User Registration is the process of setting up a user account to enable storage and retrieval of information in InValueAble.net. User Information is the personal information of the user initially inputted at registration and can be updated at the user's discretion. First time users have to register prior to "Sign In." You will be asked for name, email address and a user defined password (user information). Please keep track of your password in a secure location for future Sign-In.

After you Sign-In, the first page that appears is the "Forecast Ratios" page of the Intrinsic Valuation Modeler™. A pre-defined firm (either the default ticker "GOOG", "AAPL" or a user defined firm) is automatically loaded into the Intrinsic Valuation Modeler™. A user defined default ticker (firm) can be setup by accessing User Information. You can access User Information either by clicking on your name in the upper right-hand corner of the InValueAble.net header or by clicking on Help in the application menu and then selecting User Information. Once in User Information, you can change your default ticker (used on startup after Sign-In) and other personal information. To make changes, enter the new information, click "Save User" and you will be taken to the new default ticker "Forecast Ratios" page. Please make sure that you enter a valid ticker symbol into the default ticker field, otherwise the system will return "AAPL" Forecast Ratios page. It should be noted that prior to any default ticker changes the default ticker is "GOOG", Google. If an invalid ticker is entered, "AAPL", Apple, becomes the default ticker. If you choose not to change anything in User Information, just click "Cancel" and it will return to the default ticker Forecast Ratios page.

NOTE: Modeling techniques will be addressed later in this guide.

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After Sign-In, the first page of the Intrinsic Valuation Modeler™ is the "Forecast Ratios" page as shown below. Comments have been added to highlight key areas of the Intrinsic Valuation Modeler™ environment.

Figure 1: Key Elements of the Intrinsic Valuation Modeler™

Let's take a little tour of the page.

1. User Name: Is located in the upper right-hand corner of the browser window. Hopefully, this is your name. You can click on your name to access "User Information" which allows you to change personal information and default preferences. "User Information" can also be accessed under the Help menu.


2. Application Menu Bar: Located under the InValueAble.net header, contains the Forecast, View, Applications and Help topics.
   • "Forecast"
   • "Open..." redirects to personal "Forecasts" directory for retrieval of a previously saved valuation model to either add forecasting assumptions to the "Your Notes" section of the saved valuation model or to open the saved valuation model in the Intrinsic Valuation Modeler™ for review and/or revision.
   • "Save" will save the current valuation model to the user's personal "Forecasts" directory.
   • View
   • "Analyst Estimates" opens a new window to access recent analyst estimates on revenue and earnings-per-share for the company being modeled.
   • "Forecasts" is the user's personal file directory for saving valuation models and retrieving previously saved valuation models.
   • "Forum" is a public access forum where users can publish valuation models from their personal "Forecasts" file directory to the "Forum" for public review and comment. All published valuation models are open to comment by any user and any forum valuation model can be retrieved for viewing in the Intrinsic Valuation Modeler™ but the models are not editable. Additionally, the url enables direct access to the valuation model whether signed-in or not on InValueAble.net.
   • "Charts" displays key performance metrics for the company being modeled.
   • Applications
   • "Intrinsic Valuation Modeler™" reloads the Intrinsic Valuation Modeler™ and the user's predefined default ticker.
   • "Search" opens a new window with a search engine.
   • Help
   • "FAQ" Frequently Asked Questions about InValueAble.net, Intrinsic Valuation Modeler™, Valuation Modeling, Finance, Accounting and other relevant subjects.
   • "Financial Definitions" opens a new window to a financial definitions directory.
   • "Online Research Resources" opens a new window with online resources to research micro- and macro-economic factors that could influence valuation models.
   • "User Guide" provides a written overview for many of the features offered by InValueAble.net.
   • "Video User Guide" provides a video overview of useful features and editing processes for InValueAble.net's Intrinsic Valuation Modeler™.
   • "White Papers" provides a collection of White Papers on various subjects related to valuation modeling and investing.
   • "User Information" allows the user to update their personal information (email address, password, etc.).
   • "About" provides general overview of InValueAble.net.
   
