I’m pretty familiar with doing DCF calculations, and I’m well aware of their incredible subjectivity, the garbage in - garbage out problem, and that you can make them as simple or as complicated as you want to.
But I was wondering if anyone had any tips on how to construct a DCF for a company that has several business lines, each with their own growth rates, cost structures, etc. Revenue and COGS could easily be modeled by business line and then aggregated into an overall DCF. But then there are certain important items such as depreciation or debt that might not be easily allocated. (Like, how much of a company’s interest-bearing debt can really be specifically allocated as belonging to a particular biz line?) In theory, I suppose you could do a DCF for each business line, probably each warranting its own cost of capital (WACC or Ke), but you’d have to have really good financial info. And then I’d go nuts.
Anyway, supposing I wanted to get granular and value the company by incorporating the anticipated performance of various business lines, what might be a good way to approach the problem without getting too complex?
I think it depends. In college I built a DCF for Autozone and I think I remembering modeling three business lines seperately. How material is the depreciation and debt interest ultimately in the valuation?
Not sure how material that stuff is. In fact, I don’t have any financial statements at all.
But I’m thinking I’d probably model a few business lines solely in terms of revenues, COGS, and maybe some clearly related expenses, then aggregate these into an overall company DCF, using one cost of capital, one overall capex, etc. Oh, and some of these business lines are international. I really don’t think the quality of info I’ll get will be very helpful anyway. Just curious how this might be approached in a reasonable way.
I think it’s going to really depend on what the data looks like. My rule of thumb is keep it as simple as possible but making sure I don’t aggregate things that are going to act very different (different growth rates in income, cost, etc). Is the depreciation real estate type depreciation or “real” depreciation? The latter requires forecasting buying more stuff at the end of their useful lives, which I imagine could be pretty material to valuation. The former I doubt would be very useful besides some tax impacts, unless its a high maintenance property or something.
You are right. Its pretty complex to model that out by hand. If I were you, I would just buy a model from investmentbankingmodels.com and run the analysis.
You would still need to model each business line of course but it’s like valuation for dummies and completely automates the DCF, LBO, analysis for the firm once you plug in historical financials, growth rates, deprec, debt, etc.