damodaran-dcf-analyzer

# Damodaran DCF Analyzer

Perform institutional-quality DCF valuations following Professor Aswath Damodaran's methodology from NYU Stern.

## Reference Files

Before running analysis, consult these reference files based on company type:

- **references/industry_data.md** — Sector betas, WACC ranges, equity risk premiums by country
- **references/dcf_formulas.md** — All core formulas (FCFF, WACC, terminal value, CAPM)
- **references/valuation_examples.md** — Worked examples across company types:
  - Mature stable (P&G)
  - High-growth tech (Palantir)
  - Hypergrowth (CrowdStrike)
  - Highly cyclical (Freeport-McMoRan)
  - Turnaround (Intel)
  - Dividend aristocrat (J&J)

## Execution Workflow

### Step 1: Classify Company Type

First, determine the company's profile to select appropriate assumptions:

| Type | Characteristics | WACC Range | Terminal Growth |
|------|-----------------|------------|-----------------|
| **Mature Stable** | Low beta (<0.8), consistent FCF, dividend payer | 6-8% | 2-2.5% |
| **Moderate Growth** | Beta 0.8-1.2, 10-20% revenue growth | 8-11% | 2.5-3% |
| **High Growth** | Beta 1.2-1.6, 20-40% revenue growth | 11-14% | 3-3.5% |
| **Hypergrowth** | Beta >1.5, >40% revenue growth | 14-18% | 3.5-4% |
| **Highly Cyclical** | Commodity/industrial, volatile earnings | 12-15% | 2-3% |
| **Turnaround** | Negative/declining FCF, restructuring | 8-12% | 0-3% |

### Step 2: Gather Financial Data

Use web search to collect current data:

**Search queries:**
- `[TICKER] revenue operating income 2024 2025`
- `[TICKER] free cash flow TTM`
- `[TICKER] market cap shares outstanding`
- `[TICKER] beta WACC cost of capital`
- `[TICKER] debt cash balance sheet`

**Required metrics:**
- Current stock price and market cap
- Shares outstanding
- TTM revenue and FCF
- Total debt and cash
- Beta (5-year monthly)
- Historical growth rates

### Step 3: Calculate WACC

```
Cost of Equity = Risk-Free Rate + (Beta × 5.5%)
WACC = (E/V × Cost of Equity) + (D/V × After-Tax Cost of Debt)
```

Use 10-year Treasury (~4.3%) as risk-free rate.

### Step 4: Project Free Cash Flows

**Growth rate decay by company type:**

| Type | Yr 1 | Yr 2 | Yr 3 | Yr 4 | Yr 5 |
|------|------|------|------|------|------|
| Hypergrowth | 40% | 32% | 25% | 18% | 12% |
| High growth | 25% | 20% | 16% | 12% | 8% |
| Moderate | 15% | 13% | 11% | 9% | 6% |
| Mature | 6% | 5% | 4% | 3% | 2.5% |

**For cyclical companies:** Normalize FCF to mid-cycle before projecting.

**For turnarounds:** Use scenario analysis (bull/bear cases with probabilities).

### Step 5: Calculate Intrinsic Value

```
Terminal Value = FCF(Year 6) / (WACC - Terminal Growth)
Enterprise Value = PV(Stage 1) + PV(Terminal Value)
Equity Value = EV + Cash - Debt
Share Price = Equity Value / Shares Outstanding
```

### Step 6: Sensitivity Analysis

Create matrix varying WACC (±2%) and terminal growth (±1%):

| WACC \ Terminal | 2% | 3% | 4% |
|-----------------|-----|-----|-----|
| 10% | $XX | $XX | $XX |
| 12% | $XX | $XX | $XX |
| 14% | $XX | $XX | $XX |

### Step 7: Investment Recommendation

| Premium/Discount | Rating | Action |
|------------------|--------|--------|
| >50% premium | OVERVALUED | **AVOID** |
| 20-50% premium | FAIRLY VALUED (HIGH) | **HOLD** |
| -20% to +20% | FAIRLY VALUED | **HOLD** |
| -20% to -40% discount | UNDERVALUED | **BUY** |
| >40% discount | DEEPLY UNDERVALUED | **STRONG BUY** |

## Output Format

```
## [COMPANY] ([TICKER]) - DCF Valuation

### Executive Summary
- **Current Price:** $XX
- **Intrinsic Value:** $XX
- **Valuation Gap:** XX% [premium/discount]
- **Company Type:** [Mature/Growth/Cyclical/etc.]
- **Recommendation:** [STRONG BUY / BUY / HOLD / SELL / AVOID]

### Key Metrics
[Table with market cap, revenue, FCF, WACC, etc.]

### DCF Model
[5-year FCF projections + terminal value]

### Sensitivity Analysis
[WACC vs terminal growth matrix]

### Investment Thesis
[Bull case, bear case, key assumptions]

### Risk Factors
[Company-specific risks]

### Bottom Line
[Clear, actionable recommendation in one paragraph]
```

## Critical Rules by Company Type

**Mature companies:** Terminal value will be 75-85% of total value — be conservative on terminal growth.

**Growth companies:** Challenge aggressive assumptions — even great businesses can be overpriced.

**Cyclical companies:** ALWAYS normalize FCF to mid-cycle. Never use peak or trough earnings.

**Turnarounds:** Use probability-weighted scenario analysis, not single-point DCF.

**High-beta stocks:** The discount rate is your friend — 16%+ WACC makes most growth stories look expensive.

## Disclaimers (Always Include)

1. DCF is highly sensitive to assumptions
2. This is not professional financial advice
3. Past performance doesn't guarantee future results
4. Consult qualified advisors before investing