   
3. Ticker Input Field: This field allows the user to input a company's ticker (ie "goog", "aapl", "sbux", "ge", and over 5000 more tickers) in order to load that company's historical financial statements into the Intrinsic Valuation Modeler™ where the default valuation model will be generated for the company.


4. Firm being Modeled: This field shows the active firm loaded into the Intrinsic Valuation Modeler™.


5. Application Tabs: Allows the user to view different stages of the Intrinsic Valuation Modeler™ process.
   • "forecast ratios" tab: Is the primary input interface for modeling the firms projected performance.
   • "financial statements" tab: Contains the Income Statement, Balance Sheet, Statement of Cash Flows and Statement of Retained Earnings with historical and projected performance shown based on input provided on the "forecast ratios" model.
   • "performance ratios" tab: Automatically calculates many of the ratios needed to assess a firm's overall performance (historical and projected).
   • "dcf" tab: Displays Discount Cash Flow (dcf) valuation approach to estimating intrinsic price per share based on the Free Cash Flow to Equity (FCFE) method.
   • "ri" tab: Displays Residual Income (ri) valuation approach to estimating intrinsic price per share based on the Free Cash Flow to Equity (FCFE) method.
   • "eps" tab: Calculates future eps estimates based on the modeled intrinsic price per share and projected financial statements.


6. Intrinsic Value per Share: The Intrinsic Value per share is based on the Free Cash Flow to Equity (FCFE) Model using the current model parameters as defined in the "Projected" input section of the "Forecast Ratios" tab and calculated based on the discounted cash flow (dcf) and residual income (ri) valuation approaches.


7. Market Price per Share: If the user is connected to the internet, the Intrinsic Valuation Modeler™ will retrieve a recent market price per share for the Firm being Modeled. During market hours on a trading day (US Markets), the market price will reflect a 20 minute delayed quote. Otherwise, market price will reflect the close price on the last trading day.


8. Cost of Equity and Forecast Horizon Input Fields: These fields can be changed by the user. The Cost of Equity is set at a default value of 10% and is the factor used to discount the cash flows in the FCFE model. The Forecast Horizon field allows the user to define a period from 3 to 20 years. Forecast Horizon is defined as the time period required for a firm to reach steady-state cost structure, capital structure and sales growth.


9. Valuation Date: All new valuations are determined to Today's Date unless changed by the user. The date can be changed by clicking on the date field to bring up a calendar. Select the desired valuation date and then close the calendar window by clicking on the X box in the right hand corner of the calendar window to continue modeling.


10. Statement Date: Statement Date refers to the last fiscal year-end financial statements date in InValueAble.net's historical database for the firm being valued.


11. Income Statement and Balance Sheet Metrics: These are the primary line items for constructing Income Statements and Balance Sheets. These metrics describe ratios that are mostly in terms of sales while other ratios are in terms of Cost of Goods Sold, Average Debt, PPE & Intangibles, EBT (effective tax), Preferred Stock and Net Income (dividend payout ratio).


12. Historical Metric Ratios: These ratios are based on historical Income Statement and Balance Sheet metrics and are used to establish the initial default "Projected" section of the "forecast ratios" page.


13. Projections: Default and User-Defined Forecast Ratios: This section allows the user to change the default projections to user-defined forecast ratios which can impact the intrinsic value per share. These ratios are mostly in terms of sales (which means the values on the Income Statement and Balance Sheet are scaleable in relation to sales changes) while other ratios are in terms of Cost of Goods Sold, Average Debt, PPE & Intangibles, EBT (effective tax), Preferred Stock and Net Income (dividend payout ratio). Any changes in this section will force a recalculation of the intrinsic value of the firm being modeled.


14. Terminal Year: The terminal year represents the first year of steady-state (stable growth, stable cost structure, stable operational structure and stable capital structure) operation for the firm. This year is represented in the Intrinsic Valuation Modeler™ spreadsheet with three trailing dots "..." after the year, such as "2013..." and is the last forecast year in the spreadsheet model. All forecast ratios in the terminal year are treated as constant for each metric in perpetuity. The terminal year will change based on the time horizon selected by the user and can change when InValueAble.net's historical databases are periodically updated.

