new lecture 8 spr 09

8/14/2019 New Lecture 8 Spr 09

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Spring 2009 NBA 5060

Lecture 8 Pro Forma Financial Statements & Forecasting I

1. Pro forma financial statements

2. Some Coaching Tips

3. A structured forecasting approach Step 1: Forecasting Sales Step 2: Forecasting the rest of the income statement Step 3: Forecasting the balance sheet Step 4: Computing the statement of cash flows and free

cash flows to equity Step 5: Terminal year assumptions Step 6: Economic reality checks and an iterative process

For next class, we will complete our discussion of forecasting and developforecasts for CBRL. Consider how you would forecast CBRLs incomestatement and balance sheet.

Lecture 8 Page 1 of 8


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Pro Forma Financial Statements

Motivation

The key component for any serious security analysis Limited by the reliability of key assumptions and the inherent

uncertainty of future events

Integration from first half of the course to assist in theforecasting task, you should make use of:

Business Analysis:

Have a good understanding of the macro factors that drivesales in the industry, cyclicality, etc.

Recent trends, cycles, structural changes over time,technology risks

Entry barriers protecting ROA, sustainability of competitiveadvantage, etc.

Accounting Analysis:

Flag the historic financial statements for any non-recurringtransactions to avoid extrapolating into the future.

Watch for unorthodox accounting policies that can adverselyimpact future profits (e.g. capitalizing store opening costs).

Financial Analysis:

Use prior year F/S as a starting point.

Be aware of industry norms. You can get industrybenchmarks from, for example, Multex investor or Yahoo!Finance.

Use ROAs, ROEs, turnover ratios and profit margins asreality checks for your future forecasts.



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Coaching tips in constructing pro forma financialstatements

1. The future is inherently uncertain

2. Sound analysis is the key

3. Exploit the structure and articulation of the financial statements

4. Reality checks and iteration



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Pro forma financial statements A structured approach


Forecast Sales


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Step 1: Forecasting sales

How sales growth behaves over time

Sales growth rates display strong mean reversion. Why?


Pro formaStatement of Cash Flows

Pro formaBalance Sheet

Pro formaIncome Statement

ForecastLeverage

Property, Plant,& Equip

Forecast Margins Forecast Turnovers

DepreciationExpense

InterestExpense

Distributions to Equity Holders

Other incomeand expense

Other assetsand liabilities


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General forecasting considerations

Top-down approach

Macro forecast Industry Sales Forecast Firm Sales Forecast

This approach assumes the following conditions:

This approach is less useful when:



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Firm-specific influences on sales growth

A significant predictor of future revenue:

From Cracker Barrels 10-K

Item 1. Business

We plan to open 12 new stores in 2009, two of which already were open as of September 24, 2008.

Item 7. Managements Discussion & Analysis

We estimate that our capital expenditures (purchase of property and equipment) during2009 will be up to $98,000. This estimate includes costs related to the acquisition of sitesand construction of 12 new Cracker Barrel stores and openings that will occur during2009, as well as for acquisition and construction costs for locations to be opened in 2010,capital expenditure maintenance programs and operational innovation initiatives.

Other considerations:



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Sales growth over the longer term

How many years should you forecast? Theoretically, the value of theequity depends on an infinite stream of expected future cash flows.Practically, were limited in forecasting to just a few years.

The forecast horizon should be long enough for the firm to reachsteady-state. What does this mean?

Typically, most time is spent forecasting the near-term sales growthexpectations (e.g., from 1 to 5 years out). Use an equilibriumassumption for the last year and extrapolate the intervening years.

Sales growth rate for the last year:

Extrapolating between early years and the last year:

Linear trendB C D E F G H I J K

2000 2001 2002 2003 2004 2005 2006 2007 2008 20090.187 0.173 0.159 0.145 0.131 0.116 0.102 0.088 0.074 0.060

Example =B5+(($K$5-$B$5)/(COUNT($C$4:$K$4)))

Exponential/quadratic trend

B C D E F G H I J K 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090.187 0.104 0.076 0.065 0.062 0.061 0.060 0.060 0.060 0.060

Example =B5+(($K$5-B5)*0.65)


new lecture 8 spr 09

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