Objectives Budgeting

• Objectives Budgeting

• To build a forcasted P&L for the next 3 years.
• To forecast the earnings per share for the next 3 years.
• To build 3 scenarios: Base / Optimistic / Pessimistic

• Methodology

        Start with the Revenues

1. Analyse the revenue growth in the last three years
2. Identify the revenue guidance/strategy communicated by the company

• Compare the previous guidance provided by the company with the actual results and define if the guidance tend to be accurate, too optimistic or too pessimistic

1. Identify revenue drivers (macro + micro)
2. Build your main assumptions and explain them

Then budget the expenses

1. Analyze the main expense items as a % of revenues in the last three years.
2. Identify the cost/margin/EPS guidance communicated by the company

• Compare the previous guidance provided by the company with the actual results and define if the guidance tend to be accurate, too optimistic or too pessimistic

1. Build your main assumptions (expenses as % of revenues) for each expense item over the next three years and explain your rationale.

Define the EPS and check the company’s valuation

1. Divide the forecasted net income by the number of outstanding shares of the company to find your forecasted EPS.
2. Do this for your 3 scenarios: base / optimistic / pessimistic
3. Calculate the actual P/E (price/earning) ratio of the company = actual share price / last 12 months EPS
4. Calculate the forecasted P/E = actual share price / your next 12 months forecasted EPS
5. Compare (c.) and (d.) and conclude on whether the stock is a BUY or a SELL based on your assumptions.

Market pricing

• P/E ratios are commonly used by investors for relative valuation purposes.
• Everything else being equal, the lower the P/E the cheaper the stock.
• Relative valuation can be dangerous as it does not account for the specificities of the company.

• Weak balance sheet raise more risks
• Poor corporate governance may impair s/h value

Litigation, quality of products, lifecycle stage, degree of competitive advantage, etc