Buy-Side Financial Modeling Slides 65cc55ad90b30

Buy-Side Financial
Modeling
BUY-SIDE FINANCIAL MODELING
Process Driven Investing
Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

Welcome to
Fundamental Edge

My Career

My Career By The
Worked at 5 top 100
Numbers hedge funds over 13
years
Hired, trained &

Generated $200m+ of
Retired from managed 13 total
lifetime P&L
managing analysts
money at 36
11 of 13 years
Managed portfolios as
generated positive
large as $1.5 billion
P&L
I had a solid if not spectacular career with many highs, and many lows

Our standard:
Deliver a training program
that prepares analysts for the
rigors of the buy-side seat

Our focus is the publicly traded
fundamental equity analysis role
(i.e. “the buy-side”)

I’m not here to teach you a style
of investing. Depending on your seat,
your emphasis will shift.

Investment Style & The Model
Long only (1-5 year Single manager / 50 net Multi-manager

holding period) / Tiger Style (6-24 (adaptive, some trading,
• Understanding the month holding period) some investing)
business & industry • Structural change & • Catalyst driven investing
deeply with a long-term business momentum – goal is to generate
lens inflections steady, consistent P&L
• Underwriting generation
• Risk/reward lens
management to steer the hunting for meaningfully • Earnings cycle is key
ship misunderstood
• Alpha isolation process
• Focusing on long term situations
with flexibility around
growth in FCF/share – • AVV approach: idea expression
quality & duration of algorithm, valuation,
growth is key variance

Our Job: Impart The Universal Tools
In every seat on the buy-side, you will:
• Analyze businesses • Evaluate management
• Build (or at least use) financial models • Generate stock ideas
• Research key drivers • Communicate your stock ideas
• Derive valuations • Monitor catalysts
• Navigate earnings season
The intention of Fundamental Edge is to impart

these basic, “non-denominational” tools.

The Toolbox You Will Use
1. Research preparation 10. Tools for short selling
2. Analyze a business 11. Assess management & capital deployment
3. Construct a buy-side quality model 12. Identify catalysts & get in the flow
4. Identify what will move the stock (key drivers) 13. Wrap up and develop a thesis
5. Generate a differentiated view on key drivers 14. Communicating your idea: pitch like a pro
6. Value the stock appropriately 15. Idea monitoring & adjustment
7. Develop a reward & risk case 16. Soft skills of the successful analyst
8. Generate new ideas
9. Operate in earnings season

The Abilities You Will Need
Ability to
Ability to analyze Ability to grasp Ability to develop a
understand what is
a business a stock’s key drivers differentiated view
discounted in stock
Ability to see Ability to

Ability to
Ability to accurately investment compellingly
dispassionately
assess value opportunities communicate a
monitor and adjust
clearly thesis

As I hope to show you,
the financial model is a critical tool
in the demonstration of these
critical abilities

Quick Dive
Your First 12 Hours on a Stock

1. Read the 10-K in <60 minutes (explain) 9. Apply the most relevant 41 deep dive tools
2. Read the last earnings call transcript 10. Forecast the key drivers & create sensitivities
3. Read the latest investor day deck & transcript 11. Construct a bull, bear & base case
4. Read two sell-side initiation reports 12. Understand the narrative
5. Create a basic model 13. Create an initial upside/downside assessment
6. Identify the three key drivers of the business
7. Create a reverse DCF to assess what’s baked in
8. Create a detailed model

Buy-Side Modeling Intensive Agenda
• Process driven investing
• Buy-side model construction
• Using the model to analyze a business
• Model forecasting frameworks
• The model & valuation
• The model & thesis development

This course is less
“how to build a model” and more
“how to use a model” on the buy-side

A Typical Buy-Side Investment Process
1. 2. 3.
Initial analysis & Business analysis & Key driver assessment
opportunity assessment model construction & deep dive process
To understand what is baked To understand the business To understand the 3 key

into the stock and whether deeply, using a bespoke drivers, then executing a deep-
there is an opportunity to financial model to understand dive research process to
generate a differential view how the business operates identify areas of differentiation
(“the alpha load”) financially, then use the model on those key drivers
as a backbone to value the
stock and assess business
momentum and potential
earnings revisions

A Typical Buy-Side Investment Process (cont’d)
4. 5. 6.
Case construction & Thesis development & Idea monitoring
risk/reward assessment communication & catalyst assessment
work to understand what is Layer in qualitative and Develop an ongoing research

baked into the stock, then quantitative work into a plan relating to catalysts and
develop my own bull/ structured thesis to pitch up to earnings, then monitor ongoing
base/bear cases and determine my PM (or LP) news flow to assess whether
how attractive the risk/reward the idea is on track with my
is on the stock initial thesis

What’s the point of
fundamental research?

What Is the Point of It All?
• Investors/traders are ultimately predicting stock prices.
• To value a stock, first value the business (“stock is a fractional piece of ownership
in a business”).
• Business are valued on their FCF generation potential (decades of FCF forecasts
discounted back to derive today’s Net Present Value).
• To value a business accurately (and consistently) knowledge of the industry &

business is critical. If I know the business and industry very well, I am more
likely to consistently derive more accurate valuations than the crowd.
• Value is derived from collective perception of the future. Forecasting the future,
but ALSO, forecasting the shifting perceptions of the crowd, is important (this is
where tactical considerations enter).
The Hunt for Outperformance
• Alpha: Excess return relative to the

market portfolio
• “Excess return” is the fundamental

investors’ reason for existence
• With no expectation of alpha

generation, indexation is the logical
response

The Hunt for Outperformance (cont’d)
Performance above the market

return is defined as alpha

The Hunt for Outperformance (cont’d)
• Our quest as active investors is to identify the stock priced to a prospective excess return, or
an “alpha load”
• As that mispricing is corrected by the market, the closing of that gap drives alpha generation
in the idea

Hedge Fund Stock Selection
The evidence does support that HFs identify undervalued stocks on the long side

Hedge Fund Basics
Compensation Structure, the “2 & 20” model
Because of the heavy fee

load at a hedge fund,
funds must generate
strong alpha generation
just to break even (on a
beta-adjusted basis)

90-90 Framework
• In my observation, markets are reasonably efficient, with major exceptions
• ~10% of the time, large swaths of stocks are meaningfully mispriced
• At nearly all times, at least 10% of stocks are meaningfully mispriced
• As investors, we are hunting for these exceptions
90% of stocks
90% of the time
are somewhat fairly priced

Key Question:
Why does the opportunity exist?

Key Question: Why Does the Opportunity Exist?
1. There is a reason this alpha load exists. What is it?
2. Why is this stock trading at $92, not $100?
3. How can we identify & monetize this alpha load in a repeated fashion?

Why Do Stocks Get Cheap?
1. Decelerating fundamentals
2. Fears about terminal value
3. Complexity and muddiness
4. Miss and lower cycles
5. Sell-side down-grade cycles
6. Large owners exiting position
7. Fear & uncertainty, in all it’s forms

Life of a Hedge Fund Analyst
How will you spend your time:
• Analyzing businesses
• Building financial models Important:

• Due diligence on key drivers The business model
only works with 5%+
• Discover new investment ideas
idea level expected
• Meet & assess management teams/sell-side trips alpha generation
• Develop & pitch investment thesis
• Monitor portfolio ideas
• Make portfolio sizing & buy/sell suggestions

Quarter in the Life Calendar Focus
Identify Pre-JPM Trades December
JP Morgan conference January
• Earnings Identify Pre-Q4 Earnings Trades January
Earnings mid-Jan to early-Feb
• Prep
Leerink conference February
• Execution Cowen conference March
Barclays conference March
• Wrap Identify Pre-Q1 Earnings Trades April
Earnings mid-April to early-May
• Conferences & trips Deutch Bank conference May
BAML conference May
• 2-3 dead weeks RBC conference May
UBS conference May
Jefferies conference June
• Earnings Goldman Sachs conference June
• Prep Identify Pre-Q2 Earnings Trades June
Earnings mid-July to early-Aug
• Execution Wells Fargo conference Sep
Morgan Stanley conference Sep
• Wrap Baird conference Sep
Identify Pre-Q3 Earnings Trades Oct
• Conferences Earnings mid-Oct to early-Nov
Credit Suisse conference Nov
• REPEAT!!! (forever) Stifel conference Nov
Piper conference Nov
Identify year ahead winners/losers December
Year end
Process & Judgment
Dan Sundheim interview circa 2018 (ISI event)
Interviewer Sundheim
“Dan, what do you think is the key to “To me, it really comes down to two
success in the hedge fund world?” things. Process and judgment.”
• I loved that, and I ripped it off:
Process Judgement
More linear and scientific and process Trickier. Some frameworks may help,
tools can easily be taught. but experience is key.

Common question:
What is your process?

Process Driven Investing
What the person is asking is this:
• What is your process to repeatedly identify, research, and execute on mis-priced

investment ideas?
• What are the structured steps along the way?
• Why is this process replicable and not arbitraged away?
• What source of market error are you exploiting?

Modeling
When you own a stock, you own The price of the stock will not
a fractional piece in an underlying always accurately reflect the
business underlying per/share value of the
business – those deviations are
your opportunity as an investor
“In the short run, the market is a voting machine but in the long run it is a weighing
machine”
– Ben Graham

Think of the model & your process
as the weighing machine

6 Reasons Why We Model
1 2 3
To understand the To assess the health To analyze business

business in depth of the business momentum
• Develop “owner’s • Analyze the current • Is the business trending
knowledge” by state economics of the in the right or the wrong
understanding all the business: growth, direction?
financial data disclosed. margin, capital intensity.
• Data is the language of
business, and the model
is the repository for
data.

6 Reasons Why We Model (cont’d)
4 5 6
To derive an To identify To have a tool to

independent earnings revision put news flow in
valuation opportunities proper context
• To assess what is • To find points in time • To have a framework to
currently baked into the where a company is analyze NPV impacts of
stock price. likely to beat/miss news flow.
• To forecast key metrics consensus estimates.
that serve as the basis of
valuation.

The Model as
Process Backbone Hey go look at XYZ stock and
let me know what you think
Hours Spent on an Idea

New idea generation 10
Research key drivers 10
Construct new model 12
Attend industry conference 8
Read financial filings 6
Speak with management 6
Listen to earnings calls 4
Speak with sell-side 2
Speak with other investors 2
Total Hours 60

What sort of investing style
are you conducting?

Investment Style & The Model
Long only (1-5 year Single manager / 50 net Multi-manager

holding period) / Tiger Style (6-24 (adaptive, some trading,
• Understanding the month holding period) some investing)
business & industry • Structural change & • Catalyst driven
deeply with a long-term business momentum investing – goal is to
lens inflections generate steady,
• Underwriting consistent P&L
• Risk/reward lens
management to steer the generation
hunting for meaningfully
ship misunderstood • Earnings cycle is key
• Focusing on long term situations
• Alpha isolation process
growth in FCF/share – • AVV approach: with flexibility around
quality & duration of algorithm, valuation, idea expression
growth is key variance

Investment Style & The Model (cont’d)
Track Record: The Greats

Julian Robertson Tiger Management 31.7%
Steve Cohen SAC / Point 72 30.0%
Stan Druckenmiller Various 30.0%
Peter Lynch Fidelity Magellan 29.2%
Warren Buffett Berkshire Hathaway 20.8%
Average 28.3%

Model Use Cases
Theory: Why long/short analysts build earnings models
• To understand how the business operates and makes money
• To access the financial health of the business; particularly, growth, profitability and liquidity
• To identify the three key profit drivers of the business to focus due diligence
• To construct forecasts for revenue, EBITDA, EPS, and FCF as the basis for valuation
• To identify “what matters” to the earnings, valuation, and ultimately the price of the stock
• To construct a bull/base/bear case and a dynamically updated risk/reward for the stock

Model Use Cases (cont’d)
Model use cases (with walk through examples):
• PM asks you to look at XYZ stock and give an opinion of whether it is a long or a short
• Stock reports earnings next week, PM asks if we should add/trim position
• Stock reports earnings, pm asks analyst opinion on the strength of the print
• Stock is up 10% on strong earnings, pm asks if we should add or trim
• Stock trades off at 5% on a negative industry headline, pm asks what we should do
• PM and analyst meet with CFO, PM asks analyst what comments mean to EPS
• Activist files on stock, PM asks what stock is worth in takeout case

Let’s walk through
six common buy-side questions

Six Sample Use Cases of the Model
1. Is this a good or bad business?
2. Is this stock cheap or expensive?
3. What expectations are priced into this stock?
4. Will this stock beat or miss earnings?
5. What metrics will drive the stock?
6. How much should this stock react to this news?
Remember: I am looking for the mis-priced stock that can outperform by 5%+

Use Case 1: Is This a Good or Bad Business?

(cont’d)
The “Focus Five”
• Ultimately, business value creation can be distilled down to 5 factors:

1. Organic revenue growth
2. Margin trajectory
3. Capital intensity
4. Capital deployment
5. Terminal value perception

(cont’d)
Fundamental Edge Pizza
• This is a viable business

• I put in $250k
• I’m making $50k (20% return)
• If my alternative use of capital is the S&P
500 (10% expected return), I am happy!

Use Case 2: Is This Stock Cheap or Expensive?
How does the model help us

DCF vs. Multiples
determine valuation?

Use Case 2: Is This Stock Cheap or Expensive? (cont’d)
Why multiples?
• However, we must account for the terminal value of • When accounting for TV, the asset is again worth 10x.
the asset – apply a terminal growth rate or multiple
(same difference).
• Notice here, the TV is ~40% of total value, even after • After 3 years, TV might account for 85%+
forecasting 10 years of FCF (which is very difficult to of NPV – so why not just apply a multiple??
do accurately!!)
Use Case 2: Is This Stock Cheap or Expensive? (cont’d)
Revenue $100 Operating Profit $30

Our modeling end game: Forecast metrics COGS ($25) D&A
EBITDA
$5
$35
Gross Profit $75
% margin 75.0% Operating Cash Flow $15
• Stock analysts use 4 primary metrics to value stocks Capex ($5)
SG&A ($30) Free Cash Flow $10
% of sales 30.0%
1. Revenue R&D ($10)
% of sales 10.0%
D&A ($5)
2. EBITDA % of sales
Total Opex
5.0%
($45)
% of sales 45.0%
3. Earnings per share (EPS) Operating Profit $30
% margin 30.0%
4. Free Cash Flow Interest expense ($5)
• I call these the Forecast Metrics (FMs)

Pre-Tax Income $25
Tax Expense ($5.0)
% rate 20.0%
Net Income $20
Preview of valuation module: Applying multiples Diluted Shares 20

EPS $1.00
to these forecast metrics is a shorthand for DCF

(cont’d)
Modeling & the “P/E roll-forward”
• NTM = “Next 12 months”

• Based on a framework that stocks will trade at a multiple of the next 4 quarters of estimates
• P/E Roll-Forward Framework
Price (Today) = NTM P/E × NTM EPS

Price (T + 12 months) = NTM2 P/E × NTM2 EPS
Price (T + 36 months) = NTM4 P/E × NTM4 EPS
• Thus to forecast price, we must accurately forecast:

• Where the P/E will be in 12 months
• Where NTM EPS will be in 12 months
(cont’d)
Modeling & the “P/E roll-forward”

(cont’d)
• My EPS cases that will be instrumental in

the construction of the thesis are
predicated on “out year” EPS estimates
• These EPS estimates are a function of my

model construction my deep dive
research process, with conclusions from
that deep dive process reflected in the
key driver sections of the model

(cont’d)
NTM P/E chart
• Thought process:
• “Asset prices will revert to the
mean over time”
• “Where an asset has traded in
the past helps influence where
it might trade in the future”

Use Case 3: What Expectations Are Priced Into
This Stock?
Discounted FCF $1,616,027

Terminal Value $460,182
Reverse DCF example (DCF cases)

Net Present Value $2,076,209
Terminal Multiple 10.0x
WACC 8.0%
Enterprise Value $2,076,209

Less: Net Debt $726,673
Market Cap $1,349,536
Diluted Shares 150,000
• Build core DCF architecture, I like to model out 30 years Price

EPS
P/E
$9.00
$0.55
16.4x
Sample Business
1 2 3 4 5 25 26 27 28 29 30
• Minimizes importance of TV multiple and lets me model in stages Revenue

% yoy
$1,000,000 $1,050,000 $1,102,500 $1,157,625 $1,215,506 $3,225,100 $3,386,355 $3,555,673 $3,733,456 $3,920,129 $4,116,136
n.a. 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Operating Profit $150,000 $157,500 $165,375 $173,644 $182,326 $483,765 $507,953 $533,351 $560,018 $588,019 $617,420
% margin 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0%
bps yoy n.a. 0 0 0 0 0 0 0 0 0 0
• Taper revenue growth rates every 5 years (growing base suppresses

% yoy n.a. 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Tax Rate 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%
NOPAT $112,500 $118,125 $124,031 $130,233 $136,744 $362,824 $380,965 $400,013 $420,014 $441,015 $463,065
Interest Expense ($39,967) ($39,967) ($39,967) ($39,967) ($39,967) ($39,967) ($39,967) ($39,967) ($39,967) ($39,967) ($39,967)
% rates) Pre-Tax Income

Tax Expense
Net Income
Diluted Shares
$110,033
($27,508)
$82,525
150,000
$117,533
($29,383)
$88,150
150,000
$125,408
($31,352)
$94,056
150,000
$133,677
($33,419)
$100,258
150,000
$142,359 $443,798 $467,986 $493,384 $520,051 $548,052 $577,453
($35,590) ($110,949) ($116,997) ($123,346) ($130,013) ($137,013) ($144,363)
$106,769 $332,848 $350,990 $370,038 $390,039 $411,039 $433,090
150,000 150,000 150,000 150,000 150,000 150,000 150,000
Diluted EPS $0.55 $0.59 $0.63 $0.67 $0.71 $2.22 $2.34 $2.47 $2.60 $2.74 $2.89
% yoy n.a. 6.8% 6.7% 6.6% 6.5% 5.5% 5.5% 5.4% 5.4% 5.4% 5.4%
• Model margins on incremental margin basis (the natural cap in margin)

Invested Capital $750,000 $787,500 $826,875 $868,219 $911,630 $2,418,825 $2,539,766 $2,666,755 $2,800,092 $2,940,097 $3,087,102
YOY Change in IC n.a. $37,500 $39,375 $41,344 $43,411 $115,182 $120,941 $126,988 $133,338 $140,005 $147,005
ROIC 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0%
Increase in IC 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Capital Expenditure ($28,125) ($29,531) ($31,008) ($32,558) ($34,186) ($90,706) ($95,241) ($100,003) ($105,003) ($110,254) $0
% of revenue 2.8% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8% 0.0%
• Grow invested capital with revenue to maintain reasonable ROIC level

Free Cash Flow $84,375 $88,594 $93,023 $97,675 $102,558 $272,118 $285,724 $300,010 $315,010 $330,761 $463,065
% margin 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 11.3%
FCF/Share $0.56 $0.59 $0.62 $0.65 $0.68 $1.81 $1.90 $2.00 $2.10 $2.21 $3.09
• Discount at market implied WACC (at 16x, WACC is ~8%), adjusted for risk level
• Apply an ex-growth multiple to TV (hopefully will be sub 25% of NPV)
• Compare implied EV, less net debt, to next year’s EPS to impute fair P/E multiple

This Stock? (cont’d)
NFLX Key Drivers
• To understand “what is baked in” on the three key drivers for a stock, fix the
reverse DCF to that price then titrate the key drivers to a sensible case – NOT a
highly scientific process, more of a “finger in the air”

This Stock? (cont’d)
Horse betting: “It’s the mispriced odds”
• Horse betting is NOT about finding the

fastest horse, or the best jockey
• It is about:
1. Observing the odds
2. Creating a process to analyze
factors that determine probabilities
of outcomes
3. Betting where the odds
differ from internally
expected outcomes

Use Case 4: Will This Stock Beat or Miss
Earnings?
Will this company beat or miss earnings?
• 13 estimates for ’23 EPS from NFLX
• Ranging from $12.84 to $9.49 (26% gap)
• Is NFLX trading at 17.5x? (Canaccord)
• Is NFLX trading at 23.7x? (Rosenblatt)
• Is NFLX trading at 20.7x? (Consensus)
• Generally, P/E multiples are quote on consensus

estimates, but the “E” matters in the P/E ratio

Earnings? (cont’d)
Importance of earnings season
2% of trading days 20% of idio volatility
• T-14 to T+14 window a big monetization period for market neutral funds
• For longer term funds, a key signpost that thesis is on track and can be an important time to
play defense

What is a revision?
• Revision = A change in consensus EPS (or Revenue, EBITDA)
• Why do revisions matter? The most common valuation framework is P/E x EPS
(generally next)

Revision hunting
• Revision method
• Identify a meaningful
change in the EPS
capitalized by P/E
• GRUB was down ~40%
on one day due to a
large neg revision
• Usually revisions
become apparent
on/around earnings
season

Use Case 5: What Metrics Will Drive the Stock?
• Work to identify, then

anticipate, which
KPIs influence
valuation
• DPZ was a 10-15x

P/E stock when
Take from video
comping -3 to +1%,
was a 25-30x P/E at
5-8%+

(cont’d)
A key driver focus
• The research process

should be distilled
down to three key
drivers. Don’t get lost
in the complexity!
• Your model might be

800 rows. What are
the 3 that matter?

(cont’d)
Everything There Is to Know (ETIK)
Key Drivers:
“What’s going to
move the stock?”
Differentiation

(cont’d)
KPI tracker
• Is DPZ a read-through that pizza comp slow down is over?
• DPZ was down 25% from previous earnings
• But posted a comp acceleration Q3, stock popped 10%
• PZZA reports 3 weeks later
• What from DPZ is relevant to PZZA?

Use Case 6: How Much Should This Stock React to
This News?
Incrementalism framework
• Identify the “incremental change”
• Can be a new contract win, a new product introduction,

anything that is “new” to the market perception
• Work to understand the EPS impact of that change

• How much revenue?
• At what incremental profit?
• Tax & divide by shares
• As a starting point, hold the base multiple on that new EPS

• Using this framework, must be a “new” profit stream and
not already anticipated in the stock price)
Use Case 6: How Much Should This Stock React to
This News? (cont’d)
• Signal or noise? Example:

Stock moves down 10%.
• Something happened
• Where in the model might
this news have an impact?
• Does it impact near term EPS
or long term FCF/terminal value perception?
• What is my starting EPS?
• When I sensitize model for this change, what is the EPS impact?
• Flow through a multiple on those EPS impacts.

What a Typical PM Wants to See
Make the model user friendly for the PM (and for yourself!)
• PM wants to see:
• How big / liquid is
the stock
• Risk/reward
• Growth trajectory
• Margin trajectory
• EPS “algorithm”
• Variance
• Valuation

The PM View

(FEV) Framework
Fundamentals, Expectations, Valuation

Idea Generation: Fundamentals, Expectations,
Valuation (FEV) Approach
Typically, longs will have many of the following FEV characteristics:
Longs: Fundamentals
• Robust and accelerating revenue growth • Market share opportunities

• Pricing power • Strong incremental margins
• Margin expansion opportunities • High incremental ROIC (stable or moderating
• Moderating cost pressures capex in the face of accelerating EBITDA)
• Some form of mean reversion from weak to • High return capital deployment opportunities
strong fundamentals • Attractive free cash flow compounding that
• Strong and growing contribution from new “pays us to wait”
products

Valuation (FEV) Approach (cont’d)
Longs: Expectations Longs: Valuation
• Some high visibility investment • Cheap compared to intrinsic value

controversy that will either be dispelled (our internal DCF)
(ideally with a catalyst) or moderate in
• Cheap compared to closest peers – ideally
intensity over time
close to historical gap trough levels
• Neutral or negative investor sentiment
• Cheap relative to history – ideally close to
that is set to mean-revert
a trough historical level (beta-adjusted)
• Upcoming quarterly earnings beats
• Cheap compared to 3-5-year growth
• Positive revisions to annual street algorithm (i.e., if most 20% EPS growers
estimates are trading at 25-30x P/E, is this stock
trading at 18x?)