Now that you have a general overview of the Intrinsic Valuation Modeler™, it is time to present the environment that allows the user to edit, save, retrieve and publish valuation models.

Figure 2: Interactions between the Intrinsic Valuation Modeler™ and the Personal & Public File Directories

The Intrinsic Valuation Modeler™ has two functional environments (Forecasting and Forum) described as:

1. Forecasting: This environment requires the user to be Signed-In and gives the user complete access to all functionality in the Forecasting and Forum environments. Some features are:
• Save Forecast Models
• Retrieve and Edit Previously Saved Forecast Models
• Publish Forecast Models to Forum Directory for Public Access
• Add Comments to Forecast Models (Personal or Forum Directories)
• Save Forum Forecast Models to Personal File Directory
• Edit Forum Forecast Models and then Save to Personal File Directory
• Access Support Documents and White Papers
2. Forum: This environment has two modes of operation: Signed-In and Not Signed-In. The features of the Signed-In mode are listed in the "Forecasting" environment above. In the Not Signed-In mode, there is limited functionality as described below:
• Forum Directory Files can be Accessed and Viewed in the Intrinsic Valuation Modeler™
• Access Support Documents and White Papers

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To load a new firm (Ticker) into the model, enter a valid ticker symbol into the "Ticker for New Forecast" field located under the application menu bar. If you slowly enter the ticker, a drop-down menu will appear with several companies listed to assist in your selection of the company to be valued. Upon entering a proper ticker, click the "Load" button to load in the historical financial data into the Intrinsic Valuation Modeler™ where a default valuation model will be generated. Now, the model is available to be edited. If an invalid ticker is entered, then a message will appear to notify you of the invalid ticker.

Precedure: Load New Forecast Model:

1. Enter valid Ticker (firm) into "Ticker for New Forecast" input field
2. Enter "Load" to retrieve and load historical financial data to generate default forecast model

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There are two methods of editing the pro forma financial statements (Income Statement and Balance Sheet) within the Intrinsic Valuation Modeler™ environment:

1. Forecast Ratios Editing: This approach uses the year-over-year sales growth as the prime driver for forecasting future (projected or pro forma) financial statements. Then, the sales is used either directly or indirectly to determine the value of the Income Statement and Balance Sheet line items. The user inputs ratios (percentages) into the Forecast Ratios page that are representative of the line item's characteristics relative to the value driver (sales, COGS, average debt, EBT, etc.) of that line item.
2. Financial Statement Editing: This approach allows editing of the projected (pro forma) Income Statement and Balance Sheet directly in dollar terms.

Forecast Ratios Editing - Projected Section:

This section does not address the research required to make reasoned projections, but instead focuses on the mechanics of making changes within the Intrinsic Valuation Modeler™ environment. It should be noted that in the images below, the historical and projected columns have been adjusted so that the full 5 year forecast horizon can be viewed on the screen. This partially covers the "Metric" column but enables greater on screen view of the forecast ratios page. The column adjust feature is accessed by moving the mouse cursor just to the left of the first historical year cell; in this case, the 2003 year cell. Once properly positioned, the mouse cursor will convert to a column resize cursor image and then the user can adjust the speadsheet position as desired.

Let's try an example. Let's assume proper research has been performed and it was determined that sales growth in 2008, 2009, 2010, 2011 and 2012 would be 36.7%, 17%, 12%, 7% and 5%, respectively instead of the 47.9%, 39.3%, 30.7%, 22.2% and 13.6% for the default 5 year horizon model. Start by clicking on the "Sales Growth" cell under 2008. As can be seen in the image below, the cell becomes active and now it can be changed to 36.7% by entering 36.7. For most browsers, the number can be entered either by hitting the enter key or by tabbing to the next cell. Tabbing might not work for all browsers. Repeat this process for model years 2009, 2010, 2011 and 2012. After each cell entry, the intrinsic value will update to reflect the change in free cash flows to equity as a result of the change in sales growth.

Figure 3: Sales Growth Editing (Click on Cell to Activate, Enter New Value)

An image that includes the new sales growth projections is shown below. As can be seen, the Google intrinsic value has decreased from $503.64/share to $314.65/share based on the slower sales growth projections relative to the default model. This shows how easy it is to make changes in this model and how fast it updates to provide feedback on the relationship between the change being made and the resulting intrinsic value per value.

