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Distinctive approach: Pier Analysis provides spreadsheet models of the companies it covers
This note is part of the Pier Review reference material.
Infrastructure investors share numbers openly
Julia manages a fund that has bought 30 infrastructure assets. Among them is a 22% share of an airport in the north of England.
It has nagged at her for some time that it’s not a comfortable fit. Investors have said several times that they are not keen on it because, unlike the hospitals and schools that make up most of the other holdings, its revenues are driven by volumes of traffic, which they don’t trust. And the fund’s share in this one is quite a bit smaller than in all of its other assets.
So Julia decides to sell. She approaches Dermot, who manages a competing fund. She has known him for a long time and is confident that the airport is the kind of thing that he would like in his portfolio.
Once she’s explained her proposal, it’s entirely predictable what Dermot will say next.
Yes. I may well be interested in buying your airport. Will you send over the legal agreements that govern it, and the model?
The model is a large spreadsheet which shows how much money the airport is expected to make. The calculation builds up the projections from basic assumptions about
which routes will be operated by which airlines
how much they will pay in fees for each landing and for baggage handling
how many passengers will as a result go through the terminal
and so on, including the associated costs of operating the business.
These assumptions will be laid out in a model handbook, which will describe where they came from and what underpins them.
Buyers and sellers in this industry don’t guess how much their assets are worth. They set out their assumptions clearly, and freely share the models. The spreadsheets are the way Julia articulates her proposition. There’s no reason for Dermot to redo the calculations himself. He will take Julia’s model, which has the advantage that they have been formally audited by one of several firms specialising in such work.
It’s also the model used routinely by the institutions that account for the 78% of the airport that Julia does not own. Using the model will familiarise Dermot with how the asset is viewed by the investors who will be Dermot’s future partners if he chooses to go ahead with the purchase.
He may have a different view on the assumptions, in which case he will key different numbers into Julia’s model, and will likely discuss his opinion openly with her, and with those other shareholders. In this way the two funds will converge on a price for the interest in the airport to change hands.
Stockbrokers are not so disclosing
Compare this with the world of personal finance. Marina’s adviser Matthew notices that she has more cash than she often has, as a result of a handsome bonus that she was paid last month. He calls her to suggest that she invests it in shares of Amazon. Marina won’t think to ask Matthew for the financial model that backs up his recommendation, because it is not the usual practice in such circumstances. If she did ask, Matthew would
either, be flummoxed, because he would know he didn’t have access to a model: this would be the case in a small firm
or, know well that his firm has a model, but that it’s guarded jealously by the research analyst who covers Amazon. In well organised firms the models are carefully managed assets of the institution. In less well run boutiques the models in practice belongs to the analysts, who carry them to their next position when they move jobs.
In none of these cases is the model something that Matthew can give to Marina. The nearest she can get her hands on are some figures printed on the back of a research report. But that material is not easy to read: it’s just a slab of numbers. It comes with no documentation about how the figures are arrived at, so she can’t examine the individual calculations. They are static, in the sense that they don’t update when the share price changes, and so will be out of date by the time Marina reads them.
Pier Analysis gives you the models
The most distinctive feature of Pier Analysis is that it provides models of every company it covers. They are free for subscribers to download, examine how they are put together, and see what happens if different inputs are applied. In this way, subscribers can understand the dynamics of the business that they are considering. They can equip themselves with a clear grasp of the linkage between
the current valuation of the firm,
what the firm needs to achieve in the coming years to justify that valuation
how plausible it is that those achievements are likely, given what the business has managed in recent times.
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