• Current state FEV:

• Fundamentals set to improve
• Expectations low
• Valuation low
• Trade is done when:

• Fundamentals good &
understood
• Expectations high
• Valuation high

MIC Process
1. Understand market embedded view
2. Generate differentiated internal view
3. Bet ahead of catalyst

M: Understand the Market View
1. “If it’s in the press, it’s in the price” framework

Is it already baked
2. What’s “in the press” into the cake?
• Management commentary
• Guidance
• Sell-side commentary
3. Quantifying the “market view”

• Commentary scrub
• Reverse DCF
• Multiples analysis
• Idio performance analysis

I: Generate an Internal View
1. Deep dive process Deep Dive Process
2. Model construction
3. Key driver
differentiation (its
own module)
4. Develop your own

unique view on the
fundamentals (and,
subsequently, the
valuation)

C: Identify a Catalyst for Convergence
1. MIC process assumes the market is “wrong” and you are “right”.
2. This “expectations gap” is the source of your trading alpha.
3. When will that expectations gap close? When will the market come around to your way of
thinking?
The earnings print is the most common convergence point

for the market view becoming aligned with your view.

It’s the “surprise” that moves stocks.
When the market view must
converge to your view.

What’s Next
1. Buy-side model construction
2. Using the model to analyze a business
3. Model forecasting frameworks
4. The model and valuation
5. The model and thesis development

Follow Along: Winnebago (WGO)

Buy-Side Model
Construction

Bespoke or Template?
• In a typical 60-hour deep dive process, the model construction process might be 8-12 hours.
• Common question: Should I just use a sell-side model and repurpose?
• Model template vendors (Canalyst) improving a LOT.
• Really more a firm level decision than an analyst decision.
• Upside of bespoke modeling:

1. The model creation process helps you understand the biz.
2. You’ve created the architecture; you can ensure zero defect.
3. You can build extra infrastructure around the key drivers.
4. You can make the model durable and user friendly.

The Thinking Behind the Model
• Garbage in, garbage out!
• The model should reflect how the

business operates.
• Advice I was given: “Model like the

CFO thinks about the business”.
• Target: Not “conservative” or

“aggressive” but “accurate”.
• Most stock ideas will come down to a

differential input in 2-3 areas of the
model. Understand the model
architecture deeply.
Question before building:
How does this company make money?

Tips for Learning to Model
• Learn how businesses operate.
• Learn accounting – the language of the model.
• If possible, study various buy-side models to see different approaches.
• Repetition is key! First time you will be slow, tenth time you will be fast.

A Note on Formatting
• Formatting does matter.
• A consistent, logical, easy to navigate model is important.
• A PM may have 200+ stocks under coverage! Put yourself in PM’s shoes.
• I suggest creating a standard formatting template and sticking to it (I did, and it probably
annoyed my analysts, but it was important to me).

A Note on Formatting (cont’d)
Build an intuitive,
Geez this
cleanly formatted
model is hard
model for your (likely) to navigate…
GenX or Boomer PM

Model Construction & My Formatting Guide
• Formatting Conventions • Key sections of the model:

• Negative numbers for expenses/losses (such that we can simply add rows) • Revenue growth
• State numbers in millions, consistently • Focus on distilling YoY revenue growth down into component parts: % from volume, % from
• Show numbers to a consistent decimal place pricing, % from organic, % from M&A
• Include dollar signs ($) when metric is in dollars • 2 and 3 year stacked revenue growth to look at run-rate growth and normalize for comps
• Blue font for inputting non-currencies historically and forecasting key drivers prospectively • % QoQ metrics vs. historical average seasonality levels as another check
• Green font for linked formulas • Put large 1-time contracts into both $ and % terms so that they do not distort base and trend
• Include period ending date and number of days in period (selling days can have an impact) • Cost structure items
• Data input process • Model variable items as a % of revenue, driven by BPS YoY
• Input by hand 10 years of historical P&L, BS, CF, and at least 5 years on a quarterly basis • Model fixed or semi-fixed items with a $ YoY / inflation / growth forecast
• Lay out quarters sequentially, with hide-able columns • Go to 10-K to find granular cost breakdown
• Break apart clean margin metrics & underlying organic growth • Margin items
• Include row underneath metric with guidance and note last guidance update • Be aware of one-time items in year ago quarter, strip out for a clean comparison
• Input every financial statistic we can find from 10-Qs, 10-Ks, investor presentations, press-releases • Compare BPS QoQ vs. historical average margin seasonality
• Input industry level data, quarterly economic data (if relevant and correlated) • Look at incremental margin trends (YoY $ growth in profit / YoY $ growth in revenue)
• Flow from top to bottom: • Look at historical margin behavior – does management let upside flow to bottom line or do they
historically step-up R&D when gross margins are strong? Try to forecast real-world behavior.
• Data inputs (hide-able)
• Include unit economics
• Operating data
• EBITDA per hospital, revenue per store, SG&A per employee – etc.
• Segments
• Look at trends in unit economics to see what others are not – is SG&A/employee spiking due to
• P&L wage increases, for example? Management might have offset it this quarter, but can they do so
• Balance Sheet again next quarter?
• Cash Flow Statement • Seasonality
• Depending on complexity, input all data in “data inputs” section and link to other sections – this can • Look at % of annual EPS/EBITDA/Revenue that is derived by each quarter, historically
save immense time when updating a complex model • Many companies do not give quarterly guidance, and typical seasonality can be a good
• Using comments: starting point
• Add cell comments to key historical numbers or key future assumptions
• Pull commentary from company meetings or earnings calls that support our assumptions
• Put your thoughts into cell comments for key drivers
Model Construction & My Formatting Guide:
Formatting Conventions
• Negative numbers for expenses/losses (such that we can simply add rows)
• State numbers in millions, consistently (note otherwise)
• Show numbers to a consistent decimal place
• Include dollar signs ($) when metric is in dollars
• Blue font for inputting non-currencies historically and forecasting key drivers prospectively
• Green font for linked formulas
• Include period ending date and number of days in period (selling days can have an impact)

Data Input Process
• Input by hand 10 years of historical P&L, BS, CF, and at least 5 years on a quarterly basis
• Lay out quarters sequentially, with hide-able columns
• Break apart clean margin metrics and underlying organic growth
• Include row underneath metric with guidance and note last guidance update
• Input every financial statistic we can find from 10-Qs, 10-Ks, investor presentations,
press-releases
• Input industry level data, quarterly economic data (if relevant and correlated)

Data Input Process (cont’d)
• Flow from top to bottom: • Using comments:

• Data inputs (hide-able) • Add cell comments to key
• Operating data historical numbers or key future
assumptions
• Segments
• Pull commentary from company
• P&L
meetings or earnings calls that
• Balance Sheet support our assumptions
• Cash Flow Statement • Put your thoughts into cell
• Depending on complexity, input all data comments for key drivers
in “data inputs” section and link to
other sections – this can save immense
time when updating a complex model
Key Sections of the Model
• Revenue build • Cost structure items

• Focus on distilling YoY revenue growth • Model variable items as a % of revenue,
down into component parts: % from driven by BPS YoY
volume, % from pricing, % from organic, • Model fixed or semi-fixed items with a $
% from M&A YoY / inflation / growth forecast
• 2- and 3-year stacked revenue growth to • Go to 10-K to find granular cost
look at run-rate growth and normalize breakdown
for comps
• % QoQ metrics vs. historical average
seasonality levels as another check
• Put large 1-time contracts into both $
and % terms so that they do not distort
base and trend

Key Sections of the Model
• Margin items • Include unit economics

• Be aware of one-time items in year • EBITDA per hospital, revenue per store, SG&A per
ago quarter, strip out for a clean employee – etc.
comparison • Look at trends in unit economics to see what others are
• Compare BPS QoQ vs. historical not – is SG&A/employee spiking due to wage increases,
average margin seasonality for example? Management might have offset it this
• Look at incremental margin trends quarter, but can they do so again next quarter?
(YoY $ growth in profit / YoY $ • Seasonality
growth in revenue)
• Look at % of annual EPS/EBITDA/Revenue that is
• Look at historical margin behavior derived by
– does management let upside each quarter, historically
flow to bottom line or do they
• Many companies do not give quarterly guidance,
historically step-up R&D when
and typical
gross margins are strong? Try to
seasonality can be a good starting point
forecast real-world behavior
Model Formatting
I could not model

(enjoyably) without
formatting macros

Model Shortcuts
• If you plan to do a lot of modeling, learn excel shortcuts!
• Perhaps the best thing I learned in investment banking.

Sample Model Sections
This is a personal preference, but I • SUM: Stock Summary (PM View)

created different tabs, always with the
• MOD: Model
3-statement model on one tab (for
easier flow, tracing, and updating) • VALUATION
• REVERSE DCF
• CASES
• CONSENSUS
• Other bespoke analyses

The Reading Stack
If I am committed to a deep dive, often I will start the process with a

~6 hour reading commitment
• SEC Filings: 10-K, 10-Q, 8-K/PRs, prospectus, proxy
• Earnings calls
• Sell-side research
• Investor conference events (presentation and transcript)
• Investor days (presentation and transcript)

The Reading Stack: 10-K
• The most widely cited

SEC filing
• NFLX 10-K is 70 pages
• Heavily reviewed by the

SEC (mgmt. can’t be too
promotional, signs off on
financials)
• Rich with numbers and

objective facts about the
biz (and lots of legal
boilerplate!)

The Reading Stack: 10-Q
• Quarterly filing. Not as

news rich, but contains
quarterly financial
statements that become
an input for the model
• NFLX 10-Q is 34 pages

(still lots of less
important footnotes and
boilerplate)

The Reading Stack: 8-K/Press Releases
• Report for an “unscheduled material event” that could be of importance to shareholders.

See: Regulation FD (fair disclosure) and selective disclosure rules. Elon got in trouble (kind
of) for this.
• Often these will mimic a press release on the website.
• Often these are unimportant, but a bad 8-K can ruin your day…

The Reading Stack: Prospectus & Registration
• Public companies must file a prospectus for

issuance of stock
• S1 for registering initial shares (IPO)
• S3 for follow-on offerings (a simplified S1)
• S8 for registration of shares for employees
• S4 for an exchange offer (debt exchange)
• The prospectus contains all the information the

SEC deems important for investors to know
(use of proceeds/details of the business)

The Reading Stack: Earnings Transcripts
Quarterly cycle:
• Company issues press-release

with numbers for the quarter
• Company hosts earnings call
• Often the 10-Q is released 1-2

weeks later

The Reading Stack: Conference Transcripts
In between quarters,
executives will present
at investor conferences

The Reading Stack: Investor Days
• Quarterly call decks,

investor conference decks,
investor day decks
• More “salesy” and

promotional in nature
“our long-term vision”

The Reading Stack: Sell-Side Research
• Generally, carries a positive bias
• Expands information collection effort
• Collectively sets consensus expectations
• Generally strong: Industry knowledge, mouthpiece for management
• Generally weak: Stock picking, model accuracy

Manage Your Information Flow: Plate File
• Managing information flow is an ongoing challenge
• You will often not know when one comment or data point can make or break a thesis
• As such, I recommend a running file that aggregates all of your information on a given ticker
• For example, create a word doc tilted PFE plate for Pfizer
• Over time, this Plate file will become quite long
• These files are incredibly helpful as a refresher when:

1. Assessing or re-underwriting an investment thesis
2. Preparing for a meeting with management
• This is also great source research for me to comb through, and allows me to be
much more efficient in wrapping my arms around a given company
What to Include in Your Plate File
ü Key notes, data points and thoughts from 10-K and 10-Q
ü Key notes from investor day presentations
ü Verbatim notes from quarterly earnings calls, highlighting the key points
ü Verbatim notes from guidance calls, and key points from IR call walking through assumptions
ü Verbatim notes from any calls or meetings with CEO, CFO or IR
ü Verbatim notes from conference presentations, highlighting the key points
ü Key notes from important sell-side notes, particularly initiations, upgrades or downgrades
ü Verbatim notes from channel-check calls
ü Your ongoing question list (very helpful when preparing for a company meeting)

Sample Plate Files

Sample Plate Files (cont’d)
Read all material and

take relevant notes to
inform later steps

Raw Build: TSLA
• Step 1: Go collect all the
raw information that you
will need to construct the
model and save that down
in your TSLA folder:
• 10-Ks and 10-Qs
• Earnings call
transcripts
• Investor event
transcripts
• Investor decks
• I find this up-front

batching process makes
the ultimate model
construction and
refinement process much
more efficient
Raw Build: TSLA (cont’d)
Step 1: During this process, carefully analyze what is disclosed by the company. SEC filings are
standardized, but different companies disclose information in different ways.
• Press releases (PRs) often disclose information that is not

disclosed in 10-Qs (often, Adjusted metrics). The SEC more
highly scrutinizes SEC filings (Ks and Qs) so there is greater
latitude on what is released in PR.
• Check the IR website closely for:

• One time segment reconciliations (if a company
re-segments, will often give you past 4-12 Qs).
• Other forms of disclosure. For example, TSLA in “other documents & events” had a link a 2021 AI day
on YouTube (for which there was no transcript on BAMSEC).

Step 2: Determine your formatting conventions and stick to them.
• Sample formatting conventions

Formatting macros are
• Negative numbers for expenses/losses (such that we can simply add rows)
super helpful:
• State numbers in millions, consistently
• The buyside OG’s
• Show numbers to consistent decimal places
used TTS turbo
• Include dollar signs when metric is in dollars
• Now, Macabus
• Blue font for inputting non-currencies historically and forecasting key
is highly popular
drivers prospectively
• Green font for linked formulas
• Include period ending date and number of days in period
(selling days can have an impact)

Step 3: Open and pre-format the excel file.
My models will start with this blank excel sheet.
• This is the only template that I will pull from other models
• Columns for years in light grey (to distinguish from quarters)
• Clearly stated period end and days in period (for those pesky leap years, and calculating things like days payable)
• Mini-row after the years (aids greatly in quick navigation through model, and helps visually to see each year)

• Dates for past periods in black, dates for unreported periods in light blue (to see if model has been
updated)
• Hidden quarterly rows with button

• Control-space (highlights column), shift plus right-arrow to highly multiple columns, Alt DGG to
group columns
• I also like to ensure that all of my columns are the exact same width
• Alt-HOW to determine column width, set
width, then arrow over to other columns
to replicate width

Step 4: Begin transferring financial data from SEC filings.
Pull up 2021 TSLA

10-K, go to P&L
(page 50, usually
P&L somewhere
middle of deck).

Open the columns and add in the quarters.

Step 5: Scan investor disclosures for all operating data and drop that into model.
This should be an exhaustive process.

Step 6: : Add the analysis rows under line items to see trends.
Take from video


Analyzing a Business, Analyzing a Stock
Two things are primary…
1. Cash Economics 2. Business Momentum

• Unit economics: Does the • Is revenue growth improving or
underlying business work? deteriorating?
• Margin structure • Are margins contracting or

expanding?
• Cash generation
• Is free cash flow expanding or
contracting?

Stock Selection Frameworks
1. Extrapolation meet inflection 2. It’s the surprise that matters

• Markets tend to extrapolate • The market is a (mostly) efficient
discounting mechanism
• Acceleration/decelerations in key
drivers matter • Find the data point that when
released, surprises the markets
• Try to find when key drivers are
inflecting, as these inflections • Revisions relative to guidance are
often drive stock price inflections a proxy for surprise (albeit
imperfect

Analysis Rows: Revenue
• I will put these rows underneath revenue: % yoy 10.0%

% yoy - CC 8.0%
• % YoY: Standard way to look at and express revenue % yoy - FX 2.0%
% M&A 5.0%
• % 2 year: The “2-year stack” normalizes for unusual comps
% Organic 3.0%
• % 3 year (sometimes…more often in Covid era)
% yoy - price/mix 6.0%
• % QoQ: “Sequential” growth % yoy - volume 2.0%
• Sometimes I will put:
• Historic seasonality (to compare current)
• If disclosed, I will include breakdown of revenue growth

Analysis Rows: Expenses & Margins
• Expense items:
• % of Sales
• “BPS” YoY (100 BPS in 1%):
“Bipps” is how margin moves are
most commonly expressed
• % YoY
• Margin items:
• % Margin
• BPS YoY
• % YoY
• Incremental Margin
Step 7: Create the forecasting architecture.


Balance Sheet
What matters on the

balance sheet?
1. Average levels
(commonly
expressed via ROIC)

Cash Flow
What matters on the

cash flow statement?
1. Cash profit margin
2. Working capital cycle
3. Capex intensity
4. FCF margin

Model GAAP to Non-GAAP
GAAP or Non-GAAP?
• NVST example

Model Re-Segmenting
Best practice:
• Keep the old reporting to see historical business trajectory
• Clearly note a change in reporting
• Layer in the new reporting below, and drive the model off new reporting

The PM View
Make the model user friendly

for the PM (and for yourself!)
• PM wants to see:
• How big/liquid is the stock
• Risk/reward
• Growth trajectory
• Margin trajectory
• EPS “algorithm”
• Variance
• Valuation

The PM View (cont’d)

WGO: Building a
Model
• Identify disclosed
information

WGO: Building a Model (cont’d)
Identify disclosed information

Inputting data from 10-K for 15 years of history

Inputting the
balance sheet

Inputting the cash

flow statement

WGO Revenue Build
Identifying reporting metrics

WGO Revenue Build (cont’d)
Take from video

Inputting all of those relevant metrics

Creating analysis rows around revenue line items

Creating analysis rows around expense and profit line items

Identifying my key forecast metric and building interactive architecture

What’s Next?
1. The model and valuation
2. Using the model to analyze a business
3. Model forecasting frameworks
4. The model and thesis development

Analyzing a Business

Five Key Questions of the Fundamental
Investor
1. Is this a good business?
2. How does this business actually make money?

• What is the the dollar flow and unit economics?
3. What is the nature of the cost structure?

• Is it primarily fixed or variable? Why does that distinction matter?
4. What drives this business? What are the key drivers?
5. Is the business getting better or worse? Is the business momentum and current
state vs. future state improving?

How the Model Helps
The model lays out revenue, expenses and profits as well as the KPIs (key performance
indicators) that drive profits
• Inclusion of the data helps with important calculations:

• Margin levels
• Incremental margins
• Capital intensity: ROIC
• The history of the model shows:

• What the recent trending of the business has been
• What the long-term historical cycles have been – helpful for a
“mean reversion” mentality

Investor



Is This A Good Business?
This is a both subjective and objective

question:
• Objectively, the intent of a business is

to generate free cash flow, and the
more free cash flow a business
generates, the more valuable.
• When people say “good business” do

they actually mean “valuable
business”?
• Thus, business quality is a question of

“what drives value”?

Fundamental Edge Pizza

Fundamental Edge Pizza (cont’d)
• If I am opening a pizza shop:

1. I am investing cash in the form of equity.
2. In the expectation of making cash in return.
• So, what matters? Cash flow!

• Not necessarily today, but in the future.
• What drives cash flow?
1. Revenue
2. Profit margin
3. Capital investment

This is a viable business
• I put in $250k
• I’m making $50k (20% return)
• If my alternative use of capital is the S&P 500

(10% expected return), I am happy!

But what if my revenues decline? I am sad.

Or what if my margins decline? I am sad.

Or what if my build-out costs soar? I am sad.

As a business owner, you care
about cash flow production

What Drives Cash Flow?
Capital
Revenue Profit Margin
Investment

The “Focus Five”
Ultimately, business value creation can be distilled down to 5 factors.
• Deep dive around the value drivers!

1. Organic growth

What Drives Value in a Company?
• Ultimately, value is driven

by the discounting of FCF.
• But what drives FCF?
• The median S&P 50

company trades 16-17x and
offers MSD revenue growth
and 5-6% EPS growth.

Value Drivers: Organic Revenue Growth
Holding all else constant:
• Revenue growth from 5% to 10%

(organically) for 10 years
• No incremental capital investment
• ROIC expands from 15% to 23%
• FCF margins expand
• Fair value P/E expands from

16x to 31x

Value Drivers: Margin Expansion
• Operating margins expand by

100bps per year for 5 years, then
flat-line at 20%
• ROIC expands from 15% to 20%
• Fair value P/E expands from

16x to 26x

Value Drivers: Capital Efficiency
• ROIC starts at 30% instead of 15%
• Capex lowered to 1% of revenue

vs. 3%
• Fair value P/E expands from 16x

to 21x
No change in revenue or Op Profit

Value Drivers: Terminal Value Perception
Terminal value perception can highly

2/3 of value beyond 10 years!
influence current P/E levels
% of EV covered by discounted FCF (17x P/E stock)

45%
42%
40%
36%
35% 33%
30% 29%
25%
25%
21%
20%
17%
15% 13%
10% 9%
5%
5%
0%
1 2 3 4 5 6 7 8 9 10

Value Drivers: Terminal Value Perception (cont’d)
In a typical stock, 2/3 of value will

be derived from the post 10-year
FCF terminal value

Value Drivers: Terminal Value Perception (cont’d)
Zero out the terminal value, and all

of a sudden, the P/E of this stock
contracts to 4.7x

ROIC: Captures Profitability & Cap Intensity
• The bible on shareholder returns
ROIC = Net Operating Profit After Tax (NOPAT) ÷ Invested Capital
• ROIC is a measure of returns to all capital
• In a private business, ROIC is your capital return
• ROIC is commonly viewed as one of the most reliable

metrics of business quality, as it captures both
margins and invested capital
• In a public business, market valuation matters

Question:
What metrics do you look at
to assess business quality?

Answer:
ROIC as it captures profitability and
capital intensity and is predictive of
cash flow production. Add in organic
revenue growth and predictability/
durability of economics (i.e., stable
TV perception).

The Objective View of a “Good Business”
A good business creates LOTS of value
• What drives value?

1. Organic revenue growth
2. Expanding margins
3. Minimal capital intensity
4. High return reinvestment
5. A durable, long runway (moat)

Investor



How Does This Business Make Money?
A common question asked to analysts • What is the revenue model?
• Sometimes this is straightforward, • Pricing model

sometimes not: • Customer concentration
• Ex. Chipotle: Customer buys a burrito. • Contract duration
Profit is price of that revenue minus • Recurring revenue?
direct costs. Aggregate profit is # of
burritos sold less overheads. • What are the economics at the most
granular (unit) level?
• Ex. Hospital: Patient visits, but who
pays the bill? Discounts? Bad debt?
Insurance pays the bill but who pays
for the insurance? Can get
complicated…
Unit Economics
This is a simple,
hypothetical P&L
statement

Unit Level Economics
I can break this P&L

down to a “per pizza”
level

Investor



Fixed vs. Variable
• Work to understand
the nature of the cost
structure, and how
much is fixed vs.
variable
• The more fixed a cost

structure, the higher
the incremental (also
decremental)
margins (neither is,
in isolation, a good or
bad thing)

Fixed Costs
• Occupancy is a classic “fixed cost”. The monthly lease expense is not influence by the
number of pizzas sold.
• As revenue increases, the occupancy “per pizza” and % occupancy declines. We call that
operating leverage.
• As revenue declines, we call that “fixed cost de-leverage”.

Variable Costs
• Food cost and packaging is a classic variable cost
• In this hypothetical example, every $15 pizza requires $4.50 of variable costs to make
• There is no “leverage” in a variable cost

Incremental Margin
“Incremental Margin”
• What is the percent profitability on one

incremental sale?
• If opex is fixed, incremental margin should

be in line with variable COGS Gross Margin.
• The higher the fixed cost proportion, the

higher the incremental margin.

