One of the major responsibilities for a financial analyst is to look at company financials and make forward projections. For U.S.-listed companies, SEC filings are often the first place analysts go to get financial information, including income statements, balance sheets and statements of cash flow.
The reason analysts look at filings is because they follow standard format and don’t include forward projections, just historical facts, making them easy to analyze. Analysts will take numbers from the filings and pull them into Discounted Cash Flow (DCF), industry comparables or other models.
For dealmakers – investment bankers, private equity and corporate development professionals – these metrics are often looked at from an acquisition perspective. That is, which companies seem attractively valued for a take-over? While a buy-side analyst may be looking for growth or momentum (depending on the fund’s strategy of course), dealmakers commonly look for companies or segments that are out of favor or undervalued, often due to operational mishaps, whereby allowing them to acquire valuable assets at a discount.
One of the most time-consuming, tedious parts of the process is the act of gathering data – compiling documents, and manually copying numbers into a model, line-by-line and cell-by-cell.
Some analysts can get past this by using a market data platform that has consolidated financial information. Standardized information about revenue and tax rates can be copied, or often plugged into models.
However, standardized financials often miss a great deal of detail, such as depreciation schedules, geography or subsidiary based financial statements. For dealmakers, information about subsidiaries could be crucial as they could indicate potential weak areas that are ripe for divestment.
For illustrative purposes, let’s look at a company that operates in many segments – Procter & Gamble (P&G)($PG), the personal care behemoth. P&G reports on 5 segments: Beauty, Grooming, Health Care, Fabric & Home Care; and Baby, Feminine & Family Care.
Looking at revenue and profit by segment from their last 10K (June 2016), the Beauty and Grooming segments have been declining year over year – over 8% from 2015 – 2016 and 6% for 2014 – 2015. Negative effects of foreign exchange play a key role in the decline, but for this example we will ignore that component. Furthermore, margin in those categories has also been declining.
Further review of the 10K would indicate product mix as a factor to blame for the decline in Grooming revenue and profitability, with disposable razors as a major culprit due to their lower price points and lower margins. A conclusion could be made that P&G divest its grooming business (this is again hypothetical since grooming could be considered a core business line for P&G – according to its 10K, it owns 65% of the razor market, and is likely not an area up for divestment). Another conclusion could be simply to cease production of shrinking volume, lower margin, potentially cannibalizing disposable razors (a question left for corporate strategy, and outside the scope of this post).
Further analysis into the space, looking at sell-side research, industry reports, news and trade journal articles, as well as financial statements and mentions of the grooming sector by other companies, would reveal more information about growth prospects and consumer habits.
For example, when searching for “razors” in AlphaSense and limiting sources to broker industry and strategy reports, and consumer staples trade journals, the following trend chart is generated:
Based on this, there does seem to be a recent uptick in mentions of razors. A report from Jeffries states that razor blades were among the worst 25 categories for year-over-year growth over the past 4-weeks, showing that there may be a shift in the way people purchase razors, and / or a reduction of purchases due to changing fashion trends or razor quality. Additionally, in a weekly report, Liberum mentions P&G has a new razor subscription model to compete against Unilever’s ($UL) Dollar Shave Club. This may support the notion that consumers are acquiring razors through non-traditional channels, but also shows that P&G is trying new tactics to ensure their position as leader in shaving products doesn’t erode.
With the help of AlphaSense, dealmakers can quickly get the information they need for developing (or dismissing) an investment thesis so they can spend less time searching and more time analyzing.
1. “Industry Note, USA Consumer, Cosmetics, Household & Personal Care,” Jeffries, May 2, 2017
2. “Consumer Staples Weekly: Stonyfield bid; Gilette; Diageo tax, Nestle,” Liberum, May 15, 2017