skills/initiating-coverage/references/valuation-and-modeling.md

# Valuation and Modeling

## Minimum viable initiation model

At minimum, define:
- historical revenue and segment drivers,
- gross margin / EBITDA / EBIT or equivalent profitability,
- tax, D&A, capex, working capital where relevant,
- shares, net debt, and non-operating items,
- consensus estimates and variance from user's view,
- normalized earnings quality: GAAP EPS, adjusted/operating EPS, tax/share-count effects, non-operating items, and whether EPS is recurring,
- base/upside/downside cases,
- target price methodology,
- sensitivity table.

## Capital-Intensive And Financed Growth Gate

Apply this gate when the equity debate depends on large capex, external funding, debt, lease liabilities, converts or prospective dilution, customer concentration, or contracted capacity still requiring construction.

Before a positive ownership conclusion or target price, establish:
- a pro forma fully diluted capitalization bridge, including options, converts, expected issuance, and other material claims when relevant,
- enterprise value incorporating debt, lease commitments, cash, and non-operating items,
- interest burden, maturity/refinancing exposure, and debt-service capacity,
- maintenance and growth capex, depreciation/useful-life assumptions, and cash conversion,
- after-financing economics through normalized FCF, ROIC / return on invested capacity, or capacity-cohort cash returns, as appropriate,
- a sensitivity that shows how financing cost, utilization, pricing, margin, or dilution changes equity value.

Equity-value-to-revenue or revenue multiples may be shown as preliminary market context, but they are not primary valuation support when material financed obligations remain outside the comparison. If the inputs above are not available, deliver a preliminary or watchlist initiation underwrite and list the proof required before ownership.

## Method selection

### DCF

Best when:
- cash flow can be forecast with some confidence,
- terminal economics matter,
- company has stable or maturing model,
- user needs intrinsic value.

Required caveats:
- WACC and terminal value sensitivity,
- margin normalization,
- reinvestment/capex requirements,
- forecast horizon credibility.

### Trading comparables

Best when:
- business has relevant public peers,
- market-relative view matters,
- mature or sector-standard valuation methods exist.

Required caveats:
- peer set quality,
- growth/margin/risk differences,
- accounting differences,
- calendarization and one-time adjustments.

### Sum-of-the-parts

Best when:
- segments have different economics,
- conglomerate discount or breakup case matters,
- multiple business lines require different valuation metrics.

Required caveats:
- segment disclosure quality,
- allocated costs,
- intersegment dependencies,
- tax/leakage and corporate overhead.

### NAV / book / tangible book

Best for:
- banks,
- insurers,
- REITs,
- asset-heavy companies,
- financials and real assets.

Required caveats:
- asset marks,
- reserve adequacy,
- credit/impairment risk,
- cap rate / spread sensitivity,
- capital requirements.

### Probability-weighted valuation

Best for:
- biotech,
- litigation-driven companies,
- binary regulatory or development events,
- special situations.

Required caveats:
- probability assumptions,
- timing assumptions,
- capital needs/dilution,
- downside if event fails.

## Target price bridge

Required outputs:
- current price,
- target price,
- implied upside/downside,
- valuation method,
- key assumptions,
- implied multiple,
- sensitivity range,
- comparison to consensus target if available.

For P/E or EPS-driven target prices, use recurring or operating EPS when GAAP EPS is materially distorted. If GAAP EPS is used, explain why it is representative. If adjusted EPS is used, cite the reconciliation and state which adjustments are accepted, rejected, or still unproven.

## Sensitivities

Common sensitivities:
- revenue CAGR vs terminal margin,
- WACC vs terminal growth,
- EBITDA multiple vs EBITDA,
- NTM multiple vs estimate revision,
- NIM vs credit cost for banks,
- cap rate vs NOI for REITs,
- probability of success vs peak sales for biotech,
- commodity price vs production/cost for energy.

## Model QA expectations

Before presenting valuation:
- share count ties to latest filing or estimate source,
- net debt ties to latest filing or model,
- enterprise value math checks,
- multiples use consistent calendar year / NTM / LTM definitions,
- non-GAAP metrics are labeled,
- EPS basis and quality are explicit before applying a P/E multiple,
- source dates are visible,
- no target price is presented as more precise than the inputs justify,
- capital-intensive or externally financed growth clears the pro forma fully diluted capitalization and after-financing return gate before a positive ownership conclusion.