Mastercard & The Incremental Margin
Rule of thumb: For a growing biz, incremental margins predict the future base margin

Unit Economics at Uber
• Uber has many characteristics of an interesting stock:

• Huge TAM
• Fast growing revenue (’18: $11.3bn, ’23E: $36.5bn)
• Transformational product with super-fans
• But the stock has been very weak since IPO

• IPO at $42, recently $33 (-20%)
• Why? Uber, despite reaching big scale, has been a cash incinerator

Unit Economics at Uber (cont’d)
How to analyze unit economics:
• Pull key aggregate metrics on an

annual basis.
• For UBER: Users, trips, bookings,

revenue, operating profit and
adjusted EBITDA.
• Identify the most simple, granular

level of demand for the company.
For Uber, this is trips.
• Divide aggregate metrics by

atomic unit to look at the unit
economics of a business.
• How strong are current state unit economics

(for UBER = weak)?
• Which levers can the business pull to increase

those unit economics?
• What aggregate line items mask the real, true

underlying unit economics of the business?
• What can future state unit economics look like?
• For Uber, the key will be:

• Increasing take rate
• Reducing S&M intensity
• Leveraging all other fixed costs
• These unit economics will NOT scale
• The company must improve unit level economics to achieve profitability and FCF generation

• “Unit economics” is not a static

concept.
• It’s the trajectory that matters: MA

went from spending 32c of every
dollar on marketing to 5c. Margins
(and the stock) soared!
• It’s the opportunity for improvement

that is the key.

Uber Unit Economics, 2021 Future? % change

• If Uber can get Bookings per Trip $14.20 $17.04 20.0%
GP/trip to $2 and Revenue Take per Trip $2.74 $3.56 30.0%
COGS per Trip ($1.47) ($1.54) 5.0%
OP/trip to 45c, the Gross Profit per Trip $1.27 $2.02 58.8%
Sales & Marketing per Trip ($0.75) ($0.50) (33.0%)
stock is interesting. Other Opex per Trip ($1.12) ($1.07) (5.0%)
Operating Profit per Trip ($0.60) $0.45
• Question: Will the
Trips Now 6,368
competitive dynamics Trips Future 12,000
support an increase in Operating Profit per Trip $0.45
Potential Operating Profit $5,414
driver take rate and a Pro-Forma EPS $2.17
(BIG) reduction in Current Market Cap $65,915

sales and marketing? Current Stock Price $33.01
Pro-Forma P/E 15.2x

Current State Economics
Current Current Current Business

Profitability Cash Economics Momentum
• What is the current level • What is the current level • How fast is revenue
of margin? of FCF production? growing?
• What can “normal” • What can “normal” FCF • Is revenue growth
margins be? margin be? accelerating or
• Where in the P&L is decelerating?
• Where in the cash flow
driving above/below statement is driving • Are margins expanding or
“normal” margins? above/below “normal” contracting?
margins?
• Is the business becoming
more or less capital
intensive?
Often, but not always, current state is baked into the stock
Current State and Future State
Loss making does not necessarily = BAD, but does raise risk profile
Fundamental Edge Pizza Pizza Unit Economics Unit Scale Breakeven Day at the Pizza Shop
Year 1 Year 2 Year 3 Year 4 Year 5 Price per Pizza $10.00 Year 1 Fixed Costs ($315,000)
Food COGS per Pizza ($5.00) - Amort of pizza oven ($25,000)
Pizzas Sold 25,000 50,000 75,000 100,000 105,000 Direct Unit Economics $5.00 - Manager salary ($75,000)
% yoy n.a. 100.0% 50.0% 33.3% 5.0% % margin 50.0% - Hourly labor ($90,000)
Pizzas per Month 2,083 4,167 6,250 8,333 8,750 - Rent & utility expense ($75,000)
Pizzas per Day 68 137 205 274 288 - Other G&A ($50,000)
Price per Pizza $10.00 $10.30 $10.61 $10.93 $11.26 Volume Breakeven 63,000
% yoy n.a. 3.0% 3.0% 3.0% 3.0%
Total Revenue $250,000 $515,000 $795,675 $1,092,727 $1,181,784

% yoy n.a. 106.0% 54.5% 37.3% 8.1%
Food COGS per Pizza ($5.00) ($5.15) ($5.00) ($5.00) ($5.00)

% yoy n.a. 3.0% 3.0% 3.0% 3.0% Big Incremental Sale
Operating Profit ($190,000) ($81,650) $56,187 $201,663 $237,856

% margin (76.0%) (15.9%) 7.1% 18.5% 20.1%
bps yoy n.a. 6,015 2,292 1,139 167
% yoy n.a. (57.0%) (168.8%) 258.9% 17.9%
Incremental Margin n.a. 40.9% 49.1% 49.0% 40.6%

Future State Economics
Future Future Cash Future Business

Profitability Economics Momentum

TSLA example
Shifting from “weak” to “strong”
can be powerful for the equity

Future State Economics (cont’d)
• 2019: Concerns about viability, TSLA 2019 2022E delta

Revenue per Delivery $56,632 $48,936 (13.6%)
decelerating growth, risky
COGS per Delivery ($44,601) ($32,814) (26.4%)
price/mix cut, Elon sleeping in the Gross Profit per Delivery $12,030 $16,122 34.0%
factories (i.e., signs COGS reduction
not going well!) Revenue Growth 12.5% 55.7%
Gross Margin 16.6% 29.8%
• 2022: Successful execution of Operating Margin (0.3%) 20.2%
COGS reduction on Model 3 FCF Margin 4.4% 11.0%

Future State
Economics (cont’d)
• TSLA went from $12 to
$400 (33 bagger) in 2
years!
• “Current state, future

state” framework
explains the move.

Investor



Achieving ETIK: Deep Dive Process
1. Understand the basics of a company (4-6 hours) 9. Identify past case studies that inform (4-6 hours)
• Browse company website • Is this an HMO with depressed margins? How have the past handful of HMO margin expansion stories
• Read the 10-K cover to cover developed for the business and stock?
• Read 2-3 sell-side initiation reports 10. Schedule call with company IR or CFO (1 hour)
2. Build simple annual operating model (4-6 hours) • Walk through list of questions with management
• Look at organic volume and pricing trends going back 10+ years • Compare your assessment with management’s view
• Assess historical margin trends and incremental margins • Assess management’s likelihood of creating value for stock
• Note major capital allocation decisions 11. Identify competitors and channel contacts and schedule calls (10-14 hours)
• Get a sense of base-rate algorithm for revenue, EBITDA and EPS • Focus on uncovering direct evidence relevant to the 3 key drivers
3. Identify and understand the top 3 fundamental drivers (2-4 hours) • Attend key industry (non-sell side) conferences ex. Becker’s Hospital
• Analyze key business segments as a % of revenue and EBIT • Develop a reputation as an authority on the industry, create a network of industry contacts
• Understand what line items in model are the key profit drivers 12. Identify upcoming catalysts and develop a view on them (8-10 hours)
• Read the last 6 months of sell-side notes and identify bull vs. bear debate • Understand market embedded views for upcoming catalysts
4. Build 30-year operational DCF (2-4 hours) • Assess which catalysts we have a divergent view based on PSUC framework (1 minus (win % / (win % plus
• Understand what the stock price is telling you about expectations absolute value of loss %))
• Develop bull, base, bear scenarios on key drivers and compare to stock 13. Develop 1) bull 2) base and 3) bear case based on research (2-4 hours)
5. Understand valuation and market embedded expectations (2-4 hours) • Develop bull, base and bear stock values
• Use DCF to understand the expectations that are baked into the price • Put probabilities on those cases and develop probability tree value, compare that price to stock price – is
there a disconnect?
6. Wrap your arms around current stock narrative (10-12 hours)
• Compare reward price to risk price, is there asymmetry here?
• Spend the time to understand management message to the Street
14. Develop continuing diligence plan (1 hour)
• Listen to past investor day’s, last 8 earnings calls, last 4 conf webcasts
• Plan to regularly check in with industry contacts, competitors and company representative
7. Build full quarterly model (if we don’t have one) (10-12 hours)
• Plan to monitor company press releases, conference presentations and other catalysts
• Focus on detailed revenue build, granular cost structure build
• Tie 3 statements together and focus on cash cycle through the business
8. Comparative Competitive analysis (4-6 hours)
Total Process: (60-90 hours, or 4-6 days of work)
• Compare company to key competitors – organic growth, margins
• How does company compare to peers on key efficiency metrics Granular training modules on each
• Is company out/underperforming? Is there opportunity or threat?

ETIK to KD
Key Drivers:
move the stock?”
Differentiation

How to Identify Key Drivers
Academic Value Drivers Model Sensitivities Narrative Analysis

• Start by framing the 3 core • When you sensitize the • Where is the debate? What
value drivers: 1) organic model, what factors drive is sell-side discussion? What
revenue growth, 2) margin big moves up or down? is the discussion on earnings
expansion, and 3) capital What geographies/products calls? In group meetings,
intensity (which we will matter? Where are there what do other buy-siders
discuss today). Find the margin outliers (i.e., ask about?
business drivers that Singapore). What element in • Sell-side can catch “shiny
influence these value the model is driving growth? ball” syndrome.
drivers.
• Crack open the
• Good, senior buy-siders
• Consider 4) capital revenue/profit to see the will always be focused on
deployment and 5) terminal big, core profit drivers. the key drivers. (I was
value perception as well.
always very focused on what
a handful of healthcare
investors were asking
about).

Investor



Business Momentum
• “Business momentum” is a term used to • The model is critical in observing whether

denote accelerations (Market = likes) and the biz is accelerating or decelerating
decelerations (market = doesn’t like)
• More on this later…

The 2-Year Stack
2 and 3-year stacks attempt to normalize for unusual year ago comps
• ALGN example:

The 2-Year Stack (cont’d)
At ALGN, the street has not

accurately modeled revenue
deceleration (which is
happening due to COVID pull-
forward and tough comps)

Investor



WGO: Is This a Good Business?
Leverage to growth theme/generational trend
2010 2022 CAGR

WGO Revenue $450 $4,958 22.1%

WGO: Is This a Good Business? (cont’d)
2010 2022 CAGR

WGO Revenue $450 $4,958 22.1%

High degree of economic sensitivity

• Financing sensitivity
1. Consumer financing (70-
80% are financed on 10-15-
year loans) – combined with
ASP increases, monthly
payments have gone up
60%+ over the last 3 years
2. Fleet financing (RV dealers
financing inventory)
• Gas price sensitivity

• Average RV gets 10 MPG
(~$250/tank)

Mid to high-teens ROIC
Take from video

Mid-single digit FCF margins

SUMMARY
Summary thoughts – is this a good business?
ü Some structural growth, though highly cyclical and economically sensitive.

ü Solid if not spectacular margins & returns on capital.

WGO: How Does
This Business
Make Money?
1. WGO is the
manufacturer, not the
dealer.
2. Dealer places order,

order goes into backlog.
3. Sale to dealer is made on

cash terms, but with a
repurchase agreement.
4. Backlogs matter.
Dealer inventories
level matter.

WGO: How Does
This Business
Make Money?
1. WGO is the
dealer.


4. Backlogs matter.
Dealer inventories
level matter.

WGO: How Does This Business Make Money? (cont’d)
1. WGO is the manufacturer,

not the retailer
2. Retailer places order,

order goes into backlog

WGO: What is the Nature of the Cost Structure?
• WGO has demonstrated more of a variable cost structure
• Historical incremental margins have been in the 15-20% range (i.e., for every $1
of revenue, 15-20c goes to profits)

WGO: What Drives the Business?
1. Backlogs matter. Dealer

inventories level matter.
2. Tight backlogs and low

inventories drive high pricing.
High pricing drives high GMs.
3. High GMs drive high earnings

and FCF (high earnings and
FCF drive high stock price).

WGO: What Drives the Business? (cont’d)
WGO Key Drivers
1. Unit demand: Driven by customer demand, influenced by consumer health and

interest rates.
2. Unit pricing: Ultimately driven by unit demand, influenced by backlogs, dealer

inventories and competitive environment.
3. Margins: Ultimately driven by unit pricing net of input costs.

WGO: What is the Business Momentum?
Incredibly strong trends during calendar 20/21, but lately rolling over

WGO: What Do I Need to Figure Out?
• Trajectory of key drivers:

1. Unit demand
2. Unit pricing
3. Margins
• Reasonable bull/base/bear cases on the key drivers
• Likely stock price outcome in each case
• Whether there is an expectations gap:

1. What the stock is currently discounting
2. What I believe to be true

Buy-Side Forecasting
Frameworks

Forecasting Overview
A note on forecasting:
My goal here is to
• Building the architecture is a scientific, structured process
provide frameworks
• But it is the forecast that will ultimately drive alpha that can be used.
Your job is to choose
• Forecasting is a creative, multi-disciplinary
which to apply.

Forecasting Overview (cont’d)
General orientation to forecasting:
1. On first cut of forecast, ignore consensus estimates.
2. Be cautious of hockey-stick forecasts and approach forward estimates with a mean

reversion lens.
3. Always understand the line items that can drive meaningful earnings upside/downside.

Dummy forecasting process:
1. Start with a baseline forecast that is in-line with historical trend growth rates. For example,
if a company has historically delivered +4-6% organic growth with 25-50bps of margin
expansion, that tends to be a reasonable jumping off point.
2. Understand if operating conditions have been trending above or below historical

trend lines.
3. For peak or trough conditions, forecast with a bias towards mean reversion.
This will result in your naïve, “dummy” forecast

Detailed forecasting process
1. Study company commentary on each line item to understand detailed operating conditions. Has
demand been weak, but a new product is coming? Is a competitor product coming to market?
Reflect these elements into your forecast and note these dynamics in cell comments.
2. Specific focus areas where we break apart the forecast to the key puts and takes:
• Underlying components of organic growth.
• Underlying components of margin structure – cost growth and incremental margins.
• Underlying cash flow cycle of the business and use of cash flow – model real-world cash
usage, either buyback or M&.A
3. Do our own research and reflect that into forecasts.
4. On certain key debates, take a probabilistic view.

Highlight “key drivers” and develop

research plan
1. Highlight key drivers that may be

researched with channel checks, and
follow up to refine
2. Highlight key drivers that may be

forecasted with data, and follow up
to refine

Considerations in Forecasting: Revenue
• Understand the underlying drivers of • Mind the comps and the 2-year stack
growth
• Mind seasonality
• What is durable?
• Be cautious on durability of elevated
• What has a cap?
growth
• Approach revenue forecast from • Base effect
multiple angles – which is most
• Mean reversion
predictive?
• Model by geography
• Model by volume × price
• Model by product

Primacy of Revenue
Strong demand 90% demand

• Revenue is generally the most Pizza Shop Economics Pizza Shop Economics
important line item in a model Debt $250,000 Debt $250,000
Equity $250,000 Equity $250,000
Total IC $500,000 Total IC $500,000
• Most industries are competitive,
setting at 10-15% ROIC (ultimately) Revenue $1,000,000 Revenue $900,000
Cost Structure ($925,000) Cost Structure ($925,000)
• My friend, the aspiring tea shop
NOPAT $75,000 NOPAT ($25,000)
entrepreneur…
ROIC 15.0% ROIC (5.0%)
The difference between

Chipotle and Qdoba

Sources of Revenue Growth
• What is driving revenue growth?
• Are market share gains driving growth in a MSD market?
• Is the stock priced for continued HSD/LDD growth?
• Can the competitors stop the market share bleeding?
0 1 2 3 4 5 6 7 8 9 10
Market Revenue $100 $105 $110 $116 $122 $128 $134 $141 $148 $155 $163
% yoy n.a. 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Market Share 10.0% 10.5% 11.0% 11.5% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0%
bps yoy n.a. 50 50 50 50 0 0 0 0 0 0
Company Revenue $10.0 $11.0 $12.1 $13.3 $14.6 $15.3 $16.1 $16.9 $17.7 $18.6 $19.5
% yoy n.a. 10.3% 10.0% 9.8% 9.6% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

Sources of Revenue Growth (cont’d)
• Has revenue been driving by a pricing cycle that is reaching a cap?
• Strong price increases can drive revenue growth for a period of time, but generally
are less durable that volume driven growth.
0 1 2 3 4 5 6 7 8 9 10
Units 100 103 108 114 119 125 131 138 145 152 160
% yoy n.a. 3.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Price / Unit $1.00 $1.10 $1.21 $1.33 $1.33 $1.33 $1.33 $1.33 $1.33 $1.33 $1.33
% yoy n.a. 10.0% 10.0% 10.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Revenue $100 $113 $131 $151 $159 $167 $175 $184 $193 $203 $213
% yoy n.a. 13.3% 15.5% 15.5% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

Forecasting Frameworks
Walk through common frameworks in modeling:
1. Growth Stack
2. Mix Accelerator
3. Comp Waterfall
4. Box Replicator
5. Ramp Curve
6. Creative Lags
7. Mix Extrapolation
8. Mid-Cycle
9. Data Correlations

1. Growth Stack Forecasting
• GDP stack
• Generally, the basis of many industry forecasts
• Many industry associations will have industry forecasts that

are generally a decent starting point for stock specific forecasts
• Often these industry forecasts will be based on:

• Past trend extrapolation
• Some sort of survey work
• Ultimately, the question is:

• What is the growth rate of aggregate consumption
• What is the growth rate of share of wallet?
Growth Stack Forecasting Example
• To add more complexity, consider XYZ Burgers, a maker of synthetic hamburgers.
• How might we want to forecast revenue growth?
2019 2020 2021 2022 2023 2024 2025

Population 328.2 331.5 334.8 338.1 341.5 344.9 348.4
Population Growth 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%
% eating fake meat 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%
Pop Eating Fake Meat 3.3 6.6 10.0 13.5 17.1 20.7 24.4
% yoy n.a. 102.0% 51.5% 34.7% 26.3% 21.2% 17.8%
Market Share 25.0% 24.0% 23.0% 22.0% 21.0% 20.0% 19.0%
Volume to XYZ Burgers 0.8 1.6 2.3 3.0 3.6 4.1 4.6
% yoy n.a. 93.9% 45.2% 28.8% 20.5% 15.4% 11.9%
Price Increases / Year 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Revenue Forecast 98.9% 50.2% 33.8% 25.5% 20.4% 16.9%

2. Mix Accelerator
• Mix accelerator
dynamics:
• Biologics
• China/EM Mix Accelerator Dynamic
acceleration 1 2 3 4 5 6 7 8 9 10
Revenues: Slow Segment $900 $927 $955 $983 $1,013 $1,043 $1,075 $1,107 $1,140 $1,174
% yoy n.a. 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
• Medtech Robotics % of total revenues 90.0% 88.1% 85.9% 83.4% 80.6% 77.4% 73.8% 69.9% 65.7% 61.2%
• Medicare/Medicaid Revenues: Fast Segment $100 $125 $156 $195 $244 $305 $381 $477 $596 $745
% yoy n.a. 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%
• Generally, structurally % of total revenues 10.0% 11.9% 14.1% 16.6% 19.4% 22.6% 26.2% 30.1% 34.3% 38.8%
HSD/LDD revenue Total Revenues $1,000 $1,052 $1,111 $1,179 $1,257 $1,349 $1,456 $1,584 $1,736 $1,919
% yoy n.a. 5.2% 5.6% 6.1% 6.6% 7.3% 8.0% 8.8% 9.6% 10.6%
growth businesses will
trade at higher P/E
multiples than MSD.
Break down the
segment dynamics to
predict these shifts.

3. Comp Waterfall
Fundamental Edge Pizza Pizza Unit Economics

Year 1 Year 2 Year 3 Year 4 Year 5
Pizzas Sold 25,000 50,000 75,000 100,000 105,000

% yoy n.a. 100.0% 50.0% 33.3% 5.0%
Pizzas per Month 2,083 4,167 6,250 8,333 8,750
Pizzas per Day 68 137 205 274 288
Price per Pizza $10.00 $10.00 $10.00 $10.00 $10.00

% yoy n.a. 0.0% 0.0% 0.0% 0.0%
Total Revenue $250,000 $500,000 $750,000 $1,000,000 $1,050,000

% yoy n.a. 100.0% 50.0% 33.3% 5.0%

3. Comp Waterfall (cont’d)
Comp Waterfall Analysis Same New Store

1 2 3 4 5 6 7 8 9 10 Store Productivity
1 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 25.0% 25.0%
2 5.0% 5.0% 5.0% 5.0% 5.0% 100.0% 8.3% 50.0% 25.0%
3 5.0% 5.0% 5.0% 5.0% 5.0% 50.0% 100.0% 10.7% 75.0% 25.0%
4 5.0% 5.0% 5.0% 5.0% 5.0% 33.3% 50.0% 100.0% 12.5% 100.0% 5.0%
5 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 33.3% 50.0% 100.0% 11.7%
6 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 33.3% 50.0% 100.0% 11.0%
7 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 33.3% 50.0% 9.0%
8 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 33.3% 7.0%
9 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
10 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
11 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
12 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
13 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
14 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
15 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
16 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
17 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
18 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
19 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
20 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

3. Comp Waterfall (cont’d)
New Store Ramp Comp Impact

14.0%
12.5%
12.0% 11.7%
11.0%
10.7%
10.0%
9.0%
8.3%
8.0%
7.0%
6.0%
5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
4.0%
2.0%
0.0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

4. Box Replicator
Understand unit economics/revenue/profit of each individual unit.
• Then key question is:

• How many boxes?
• Can economics sustain with growth/cannibalization?
Box Replicator
0 1 2 3 4 5
EBITDA/Box $0.250 $0.250 $0.250 $0.250 $0.250 $0.250
Boxes 10 15 20 25 30 35
EBITDA $2.5 $3.8 $5.0 $6.3 $7.5 $8.8

5. Ramp Curve
• Biotech
• Electric vehicles
• Social media
• See how long it took Ramp Curve

0 1 2 3 4 5
FB to get to $1 billion, Drug 1 $15 $25 $35 $65 $85 $100
example Drug 2 $5 $25 $45 $65 $75 $80
Drug 3 $10 $15 $20 $25 $30 $35
• Or how fast different Drug 4 $35 $55 $75 $130 $155 $175
Average $16 $30 $44 $71 $86 $98
drugs launched
Target Drug ? ? ? ? ? ?