Figure 4: Edited Sales Growth with New Estimate of Intrinsic Value

Now that you have seen how to change one of the fields in the "Projected" section, you can apply this to other metrics and make changes based on research and reasonable assumptions of a modeled company's future prospects. For editing the projected financial statements, you should apply the following process (valid for either ratio editing or direct financial statement editing):

1. Select the proper forecast horizon
2. Model the Sales cells from left to right up to the terminal year
3. Model all Balance Sheet cells (if modeling on the Forecast Ratios page also known as "Assets and Liabilities relative to operation" and "Leverage and Other non-Common Interest")
4. Model all Income Statement cells to complete the modeling process (if modeling on the Forecast Ratios page also known as "Margin Structure and non-Common Impacts to Earnings")

This process must be followed for direct financial statement editing since some income statement items are dependent on balance sheet values (Depreciation & Amortization is dependent on Average PPE and Intangibles; Interest Expense is dependent on Average Debt). For ratio editing, this approach is optional but is still a good practice to follow.

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To save a forecast model for a firm (Ticker), click on "Forecast" on the application menu and select "Save" to save the current forecast. In some browsers, a message will notify the user of the forecast model state such as "Saving..." followed by "Saved" and then the message will disappear. The saved forecasts can be accessed through the open procedure defined below.

Precedure: Save Current Forecast Model:

1. Select "Forecast" on Application Menu
2. Select "Save" on the drop-down menu
3. Message indicator will show "Saving..." and "Saved" to complete the save procedure

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Valuation models (forecasts) are saved in the user's personal directory of equity valuation models called "Forecasts." The Forecasts directory can be accessed through two methods: 1) in the application menu, select Forecast and then Open... or 2) in the application menu, select View and then select Forecasts. The Forecasts directory is for the user's personal use and cannot be accessed by other users. Figure 5, below, shows the appearance of the Forecasts directory.

Figure 5: Forecasts - Personal Directory of Equity Valuation Models

To open a saved valuation model, mouseover the desired selection and click on that model (one-click). This will open the model in the Intrinsic Valuation Modeler™ for viewing or for additional editing. If you make changes to the model, you will need to save again in order to keep the changes that have been made. It should be noted that each time a valuation model is saved (where changes to the model have been made) - a unique valuation model is saved to the Forecasts directory.

Forecasts Directory Features:

1. Quick Link Buttons:
• Forecasting: Click button to transfer to Intrinsic Valuation Modeler™
• Forum: Click button to transfer to Forum (Public Directory)
2. Forecasts Search: Enter ticker to search for a saved forecast in your personal directory
3. Pagination: Select page number or use arrows to move through the directory to view models (at top and bottom of directory). Active page is shown without box format around number.
4. Directory: Lists all saved valuation models.
• Date: This is the date that the valuation model was saved to the Forecasts Directory. This is a sortable field (click on Date).
• When: Time when saved on Date.
• Company Name: Name of company in valuation model. This is a sortable field (click on Company Name).
• Ticker: Ticker symbol of company in valuation model. This is a sortable field (click on Ticker).
• Value: Estimated Intrinsic Value based on valuation model. This is a sortable field (click on Value).
• Your Notes: Personal comments - not accessible by other users.
• Forum Notes: Public comments posted on published valuation models.
• Forum: Valuation models can be published (posted to Forum by clicking on "publish"). The user will be prompted for comments on changes made to the model and justification for the valuation. If a model has been previously posted to Forum, then this field status will be "published."
• Delete: Files can be deleted so that users can manage their own personal directories.

The Forecasts Directory (above) and the Forum Directory (below) are very similar - but there are a few differences. One difference is the coloration scheme to make users more aware of which directory they are in. The Forecasts Directory has a blue color scheme on key terms and the Forum Directory has an orange color scheme on key terms.

