why each peer was chosen)
- Statistical summary included (max/75th/median/25th/min) - MANDATORY
- Multiple selection appropriate (EV/EBITDA for mature, EV/Revenue for high-growth)
- Premium/discount justified with specific factors
- Data sourced properly with dates noted
Overall Valuation Quality Checks
- At least 2 valuation methods used (DCF + Comps minimum)
- Weighting explained and appropriate
- Valuation range provided (low/base/high), not just point estimate
- Scenarios analyzed (Bull/Base/Bear)
- Sanity checks performed (see below)
- All assumptions documented with rationale
Sanity Checks
Always perform these validation checks:
-
Historical Multiple Check
- Is implied multiple in line with company's historical trading range?
- If not, explain why
-
Peer Comparison
- Is premium/discount vs. peers justified by fundamentals?
- Check: growth, margins, market position
-
Implied Growth Check
- What growth is market pricing in at current price?
- Is that reasonable given company trajectory?
-
Market Cap Reasonableness
- Does total market cap make sense given company size and peers?
- Would company be too large/small relative to industry?
-
Terminal Value Check
- Is terminal value < 60-70% of total enterprise value?
- If > 70%, projections may not be long enough
-
WACC Reasonableness
- Is WACC 8-14% range for typical companies?
- Tech/high-growth: 10-14%
- Mature/stable: 7-10%
-
Implied Returns Check
- What IRR from current price to target over 12 months?
- Is that consistent with recommendation rating?
Output Files
Create the following deliverables:
1. Valuation Analysis Document
File: [Company]_Valuation_Analysis_[Date].md (written analysis)
Contents (4-6 pages):
- Executive summary with price target
- DCF analysis (1 page) with sensitivity table
- Comparable companies analysis (1 page) with statistical summary
- Precedent transactions (0.5 page) if applicable
- Valuation summary and football field (0.5 page)
- Investment recommendation (1 page)
- Key catalysts and risks (1 page)
2. Excel Valuation Tabs
Add to Task 2's financial model file: [Company]_Financial_Model_[Date].xlsx
IMPORTANT: Do NOT create a separate Excel file. Add these tabs to the existing financial model from Task 2. This keeps all quantitative data in one place.
Tabs to add:
- DCF tab with full calculations
- Sensitivity analysis tab
- Comps tab with peer data
- Precedent transactions tab (if applicable)
- Valuation summary tab
Success Criteria
A successful valuation analysis should:
- Use at least 2 methods (DCF + Comps minimum)
- Include comprehensive DCF sensitivity analysis (2-way tables)
- Include statistical summary in comps (max/75th/median/25th/min)
- Provide valuation range (low/base/high), not point estimate
- Document all key assumptions with clear rationale
- Perform sanity checks
- Arrive at defensible price target
- Provide clear buy/hold/sell recommendation
- Identify 3-5 key catalysts
- Identify 3-5 key risks
- Be auditable and transparent
Next Steps
After completing Task 3, the valuation analysis will be used for:
- Task 4 (Charts): Create DCF sensitivity heatmaps, valuation football field, scenario comparison charts
- Task 5 (Report Assembly): Integrate valuation analysis into final report
The price target and recommendation are the foundation of the final investment recommendation in the equity research report.