6. Creative Lags: SCI example
Creative use of lags Births % off peak 85 lag

1920 3.0
1921 3.0 0.0% 1999
1922 2.9 (3.3%) 2007
1923 2.9 (3.3%) 2008
1924 3.0 0.0% 2009
1925 2.9 (3.3%) 2010
Peak to Trough Birth Rate vs. 1920 1926 2.8 (6.7%) 2011
1927 2.8 (6.7%) 2012
50.0% 1928 2.7 (10.0%) 2013
1929 2.6 (13.3%) 2014 decel just starting
1930 2.6 (13.3%) 2015
40.0%
1931 2.5 (16.7%) 2016
1932 2.4 (20.0%) 2017
30.0% 1933 2.3 (23.3%) 2018
1934 2.4 (20.0%) 2019
1935 2.4 (20.0%) 2020
20.0% 1936 2.4 (20.0%) 2021
1937 2.4 (20.0%) 2022
10.0% 1938 2.5 (16.7%) 2023 Starts to pick-up
1939 2.5 (16.7%) 2024
1940 2.6 (13.3%) 2025
0.0% 1941 2.7 (10.0%) 2026
1942 3.0 0.0% 2027
1943 3.1 3.3% 2028
(10.0%)
1944 2.9 (3.3%) 2029
1945 2.8 (6.7%) 2030
(20.0%) 1946 3.4 13.3% 2031
1947 3.8 26.7% 2032
1948 3.6 20.0% 2033
(30.0%) 1949 3.6 20.0% 2034
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1950 3.6 20.0% 2035
1951 3.8 26.7% 2036
1952 3.9 30.0% 2037
1953 4.1 36.7% 2038
1954 4.1 36.7% 2039
1955 4.1 36.7% 2040
1956 4.2 40.0% 2041
1957 4.3 43.3% 2042
1958 4.2 40.0% 2043

7. Mix
Extrapolation: SCI
Example
• Find an analogue % of deaths cremated
60%
56%
• UK (a more secular 50%
51%
52%
53%
55%
49%
society than US): 70% of
50% 48%
47%
45%
44%
43%
42%
deaths are cremated 40%
37%
38%
39%
41%
36%
34% 34%
32%
31%
• Likely that US headed 30%
26%
30%
there (slowly) 19%

20%
15%
10%
0%
1985 1995 2000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

7. Mix
Extrapolation: SCI
Example (cont’d) 2007 2008 2009 2010 2011 2012 2013 2014
Total Funeral Revenue $1,525.3 $1,475.7 $1,391.9 $1,492.9 $1,573.5 $1,625.8 $1,704.4 $1,922.0
Total Funeral Gross Profit $307.6 $312.5 $305.8 $317.0 $330.7 $347.8 $350.9 $404.1
• Burial: $10k
Total Revenue per Funeral $5,087.7 $5,305.1 $5,394.1 $5,522.1 $5,660.4 $5,734.4 $5,941.8 $5,902.2
% yoy n.a. 4.3% 1.7% 2.4% 2.5% 1.3% 3.6% (0.7%)
• Cremation: $2k Estimated Cremation Rev per Funeral $1,262.4 $1,357.5 $1,459.6 $1,569.5 $1,687.6 $1,814.7 $1,951.3 $2,078.1
% yoy n.a. 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 6.5%
Estimated Burial Rev per Funeral $7,472.3 $7,882.5 $8,117.0 $8,337.6 $8,820.1 $9,425.8 $9,932.3 $10,095.1
% yoy n.a. 5.5% 3.0% 2.7% 5.8% 6.9% 5.4% 1.6%
Estimated Cremation Revenue $145.3 $149.2 $154.0 $176.5 $207.8 $249.5 $279.9 $353.9
Estimated Burial Revenue $1,380.0 $1,326.5 $1,237.9 $1,316.4 $1,365.7 $1,376.3 $1,424.5 $1,568.1
Estimated Cremation Revenue Mix 9.5% 10.1% 11.1% 11.8% 13.2% 15.3% 16.4% 18.4%
Estimated Burial Revenue Mix 90.5% 89.9% 88.9% 88.2% 86.8% 84.7% 83.6% 81.6%
Total Funeral Services Performed (cremation plus burial) 299,801 278,165 258,040 270,351 277,983 283,516 286,851 325,641
% yoy n.a. (7.2%) (7.2%) 4.8% 2.8% 2.0% 1.2% 13.5%
% SAME STORE n.a. (2.7%) (6.8%) (2.0%) (2.4%) (2.0%) (0.8%) (1.8%)
% NEW STORE n.a. (4.5%) (0.4%) 6.8% 5.3% 4.0% 2.0% 15.4%
0.70% 2.70% 4.20% 1.50% 2.30%
% Burial 61.6% 60.5% 59.1% 58.4% 55.7% 51.5% 50.0% 47.7%
% Cremation 38.4% 39.5% 40.9% 41.6% 44.3% 48.5% 50.0% 52.3%

8. Mid-Cycle/Historical Growth Average
• How to forecast 2021 revenue in this series?

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Revenue Growth 2.0% 4.0% 6.0% 2.0% (2.0%) 1.0% 5.0% 6.0% 2.0% 8.0% 9.0% ?
• There is no right answer, but here are some things to consider:

• Reversion to the mean can be powerful. 10-year avg growth rate is 3.9%, which implies a 5.1%
deceleration into 2021.
• However, over the last 5 years the company has grown more quickly at 6%.
• Key questions to ask?

• What is the core driver of revenue growth?
• How impactful is the economy? New products? Pricing? Competition?
• How has the business mix evolved over time?
• Perhaps in 2016 this company divested a low growth segment and purchased a
high-growth segment
9. Data Correlations: Google Trends Example
• My research question: Durability of RV demand
• Go to google trends, type in a search term

9. Data
Correlations:
Google Trends
Example (cont’d)
• Download the data into
excel
• Sum the data into

quarters

9. Data Correlations: Google Trends Example (cont’d)
Look at data on a YoY growth basis. Create a chart.

Q4 17 Q1 18 Q2 18 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Q4 19 Q1 20 Q2 20 Q3 20 Q4 20 Q1 21 Q2 21 Q3 21 Q4 21 Q1 22 Q2 22
rvs for sale near me: (United States) 244 242 425 459 248 322 542 285 285 415 794 966 702 667 866 711 428 536 652
% yoy 1.6% 33.1% 27.5% (37.9%) 14.9% 28.9% 46.5% 238.9% 146.3% 60.7% 9.1% (26.4%) (39.0%) (19.6%) (24.7%)
YOY Change in Google Trends "RVs For Sale Near Me"

300.0%
250.0% 238.9%
200.0%
146.3%
150.0%
100.0%
60.7%
46.5%
50.0% 33.1% 27.5% 28.9%
14.9% 9.1%
1.6%
0.0%
(26.4%) (19.6%) (24.7%)

(50.0%) (37.9%) (39.0%)
(100.0%)
Q4 18 Q1 19 Q2 19 Q3 19 Q4 19 Q1 20 Q2 20 Q3 20 Q4 20 Q1 21 Q2 21 Q3 21 Q4 21 Q1 22 Q2 22

Compare the YoY change in searches to YoY revenue growth from WGO, CWH and THO

• Think through the supply chain, from customer search to manufacturer sale. If it make
sense, lag the series 1-2 quarters.
• In this case, a 2Q lag makes logical sense, and correlates tightly.
"RV's for sale" yoy, lagged 2 quarters vs. manufacturer sales yoy Correlation
300.0%
No Lag 10.6%
Lagged 1Q 39.3%
250.0%
Lagged 2Q 87.2%
200.0% R-Squared
No Lag 1.1%
150.0% Lagged 1Q 15.4%
Lagged 2Q 76.0%
100.0%
50.0%
0.0%
Q4 18 Q1 19 Q2 19 Q3 19 Q4 19 Q1 20 Q2 20 Q3 20 Q4 20 Q1 21 Q2 21 Q3 21 Q4 21
(50.0%)
(100.0%)
Google Trends: RVs for Sale Near Me Company Sales % YOY

Use this framework to help you forecast the coming quarters
Q2 21 Q3 21 Q4 21 Q1 22 Q2 22 Q3 22E Q4 22E
Google Trends, Lagged 2 Quarters 146.3% 60.7% 9.1% (26.4%) (39.0%) (19.6%) (24.7%)
WGO 40.4% 45.7% 38.7% 51.8% ? ? ?

CWH 28.3% 14.2% 21.5% 6.7% 5.2% ? ?
THO 54.6% 56.0% 42.1% 34.6% 6.4% ? ?
Correlation
No Lag 10.6%
Lagged 1Q 39.3%
Lagged 2Q 87.2%
R-Squared
No Lag 1.1%
Lagged 1Q 15.4%
Lagged 2Q 76.0%
Durability of Growth: Revenue: Percent or Dollar?

Revenue: Percent or Dollar?

Difficulty of Sustaining 10% + Revenue
• Growth durability is a critical question when investing in higher valuation stocks
• As companies become bigger, high ROIC projects become rarer (more competitive)
• A larger base revenue makes high percent growth more difficult, and markets extrapolate

Difficulty of Sustaining 10% + Revenue (cont’d)
• 25% shrank
• Only 21% grew

+10% (including
M&A)
• Companies have
a life cycle!

Difficulty of Sustaining 10% + Revenue (cont’d)
• Work to understand the life-cycle
• Is it a quick ramp business? (tech)
• Is it a durable ramp business? Box

replicator (WMT)
• Restaurant short trigger: 50% of TAM

Sustaining Growth
• P/E multiples tend to correlate with top-line % revenue growth. Usually, when growth
slows, P/Es will crack.
• Sustained 10% and revenue growth is RARE, but when it does happen it generally drives
phenomenal outcomes for the stock.
• IDXX/AMZN/TSLA/GOOGL/AAPL/V, etc. – growth durability stories
• Work to understand the 10+ year runway for growth.

• What is the secular driver?
• Market loves small percent of TAM with easy understanding of TAM share-taking
(i.e., shift to e-commerce, shift to on-line adverting, shift to cloud)

Expense Forecasting
Decide which costs are fixed, and which are variable
• Example: T-Shirt company 2020 2021 2022 2023 2024 2025
• Sell a t-shirt for $15, the T-Shirts Sold 100 110 121 133 146 161
% yoy n.a. 10.0% 10.0% 10.0% 10.0% 10.0%
raw-shirt cost me $5.
Price per T-Shirt $15.00 $15.15 $15.30 $15.45 $15.61 $15.77
• $5 for the shirt is variable – % yoy n.a. 1.0% 1.0% 1.0% 1.0% 1.0%
I incur that expense with Cost per T-Shirt ($5.00) ($5.10) ($5.20) ($5.31) ($5.41) ($5.52)
% yoy n.a. 2.0% 2.0% 2.0% 2.0% 2.0%
every sale, undeniably.
Gross Profit per T-Shirt $10.00 $10.05 $10.10 $10.15 $10.20 $10.24
• I also spend money for an % margin 66.7% 66.3% 66.0% 65.7% 65.3% 65.0%
office and salaries. Those

costs do not fluctuate directly
with the sales level. Those are fixed.

Approaches to Expense Forecasting
2020 2021 2022 2023 2024 2025

Rule of thumb: T-Shirts Sold 100 110 121 133 146 161
% yoy n.a. 10.0% 10.0% 10.0% 10.0% 10.0%
• Forecast variable expenses as a Price per T-Shirt

% yoy
$15.00
n.a.
$15.15
1.0%
$15.30
1.0%
$15.45
1.0%
$15.61
1.0%
$15.77
1.0%
percent of sales or cost per unit Cost per T-Shirt

% yoy
($5.00)
n.a.
($5.10)
2.0%
($5.20)
2.0%
($5.31)
2.0%
($5.41)
2.0%
($5.52)
2.0%
Gross Profit per T-Shirt $10.00 $10.05 $10.10 $10.15 $10.20 $10.24
• Forecast fixed costs with a simple % margin 66.7% 66.3% 66.0% 65.7% 65.3% 65.0%
Total Revenue $1,500 $1,667 $1,851 $2,057 $2,285 $2,539

growth rate Total Gross Profit
% margin
$1,000
66.7%
$1,106
66.3%
$1,222
66.0%
$1,351
65.7%
$1,493
65.3%
$1,650
65.0%
Headquarters Cost ($200) ($202) ($204) ($206) ($208) ($210)

% of sales 13.3% 12.1% 11.0% 10.0% 9.1% 8.3%
bps yoy n.a. (121) (110) (100) (91) (83)
% yoy n.a. 1.0% 1.0% 1.0% 1.0% 1.0%
Salaries ($200) ($202) ($204) ($206) ($208) ($210)
% of sales 13.3% 12.1% 11.0% 10.0% 9.1% 8.3%
bps yoy n.a. (121) (110) (100) (91) (83)
% yoy n.a. 1.0% 1.0% 1.0% 1.0% 1.0%
Total Fixed Costs ($400) ($404) ($408) ($412) ($416) ($420)
% of sales 26.7% 24.2% 22.0% 20.0% 18.2% 16.6%
bps yoy n.a. (242) (220) (200) (182) (166)
% yoy n.a. 1.0% 1.0% 1.0% 1.0% 1.0%
Operating Profit $600 $702 $814 $939 $1,077 $1,230

% margin 40.0% 42.1% 44.0% 45.6% 47.1% 48.4%
bps yoy n.a. 209 187 167 148 131
% yoy n.a. 16.9% 16.0% 15.3% 14.7% 14.2%
Incremental Margin n.a. 61.0% 60.8% 60.6% 60.5% 60.2%

Modeling: Fixed vs. Variable Costs
Modeling Modeling Modeling

Fixed Costs Variable Costs Semi-fixed Costs
• Bias: Model as a growth • Bias: model as a percent • Blend the two
rate. of revenues or on a per approaches. Try to
• With aggregate revenue unit basis. identify drivers of those
growth above rate of fixed cost items. Driven by new
• Given variable costs
cost growth, margins will store growth? Some other
growth with units,
expand (“operating expansion metric?
variable costs in general
leverage”). will not be.
• “Fixed cost leverage” is • However, “price-cost”
generally the source of dynamics on variable cost
above base “incremental line items do drive margin
margin” growth. moves.

Modeling: Fixed vs. Variable Costs (cont’d)
0 1 2 3 4 5 6 7 8 9 10
Units 100 105 110 116 122 128 134 141 148 155 163
% yoy n.a. 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Price / Unit $1.00 $1.02 $1.04 $1.06 $1.08 $1.10 $1.13 $1.15 $1.17 $1.20 $1.22
% yoy n.a. 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Revenue $100 $107 $115 $123 $132 $141 $151 $162 $173 $185 $199
% yoy n.a. 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1%
Fixed Costs ($30.00) ($30.60) ($31.21) ($31.84) ($32.47) ($33.12) ($33.78) ($34.46) ($35.15) ($35.85) ($36.57)
% of revenue 30.0% 28.6% 27.2% 25.9% 24.7% 23.5% 22.4% 21.3% 20.3% 19.3% 18.4%
bps yoy n.a. (143) (136) (130) (123) (118) (112) (107) (102) (97) (92)
% yoy n.a. 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Variable Costs ($60.00) ($64.26) ($68.82) ($73.71) ($78.94) ($84.55) ($90.55) ($96.98) ($103.86) ($111.24) ($119.14)
% of revenue 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0%
bps yoy n.a. 0 0 0 (0) 0 0 0 (0) 0 (0)
% yoy n.a. 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1%
Per Unit ($0.60) ($0.61) ($0.62) ($0.64) ($0.65) ($0.66) ($0.68) ($0.69) ($0.70) ($0.72) ($0.73)
% yoy n.a. 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Total Expenses ($90.00) ($94.86) ($100.03) ($105.55) ($111.42) ($117.67) ($124.33) ($131.44) ($139.01) ($147.09) ($155.71)
% of revenue 90.0% 88.6% 87.2% 85.9% 84.7% 83.5% 82.4% 81.3% 80.3% 79.3% 78.4%
bps yoy n.a. (143) (136) (130) (123) (118) (112) (107) (102) (97) (92)
% yoy n.a. 5.4% 5.5% 5.5% 5.6% 5.6% 5.7% 5.7% 5.8% 5.8% 5.9%

Price vs. Volume
Price Increase Fundamental Edge Pizza Volume Increase Fundamental Edge Pizza
All else equal, a Pre Post Pre Post
point of revenue Pizzas Sold 100,000 100,000 Pizzas Sold 100,000 110,000
% yoy n.a. 0.0% % yoy n.a. 10.0%
growth from price Price per Pizza $10.00 $11.00 Price per Pizza $10.00 $10.00
is more valuable to % yoy n.a. 10.0% % yoy n.a. 0.0%
margin than a point Revenue

% yoy
$1,000,000
n.a.
$1,100,000
10.0%
Revenue
% yoy
$1,000,000
n.a.
$1,100,000
10.0%
from volume Food COGS per Pizza ($5.00) ($5.00) Food COGS per Pizza ($5.00) ($5.00)
% yoy n.a. 0.0% % yoy n.a. 0.0%
Amortization of Pizza Oven ($25,000) ($25,000) Amortization of Pizza Oven ($25,000) ($25,000)
Direct Food Costs ($500,000) ($500,000) Direct Food Costs ($500,000) ($550,000)
Total COGS ($525,000) ($525,000) Total COGS ($525,000) ($575,000)
% of revenue 52.5% 47.7% % of revenue 52.5% 52.3%
bps yoy n.a. (477) bps yoy n.a. (23)
% yoy n.a. 0.0% % yoy n.a. 9.5%
Gross Profit $475,000 $575,000 Gross Profit $475,000 $525,000

% margin 47.5% 52.3% % margin 47.5% 47.7%
bps yoy n.a. 477 bps yoy n.a. 23
% yoy n.a. 21.1% % yoy n.a. 10.5%

Modeling Margins: BPS YOY or Incremental Margins
0 1 2 3 4 5 6 7 8 9 10
• It is more common to
Revenue $100 $105 $110 $116 $122 $128 $134 $141 $148 $155 $163
model margins by “BPS YoY” % yoy n.a. 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Operating Profit $10.00 $11.55 $13.23 $15.05 $17.02 $19.14 $21.44 $23.92 $26.59 $29.48 $32.58
% margin 10.0% 11.0% 12.0% 13.0% 14.0% 15.0% 16.0% 17.0% 18.0% 19.0% 20.0%
• A consistent BPS YoY bps yoy n.a. 100 100 100 100 100 100 100 100 100 100
% yoy n.a. 15.5% 14.5% 13.8% 13.1% 12.5% 12.0% 11.6% 11.2% 10.8% 10.5%
implies expanding Incremental Margin n.a. 31.0% 32.0% 33.0% 34.0% 35.0% 36.0% 37.0% 38.0% 39.0% 40.0%
“incremental margins” 0 1 2 3 4 5 6 7 8 9 10
Revenue $100 $105 $110 $116 $122 $128 $134 $141 $148 $155 $163
% yoy n.a. 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
• It is more “real world” to Operating Profit $10.00 $11.55 $13.18 $14.89 $16.68 $18.56 $20.54 $22.62 $24.80 $27.09 $29.50
model by incrementals, % margin

bps yoy
10.0%
n.a.
11.0%
100
12.0%
95
12.9%
91
13.7%
86
14.5%
82
15.3%
78
16.1%
75
16.8%
71
17.5%
68
18.1%
64
% yoy n.a. 15.5% 14.1% 13.0% 12.1% 11.3% 10.7% 10.1% 9.6% 9.2% 8.9%
which leads to tapering Incremental Margin n.a. 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0%
BPS YoY

“Model to Reality”
• In constructing a model, try to think through “how this business makes” money and how a
dollar flows through the P&L.
• Does it make sense grow HQ costs in line with revenue?
• How might the CFO think about responding to drops in revenues? Might a large drop in
revenue lead to the CFO to pull back on marketing spend?
• Your goal is to “model to reality.”

A Key Driver Focus
• The research process should

be distilled down to three
key drivers. Don’t get lost in
the complexity!
• Your model might be 800

rows. What are the 3 that
matter?

Business Momentum
• “Business momentum” is a term used to denote accelerations (market = likes) and

decelerations (market = doesn’t like)
• The model is critical in observing whether the biz is accelerating or decelerating
• More on this later

The 2-Year Stack
• 2 and 3-year stacks

attempt to normalize for
unusual year ago comps
• ALGN example

The 2-Year Stack (cont’d)
At ALGN, the street has not

accurately modeled revenue
deceleration (which is
happening due to COVID pull-
forward and tough comps)

Thinking Through The Three Statements
• P&L: Source of most “forecast metrics.” Will value the stock by applying a multiple
to these metrics.
• Balance sheet: Risk to equity and calls on cash
• Cash flow statement: normalized FCF production

Modeling Balance
Sheet
Balance Sheet & liquidity
• Leverage and liquidity Needs capital markets to fund operations? N

are key risk factors for Risk of equity raise Low
Next debt term due 6/30/32
equities Net debt / TTM EBITDA 0.78x
12m forward net debt / TTM EBITDA 0.78x
FCF / interest expense 30.27x
• Net debt/EBITDA is the Covenant n.a.
most commonly cited
2019 2020 2021
metric Total Debt $1,538 $1,978 $1,460
Short Term Debt $31 $918 $456
Long Term Debt $1,507 $1,060 $1,004
• Balance sheet tells you Total Cash $211 $889 $1,074
existing calls on cash Net Debt / (Cash) $1,326 $1,089 $386
TTM EBITDA $421 $210 $495
Net Debt / EBITDA 3.2x 5.2x 0.8x
Interest Expense ($62.5)

EBITDA / Interest 7.9x
Next Debt Term Due Jun-32

Modeling FCF
• FCF is the key metric to

value the stock
• The challenge: it Normalized FCF generation

Normalized Free Cash Flow $450.0
bounces around, a lot! Diluted Shares

Normalized FCF / Share
179.58
$2.51
Current Price $34.9
• Capex cycles, Normalized FCF Yield 7.2%
working capital Revenue

2016 2017 2018 2019 2021 2022E 2023E Normal
$2,785.4 $2,810.9 $2,844.5 $2,751.6 $1,929.1 $2,508.9 $2,587.9 $3,000.0
volatility Operating Cash Flow pre WC

% margin
$399.5
14.3%
$383.4
13.6%
$376.1
13.2%
$358.2
13.0%
$171.0
8.9%
$468.3
18.7%
$407.0
15.7%
$525.0
17.5%
YOY Change in Working Capital $17.5 ($24.3) $24.0 $0.0 $0.0 $0.0 $0.0 $0.0
• On top of margin Capex
Capex % of Rev
($48.2) ($48.8) ($72.2) ($76.2) ($42.4) ($43.1) ($61.4) ($75.0)
1.7% 1.7% 2.5% 2.8% 2.2% 1.7% 2.4% 2.5%
volatility Free Cash Flow FCF
PF Diluted Shares
$368.8
127.9
$310.3
127.9
$327.9
127.9
$282.0
162.3
$128.6
164.1
$425.2
177.6
$345.7
179.6
$450.0
179.6
PF Free Cash Flow per share $2.88 $2.43 $2.56 $1.74 $0.78 $2.39 $1.92 $2.51
• NOLs
• When thinking about

FCF, I like to normalize
these volatile items

Modeling Below-the-Line
• If interest expense is meaningful,

forecast net debt stack, look at average
interest expense rate
• Tax rate: Company likely to give

guidance
• Share-count: If buyback exists, divide

FCF to buyback by share price to model
in declines in share count (great debates
on what price to model in out years…)
• A call with IR will be very helpful on

these line items

Company Guidance
• Best guess provided by the company

on forward financial metrics
• Provided by the company to help give

investors clarity on the business
• Generally (but not always) has a

conservative posture

Company Guidance (cont’d)
Long term vs. Guidance cadence for “Hard” vs “Soft” guidance

annual/quarterly guidance December year-end
• Companies will give hard
• Long term: Companies will • Q3 call (usually November) guidance in the press
often give long-term often will get “headwinds/ release – these are firm
guidance on certain tailwinds” for the next numbers
metrics such as revenue year
• On the earnings calls
growth, gross margins,
• Q4 call (usually Jan/Feb)
EBITDA margins, etc. that
will get formal guidance
are ~3-year goals for the
business • Sometimes, companies will
do a December guidance
• Annual/quarterly:
call
Companies will also
usually give annual and • Initial guidance is a
quarterly guidance “guidance vs. consensus”
game

Company Guidance: Long Term Example

Company Guidance: Short Term Example

Company Guidance: Soft vs. Hard
Hard Guidance Soft Guidance Guidance Process

• The hard • Directional commentary on key • Create a guidance
financial metrics drivers section in your
provided in a plate and write
• Usually provided on an earnings
press release down hard & soft
calls, investor presentation, or NDR
• Example: “We guidance
(non-deal roadshow)
expect to earn • Create a row in your
• Example: “Q2 should be the low
$5.00 of EPS this model below the
point for GMs and we expect
year” relevant metric and
sequential improvement in Q3 and
add hard and soft
Q4”
guidance
• Paying attention to soft guidance is a
key part of the “hedge fund hustle”

Consensus: NFLX Example
23 EPS
• 13 estimates for ’23 EPS from NFLX 1 Canaccord Genuity $12.84
2 Raymond James $12.41
3 Guggenheim Securities $11.96
• Ranging from $12.84 to $9.49 (26% gap) 4 Jefferies $11.84
5 Monness, Crespi, Hardt $11.19
6 Restricted 2 $10.65
• Is NFLX trading at 17.5x? (Canaccord) 7 Truist Securities $10.63
• Is NFLX trading at 23.7x? (Rosenblatt) 9 Wolfe Research
10 Cowen & Company
$10.38
$10.09
• Is NFLX trading at 20.7x? (Consensus) 12 Deutsche Bank Research $9.52
13 Rosenblatt Securities $9.49
Consensus $10.87
• Generally, P/E multiples are quote on
Price as of 10.7.22 $224.75
consensus estimates, but the “E”
Street High $12.84
matters in the P/E ratio. Street Low $9.49
Street Low vs. High (26.1%)
P/E, Street High 17.5x

P/E, Street Low 23.7x
P/E, Consensus 20.7x

What Is A Revision
• Revision = Change in consensus EPS (or Revenue, EBITDA)
• Why do revisions matter?