Figure 6: Forum - Public Directory of Equity Valuation Models

Forum - Public Directory of Equity Valuation Models is shown in Figure 6. Many of the features of the Forum are similar to the Forecasts directory - but there are subtle differences. To open a saved valuation model, mouseover the desired selection and click on that model (one-click). This will open the model in the Intrinsic Valuation Modeler™ (Forum mode) for viewing or for editing. The Intrinsic Valuation Modeler™ Forum mode has two states: 1) Signed-In: valuation model can be edited and saved to Forecasts (Personal) Directory if desired and 2) Not Signed-In: valuation model cannot be edited, only viewed. It should be noted that the Forum does not have a "Delete" feature. Eventually, Forum files will be archived to keep the Forum space manageable.

Forum Directory Features:

1. Quick Link Buttons:
• Forecasting: Click button to transfer to Intrinsic Valuation Modeler™
• Forecasts: Click button to transfer to Forecasts (Personal Directory)
2. Forum Search: Enter ticker to search for a saved forecast in the public Forum directory
3. Pagination: Select page number or use arrows to move through the directory to view models (at top and bottom of directory). Active page is shown without box format around number.
4. Directory: Lists all saved valuation models.
• Date: This is the date that the valuation model was published (from the user's Forecasts Directory) to the Forum Directory. This is a sortable field (click on Date).
• When: Time when saved on Date.
• Company Name: Name of company in valuation model. This is a sortable field (click on Company Name).
• Ticker: Ticker symbol of company in valuation model. This is a sortable field (click on Ticker).
• Value: Estimated Intrinsic Value based on valuation model. This is a sortable field (click on Value).
• Your Notes: Personal comments - not accessible by other users.
• Comments: Public comments posted on published valuation models. For the user who posted this model, their Forecasts directory will contain this item as "Forum Notes", that is, if model is not deleted in their account.
• Shared by: The "Shared by" field is to promote authorship integrity for the valuation models posted to the Forum through use of the author's first name and an arbitrary registration number unique to that user.

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To load a saved forecast model for a firm (Ticker), click "Forecast" on the application menu and select "Open..." to be transferred to the user's personal "Forecasts" page and valuation model directory(table). On the Forecasts page, select the desired model by clicking on the row within the saved model directory for the valuation model that you want to load into the Intrinsic Valuation Modeler™. You can search on valuation models using the ticker search box or sort the valuation models by clicking on the table headers (Date, Company Name, Ticker or Value). If no files exist on the Forecasts page, then no forecast models have been saved, yet.

Precedure: Open a Previously Saved Forecast Model:

1. Select "Forecast" on Application Menu
2. Select "Open..." on the drop-down menu; user transferred to "Forecasts" page and Directory
3. Select row of forecast model to be retrieved into the Intrinsic Valuation Modeler™

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InValueAble.net provides a Search tool to assist users in their search for relevant online information on companies they are modeling or any subject matter. The Search tool is accessed through the Application Menu by clicking on "Applications" and then "Search." The Search tool utilizes Google search - so you know it's a reliable search engine. Additionally, InValueAble.net Search features a Forum View (Not Signed-In mode) which shows the directory of publicly available valuation models with the same Forum Directory Features (listed above). Users can set InValueAble.net Search as their homepage or bookmark the link for quick access and viewing of the Forum content.

Figure 7: InValueAble.net Search

Precedure: Open Search Tool:

1. Select "Applications" on Application Menu
2. Select "Search" on the drop-down menu; user transferred to "Search" page

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Forecast modeling involves a three-stage process to develop a complete understanding of the firm being modeled, the future prospects of the firm and how this translates into the firm's future performance as realized through the financial statement and resulting free cash flows to equity which determines the firm's valuation. A three step approach is present below.

Figure 8: Forecasting Process - Three Step Approach

Let's describe the steps in more detail:

1. Understand the Firm:

1.1 Macroeconomic Environment: The macroeconomic environment includes factors such as Gross Domestic Product (GDP), Inflation, Interest Rates, Foreign Exchange Rates (FOREX), Business Cycle and Commodity Prices that affect feedstock expenses, distribution expenses, capital costs, and specific industry demand characteristics. Understanding an industry's sensitivity to these factors enhances the user's ability to develop better forecast models for a particular firm. Resources for these factors can be found on governmental websites as provided by our Online Research Resources page.

