Basic, lesson 1 of 4
How a research model is laid out
A sell side model runs by quarter, by segment, from drivers. The layout decides how fast you can update it at 9 p.m. on a print night.
8 min, 2 checks
1Quarters, segments, drivers
The stock reacts to quarters, and consensus is published by quarter, so the model is quarterly with annual columns that sum the four. Each reported segment gets its own block. Within each block, revenue is built from drivers (units, price, stores, customers), and every forecast cell points back to an assumption you can see and change.
| Tab | What it holds |
|---|---|
| Drivers | Every assumption in one place: growth, price, margins, tax rate, share count |
| Segments | Revenue and operating profit by business line, by quarter |
| Income statement | Consolidated, by quarter and year, GAAP and adjusted |
| Cash flow and balance sheet | Free cash flow, net debt, share count |
| Consensus | Street numbers next to yours, with the gap in percent |
| Valuation | The target price build |
Check 1
Why do sell side models run by quarter?
2Seasonality
Many businesses earn unevenly through the year: retailers in the holiday quarter, travel in summer, software in the last quarter of the fiscal year when budgets close. Quarterly forecasts use each quarter's historical share of the year, adjusted for known shifts such as a moved holiday or a week added to the calendar.
Worked example
Implied fourth quarter
- 1Full year revenue guidance: 2,000
- 2Reported Q1 to Q3: 380 + 420 + 450 = 1,250
- 3Implied Q4: 2,000 - 1,250 = 750, or 37.5% of the year
If Q4 has been 35% of the year historically, guidance assumes a stronger than usual holiday, and that is the debate for the stock.
Check 2
Full year guidance is $3,600 million. The first three quarters total $2,580 million. What fourth quarter does guidance imply, in millions of dollars?
Terms in this lesson: Sell side, Income statement, Balance sheet.
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