• The most common valuation framework is P/E x EPS (generally next)
• If a stock is trading at $20, or 20x P/E on $1 of EPS:

• And EPS gets cut to $0.50
• And that 20x P/E holds
• The stock goes down the magnitude of the EPS cut (in this case, 50%)
Example EPS P/E Target

2022 Guidance $1.00 20.0x $20.00
2022 Guidance - Revised $0.75 18.0x $13.50
% stock move (32.5%)
Revision Hunting
• Usually happens around quarters, but not always
• Understand the guidance cycle – when in year
• Understand past bias on initial guides (i.e., usually 5-7% upside cushion)
• Understand difference in Q1 vs. Q3 print (band-aid ripper) – hunt for hockey stick guides
• Look at base rate earnings moves
• Look at management propensity to miss

Revisions: META

Revisions: MCK

Revision Hunting
(cont’d)
Revision method
Price EPS P/E
• Identify a meaningful Oct-19
Nov-19
$55.0
$34.0
$1.63
$0.30
33.7x
113.3x
change in the EPS % Change (38.2%) (81.6%)
capitalized by P/E
• GRUB was down ~40%

on one day due to a
large neg revision
• Usually revisions
become apparent
on/around earnings
season

Consensus: A Sell-Sider’s Role
• Sell-side analyst vs. buy-side analyst
• Sell-side analyst role

• Cover on sector, typically 15-25 stocks
• Build models and forecast earnings on all companies. Submit those estimates.
• “Consensus” is the average of these submitted estimates
• Carry buy/hold/sell rating on each stock covered
• Organize management meetings (non-deal roadshows)
• Meet with buyside clients
• Organic annual conference where investors meet with companies

Consensus: A Sell-Sider’s Role (cont’d)
• What drives success as a sell-sider?

• Intuitional Investor vote – essentially, being very helpful to buy-side clients
• What do buy-siders vote/pay for?
• Corporate access/management meetings
• Help understanding industry dynamics
• Sometimes stock recommendations
• Sometimes estimates
• Conclusion: Sell-side equity research is a client service role, where helping your
buy-side client win is a key to success.

Consensus: A Sell-Sider’s Role (cont’d)
What can upset a buy-side client?
• Downgrading a stock you own (especially when unfounded).
• Not getting the client access to management meetings.

• What is the quickest way to piss of a management team?
1. Have a sell rating on the stock.
2. Have an outlier EPS estimate (particularly too low, to support sell rating).
• Having an outlier EPS estimate that either.

1. Makes it harder to engineer an EPS beat (i.e., too high).
2. Creates fear of a downside EPS risk case (i.e., too low).
• This creates an institutional bias for “consensus” hugging behavior.

• Most sell-siders will take consensus and add or subtract a nickel/dime.

Estimate Accuracy
Limits to sell-side estimate accuracy
1. Minimal incentive for estimate accuracy (the #1 carrot is Institutional Investor vote…this is
a sales job)
2. Pressure to cluster around guidance (plus/minus a nickel) due to pressure from corporate
and clients
3. Approval process to update estimates creates inertia
4. Generally simplistic model architecture limits utility
5. General lack of access to alternative data

Estimate Accuracy (cont’d)
Simple accuracy hacks

1. Update estimates more regularly 3. Seasonality of profitability
• Update estimates based on mid- • Ex. generally Q1 is 30% of net
quarter updates from income, but this Q1 the street
management, 8-K disclosures, expects only 25% of the year
external data progression • Ex. A steep Q3/Q4 ramp after Q2 is
2. Granular forecasting of revenue a precursor to heightened earnings
reduction risk (many shorts tend to
• Surprisingly, most street models
pay in Q3)
have 1 revenue forecast line
• Price/volume build, segment build,
organic vs. inorganic build –
provides better accuracy
Estimate Accuracy (cont’d)
4. Historical percent beat vs. initial 6. Incremental margin profitability

guidance framework
• Companies generally put out a low • Models profitability as an
bar with upside incremental margin on new
revenue, rather than BPS
5. Organic growth mean-reversion
expansion in total margins
framework
• Models forward organic growth 7. Model capital deployment
within a 5-year average band • Instead of letting cash build on the
balance sheet, model the
deployment of cash to buyback &
bolt-on M&A

Consensus: DGX Example
• $7.50-$9.00 updated
guidance ($8.25 mean)
• $8.66 mean
• Only 3 out of 17 analysts

lie outside of the
bracketed numbers and
Morningstar and Wolfe
are not core sell-side/
equity issuance firms
• My estimate? $12.50

WGO Forecasting
Over long periods of time, the RV industry has been a ~3-4% unit growth industry
CAGR Growth Rate

1980 -2022 3.7%
1990 -2022 2.9%
2000 - 2022 2.3%
2010 - 2022 6.1%
Average 3.8%

WGO Forecasting (cont’d)
With towables
taking market
share of aggregate
RV shipments

$5.5bn of 2025 Revenue

Market share gains flattening

To generate a baseline unit forecast, forecast industry units then market share
2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E
Industry RV Shipments 430,691 504,599 483,672 406,070 430,412 600,240 493,268 419,278 406,699 418,900
% yoy 15.1% 17.2% (4.1%) (16.0%) 6.0% 39.5% (17.8%) (15.0%) (3.0%) 3.0%
YOY Shipments 56,445 73,908 (20,927) (77,602) 24,342 169,828 (106,972) (73,990) (12,578) 12,201
WGO Share 3.0% 7.1% 8.4% 9.5% 11.3% 12.5% 12.7% 13.0% 13.2% 13.5%
bps share n.a. 410 130 110 180 120 20 25 25 25
Implied WGO Units (ex-Boats) 12,921 35,827 40,628 38,577 48,637 75,030 62,645 54,296 53,684 56,342
% yoy n.a. 177.3% 13.4% (5.1%) 26.1% 54.3% (16.5%) (13.3%) (1.1%) 5.0%
2015-2019 Average 439,856

2009-2019 Average 347,572
2025 "Normal" 418,900
Est COVID pull-forward 194,170

2022-2024 Impact (193,541)

RVIA data provides an early look on quarterly volumes
200.0%
150.0%
100.0%
50.0%
0.0%
Q4 20 Q1 21 Q2 21 Q3 21 Q4 21 Q1 22 Q2 22 Q3 22 Q4 22 Q1 23 Q2 23
(50.0%)
(100.0%)
WGO RVIA

• How to figure out direction of ASPs?
• One idea: Web scraping

Supplemented by on
the ground diligence

Buy-Side Valuation

Valuation & The Model
How does a model help us value a stock?
• Identify the factors that influence valuation

1. Growth algorithm
2. Business momentum
3. Business quality
4. Capital deployment/capital structure
5. Terminal value stability
• Generate the forecast metrics to which we apply a multiple

• Revenue/EBITDA/EPS/FCF

The present value of any asset
is the discounted value
of its future cash flows

The Dichotomy of the DCF
Two things are true…
DCF is the best method to value Also true, 99% of PM’s don’t like
an asset, all other methods DCFs. So sensitive to cost of capital
are just a shortcut. and terminal growth assumptions.
If the best method is not useful, what do we do?

Messy Reality
• Equities are a “long duration” asset.

Meaning the average stock only derives 1/3 of
its current enterprise value from the next 10
years of cash flows, leaving wholly 2/3 of the
value of the enterprise dependent on collective
market perceptions of years 10-40.
• In this dynamic, highly uncertain world, who

has any clue how the average business is going
to perform in years 10 to 40?
• Few CFOs have much visibility in their own

business beyond the next 12 months…

Messy Reality (cont’d)
NFLX: % of Enterprise Value Covered, by year

100%
90% 86% 87%

83% 84%
79% 81%
80% 78%
76%
74%
72%
69%
70% 67%
65%
62%
59%
60% 56%
53%
50%
50% 46%
43%
39%
40%
35%
31%
30% 27%
22%
20% 18%
14%
9%
10%
4%
2%
0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

“Valuation is a Point of View”
As a small rotation of the kaleidoscope

can change the image, a seemingly
small change in current fundamentals
can meaningfully impact the valuation
point of view of the market.

14.0x
10.0x
11.0x
12.0x
13.0x
15.0x
16.0x
17.0x
18.0x
19.0x
20.0x
21.0x
22.0x
23.0x
24.0x
25.0x
26.0x
27.0x
28.0x
8.0x
9.0x
12/31/99
7/31/00
2/28/01
9/30/01
Market Valuation
4/30/02
11/30/02
6/30/03
1/31/04
8/31/04
3/31/05
10/31/05
5/31/06
12/31/06
7/31/07
2/29/08
9/30/08
4/30/09
11/30/09
6/30/10
1/31/11
8/31/11
S&P 500 NTM P/E
3/31/12
10/31/12
5/31/13
22-year median: 15.9x
12/31/13
7/31/14
2/28/15
9/30/15
4/30/16
11/30/16
6/30/17
1/31/18
8/31/18
3/31/19
10/31/19
5/31/20
12/31/20
7/31/21
2/28/22
9/30/22
“The Market”
• Collectively, the S&P 500 drives 5-6% revenue growth, 9-12% EPS growth (historically
delivered 6% EPS growth)
• Long-short spread is the name of the game in hedge fund stock selection
Thinking about stock level characteristics as superior

or inferior to the market is a helpful mental framework
S&P 500 2021 2022 2023 2024

Sales Growth 17.7% 7.7% 5.5% 6.7%
EBIT Growth 39.7% 11.5% 8.5% 7.0%
EPS Growth 50.1% 8.5% 10.3% 11.7%
EBIT Margin 16.9% 17.5% 18.0% 17.5%
Why Has The Market Traded At ~16x P/E?
Discounted FCF $1,654,107
• Run the “median” S&P 500 Terminal Value

Net Present Value
Terminal Multiple
$439,427
$2,093,535
10.0x
WACC 8.0%
company through a 30-year DCF Enterprise Value

Less: Net Debt
$2,093,535
$732,737 5.5%
Market Cap $1,360,797
• 4.5% revenue growth

Diluted Shares 150,000
Price $9.07
EPS $0.55
P/E 16.5x
• Modest margin expansion 1 2 3 4 5

Sample Business
25 26 27 28 29 30
Revenue $1,000,000 $1,045,000 $1,092,025 $1,141,166 $1,192,519 $2,876,014 $3,005,434 $3,140,679 $3,282,010 $3,429,700 $3,584,036
% yoy n.a. 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5%
• 8% WACC Operating Profit

% margin
bps yoy
$150,000
15.0%
n.a.
$157,273
15.1%
5
$164,896
15.1%
5
$172,887
15.2%
5
$181,263
15.2%
5
$465,914
16.2%
5
$488,383
16.3%
5
$511,931
16.3%
5
$536,609
16.4%
5
$562,471
16.4%
5
$589,574
16.5%
5
% yoy n.a. 4.8% 4.8% 4.8% 4.8% 4.8% 4.8% 4.8% 4.8% 4.8% 4.8%
Tax Rate 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%
NOPAT $112,500 $117,954 $123,672 $129,665 $135,947 $349,436 $366,287 $383,948 $402,456 $421,853 $442,181
Interest Expense ($40,301) ($40,301) ($40,301) ($40,301) ($40,301) ($40,301) ($40,301) ($40,301) ($40,301) ($40,301) ($40,301)
Results in a DCF value that

Pre-Tax Income $109,699 $116,972 $124,595 $132,586 $140,962 $425,614 $448,083 $471,630 $496,308 $522,170 $549,273
Tax Expense ($27,425) ($29,243) ($31,149) ($33,147) ($35,241) ($106,403) ($112,021) ($117,908) ($124,077) ($130,543) ($137,318)
Net Income $82,275 $87,729 $93,446 $99,440 $105,722 $319,210 $336,062 $353,723 $372,231 $391,628 $411,955
Diluted Shares 150,000 150,000 150,000 150,000 150,000 150,000 150,000 150,000 150,000 150,000 150,000
implies 16.5x P/E on next year Diluted EPS

% yoy
$0.55
n.a.
$0.58
6.6%
$0.62
6.5%
$0.66
6.4%
$0.70
6.3%
$2.13
5.3%
$2.24
5.3%
$2.36
5.3%
$2.48
5.2%
$2.61
5.2%
$2.75
5.2%
Invested Capital $750,000 $783,750 $819,019 $855,875 $894,389 $2,157,010 $2,254,076 $2,355,509 $2,461,507 $2,572,275 $2,688,027
YOY Change in IC n.a. $33,750 $35,269 $36,856 $38,514 $92,886 $97,065 $101,433 $105,998 $110,768 $115,752
ROIC 15.0% 15.1% 15.1% 15.2% 15.2% 16.2% 16.3% 16.3% 16.4% 16.4% 16.5%
Increase in IC 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5%
Capital Expenditure ($25,313) ($26,452) ($27,642) ($28,886) ($30,186) ($72,799) ($76,075) ($79,498) ($83,076) ($86,814) $0
% of revenue 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 0.0%
Free Cash Flow $87,188 $91,503 $96,030 $100,779 $105,761 $276,637 $290,212 $304,450 $319,381 $335,039 $442,181
% margin 8.7% 8.8% 8.8% 8.8% 8.9% 9.6% 9.7% 9.7% 9.7% 9.8% 12.3%
FCF/Share $0.58 $0.61 $0.64 $0.67 $0.71 $1.84 $1.93 $2.03 $2.13 $2.23 $2.95
Discount Rate 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
Discounted FCF $80,729 $78,449 $76,232 $74,076 $71,979 $40,394 $39,237 $38,113 $37,021 $35,959 $43,943

Valuation Approaches
Question: Which valuation approach below is the best? Answer: It depends…
P/E EV/EBITDA EV/Sales DCF

The value of a stock is a The value of a stock is a The value of a stock is a The value of a stock is the
multiple of current net multiple of EBITDA, less net multiple of sales, less net discounted value of unlevered
income per share debt, divided by shares debt, divided by shares FCF, less net debt, divided
Use case: Broad Use case: Broad Use case: Unprofitable by shares
company Use case: Broad
FCF Yield Normalized EPS Takeout Value Dividend Yield

The value of a stock is a The value of a stock is a The value of a stock is the per The value of a stock
function of a target FCF yield multiple of the normalized share value of the company in is a function of a target
Use case: Broad earnings power of a takeover transaction dividend yield
the business Use case: Takeout is a Use case: Dividend paying
Use case: Current earnings potential outcome stocks for dividend focused
are inflated or depressed investors

Remember:
Valuation is a point of view.
Valuation is ultimately a bet on
long-term fundamentals.

Valuation Is A Point Of View
5 Year 5 Year 5 Year

Member ARPU Margin
High $700 15.0% $16.00 35.0%
Current $365 6.0% $15.00 25.0%
Low $165 0.0% $13.00 21.0%
My View $300 4.0% $15.50 25.0%
Return from $700 (57.1%)

Return from $165 81.8%

“The Core Formula”
P/E × EPS = Price
• Key questions:
• What is the proper P/E to apply?
• What the proper EPS to apply that P/E to?
• When is the price?
NTM P/E × NTM EPS = Price
NTM2 P/E × NTM2 EPS = Price (in 12 months)

Why Multiples?
• Ignores cost of capital
• DCF can be expressed as a multiple of Year 1 FCF as a short-hand
• “Multiples are a short-hand for DCF”
1 2 3 4 5 6 7 8 9 10
Free Cash Flow $10 $10 $10 $10 $10 $10 $10 $10 $10 $10
Purchase Price $100

Sum of FCF $100
Payback Period, Years 10
Purchase Price $100

Year 1 FCF $10
Multiple 10.0x

Why Multiples? (cont’d)
• However, cash has an opportunity cost and cash flows have risk, so we must discount these
future cash flows
• At a 10% discount rate, this FCF stream is worth $61 (or a 6.1x multiple)
1 2 3 4 5 6 7 8 9 10
Free Cash Flow $10 $10 $10 $10 $10 $10 $10 $10 $10 $10
Discount Period 1 2 3 4 5 6 7 8 9 10
Discount Rate 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Discounted FCF $9.1 $8.3 $7.5 $6.8 $6.2 $5.6 $5.1 $4.7 $4.2 $3.9
Sum of Discounted FCF $61
Purchase Price $61

Year 1 FCF $10
Multiple 6.1x

• However, we must account for the terminal • Notice here, the TV is ~40% of total value,
value of the asset – apply a terminal growth rate even after forecasting 10 years of FCF (which is
or multiple (same difference). very difficult to do accurately!).
• When accounting for TV, the asset is again • After 3 years, TV might account for 85%+ of
worth 10x. NPV – so why not just apply a multiple?
1 2 3 4 5 6 7 8 9 10 Terminal
Free Cash Flow $10 $10 $10 $10 $10 $10 $10 $10 $10 $10 $100 10.0x
Discount Period 1 2 3 4 5 6 7 8 9 10 10
Discount Rate 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Discounted FCF $9.1 $8.3 $7.5 $6.8 $6.2 $5.6 $5.1 $4.7 $4.2 $3.9 $38.6
Sum of Discounted FCF $61

Sum of Terminal Value $39
Net Present Value $100
Purchase Price $100

Year 1 FCF $10
Multiple 10.0x

Applying a P/E Ratio
P/E
Which is the most Stock 1 10.0x
Stock 2 30.0x
attractive stock? Stock 3 100.0x
Stock 1 0 1 2 3 4 5
EPS $1.00 $0.95 $0.90 $0.86 $0.81 $0.77
% yoy (5.0%) (5.0%) (5.0%) (5.0%) (5.0%)
Stock 2 0 1 2 3 4 5
EPS $1.00 $1.15 $1.32 $1.52 $1.75 $2.01
% yoy 15.0% 15.0% 15.0% 15.0% 15.0%
Stock 3 0 1 2 3 4 5
EPS $1.00 $1.70 $2.72 $4.08 $5.71 $7.43
% yoy 70.0% 60.0% 50.0% 40.0% 30.0%

Applying a P/E Ratio (cont’d)
Which is the most

attractive stock?

Applying a P/E Ratio (cont’d)
• Generally, it is the E in the P/E that will matter much more!
• Having the proper foresight on the E for TSLA led to a 30-bagger.
TSLA Street Then Street Now

2019 EPS 2023 EPS 2023 EPS
Price $37.0 $37.0 $37.0
EPS $0.01 $1.50 $12.47
P/E 3700.0x 24.7x 3.0x

Reason investors use multiples:
1. Generally skeptical of DCFs (“garbage in, garbage out”), except at extremes

• Can be easily manipulated with small tweaks to growth or WACC assumptions
• Hard to benchmark to peers and to history of asset
• Terminal Value can often be 85%+ of DCF anyways, which is effectively a multiple
2. Simplistic method
• Easy to implement
• Can compare to where asset has traded historically
• Can compare to other similar assets

NTM P/E Chart
Thought process:
• “Asset prices will

revert to the
mean over time”
• “Where an asset
has traded in
the past helps
influence where
it might trade in
the future”

Constructing an NTM P/E Chart
Thought process:
• “Asset prices will

revert to the
mean over time”
• “Where an asset
has traded in
the past helps
influence where
it might trade in
the future”

Constructing an NTM P/E Chart (cont’d)
Look at market relative multiple to adjust for prevailing market level

Free Cash Flow Yield
• Inverts the multiple: • Used as a mental proxy for dividend yield

• “If the company used all FCF to pay a
FCF ÷ Market Cap = FCF Yield
dividend…yield would be x%.”
Market Cap ÷ FCF = FCF Multiple • Used as a proxy for payback period
• “A 10% FCF yield could buy back the market cap
• Considered on an unlevered (pre
in 10 years w/ no growth.”
interest) or levered basis (post interest):
Levered FCF = L-FCF ÷ MCAP FCF Yield

Enterprise Value $500
Net Debt $100
Unlevered FCF Yield = UL-FCF ÷ EV Market Cap $400
• Many investors prefer since cash drives Free Cash Flow $40
value (not accounting EPS). EPS is meant to
be a proxy for FCF, so why not just use FCF? FCF Yield, Levered 10.0%
Applying P/E Multiples
• Peer relative multiples tell you about the embedded expectation for a name.
• What is the market telling us about expected organic revenue growth for MedTech 5?
Organic
NTM P/E Rev Growth
MedTech 1 26.0x 12.0%
MedTech 2 24.0x 8.0%
Avg 21.5x 7.8%
MedTech 5 18.0x ?
• What if we believe that MedTech 5 has a pathway to achieve Medtech 3 organic growth?
Drivers of Multiples
Why does AMZN 33.0x

AMZN NTM EV/EBITDA
trade to high/low 32.0x

31.0x
30.0x
multiples? 29.0x
28.0x
27.0x
• Consult model – 26.0x

25.0x
24.0x
analyze business 23.0x
22.0x
momentum… 21.0x
20.0x
19.0x
18.0x
17.0x
16.0x
15.0x
14.0x
13.0x
12.0x
11.0x
10.0x

AMZN Example
AMZN Stock Price

$195
$190
$185
$180
$175 +115%
$170
$165
$160
$155
$150
$145
$140
$135
$130
$125
$120
$115
-45%
$110
$105
$100
$95
$90
$85
$80
$75
$70
$65
$60
$55
1/1/19
3/1/19
5/1/19
7/1/19
9/1/19
11/1/19
1/1/20
3/1/20
5/1/20
7/1/20
9/1/20
11/1/20
1/1/21
3/1/21
5/1/21
7/1/21
9/1/21
11/1/21
1/1/22
3/1/22
5/1/22
7/1/22
9/1/22
AMZN Example (cont’d)

What Drives Multiples?
• Market multiple
• Growth
• Normalized profitability
• Capital intensity
• Duration/quality
1/16/2020
EV / Revenue EV/EBITDA P/E Revenue
Price Shares MCAP Net Debt EV 2019 2020 2021 2019 2020 2021 2019 2020 2021
XRAY $59.96 224.9 $13,485 $1,190 $14,675 3.7x 3.5x 3.4x 16.7x 15.3x 14.2x 24.4x 21.9x 19.7x
STMN $1,039.09 15.9 $16,522 $60 $16,582 10.1x 8.8x 7.7x 33.0x 27.6x 24.1x 46.5x 38.2x 32.8x
ALGN $280.70 79.8 $22,400 ($782) $21,617 9.0x 7.5x 6.3x 34.6x 28.1x 23.1x 52.4x 43.1x 35.0x
SDC $13.20 382.9 $5,054 ($328) $4,726 6.3x 4.1x 3.0x n.a. 270.1x 33.2x n.a. n.a. 264.0x
AVG 7.3x 6.0x 5.1x 28.1x 85.3x 23.7x 41.1x 34.4x 87.9x
AVG (ex. SDC) 7.6x 6.6x 5.8x 28.1x 23.7x 20.5x 41.1x 34.4x 29.2x
NVST - BELL ROCK $34.93 178.5 $6,235 $1,119 $7,354 2.7x 3.8x 2.9x 17.5x 35.0x 14.9x 22.8x 64.9x 18.9x

When Do Multiples Not Work?
When does the core P/E x EPS formula not work well?
• Young company with hyper revenue growth
• Young company with negative margins
• Company with temporary operating losses (COVID impacted, for example)
• Company coming out of a capital cycle with depreciation well above capex
• Company with a new division or product that is generating meaningful losses

In these scenarios, normalized
earnings analysis is a useful tool

Normalized Earnings
2019 2020 2021 2022E 2023E 2024E
Is AMZN cheap (2x North American Sales

International Sales
$170,773
$74,723
$236,282
$104,412
$279,833
$127,787
$314,760
$118,952
$346,236
$130,848
$387,785
$146,549
Current Price
'24 Normalized EPS
$103.40
$5.08
AWS Sales $35,026 $45,370 $62,202 $80,410 $100,512 $125,640 P/E 20.4x
EV/Rev) or expensive TOTAL SALES

Street 10.30.22
$280,522 $386,064 $469,822 $514,122
$512,922
$577,596
$571,399
$659,974
$653,153
'24 Normalized EPS $5.08
(200x P/E)? Depends on North American Operating Income

International Operating Income
$7,033
($1,693)
$8,651
$717
$7,271
($924)
($4,452)
($8,351)
$17,312
$3,925
$19,389
$4,396
Target P/E
Target Price
35.0x
$177.73
AWS Operating Income $9,201 $13,531 $18,532 $23,276 $30,154 $37,692 % upside 71.9%
your view of normalized. TOTAL OPERATING INCOME

