I’m in the middle of putting together a model for a growth company and I’m having trouble with sales forecasts for the next five years. With mature companies you can get around with taking an average figure of past revenue growth rates however it wouldn’t seem appropriate for a growth company which has had varying past growth (For the company in question: 4%, 6%, 9%, 30%)
What’s the best way to approach this?
I usually look at the MD&A of the company. 99% of the time, you’re guaranteed to find sales forecasts in management’s discussion. However, you’d be naive to take manangement’s word on it. I take it a step further to look at the competitors’ numbers to determine whether the subject company’s numbers are reasonable. This is just the starting point. I guess this should be enough if you’re simply doing this for fun.
For realistic analysis, you must look at industry-specific publications and access market trends from sources like Bloomberg, ValueLine, Morningstar, etc. to get to a feasible number. This trick was discussed in the L2 material, but you can also double-check your analysis by reverse engineering your numbers from average forecasts of other analysts (this data is available for free on Yahoo, Google, etc. - at least in its basic form).
You can really recognize a company’s BS when you look at other sources. I have seen some reports wherein the analysts simply take the GDP numbers and interpolate them for forecasts. This is surely the dumbest way to get a report out :).
Hope this helps.
For intermediate term, one can extrapolate past growth. Depending on the industry, one can even look at the primary drivers of revenue growth (e.g. GDP growth, demographic shifts, interest rates, etc.) and get a better forecast. There is a lot of uncertainty as you move out to more distant future though.