1.2 Microeconomic Environment: The microeconomic environment is more focused on the specific industry in which the firm competes and how it competes within this industry. Industry specific factors can be broken down into the types of target customers, cost structures, capital structure, labor relations, distribution channels, and much more. How a company competes within the industry is best described by Porter's Five Forces Model: 1) Supplier Power, 2) Buyer Power, 3) Industry Rivalry, 4)Barriers to Entry, 5) Substitute Products and occasionally a sixth factor is thrown in 6) Complementary Products. A careful analysis of these factors and the value chain of the firm provides more insight into the value drivers of the firm and how these value drivers affect changes in the financial statements of the firm. These factors are also the basis for corporate strategy formulation and provides insight in the firm's strategy. Resources for these factors can be found on our Online Research Resources page.

1.3 Review firm's 10K, 10Q, and Website: Great sources of information to review the firm's strategy, competitive environment and financial performance. Free 10Ks (annual report) and 10Qs (quarterly reports) can be found on the Securities and Exchange Commission (SEC) website as provide on our Online Research Resources page.

1.4 Performance Ratio Analysis: The Intrinsic Valuation Modeler™ environment provides a "Performance Ratio" tab which calculates historical and projected performance ratios for the firm being modeled. The performance ratio tab has seven sections: 1) Growth rates, 2) Profitability, 3) DuPont ROE model, 4) Margins, 5) Liquidity, 6) Turnover and 7) Solvency. Descriptions and equations for the ratios are detailed on our Performance Ratios page.

2. Forecast Future Prospects of the Firm:

2.1 Select Appropriate Forecast Horizon: Based on the research performed to understand the firm, the selection of the appropriate forecast horizon should be entered. In most cases, firms converge to steady-state conditions within 5 years. Under special conditions, this could be longer for a growing small firm that has a competitive advantage which prevents competitors from eroding their growth prospects. It should be noted that Forecast Horizon must be entered prior to making any forecast changes; otherwise, you will lose your forecast changes if forecast horizon is entered afterwards.

2.2 Revise Default Forecast to User-Defined Forecast: Note that you should change the Forecast Horizon prior to any Forecast Ratio changes since changes to the forecast horizon will reset to a new default Forecast Ratio spreadsheet. Based on the firm research, sales growth is the first metric to be modeled over the forecast horizon. The next items are the cost line items (COGS/Sales, R&D/Sales, SGA/Sales, etc.) on the Income Statement over the forecast horizon. Then, a determination of whether the effective tax rate will stay the same or change over the forecast period.

3. Value the Firm:

3.1 Determine Proper Cost of Equity Capital: Generally, the cost of equity capital is determined through the Capital Asset Pricing Model (CAPM) as briefly discussed in FCFE Modeling Overview. Another way to think of this parameter is as the expected return on investment provide by any investment of this type with a similar risk profile. The Intrinsic Valuation Modeler™ default value is 10% or 0.1. A higher discount rate (usually implying higher risk) will lower the Intrinsic Value per share while a lower discount rate (usually implying lower risk) will raise the Intrinsic Value per share. The appropriate value must be used to get a reasonable valuation.

3.2 Have there been any stock splits or reverse splits: If the firm has split or reverse split its shares since the last date on the historical financial statements used to build the default valuation model, then the number of outstanding shares will need to be updated to reflect firm valuation spread over more outstanding shares. Currently, this field is not editable - but this may change in the future.

3.2 Contingency Claims Prior to 2006, one of the most significant contingent claims against equity was the stock options issued by the company to its executives, employees and related entities. After 2005, all companies using Generally Accepted Accounting Principles (GAAP) were required to implement SFAS 123R to account for issued stock options. This eliminated a major contingent claim by expensing stock options as incurred as described by SFAS 123R. Other contingent claims can be stock warrants and the convertible component of a convertible debt issue. These factors could be significant for a small growing company but for a large company these factors are usually a small portion of the company's overall value. Currently, the Intrinsic Valuation Modeler™ provides a placeholder for contingent claims - but is not editable. Funtionality for this feature might be added in the future.

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