Street 10.30.22
$14,541 $22,899 $24,879 $10,473
$12,892
$51,391
$24,066
$61,478
$42,123
North American Operating Income 4.1% 3.7% 2.6% (1.4%) 5.0% 5.0%
International Operating Income (2.3%) 0.7% (0.7%) (7.0%) 3.0% 3.0%
AWS Operating Income 26.3% 29.8% 29.8% 28.9% 30.0% 30.0%
TOTAL OPERATING INCOME 5.2% 5.9% 5.3% 2.0% 8.9% 9.3%
Interest income $831 $555 $448 $644 $400 $400

Interest expense ($1,600) ($1,647) ($1,809) ($2,173) ($2,000) ($2,000)
Other income, net $203 $2,371 $14,633 ($13,356) $0 $0
Total Non-Operating Income ($566) $1,279 $13,272 ($14,885) ($1,600) ($1,600)
PRE-TAX INCOME $13,975 $24,178 $38,151 ($4,412) $49,791 $59,878
Provision for income taxes ($2,374) ($2,863) ($4,791) $1,384 ($6,473) ($7,784)
% rate 13.0% 13.0%
Equity-method investment activity ($14) $16 $4 ($16) $0 $0
NET INCOME $11,587 $21,331 $33,364 ($3,044) $43,318 $52,094
Diluted Shares 10,080 10,200 10,300 10,255 10,257 10,259
DILUTED EPS $1.15 $2.09 $3.24 ($0.30) $4.22 $5.08

P/E
Street 10.30.22 $1.15 $2.09 $3.24 $0.52 $2.05 $3.46
198.8x 50.4x 29.9x

Normalized Earnings (cont’d)
Company earned Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Revenue $100 $65 $78 $94 $108 $113
$1.13 last year, but % yoy n.a. (35.0%) 20.0% 20.0% 15.0% 5.0%
will lose 13c this year
Operating Profit $20 $3 $8 $14 $22 $23
– how to value? % margin 20.0% 5.0% 10.0% 15.0% 20.0% 20.0%
Interest Expense ($5) ($5) ($5) ($5) ($5) ($5)

Pre-Tax $15 ($2) $3 $9 $17 $18
Tax Expense ($4) $0 ($1) ($2) ($4) ($4)
% rate 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%
Net Income $11 ($1) $2 $7 $12 $13
Diluted Shares 10 10 10 10 10 10
EPS $1.13 ($0.13) $0.21 $0.68 $1.24 $1.32
% yoy n.a. (111.7%) (260.0%) 222.9% 82.8% 6.5%

One method: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Normalized Price Calculation
Revenue $100 $65 $78 $94 $108 $113 Normal Multiple 20.0x
% yoy n.a. (35.0%) 20.0% 20.0% 15.0% 5.0%
• Look out to “normal year” Normal EPS $1.24
Operating Profit $20 $3 $8 $14 $22 $23 Normalized Price $24.80
% margin 20.0% 5.0% 10.0% 15.0% 20.0% 20.0%
• In this example, a nasty
Discount Year 3
revenue hit takes 3 years Interest Expense
Pre-Tax
($5)
$15
($5)
($2)
($5)
$3
($5)
$9
($5)
$17
($5)
$18
Discount Rate 15.0%
to fully recover Tax Expense
% rate
($4)
25.0%
$0
25.0%
($1)
25.0%
($2)
25.0%
($4)
25.0%
($4)
25.0%
Net Income $11 ($1) $2 $7 $12 $13
Discounted Normalized $16.31
• Margins take 3 years to Diluted Shares 10 10 10 10 10 10
EPS $1.13 ($0.13) $0.21 $0.68 $1.24 $1.32
fully recover % yoy n.a. (111.7%) (260.0%) 222.9% 82.8% 6.5%
• Year 4 or $1.24 would

be the normal year

AMZN North America Margins

6.0%
5.1% 5.0%
5.0%
4.1%
4.0% 3.7%
3.0% 2.6%
2.0%
1.0%
0.0%
(1.0%)
(2.0%) (1.4%)
2018 2019 2020 2021 2022E Normal

Future State Earnings
Normalized Price Calculation

Hypergrowth name Normal Multiple 25.0x
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Revenue $100 $125 $156 $195 $244 $305
Normal EPS $4.20
• Growing revenue at % yoy n.a. 25.0% 25.0% 25.0% 25.0% 25.0% Normalized Price $105.07
25%, but losing money Operating Profit ($10) ($6) $8 $20 $37 $61 Discount Year 4
% margin (10.0%) (5.0%) 5.0% 10.0% 15.0% 20.0% Discount Rate 15.0%
• Not until Year 5 will Interest Expense ($5) ($5) ($5) ($5) ($5) ($5)
Discounted Normalized $60.07
Pre-Tax ($15) ($11) $3 $15 $32 $56
the company be Tax Expense $4 $3 ($1) ($4) ($8) ($14)
% rate 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%
making money Net Income
Diluted Shares
($11)
10
($8)
10
$2
10
$11
10
$24
10
$42
10
EPS ($1.13) ($0.84) $0.21 $1.09 $2.37 $4.20
% yoy n.a. (25.0%) (125.0%) 416.7% 117.6% 77.2%

Coatue Framework
• “Focus on TAM,
earnings, growth
and corresponding
P/E 5-7 year out”
• “Public investors
are not always as
imaginative as
private investors”

Normalizing Earnings (cont’d)
What do we normalize for?
• Mid-cycle/normalized revenue
• Strip out any big revenue headwinds or tailwinds
• Normalized margin
• Beware of putting a multiple on a peak or trough margin
• Capital structure
• If company is paying down debt, consider that
• If company has high interest debt that can be refinanced, consider that
• Normalized capital intensity

• Depreciation vs. capex spread
Disaggregating P/E
Using P/E framework, two ways a stock

can change price:
1. “E” changes (revised or rolled forward)
2. P/E multiple changes
P/E EPS Price

20.0x $1.00 $20.00
20.0x $1.50 $30.00
0.0% 50.0% 50.0%
P/E EPS Price

20.0x $1.00 $20.00
30.0x $1.00 $30.00
50.0% 0.0% 50.0%
P/E Roll-Forward
• Investing is simply price forecasting
P/E, Today P/E, 1 Year Forward

The value of a stock today The value of a stock in 1 year
is a multiple of current NTM EPS is a multiple of NTM EPS,
one year from now
• With a P/E roll-forward approach, we must forecast 1) EPS and 2) changes in P/E
Now 1 Year % yoy

Price $20.00 $30.00 50.0%
EPS $1.00 $1.20 20.0%
P/E 20.0x 25.0x 25.0%

Investing Styles
In investing, there are many ways to make money…
Compounders Estimate Revisions Catalyst/Event-Driven

“If I can just buy businesses “If I can predict where Street “If I can predict how certain
compounding profits at a high estimates are headed, I can predict catalysts will play out, I can predict
level and holding the multiple, where the stock is headed.” where the stock is headed.”
the stock should appreciate
with profit growth.”
Growth/Momentum Mean Reversion Investing Value Investing

“If I can just buy stocks that are “If I can just buy stocks that have “If I can buy stocks at a meaningful
working, they should continue underperformed, they should discount to intrinsic value, over
to work.” bounce back.” time I should make money.”

Picking a P/E?
• Own history (absolute and market relative)
• Peers (“looks like”)
• Value drivers (DCF cases) with extrapolation
• Reverse DCF implied P/E
• PEG/algorithm approach
• Historical KPI correlation (AMZN example)

Mental Models for Return Forecasting
Mental model to use (not perfect, but effective)
• A simple framework
• P/E × EPS = Price
• As stock pickers, we are price forecasters
• For a 1-year forecast, we need to forecast NTM + 2 EPS and NTM + 2 P/E
• Three ways to “get paid”

1. EPS grows, roll forward the P/E (compounder)
2. EPS revision
3. P/E up or down

Value Stock
P/E EPS Price

Start 5.0x $1.00 $5.00
End 9.0x $1.10 $9.90
% return 80.0% 10.0% 98.0%

Growth Stock
P/E EPS Price

Start 100.0x $1.00 $100.00
End 50.0x $4.00 $200.00
% return (50.0%) 300.0% 100.0%

Compounder
P/E EPS Price

Start 20.0x $1.00 $20.00
End 20.0x $2.00 $40.00
% return 0.0% 100.0% 100.0%

The Algorithm
• “What’s the algorithm?” • Flow down the P&L:
• 3–5-year structural growth • Revenue

• Margin
• Below-the line
• Capital deploy
• EPS growth
Normalized EPS growth algorithm: 3-5+ years Low High Mid

Normalized organic revenue growth 2.5% 5.0% 3.8%
Normalized inorganic revenue growth 1.0% 2.5% 1.8%
Normalized revenue growth 3.5% 7.5% 5.5%
Normalized op profit growth 5.0% 10.0% 7.5%
Normalized EPS Growth 5.0% 10.0% 7.5%
Riding the Algorithm
GOOGL MNST TDG DHR UNH CMG SBUX V AVG REL

Avg 25.6% 55.5% 23.9% 18.4% 23.2% 36.5% 23.1% 24.3% 32.2% 24.0%
Bat Avg 84.0% 84.6%
Perf Rel
2022 YTD (33.5%) (2.6%) (8.6%) (23.5%) 9.8% (13.9%) (25.5%) (3.4%) (12.7%) 5.5%
2021 65.3% 3.8% 2.8% 48.1% 43.2% 26.1% 9.3% (0.9%) 24.7% (2.2%)
2020 30.9% 45.5% 10.5% 44.7% 19.3% 65.7% 21.7% 16.4% 31.8% 15.6%
2019 28.2% 29.1% 64.7% 48.8% 18.0% 93.9% 36.5% 42.4% 45.2% 16.3%
2018 (0.8%) (22.2%) 23.8% 11.1% 13.0% 49.4% 12.1% 15.7% 12.8% 19.0%
2017 32.9% 42.7% 10.3% 19.2% 37.8% (23.4%) 3.4% 46.1% 21.1% 1.7%
2016 1.9% (10.7%) 9.0% (16.2%) 36.0% (21.4%) (7.5%) 0.6% (1.0%) (10.6%)
2015 46.6% 37.5% 16.3% 8.4% 16.4% (29.9%) 46.3% 18.3% 20.0% 20.7%
2014 (5.4%) 59.9% 21.9% 11.0% 34.2% 28.5% 4.7% 17.7% 21.6% 10.2%
2013 58.4% 28.3% 18.1% 38.1% 38.8% 79.1% 46.2% 46.9% 44.2% 14.6%
2012 9.5% 14.7% 42.5% 18.8% 7.0% (11.9%) 16.6% 49.3% 18.3% 4.9%
2011 8.7% 76.2% 32.9% (0.3%) 40.3% 58.8% 43.2% 44.3% 38.0% 38.0%
2010 (4.2%) 36.1% 51.6% 25.5% 18.5% 141.2% 39.3% (19.5%) 36.1% 23.3%
2009 101.5% 14.5% 41.5% 32.8% 14.6% 42.2% 143.8% 66.7% 57.2% 33.8%
2008 (55.5%) (24.3%) (25.7%) (35.5%) (54.3%) (57.9%) (53.8%) n.a. (43.8%) (5.4%)
2007 50.2% 31.5% 70.4% 21.1% 8.3% 158.0% (42.2%) n.a. 42.5% 38.9%
2006 11.0% 70.9% n.a. 29.9% (13.5%) n.a. 18.0% n.a. 23.3% 9.6%
2005 115.2% 332.9% n.a. (2.8%) 41.2% n.a. (3.8%) n.a. 96.5% 93.5%
2004 n.a. 332.4% n.a. 25.1% 51.3% n.a. 88.1% n.a. 124.2% 115.2%
2003 n.a. 99.5% n.a. 39.6% 39.4% n.a. 62.7% n.a. 60.3% 33.9%
2002 n.a. 0.5% n.a. 8.9% 18.0% n.a. 7.0% n.a. 8.6% 32.0%
2001 n.a. 8.4% n.a. (11.8%) 15.3% n.a. (13.9%) n.a. (0.5%) 12.5%
1999 n.a. (10.1%) n.a. 41.7% 131.1% n.a. 82.5% n.a. 61.3% 71.4%
1998 n.a. (19.8%) n.a. (11.2%) 23.4% n.a. (13.6%) n.a. (5.3%) (24.8%)
1997 n.a. 196.6% n.a. 72.1% (13.3%) n.a. 46.3% n.a. 75.4% 48.7%
1996 n.a. 70.6% n.a. 35.4% 10.4% n.a. 34.1% n.a. 37.6% 6.6%

WGO
How might we figure out What influences

a price target for WGO? valuation & P/E?
• Core formula: P/E × EPS • Business quality
• Current P/E = Current Price ÷ • Growth

NTM EPS (FY ’24)
• Business momentum: Trajectory
• 1-year target = P/E × FY25 EPS of revenue and margins
(Aug ’25)
• Perceived “over” or “under”
• 3-year target = P/E × FY27 EPS earning
(Aug ’27)

WGO Valuation
EV/REV EV/GP EV/EB P/E LTM Yield NTM Yield

• Current NTM P/E:
Current 0.7x 4.0x 6.6x 7.8x 0.1x 0.2x
7.8x
1 year Median 0.6x 3.5x 5.6x 6.9x 11.8% 15.5%
• 10 Year Range: 3 year Median 0.7x 4.0x 6.3x 8.5x 9.9% 11.1%
5 year Median 0.7x 4.2x 6.7x 9.0x 9.1% 10.2%
4.3x-22.2x
10 year Median 0.7x 4.6x 7.3x 11.6x 5.4% 6.2%
• 10 Year Median: 1 year Max 0.7x 4.3x 6.9x 8.7x 14.6% 20.0%
11.6x 3 year Max 1.1x 7.4x 13.4x 21.2x 16.6% 20.0%
5 year Max 1.1x 7.4x 13.4x 21.2x 16.6% 20.0%
10 year Max 1.1x 7.8x 13.4x 22.2x 16.6% 20.0%
1 year Min 0.4x 2.5x 3.7x 4.3x 4.6% 13.2%

3 year Min 0.4x 2.5x 3.7x 4.3x 2.1% 4.6%
5 year Min 0.4x 2.5x 3.7x 4.3x (1.0%) 1.5%
10 year Min 0.4x 2.5x 3.7x 4.3x (11.8%) (50.8%)

WGO (cont’d) 4.23.23
Absolute Min Max Median
1 year 4.3x 8.7x 6.9x
• Historical observed 3 year 4.3x 21.2x 8.5x
5 year 4.3x 21.2x 9.0x
P/E range: 8-12x P/E 10 year 4.3x 22.2x 11.6x
S&P rel Min Max Median

1 year (12.8x) (8.7x) (10.0x)
3 year (15.0x) (1.0x) (10.7x)
5 year (15.0x) (1.0x) (9.3x)
10 year (15.0x) 8.1x (5.9x)
18.3x Implied Min Max Median

1 year 5.5x 9.5x 8.2x
3 year 3.2x 17.3x 7.6x
5 year 3.2x 17.3x 9.0x
10 year n.a. 26.4x 12.4x
Dummy Valuation Summary

Current P/E 7.8x % move
Central 9.0x 15.5%
Range High 10.0x 11.1%
Range Low 8.0x (20.0%)

Business Momentum
Work to identify the linkage between fundamentals and valuation
WGO: YOY Revenue Growth WGO: TTM Adjusted Operating Margin

160% 14.0%
139%
140% 12.0%
12.0% 11.7% 11.7% 11.8%
11.2% 11.0%
120% 10.7% 10.5%
100% 10.0%
83% 8.8%
80% 75% 73% 8.0% 7.9% 7.7% 7.8% 7.8%

8.0%
64%
7.0%
6.8%
60% 52% 6.5%
45% 46%
39% 40% 39% 6.0%
40% 35% 34%
26% 4.8%
18% 18% 19% 4.2%
20% 15% 14%
10% 4.0%
0%
(1%)
(8%) (6%) 2.0%
(20%)
(18%)
(24%) (26%)
(40%) 0.0%
Q1 17
Q2 17
Q3 17
Q4 17
Q1 18
Q2 18
Q3 18
Q4 18
Q1 19
Q2 19
Q3 19
Q4 19
Q1 20
Q2 20
Q3 20
Q4 20
Q1 21
Q2 21
Q3 21
Q4 21
Q1 22
Q2 22
Q3 22
Q4 22
Q1 23
Q2 23
Q4 18
Q1 19
Q2 19
Q3 19
Q4 19
Q1 20
Q2 20
Q3 20
Q4 20
Q1 21
Q2 21
Q3 21
Q4 21
Q1 22
Q2 22
Q3 22
Q4 22
Q1 23
Q2 23
3/3/23
1/3/23
11/3/22
9/3/22
7/3/22
5/3/22
3/3/22
1/3/22
11/3/21
9/3/21
7/3/21
5/3/21
3/3/21
1/3/21
11/3/20
9/3/20
7/3/20
5/3/20
WGO NTM P/E
3/3/20
1/3/20
11/3/19
9/3/19
7/3/19
5/3/19
3/3/19
1/3/19
11/3/18
9/3/18
7/3/18
5/3/18
3/3/18
1/3/18
WGO P/E Chart
11/3/17
9/3/17
7/3/17
5/3/17
3/3/17
1/3/17
27.0x
22.0x
17.0x
12.0x
7.0x
2.0x
Business Momentum (cont’d)
WGO: YOY Revenue Growth

160%
139%
140%
120%
100%
83%
80% 75% 73%
64%
60% 52%
45% 46%
39% 40% 39%
40% 35% 34%
26%
18% 18% 19%
20% 15% 14%
10%
0%
(1%)
(8%) (6%)
(20%)
(18%)
(24%) (26%)
(40%)
Q1 17
Q2 17
Q3 17
Q4 17
Q1 18
Q2 18
Q3 18
Q4 18
Q1 19
Q2 19
Q3 19
Q4 19
Q1 20
Q2 20
Q3 20
Q4 20
Q1 21
Q2 21
Q3 21
Q4 21
Q1 22
Q2 22
Q3 22
Q4 22
Q1 23
Q2 23
WGO: TTM Adjusted Operating Margin

14.0%
12.0%
12.0% 11.7% 11.7% 11.8%
11.2% 11.0%
10.7% 10.5%
10.0%
8.8%
8.0% 7.9% 7.8% 7.8%

8.0% 7.7%
7.0%
6.8%
6.5%
6.0%
4.8%
4.2%
4.0%
2.0%
0.0%
Q4 18
Q1 19
Q2 19
Q3 19
Q4 19
Q1 20
Q2 20
Q3 20
Q4 20
Q1 21
Q2 21
Q3 21
Q4 21
Q1 22
Q2 22
Q3 22
Q4 22
Q1 23
Q2 23
Temporary Tailwind Shorts
Capitalizing a One-Time EPS Stream

1 2 3 4 5
EPS Baseline $1.00 $1.00 $1.00 $1.00 $1.00
One-Time EPS $0.00 $1.00 $0.00 $0.00 $0.00
Total EPS $1.00 $2.00 $1.00 $1.00 $1.00
% yoy
P/E 25.0x 35.0x 25.0x 25.0x 25.0x
Price $25.00 $70.00 $25.00 $25.00 $25.00

% yoy 180.0% (64.3%) 0.0% 0.0%

WGO P/E Ratio
WGO EPS
$16.00
$13.81
$14.00
$12.00
$10.00
$8.55
$8.00 $7.56 $7.57
$6.00
$4.00 $3.54
$3.22
$2.53 $2.58
$2.00
$0.00
2017 2018 2019 2020 2021 2022 2023E 2024E

WGO P/E Ratio (cont’d)
WGO P/E
30.0x
26.4x 25.9x
25.0x
20.7x
20.0x 18.9x
15.0x
10.0x 8.8x 8.8x

7.8x
4.8x
5.0x
–
2017 2018 2019 2020 2021 2022 2023E 2024E

WGO Free Cash Flow
WGO FCF
$350
$313
$300
$250 $238
$200 $192
$150
$93
$100 $83
$55
$50
$0
2017 2018 2019 2020 2021 2022

WGO FCF Yield
WGO FCF Yield

16.0% 15.2%
14.0%
12.0% 11.6%
10.0% 9.4%
8.0%
6.0%
4.5%
4.0%
4.0%
2.7%
2.0%
0.0%
2017 2018 2019 2020 2021 2022

Historical observed range: 8-12x P/E
Current P/E: 7.8x NTM P/E

Why is WGO at bottom end of this range?
Weak business momentum?
Concerns about unsustainability of EPS?

WGO Valuation vs. Peers
Has traded to -4 to +1x P/E vs. peers (currently -2x)

WGO NTM P/E vs Peers NTM P/E (THO/BC/PII)
3.0x
2.0x
1.0x
(1.0x)
(2.0x)
(3.0x)
(4.0x)
(5.0x)
(6.0x)
1/3/17
3/3/17
5/3/17
7/3/17
9/3/17
11/3/17
1/3/18
3/3/18
5/3/18
7/3/18
9/3/18
11/3/18
1/3/19
3/3/19
5/3/19
7/3/19
9/3/19
11/3/19
1/3/20
3/3/20
5/3/20
7/3/20
9/3/20
11/3/20
1/3/21
3/3/21
5/3/21
7/3/21
9/3/21
11/3/21
1/3/22
3/3/22
5/3/22
7/3/22
9/3/22
11/3/22
1/3/23
3/3/23
WGO Valuation vs. Market
Trading at a 10x discount to the S&P 500

WGO NTM P/E vs S&P 500 NTM P/E
2.0x
(2.0x)
(4.0x)
(6.0x)
(8.0x)
(10.0x)
(12.0x)
(14.0x)
(16.0x)
1/3/17
4/3/17
7/3/17
10/3/17
1/3/18
4/3/18
7/3/18
10/3/18
1/3/19
4/3/19
7/3/19
10/3/19
1/3/20
4/3/20
7/3/20
10/3/20
1/3/21
4/3/21
7/3/21
10/3/21
1/3/22
4/3/22
7/3/22
10/3/22
1/3/23
4/3/23
WGO: Valuation
Next steps:
• How do we finalize our fundamental views on WGO?
• How do we take this valuation work and create our bull, base and bear cases?
• How do those cases inform our view of fair value on WGO?
• How does this work come together in a thesis?

Buy-Side Thesis
Development

Module 1: Process Driven Investing
SUMMARY
RECAP
ü Alpha load and the quest for outperformance
ü Process driven investing
ü The model as process backbone
ü Six sample model use cases

1. Is this a good or bad business?
2. Is this stock cheap or expensive?
3. What expectations are priced into this stock?
4. Will this stock beat or miss earnings?
5. What metrics in the model will drive the stock?
6. How much should this stock react to this news?
ü An FEV and MIC approach to stock selection

Module 2: Model Construction
SUMMARY
RECAP
ü The upside of bespoke modeling
ü The raw ingredients for you model: The reading stack
ü Collecting information with your plate file
ü A scratch build model roadmap: TSLA
ü Stock selection frameworks & the analysis rows

1. Organic growth
ü What a PM wants to see from a model

Module 3: Analyze a Business
SUMMARY
RECAP
ü A good business, bad business framework ü Unit economics and “how does this business
make money”
ü The Fundamental Edge pizza shop
ü Cost structure analysis and incremental
ü The Focus Five: What Drives Value
margins
1. Organic growth
ü The importance of key driver identification

Module 4: Forecasting Frameworks
SUMMARY
RECAP
ü General orientation to forecasting ü Revenue forecasting and sustaining growth
ü Forecasting frameworks ü Approaches to expense forecasting

1. Growth stack forecasting ü Company guidance, consensus, and revisions
2. Mix accelerator
3. Comp waterfall
4. Box replicator
5. Ramp curve
6. Creative lags
7. Mid-cycle
8. Data correlations

Module 5: The Model & Valuation
SUMMARY
RECAP
ü The factors that influence valuation ü Why multiples?

1. Growth algorithm ü The core formula for price target derivation
2. Business momentum ü Frameworks for the application of multiples
3. Business quality
ü Normalized earnings analysis
4. Capital deployment/capital structure
5. Terminal value stability
ü The dichotomy of the DCF and messy reality

of equity pricing

Achieving ETIK: Deep Dive Process
1. Understand the basics of a company (4-6 hours) 9. Identify past case studies that inform (4-6 hours)
• Browse company website • Is this an HMO with depressed margins? How have the past handful of HMO margin expansion
• Read the 10-K cover to cover stories developed for the business and stock?
• Read 2-3 sell-side initiation reports 10. Schedule call with company IR or CFO (1 hour)
2. Build simple annual operating model (4-6 hours) • Walk through list of questions with management
• Look at organic volume and pricing trends going back 10+ years • Compare your assessment with management’s view
• Assess historical margin trends and incremental margins • Assess management’s likelihood of creating value for stock
• Note major capital allocation decisions 11. Identify competitors and channel contacts and schedule calls (10-14 hours)
• Get a sense of base-rate algorithm for revenue, EBITDA and EPS • Focus on uncovering direct evidence relevant to the 3 key drivers
3. Identify and understand the top 3 fundamental drivers (2-4 hours) • Attend key industry (non-sell side) conferences ex. Becker’s Hospital
• Analyze key business segments as a % of revenue and EBIT • Develop a reputation as an authority on the industry, create a network of industry contacts
• Understand what line items in model are the key profit drivers 12. Identify upcoming catalysts and develop a view on them (8-10 hours)
• Read the last 6 months of sell-side notes and identify bull vs. bear debate • Understand market embedded views for upcoming catalysts
4. Build 30-year operational DCF (2-4 hours) • Assess which catalysts we have a divergent view based on PSUC framework (1 minus (win % /
• Understand what the stock price is telling you about expectations (win % plus absolute value of loss %))
• Develop bull, base, bear scenarios on key drivers and compare to stock 13. Develop 1) bull 2) base and 3) bear case based on research (2-4 hours)
5. Understand valuation and market embedded expectations (2-4 hours) • Develop bull, base and bear stock values
• Use DCF to understand the expectations that are baked into the price • Put probabilities on those cases and develop probability tree value, compare that price to stock
price – is there a disconnect?
6. Wrap your arms around current stock narrative (10-12 hours)
• Compare reward price to risk price, is there asymmetry here?
• Spend the time to understand management message to the Street
14. Develop continuing diligence plan (1 hour)
• Listen to past investor day’s, last 8 earnings calls, last 4 conf webcasts
• Plan to regularly check in with industry contacts, competitors and company representative
7. Build full quarterly model (if we don’t have one) (10-12 hours)
• Plan to monitor company press releases, conference presentations and other catalysts
• Focus on detailed revenue build, granular cost structure build
• Tie 3 statements together and focus on cash cycle through the business
8. Comparative Competitive analysis (4-6 hours)
Total Process: (60-90 hours, or 4-6 days of work)
• Compare company to key competitors – organic growth, margins
• How does company compare to peers on key efficiency metrics Granular training modules on each
• Is company out/underperforming? Is there opportunity or threat?

ETIK to KD
Key Drivers:
move the stock?”
Differentiation

Constructing a Thesis: Idea Velocity Approach
“Thesis” is a fancy term for reason to own the stock
• Every Thursday AMC we will have a team idea meeting
• Each team member brings one idea per week: long, short, pair, or theme
• This drives a steady flow of 5 potential ideas into the portfolio each week
• We collectively discuss potential ideas Friday at lunch to target our deep dives

Constructing a Thesis: What a Thesis Contains
• Price-embedded key-drivers, as • Internal estimates vs. street

determined by reverse DCF (i.e., • Base case return if we are correct
“what’s in the stock”)
• Risk case return if we are wrong
• Our base case view on key drivers, and
• R/R asymmetry, and entry price triggers
why we believe those drivers
that generate our required asymmetry
• Why the mispricing and misperception
• 6-month catalyst calendar with R/R for
exists – is it a bias, fear, slow absorption
each catalyst
of info?
• Baseline 3-year IRR stock driven by
• When that mispricing is likely to close,
rev/EBITDA/EPS algorithm and
and which market participant will close
valuation – i.e.., what is likely to be the
it (i.e., ”who are we selling the stock to
primary trend on the stock? Are we
if we are right?”)
swimming upstream or downstream?
• Various ways we can win on the idea
Bringing it Together: Reward, Risk, and R/R
12 Months Base Target

• Common buy-side question:
2024 EPS $3.83
• “What is the risk/reward?” Target P/E 35.0x
EOY Target Price $134.08
• “What is the upside/downside?” % return 55.9%
• PMs want to know 1) how much I make if I am right, 12 Months Risk Case
2023 EPS $2.10
2) how much I will lose if I am wrong?
Target P/E 32.0x
Next 12 Months Risk $67.20
• Experienced investors know there is no such thing as a % RISK (21.9%)
“sure thing” and have a tendency to think probabilistically
(the good ones, at least). R/R 2.6x
• Successful investors think as much (or more) about what

can go wrong vs. what can go right.
• “Take care case of the risk case and the reward will take
care of itself.”

Ingredients of a Good Idea
Demonstration
Lever for
Articulable that stock is
appreciation
reason a stock erroneously
Your Title and/or catalyst
Your Title
is cheap discounting key
for re-pricing
drivers

Communicating Your Idea: Pitch Structure
• Pitch script (3-5 minutes).

• State company name, basic industry, market cap, enterprise value and liquidity (trailing 3 month).
• Explain 2-3 basic elements of the industry. Set the table for the company.
• What is industry organic growth rate?
• Is the industry consolidating rapidly?
• What are the key industry headwinds/tailwinds?
• What are key controversies in the industry?
• Does the industry earn above/below/inline ROIC with WACC
• Where are industry margins in relation to historical peak/trough cycle?
• Explain the company’s place within the industry:
• Is the company the market leader or a new entrant?
• Is the company a share gainer or a share loser?
• Does the company have a new management team from the market leader?

Communicating Your Idea: Pitch Structure (cont’d)
• Thesis point #1
• Example: Organic growth is accelerating from 5% to 8% due to a new product. Consensus
under-estimates this new product and only expects an acceleration to 6%.
• Thesis point #2
• Example: Incremental margins on this new product are 70%. As such, the incremental
revenue will drop through at a high rate, leading to margin expansion of 150bps for the next 2
years, vs. only 75bps expected at Street.
• Thesis point #3
• Example: The company has paid off debt and now has excess FCF. We expect the
initiation of a buyback to reduce share count by 5% this year and next, leading to
additional EPS growth.

Risk Point #1 Risk Point #2
Example: Market uptake for this Example: Consumer spending

new product may be disappointing. power may weaken. However, we
If this is the case, we would be have consumer shorts to offset.
proven wrong. Lay out research we Add mitigants.
have done and assign probabilities
to our view. Be open minded and
assume a wide range of outcomes.
Explain how much downside the
stock has if our risk case is realized.
Add mitigants.

• Valuation starting point and 3-year algorithm

• Example: XYZ company is trading at 18x NTM P/E, 12x EV/EBITDA and 6% FCF yield
• We expect this company to have 3-year CAGR revenue growth of 8% organic, 12% total
with M&A, 15% EBITDA and 20% EPS growth
• Our estimates vs. Street

• We expect $4 per share EPS in 2019 vs. only $3.25 from Street
• Upside, downside, risk/reward

• Our reward case is +60% vs. risk case of -31% for a nearly 2x1 R/R

Getting in the Flow
• Stay up to date on company • Immerse into Street narrative

communication • Read every sell-side note published
• Read every 8-K, company on the stock
presentation and press release • Speak with sell-side analysts who
(subscribe on IR section of website) cover the stock
• Listen to every quarterly earnings call • Speak with specialist sales analysts
• Listen to each conference who cover the sector
presentation • Speak regularly with other buy-side
• Attend annual investor day (if analysts who cover the stock
applicable) • Speak to traders who see flow into
and out of stock
• Monitor select blogs and short-seller
research that may cover the stock

Getting in the Flow (cont’d)
• Understand how stock has traded in the past

• Understand seasonal trading patterns;
strong in Spring, weak in Fall?
• Understand reactions to past news events:
• How has stock traded on emergence of
some overhang?
• How has stock traded over past 16
earnings prints?
• How has stock traded on rumors of
M&A – buyer or seller?
• Get a feel for how stock has traded in
past to forecast what stock might do in
future.

Wrapping Up: • If this business went away, would its customers care?
Risk Checklist
• Does this business have attractive unit economics?
Business Model • Does this business have high return reinvestment opportunities?
• Does this business have pricing power?
• Could a new entrant disrupt these attractive economics?
• Is volume growth steady and forecastable?

• Is the industry at a cyclical peak in demand that consensus is extrapolating?
Revenue Growth
• Does the industry have attractive forecasted supply/demand dynamics?
• Are acquisitions masking underlying organic revenue deterioration?
• Is the business at peak margins relative to history?

Profit Margin • Is the business over-earning relative to peer companies?
• Are there any key cost items that are volatile a d unforecastable?
• Does the business rely on external financing to stay viable?

Balance Sheet • Does the business have a stable and comfortable debt load?
• Is there an imminent refinancing that may cause concern for the equity?
• Does the cash flow statement show unburdened distributable free cash flow?
• Does the company have a history of buying back stock when attractively priced?
Capital Deployment
• Has the company destroyed value with misguided acquisitions?
• Does management allocate capital with an investor’s lens?
• What is senior management’s track record of operations and value creation?

Management • Is senior management’s compensation structure aligned with investors?
• Does management apply clear and conservative accounting standards?
• Are valuation multiples at historic peak levels?

• Is the company likely to miss or exceed consensus estimates in coming periods?
Equity Market • Is this a consensus owned name subject to disappointment and selling?
• What would have to happen for stock to get cut by 25%? How likely is that?
• What would have to happen for stock to get cut by 50%? How likely is that?

Prospective Internal Rate of Return (IRR)
Internal rate of return (IRR)
• I think about prospective IRR as the likely “trade corridor” or the likely
predominant direction of the stock
• If I am right that a stock offers a 20% IRR, it still might go nowhere for 6 months,
but the predominant direction is up and to the right (and a 6-month period of
sideways trading actually expands the IRR)
• Drivers of IRR using P/E × EPS framework: Starting 3 years

EPS $1.00 $1.33
1. EPS Growth
P/E 10.0x 15.0x
2. P/E revision Price $10.00 $20.00
IRR 26.0%

Developing a Reward Case
Select a time-frame. Can be 2 months or 2 years, but I like to pick a time-frame and run
all of my stocks through that consistent time-frame.
• My base analysis on a stock includes:

• 3-year IRR: The long term, likely direction of the stock.
• 12m Reward: Where the stock can go in 12 months.
• 12m Risk: How bad the stock could get anywhere over the next 12 months. The “risk”
I’m taking to play out to my reward.
• 12m reward case:

• Starting point: NTM EPS × NTM P/E
• 12m Reward: NTM2 EPS × NTM2 P/E

Developing a Risk Case
Analyze carefully what could cause the investment to go wrong
• Ways a stock goes down:

• Profit estimates decline.
• Valuation multiple declines (a proxy for higher risk/sentiment or terminal value
overhang, slower growth, expected margin contraction, or higher capital intensity).
• Dilution: Issuance of a dilutive convertible or secondary issuance of equity.
• Construction an intellectually honest risk case:

• Study history: what happened in past recessionary periods?
• Study the historical NTM P/E chart. Where did P/E trough and what
circumstances caused that trough level of trading? Any patterns to recognize?
• Ask management what they think?
Developing a Risk Case (cont’d)
Ways to think about a risk case
• Trough P/E ratio, absolute or relative • Not profitable?
• Trough EV/EBITDA ratio • Cash burn in bear case vs.

balance sheet cash (cash
• Trough margins runway)
• Trough revenue • EV/Revs or EV/GP multiple
• Liquidity situation (self-funded biz • Asset backing?

will have a less severe risk case) • M&A backing?

ABT risk case: Though process would start in the 15-18x P/E range (past troughs)
10/2/22
7/2/22
4/2/22
1/2/22
10/2/21
7/2/21
4/2/21
1/2/21
10/2/20
7/2/20
4/2/20
1/2/20
10/2/19
7/2/19
4/2/19
1/2/19
10/2/18
7/2/18
4/2/18
ABT NTM P/E
1/2/18
10/2/17
7/2/17
4/2/17
1/2/17
Developing a Risk Case: Valuation
10/2/16
7/2/16
4/2/16
1/2/16
10/2/15
7/2/15
4/2/15
1/2/15
10/2/14
7/2/14
4/2/14
1/2/14
10/2/13
7/2/13
4/2/13
1/2/13
10/2/12
35.0x
30.0x
15.0x
10.0x
25.0x
20.0x
Probability Trees
• Reflects the reality that equities are not binary, and have multiple scenarios
• Stock prices reflect embedded probabilities, and a probability tree can highlight where the
market price is too optimistic, or too pessimistic
• Look for longs where bear/disaster case is only modest downside (i.e., baking in the worst
case, or close to it)
• Look for shorts where bull case

Target % return Prob
is already baked in, and market
Bull Case: Takeout $100.0 100.0% 10.0%
is complacent on risks Bull Case $90.00 80.0% 10.0%
Base Case $80.00 60.0% 50.0%
• Look on both sides where there
Bear Case $34.45 (31.1%) 20.0%
is cheap/free embedded optionality Disaster Case $25.00 (50.0%) 10.0%
for a big move Probability-Adjusted $68.39 36.8% 100.0%
Welcome to the Firm: WGO
SUMMARY
RECAP
Welcome to the firm.

Take a look at WGO
and let me know
what you think.

WGO: Building a
Model
• Identify disclosed
information

Identify disclosed information

Inputting data from 10-K for 15 years of history

Inputting the
balance sheet

Inputting the cash

flow statement

WGO Revenue Build
Identifying reporting metrics

Take from video

Inputting all of those relevant metrics

Creating analysis rows around revenue line items

Creating analysis rows around expense and profit line items

Identifying my key forecast metric and building interactive architecture

Five Key Questions of the Fundamental Investor
SUMMARY
RECAP


WGO: Is This a Good Business?
2010 2022 CAGR

WGO Revenue $450 $4,958 22.1%

Market share gains
2010 2022 CAGR

WGO Revenue $450 $4,958 22.1%


• Financing sensitivity
1. Consumer financing (70-
80% are financed on 10–15-
year loans) – combined with
ASP increases, monthly
payments have gone up
60%+ over the last 3 years
2. Fleet financing (RV dealers
financing inventory)
• Gas price sensitivity

• Average RV gets 10 MPG
(~$250/tank)
Solid and rising profit margins, but are they sustainable?

Mid to high-teens ROIC
Take from video

Mid-single digit FCF margins
Take from video

SUMMARY
Summary thoughts – is this a good business?
ü Some structural growth, though highly cyclical and economically sensitive.

ü Solid if not spectacular margins and returns on capital.
Trading at 8x earnings

WGO: How Does This Business Make Money?
1. WGO is the manufacturer,

not the retailer
2. Retailer places order,

order goes into backlog

WGO: How Does
This Business
Make Money?
(cont’d)
1. WGO is the
dealer.


4. Backlogs matter.
Dealer inventories
level matter.

WGO: How Does
This Business
Make Money?
(cont’d)
1. WGO is the
dealer.


4. Backlogs matter.
Dealer inventories
level matter.

WGO: How Does This Business Make Money? (cont’d)
Break down the revenue and profit by segment

WGO: What is the Nature of the Cost Structure?
• WGO has demonstrated more of a variable cost structure
• Historical incremental margins have been in the 15-20% range (i.e., for every $1
of revenue, 15-20c goes to profits)

WGO: What Drives the Business?
1. Backlogs matter. Dealer

inventories level matter.
2. Tight backlogs and low inventories

drive high pricing. High pricing
drives high GMs.
3. High GMs drive high earnings and

FCF (high earnings and FCF drive
high stock price).

WGO: What Drives the Business? (cont’d)
WGO Key Drivers
1. Unit demand: Driven by customer demand, influenced by consumer health and

interest rates.
2. Unit pricing: Ultimately driven by unit demand, influenced by backlogs, dealer

inventories and competitive environment.
3. Margins: Ultimately driven by unit pricing net of input costs.

WGO: What is the Business Momentum?
Incredibly strong trends during calendar 20/21, but lately rolling over

WGO: What Do I Need to Figure Out?
• Trajectory of key drivers:

1. Unit demand
2. Unit pricing
3. Margins
• Reasonable bull/base/bear cases on the key drivers
• Likely stock price outcome in each case
• Whether there is an expectations gap:

1. What the stock is currently discounting
2. What I believe to be true

WGO Forecasting
Over long periods of time, the RV industry has been a ~3-4% unit growth industry
CAGR Growth Rate

1980 -2022 3.7%
1990 -2022 2.9%
2000 - 2022 2.3%
2010 - 2022 6.1%
Average 3.8%

With towables
taking market
share of aggregate
RV shipments

$5.5bn of 2025 Revenue

Market share gains flattening

To generate a baseline unit forecast, forecast industry units then market share
2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E
Industry RV Shipments 430,691 504,599 483,672 406,070 430,412 600,240 493,268 419,278 406,699 418,900
% yoy 15.1% 17.2% (4.1%) (16.0%) 6.0% 39.5% (17.8%) (15.0%) (3.0%) 3.0%
YOY Shipments 56,445 73,908 (20,927) (77,602) 24,342 169,828 (106,972) (73,990) (12,578) 12,201
WGO Share 3.0% 7.1% 8.4% 9.5% 11.3% 12.5% 12.7% 13.0% 13.2% 13.5%
bps share n.a. 410 130 110 180 120 20 25 25 25
Implied WGO Units (ex-Boats) 12,921 35,827 40,628 38,577 48,637 75,030 62,645 54,296 53,684 56,342
% yoy n.a. 177.3% 13.4% (5.1%) 26.1% 54.3% (16.5%) (13.3%) (1.1%) 5.0%
2015-2019 Average 439,856

2009-2019 Average 347,572
2025 "Normal" 418,900

2022-2024 Impact (193,541)

RVIA data provides an early look on quarterly volumes
200.0%
150.0%
100.0%
50.0%
0.0%
Q4 20 Q1 21 Q2 21 Q3 21 Q4 21 Q1 22 Q2 22 Q3 22 Q4 22 Q1 23 Q2 23
(50.0%)
(100.0%)
WGO RVIA

• How to figure out direction of ASPs?
• One idea: Web scraping

Supplemented by on
the ground diligence

WGO
How might we figure out What influences

a price target for WGO? valuation and P/E?
• Core formula: P/E × EPS • Business quality
• Current P/E = Current Price ÷ • Growth

NTM EPS (FY ’24)
• Business momentum: Trajectory
• 1-year target = P/E × FY25 EPS of revenue and margins
(Aug ’25)
• Perceived “over” or “under”
• 3-year target = P/E × FY27 EPS earning
(Aug ’27)

WGO Valuation
EV/REV EV/GP EV/EB P/E LTM Yield NTM Yield

• Current NTM P/E:
Current 0.7x 4.0x 6.6x 7.8x 0.1x 0.2x
7.8x
1 year Median 0.6x 3.5x 5.6x 6.9x 11.8% 15.5%
• 10 Year Range: 3 year Median 0.7x 4.0x 6.3x 8.5x 9.9% 11.1%
5 year Median 0.7x 4.2x 6.7x 9.0x 9.1% 10.2%
4.3x-22.2x
10 year Median 0.7x 4.6x 7.3x 11.6x 5.4% 6.2%
• 10 Year Median: 1 year Max 0.7x 4.3x 6.9x 8.7x 14.6% 20.0%
11.6x 3 year Max 1.1x 7.4x 13.4x 21.2x 16.6% 20.0%
5 year Max 1.1x 7.4x 13.4x 21.2x 16.6% 20.0%
10 year Max 1.1x 7.8x 13.4x 22.2x 16.6% 20.0%
1 year Min 0.4x 2.5x 3.7x 4.3x 4.6% 13.2%

3 year Min 0.4x 2.5x 3.7x 4.3x 2.1% 4.6%
5 year Min 0.4x 2.5x 3.7x 4.3x (1.0%) 1.5%
10 year Min 0.4x 2.5x 3.7x 4.3x (11.8%) (50.8%)

WGO (cont’d) 4.23.23
Absolute Min Max Median
1 year 4.3x 8.7x 6.9x
• Historical observed 3 year 4.3x 21.2x 8.5x
5 year 4.3x 21.2x 9.0x
P/E range: 8-12x P/E 10 year 4.3x 22.2x 11.6x
S&P rel Min Max Median

1 year (12.8x) (8.7x) (10.0x)
3 year (15.0x) (1.0x) (10.7x)
5 year (15.0x) (1.0x) (9.3x)
10 year (15.0x) 8.1x (5.9x)
18.3x Implied Min Max Median

1 year 5.5x 9.5x 8.2x
3 year 3.2x 17.3x 7.6x
5 year 3.2x 17.3x 9.0x
10 year n.a. 26.4x 12.4x
Dummy Valuation Summary

Current P/E 7.8x % move
Central 9.0x 15.5%
Range High 10.0x 11.1%

Business Momentum

160%
139%
140%
120%
100%
83%
80% 75% 73%
64%
60% 52%
45% 46%
39% 40% 39%
40% 35% 34%
26%
18% 18% 19%
20% 15% 14%
10%
0%
(1%)
(8%) (6%)
(20%)
(18%)
(24%) (26%)
(40%)
Q1 17
Q2 17
Q3 17
Q4 17
Q1 18
Q2 18
Q3 18
Q4 18
Q1 19
Q2 19
Q3 19
Q4 19
Q1 20
Q2 20
Q3 20
Q4 20
Q1 21
Q2 21
Q3 21
Q4 21
Q1 22
Q2 22
Q3 22
Q4 22
Q1 23
Q2 23

14.0%
12.0%
12.0% 11.7% 11.7% 11.8%
11.2% 11.0%
10.7% 10.5%
10.0%
8.8%
8.0% 7.9% 7.8% 7.8%

8.0% 7.7%
7.0%
6.8%
6.5%
6.0%
4.8%
4.2%
4.0%
2.0%
0.0%
Q4 18
Q1 19
Q2 19
Q3 19
Q4 19
Q1 20
Q2 20
Q3 20
Q4 20
Q1 21
Q2 21
Q3 21
Q4 21
Q1 22
Q2 22
Q3 22
Q4 22
Q1 23
Q2 23
3/3/23
1/3/23
11/3/22
9/3/22
7/3/22
5/3/22
3/3/22
1/3/22
11/3/21
9/3/21
7/3/21
5/3/21
3/3/21
1/3/21
11/3/20
9/3/20
7/3/20
5/3/20
WGO NTM P/E
3/3/20
1/3/20
11/3/19
9/3/19
7/3/19
5/3/19
3/3/19
1/3/19
11/3/18
9/3/18
7/3/18
5/3/18
3/3/18
1/3/18
WGO P/E Chart
11/3/17
9/3/17
7/3/17
5/3/17
3/3/17
1/3/17
27.0x
22.0x
17.0x
12.0x
7.0x
2.0x
WGO P/E Chart
Capitalizing a One-Time EPS Stream

1 2 3 4 5
EPS Baseline $1.00 $1.00 $1.00 $1.00 $1.00
One-Time EPS $0.00 $1.00 $0.00 $0.00 $0.00
Total EPS $1.00 $2.00 $1.00 $1.00 $1.00
% yoy
P/E 25.0x 35.0x 25.0x 25.0x 25.0x
Price $25.00 $70.00 $25.00 $25.00 $25.00

% yoy 180.0% (64.3%) 0.0% 0.0%

WGO P/E Chart (cont’d)
WGO EPS
$16.00
$13.81
$14.00
$12.00
$10.00
$8.55
$8.00 $7.56 $7.57
$6.00
$4.00 $3.54
$3.22
$2.53 $2.58
$2.00
$0.00
2017 2018 2019 2020 2021 2022 2023E 2024E

WGO P/E Chart (cont’d)
WGO P/E
30.0x
26.4x 25.9x
25.0x
20.7x
20.0x 18.9x
15.0x
10.0x 8.8x 8.8x

7.8x
4.8x
5.0x
–
2017 2018 2019 2020 2021 2022 2023E 2024E

WGO Free Cash Flow
WGO FCF
$350
$313
$300
$250 $238
$200 $192
$150
$93
$100 $83
$55
$50
$0
2017 2018 2019 2020 2021 2022

WGO FCF Yield
WGO FCF Yield

16.0% 15.2%
14.0%
12.0% 11.6%
10.0% 9.4%
8.0%
6.0%
4.5%
4.0%
4.0%
2.7%
2.0%
0.0%
2017 2018 2019 2020 2021 2022

Historical observed range: 8-12x P/E
Current P/E: 7.8x NTM P/E

Why is WGO at bottom end of this range?
Weak business momentum?
Concerns about unsustainability of EPS?

WGO: Thesis Construction Key Questions
• What are my thoughts on fundamentals, expectations, and valuation?
• Do I see a variance vs. consensus?
• What is baked in? What do I believe to be true? What is the expectations gap?

Valuation (FEV) Approach

• Current state FEV:

• Fundamentals set to improve
• Expectations low
• Valuation low
• Trade is done when:

• Fundamentals good and
understood
• Expectations high
• Valuation high

WGO: Fundamentals

160%
139%
140%
120%
100%
83%
80% 75% 73%
64%
60% 52%
45% 46%
39% 40% 39%
40% 35% 34%
26%
18% 18% 19%
20% 15% 14%
10%
0%
(1%)
(8%) (6%)
(20%)
(18%)
(24%) (26%)
(40%)
Q1 17
Q2 17
Q3 17
Q4 17
Q1 18
Q2 18
Q3 18
Q4 18
Q1 19
Q2 19
Q3 19
Q4 19
Q1 20
Q2 20
Q3 20
Q4 20
Q1 21
Q2 21
Q3 21
Q4 21
Q1 22
Q2 22
Q3 22
Q4 22
Q1 23
Q2 23
WGO: Fundamentals (cont’d)

14.0%
12.0%
12.0% 11.7% 11.7% 11.8%
11.2% 11.0%
10.7% 10.5%
10.0%
8.8%
8.0% 7.9% 7.8% 7.8%

8.0% 7.7%
7.0%
6.8%
6.5%
6.0%
4.8%
4.2%
4.0%
2.0%
0.0%
Q4 18
Q1 19
Q2 19
Q3 19
Q4 19
Q1 20
Q2 20
Q3 20
Q4 20
Q1 21
Q2 21
Q3 21
Q4 21
Q1 22
Q2 22
Q3 22
Q4 22
Q1 23
Q2 23
WGO: Expectations
• No annual guidance given Consensus as of 5.9.23

(only FY ’25 guidance) 2021 2022 2023E 2024E
Revenue $3,630 $4,958 $3,769 $3,744
• Consensus assumes % yoy n.a. 36.6% (24.0%) (0.7%)
meaningful revenue and Operating Income $407 $585 $329 $338
% margin 11.2% 11.8% 8.7% 9.0%
margin contraction in FY23
EPS $8.55 $13.81 $7.56 $7.57
then stability into FY24 Internal EPS $7.66 $6.32
% variance 1.3% (16.6%)
• My base case is below FY’24
For educational purposes only: not investment advice
consensus due to:
• More normalization in
average selling prices,
which feeds into margin
compression
WGO Valuation
Trading at a 10x discount to the S&P 500

WGO NTM P/E vs S&P 500 NTM P/E
2.0x
(2.0x)
(4.0x)
(6.0x)
(8.0x)
(10.0x)
(12.0x)
(14.0x)
(16.0x)
1/3/17
4/3/17
7/3/17
10/3/17
1/3/18
4/3/18
7/3/18
10/3/18
1/3/19
4/3/19
7/3/19
10/3/19
1/3/20
4/3/20
7/3/20
10/3/20
1/3/21
4/3/21
7/3/21
10/3/21
1/3/22
4/3/22
7/3/22
10/3/22
1/3/23
4/3/23
WGO: FEV
Valuation
Expectations
Fundamentals Cheap, as long as
Out year consensus
Deteriorating margins stay
seems too high
elevated

WGO: FEV
Valuation
Expectations
Out year consensus
seems too high
elevated

MIC Process
1. Understand market embedded view
2. Generate differentiated internal view
3. Bet ahead of catalyst

M: Understand the Market View
1. “If it’s in the press, it’s in the price” framework

Is it already baked
2. What’s “in the press” into the cake?
• Management commentary
• Guidance
• Sell-side commentary
3. Quantifying the “market view”

• Commentary scrub
• Reverse DCF
• Multiples analysis
• Idio performance analysis

I: Generate an Internal View
1. Deep dive process Deep Dive Process
2. Model construction
3. Key driver
differentiation (its
own module)
4. Develop your own

unique view on the
fundamentals (and,
subsequently, the
valuation)

C: Identify a Catalyst for Convergence
1. MIC process assumes the market is

“wrong” and you are “right”. It’s the “surprise” that moves stocks.
When the market view must
2. This “expectations gap” is the source of converge to your view.
your trading alpha.
3. When will that expectations gap close?

When will the market come around to your
way of thinking?
4.
The earnings print is the most common convergence point
for the market view becoming aligned with your view.

WGO: Reverse DCF

WGO: Normalized Earnings

WGO: Normalized Earnings

WGO: Normalized Earnings (cont’d)
Base EPS $6.58 Bull EPS $9.90 Bear EPS $3.52

P/E Target % return 3yr IRR P/E Target % return 3yr IRR P/E Target % return 3yr IRR
12.0x $78.98 36.6% 10.9% 14.0x $138.55 139.5% 33.8% 10.0x $35.20 (39.1%) (15.3%)
11.0x $72.40 25.2% 7.8% 13.0x $128.66 122.4% 30.5% 9.0x $31.68 (45.2%) (18.2%)
10.0x $65.82 13.8% 4.4% 12.0x $118.76 105.3% 27.1% 8.0x $28.16 (51.3%) (21.3%)
9.0x $59.24 2.4% 0.8% 11.0x $108.86 88.2% 23.5% 7.0x $24.64 (57.4%) (24.8%)
8.0x $52.66 (9.0%) (3.1%) 10.0x $98.97 71.1% 19.6% 6.0x $21.12 (63.5%) (28.5%)
Base Case Thoughts Bull Case Thoughts Base Case Thoughts

30% unit correction but above pre-20 levels Assumes modest slowdown from peak levels Generally assumes reversion to 2017-2020 avg
ASP mid-$55k (above $47k pre-'20) Assumes structurally higher demand Revenue ~$3bn vs. $2bn 2017-2020 avg
GM 16% (above 14.5% pre'20 level) Assumes structurally higher pricing Margin structure back to averages
Roughly closer to pre-'20 than peak levels Assumes structurally higher margins Still above '17-'20 avg EPS of $2.76
Closer to in-line with mgmt guidance

WGO: Long Term EPS Algorithm
WGO EPS Algorithm

P/E EPS Algo
Industry growth 2.5%
Market share tailwind 1.5% Market 18.0x 6.0%
Pricing tailwind 2.0% WGO 8.0x 10.0%
Organic Revenue Algorithm 6.0%
Inorganic 3.0%
Revenue Algorithm 9.0%
Profit Growth 10.0%
EPS Growth 10-12%
Cash for M&A $150

EV/Rev 1.25x
Rev M&A Potential 120
Base Revenue 3,632.8
% M&A impact 3.3%

WGO: ASP Sustainability
Motorhome Average Selling Price

$170,000
$156,917
$150,000
$138,999
$130,098
$130,000
$110,000
$93,116 $91,759 $93,549

$89,879
$90,000
$70,000
$50,000
2016 2017 2018 2019 2020 2021 2022

WGO: Motorhome Margin
The biggest shift in Motorhome Adjusted EBITDA Margins

14.0%
the margin structure 12.5%
’20 to ’22 has been on 12.0%

11.0%
Motorhome margins 10.0%
8.0%
6.5% 6.6%
6.0%
4.1% 3.9%
4.0%
3.1%
2.0%
0.0%
2016 2017 2018 2019 2020 2021 2022

WGO: Motorhome Margin (cont’d)
The biggest shift in Motorhome EBITDA per Unit

$25,000
the margin structure
’20 to ’22 has been on $20,000
$19,737
Motorhome margins
$15,511
$15,000
$10,000
$6,164 $6,103
$5,000 $3,719 $3,617 $4,065
$0
2016 2017 2018 2019 2020 2021 2022

WGO: Motorhome Margin (cont’d)
The biggest shift in the margin structure ’20 to ’22 has been on Motorhome margins
Motorhome Unit Economics Sensitivity WGO EPS

Profit per unit, pre Covid Average $4,734 $16.00
2022 Profit per Unit $19,737 $14.00

$13.81
Delta $15,004 $12.00
$10.00
Profit per Unit Delta $15,004 $8.55

$7.56 $7.57
$8.00
Units 12,058
$6.00
Profit Impact $180.9
Tax Rate 20.0% $4.00
$2.53
$3.22
$3.54
$2.58
After Tax Impact $144.7 $2.00
Diluted Shares 35.5 $0.00

2017 2018 2019 2020 2021 2022 2023E 2024E
EPS Impact $4.08

WGO: COVID Pull-Forward
Attempt to estimate the COVID-era “pull-forward”
Units
2015-2019 Average 439,856
2009-2019 Average 347,572
2025 "Normal" 392,345

2022-2024 Impact (217,464)
2016 2017 2018 2019 2020 2021 2022 2023E 2024E 2025E 2026E
Industry RV Shipments 430,691 504,599 483,672 406,070 430,412 600,240 493,268 394,614 382,776 392,345 402,154
% yoy 15.1% 17.2% (4.1%) (16.0%) 6.0% 39.5% (17.8%) (20.0%) (3.0%) 2.5% 2.5%
YOY Shipments 56,445 73,908 (20,927) (77,602) 24,342 169,828 (106,972) (98,654) (11,838) 9,569 9,809
WGO Share 3.0% 7.1% 8.4% 9.5% 11.3% 12.5% 12.7% 13.0% 13.2% 13.5% 13.7%
bps share n.a. 410 130 110 180 120 20 25 25 25 25
Implied WGO Units (ex-Boats) 12,921 35,827 40,628 38,577 48,637 75,030 62,645 51,103 50,526 52,770 55,095
% yoy n.a. 177.3% 13.4% (5.1%) 26.1% 54.3% (16.5%) (18.4%) (1.1%) 4.4% 4.4%

WGO: COVID Pull-Forward (cont’d)
Attempt to estimate the COVID-era “pull-forward”
Units
2015-2019 Average 439,856 Covid Pull-Forward EPS Sensitivity
2009-2019 Average 347,572 Induistry Unit Pullforward 194,170
2025 "Normal" 392,345
WGO Share 12.7%
Est COVID pull-forward 194,170 WGO Pullforward Units 24,660
2022-2024 Impact (217,464) 2022 Profit per Unit $8,023
Pull-Forward Profit $198
Tax Rate 20.0%
After Tax Impact $158.3
Diluted Shares 35.5
EPS Impact $4.46

WGO: EPS Baseline?
Thinking about the peak EPS and stripping out:
1. COVID unit pull-forward
2. Normalization of motorhome margins leads to a normalized EPS level closer to $5
Stripped out Impact

Peak EPS (2022 print) $13.82
COVID pull-forward ($4.46)
Motorhome margins ($4.08)
Underlying Baseline $5.28

WGO: Backlog & Inventory Impact
The Inventory Cycle 101
• A “strong” pricing environment • A “weak” pricing environment

• Strong demand (strong backlogs) • Weak demand (light backlogs)
• Strong consumer pull-through • Weak consumer pull-through
• Light inventories (no need for • Heavy inventories (stale inventory,
discounting) drives discounting)
• Strong pricing drives strong gross • Weak pricing drives weak gross
margins margins
WGO has been in a strong environment,

but a weak environment appears to be emerging
WGO: Backlog & Inventories

WGO: Backlog & Inventories (cont’d)

WGO: Past Recession
• The business was severely impaired in the ’08-’09 recession
• The stock went from $40 to $4
• WGO is clearly not a stock for a “severe recession” scenario
2007 2008 2009 2010

Total Net Revenue $870.2 $604.4 $211.5 $449.5
% yoy n.a. (30.5%) (65.0%) 112.5%
Adjusted Operating Profit $54.9 ($9.8) ($59.5) $0.5

% margin 6.3% (1.6%) (28.1%) 0.1%

WGO: Risk
Checklist

WGO: Risk Checklist (cont’d)
Risk checklist thoughts
Positives Negatives
• Generally, a good business with a • Might be at peak levels of demand

good track record
• Might be at peak margins
• Has been gaining market share in a
• Consumer recession could be a
growing industry
major headwind
• Steady, stable and growing margins
• Interest rate risks
• Valuation reasonable at 8x NTM
P/E

WGO: Bull/Base/Bear
$77.38 $43.13
1 year return scenarios Tactical R/R Tactical R/R 2023E
2025 EPS P/E 12m Target % return Price
$70.00
Reward
10.5%
Risk
(38.4%)
R/R
0.3x
% move
20.4%
Bull $8.50 12.0x $102.00 75.5% $69.00 12.1% (37.5%) 0.3x 18.7%
$68.00 13.8% (36.6%) 0.4x 17.0%
Base $6.92 10.0x $69.17 19.0% $67.00 15.5% (35.6%) 0.4x 15.3%
$66.00 17.2% (34.7%) 0.5x 13.5%
Bear $5.75 7.5x $43.13 (25.8%) $65.00 19.0% (33.7%) 0.6x 11.8%
$64.00 20.9% (32.6%) 0.6x 10.1%
$63.00 22.8% (31.5%) 0.7x 8.4%
Reward (25% bull, 75% base) $77.38 33.1% $62.00

$61.00
24.8%
26.9%
(30.4%)
(29.3%)
0.8x
0.9x
6.7%
4.9%
Risk $43.13 (25.8%) $60.00
$59.00
29.0%
31.2%
(28.1%)
(26.9%)
1.0x
1.2x
3.2%
1.5%
$58.00 33.4% (25.6%) 1.3x (0.2%)
$57.00 35.8% (24.3%) 1.5x (1.9%)
$56.00 38.2% (23.0%) 1.7x (3.7%)
$55.00 40.7% (21.6%) 1.9x (5.4%)
$54.00 43.3% (20.1%) 2.1x (7.1%)
$53.00 46.0% (18.6%) 2.5x (8.8%)
$52.00 48.8% (17.1%) 2.9x (10.5%)
$51.00 51.7% (15.4%) 3.3x (12.3%)
$50.00 54.8% (13.8%) 4.0x (14.0%)
$49.00 57.9% (12.0%) 4.8x (15.7%)
$48.00 61.2% (10.2%) 6.0x (17.4%)
$47.00 64.6% (8.2%) 7.8x (19.1%)
$46.00 68.2% (6.3%) 10.9x (20.9%)
$45.00 72.0% (4.2%) 17.3x (22.6%)

WGO: Conclusion?
• Hard one to call
• On bull/management case of $10-12 EPS, stock is very cheap (5-6x P/E) and is a solid,
if not cyclical, business
• However, the seeming over-earning and deteriorating business momentum

urge caution
• Particularly if one has a view of a consumer recession, the stock could be in for a
difficult period

WGO: Motorhome Margin
The biggest shift in the margin structure ’20 to ’22 has been on Motorhome margins
Motorhome Unit Economics Sensitivity WGO EPS

Profit per unit, pre Covid Average $4,734 $16.00
2022 Profit per Unit $19,737 $14.00

$13.81
Delta $15,004 $12.00
$10.00
Profit per Unit Delta $15,004 $8.55

$7.56 $7.57
$8.00
Units 12,058
$6.00
Profit Impact $180.9
Tax Rate 20.0% $4.00
$2.53
$3.22
$3.54
$2.58
After Tax Impact $144.7 $2.00
Diluted Shares 35.5 $0.00

2017 2018 2019 2020 2021 2022 2023E 2024E
EPS Impact $4.08

WGO: EPS Baseline?
Thinking about the peak EPS and stripping out:
1. COVID unit pull-forward
2. Normalization of motorhome margins leads to a normalized EPS level closer to $5
Stripped out Impact

Peak EPS (2022 print) $13.82
COVID pull-forward ($4.46)
Motorhome margins ($4.08)
Underlying Baseline $5.28

WGO: FEV
Valuation
Expectations
Out year consensus
seems too high
elevated

WGO: Model Walk-Through
Ticker WGO 1 year return scenarios Tactical R/R 2023E

Action No position 2019A 2020A 2021A 2022A 2023E 2024E 2025E 2026E 2025 EPS P/E 12m Target % return Price Reward Risk R/R % move
Last Updated 5.9.23 Revenue $1,986 $2,356 $3,630 $4,958 $3,633 $2,952 $2,963 $3,139 Bull $8.50 12.0x $102.00 75.5% $70.00 10.5% (38.4%) 0.3x 20.4%
Cap Table % yoy 4.3% 18.6% 54.1% 36.6% (26.7%) (18.7%) 0.4% 6.0% Base $6.92 10.0x $69.17 19.0% $69.00 12.1% (37.5%) 0.3x 18.7%
Price as of 5.9.23 $58.13 Bear $5.75 7.5x $43.13 (25.8%) $68.00 13.8% (36.6%) 0.4x 17.0%
Diluted Shares 36 Adjusted EBITDA $180 $168 $436 $649 $376 $339 $366 $391 $67.00 15.5% (35.6%) 0.4x 15.3%
Market Cap $2,064 % margin 9.0% 7.1% 12.0% 13.1% 10.4% 11.5% 12.4% 12.4% Reward (25% bull, 75% base) $77.38 33.1% $66.00 17.2% (34.7%) 0.5x 13.5%
Total Debt $591 % yoy 8.5% (6.4%) 159.4% 48.8% (42.1%) (9.9%) 8.1% 6.7% Risk $43.13 (25.8%) $65.00 19.0% (33.7%) 0.6x 11.8%
Cash $229 $64.00 20.9% (32.6%) 0.6x 10.1%
Net Debt $362 Adjusted EPS $3.44 $2.59 $8.89 $13.82 $7.66 $6.32 $6.92 $7.45 4.23.23 $63.00 22.8% (31.5%) 0.7x 8.4%
Enterprise Value $2,425 % yoy 12.6% (24.6%) 243.0% 55.4% (44.6%) (17.5%) 9.5% 7.8% Absolute Min Max Median $62.00 24.8% (30.4%) 0.8x 6.7%
Street EPS $7.56 $7.57 $8.51 1 year 4.3x 8.7x 6.9x $61.00 26.9% (29.3%) 0.9x 4.9%
Buy price $50.00 % yoy (45.3%) (1.1%) 3 year 4.3x 21.2x 8.5x $60.00 29.0% (28.1%) 1.0x 3.2%
No-brainer price $45.00 Expected Delta 1.3% (16.6%) 5 year 4.3x 21.2x 9.0x $59.00 31.2% (26.9%) 1.2x 1.5%
10 year 4.3x 22.2x 11.6x $58.00 33.4% (25.6%) 1.3x (0.2%)
Normalized FCF $150 2019A 2020A 2021A 2022A 2023E 2024E 2025E 2026E $57.00 35.8% (24.3%) 1.5x (1.9%)
FCF / Share $4.23 EV/Sales 1.2x 1.0x 0.7x 0.5x 0.7x 0.8x 0.8x 0.8x S&P rel Min Max Median $56.00 38.2% (23.0%) 1.7x (3.7%)
% yield 7.3% EV/EBITDA 13.5x 14.4x 5.6x 3.7x 6.4x 7.2x 6.6x 6.2x 1 year (12.8x) (8.7x) (10.0x) $55.00 40.7% (21.6%) 1.9x (5.4%)
P/E 16.9x 22.4x 6.5x 4.2x 7.6x 9.2x 8.4x 7.8x 3 year (15.0x) (1.0x) (10.7x) $54.00 43.3% (20.1%) 2.1x (7.1%)
3 Year Target Street P/E 16.9x 22.4x 6.5x 4.2x 7.7x 7.7x n.a. n.a. 5 year (15.0x) (1.0x) (9.3x) $53.00 46.0% (18.6%) 2.5x (8.8%)
2026 EPS $7.45 10 year (15.0x) 8.1x (5.9x) $52.00 48.8% (17.1%) 2.9x (10.5%)
Target P/E 10.0x $51.00 51.7% (15.4%) 3.3x (12.3%)
3 Year Target $74.54 18.3x Implied Min Max Median $50.00 54.8% (13.8%) 4.0x (14.0%)
% return 28.2% 1 year 5.5x 9.5x 8.2x $49.00 57.9% (12.0%) 4.8x (15.7%)
x money multiple 1.3x 3 year 3.2x 17.3x 7.6x $48.00 61.2% (10.2%) 6.0x (17.4%)
% IRR 8.6% 5 year 3.2x 17.3x 9.0x $47.00 64.6% (8.2%) 7.8x (19.1%)
10 year n.a. 26.4x 12.4x $46.00 68.2% (6.3%) 10.9x (20.9%)
12 Months Base Target $45.00 72.0% (4.2%) 17.3x (22.6%)
2024 EPS $6.92 Dummy Valuation Summary
Target P/E 10.0x Current P/E 7.8x % move
EOY Target Price $69.17 Central 9.0x 15.5%
% return 19.0% Range High 10.0x 11.1%
12 Months Risk Case
2022 Risk EPS $5.75
Target P/E 7.5x
Next 12 Months Risk $43.13
% return (25.8%)

The Model as
Process Backbone Hey go look at XYZ stock and
let me know what you think
Hours Spent on an Idea

New idea generation 10
Research key drivers 10
Construct new model 12
Attend industry conference 8
Read financial filings 6
Speak with management 6
Listen to earnings calls 4
Speak with sell-side 2
Speak with other investors 2
Total Hours 60

Our standard:
Deliver a training program that
prepares analysts for the rigors
of the buy-side seat

What We Offer
• Live Academy: 4-week, 60+ hour bootcamp including guest speaker and pitch week
• Asynch Academy: 3-week, 85% pre-recorded
• Intern Academy: 5-day “kick off to summer” event
• And more on the way!
Please visit www.fundamentedge.com or www.wallstreetprep.com for more information


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Buy-Side Financial

Process Driven Investing

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

Hired, trained &

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

Long only (1-5 year Single manager / 50 net Multi-manager

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

In every seat on the buy-side, you will:

• Analyze businesses • Evaluate management

• Build (or at least use) financial models • Generate stock ideas

• Research key drivers • Communicate your stock ideas

• Derive valuations • Monitor catalysts

• Navigate earnings season

The intention of Fundamental Edge is to impart

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

1. Research preparation 10. Tools for short selling

2. Analyze a business 11. Assess management & capital deployment

6. Value the stock appropriately 15. Idea monitoring & adjustment

8. Generate new ideas

9. Operate in earnings season

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

Ability to see Ability to

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

Your First 12 Hours on a Stock

4. Read two sell-side initiation reports 12. Understand the narrative

5. Create a basic model 13. Create an initial upside/downside assessment

6. Identify the three key drivers of the business

7. Create a reverse DCF to assess what’s baked in

8. Create a detailed model

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

• Process driven investing

• Buy-side model construction

• Using the model to analyze a business

• Model forecasting frameworks

• The model & valuation

• The model & thesis development

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

To understand what is baked To understand the business To understand the 3 key

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

work to understand what is Layer in qualitative and Develop an ongoing research

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

• Investors/traders are ultimately predicting stock prices.

• To value a business accurately (and consistently) knowledge of the industry &

• Alpha: Excess return relative to the

• “Excess return” is the fundamental

• With no expectation of alpha

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

Performance above the market

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

Compensation Structure, the “2 & 20” model

Because of the heavy fee

Licensed to Nicholas James. Email address: nicholas.al.james@gmail.com

• In my observation, markets are reasonably efficient, with major exceptions

• ~10% of the time, large swaths of stocks are meaningfully mispriced