Trefis: How a Company's Products Impact Its Stock Price

by: SA Editors

This article is part of a regular series in which we interview our App Providers - the folks that develop the amazing stock-market Apps on Seeking Alpha's new App Platform.

Please use the comment stream below to share your own experiences with the featured App. And feel free to suggest to the developers any improvements or changes you'd like to see (or write a review!).

This week we interview Manish Jhunjhunwala of Trefis - whose platform "uses extensive data to show in a single snapshot what drives the value of a company's business."

This week only: Trefis and our App Store crew are teaming up to offer subscribers to Trefis Premium a 50% discount. Use coupon code Trefis50off when signing up.

And now, the interview:

Manish, where did you get the name Trefis? Does it have any significance?

We think of Trefis as an engine for Insights: a place to create and to consume Insights.

We created the name Trefis as a shorthand for "trends, forecasts, and insights" - which reflects our emphasis of providing a platform where people are engaged in generating and consuming insights, commonly starting with qualitative trends and then quantifying them in the form of forecasts.

What are the key differences between the Free and Pro versions of Trefis?

The difference is in the number of companies available: The Free version has the most popular companies in Mobile, Software, and Semiconductor sectors. The Pro version provides access to a broader set of companies across Tech, Media, Telecom, Consumer, Food and Beverage, as well as the Financial Services Sector which we recently launched.

As more companies and sectors are added, current Pro subscribers get access to the expanded set of companies at no additional cost.

How many companies do you currently cover? Are there plans to expand your coverage?

We currently cover about 100 large companies spanning some of the popular sectors outlined above. We are continuously adding more companies and sectors to our coverage. Over the next year or so we expect to more than double our coverage universe, bringing it in-line with some of the small to mid-size investment banks.

Taking a look at Trefis on New York Times (NYSE:NYT), I notice that print ads account for 32% of its stock price; subscriptions for another 30%; online ads for 21%; and for 11%. How do you arrive at those numbers? How does Trefis come up with the Price Estimate for a company, and the individual contributions of a division?

Trefis uses the discounted cash flow (DCF) model within the sum-of-the-parts framework to estimate the value of a company’s stock and its business segments or divisions.

More specifically:

  1. To estimate the value of a company we organize a company’s different products/offerings as divisions. For example, for NYT, Print Ads, Circulation and are some of the divisions.
  2. Each division might include a number of products/offerings. So within each division we start with the forecasts for fundamental drivers like pricing, market share, and profit margins for its different products/offerings to calculate the division’s expected revenues and expenses for future years.
  3. We use the revenues and expenses calculated to derive the cash profits for the division, and then discount the cash profits using the DCF methodology to estimate the division’s value**.
  4. Value of the company is then calculated as the sum of the values of different divisions, plus cash, minus debt. The per share price is the company value divided by shares outstanding.

Our forecasts for fundamental drivers like pricing, units, and profit margins of a product, account for information available from various sources, including company filings, earnings calls, as-well-as market reports and expert analysis. We transparently lay out that analysis for each chart, along with underlying sources for historical data on the website, and for the widget focus on providing an efficient way to leverage the tool.

** In instances when we use the dividend discount model, we use the revenues and expenses calculated for each division to derive the net income and the expected dividends. The expected dividends are then discounted using the dividend discount model to estimate the division’s value. The value from different divisions is added to obtain the company’s value.

Have you ever tried to break out a company's business and not succeeded?

That hasn’t been a problem. We use the same discounted cash flow methodology and the sum-of-the-parts framework that have been used on Wall Street for a while. In structuring a company’s analysis, we strive to make the breakdown intuitive and easy-to-grasp. That said, limitations of available data does often influence how we break down the company, and sometimes presents challenges to making the structure intuitive.

In essence, Trefis makes the same content, data, and tools that were until now available only to professional investors, accessible to everyone. However, it's not just access; we believe ease-of-use and understanding are equally important, and have spent significant resources on that.

Your Scenario tool seems very interesting, both for modeling projections, and for bouncing ideas off friends and other Trefis users. How does it work?

We found that often when new information, news and trends become known in the market, there is commonly more than enough qualitative discussion in the media. However, what is difficult is to understand whether the news or trend really matters to a company, and more importantly, how much.

On Trefis you can quantify how much a recent news event, or a trend might impact a company's stock. You can play with assumptions, or try scenarios relevant to recent trends.

For example, you can answer questions like:

If Microsoft Bing's (NASDAQ:MSFT) market share in search doubled over time as it took share from Google, how much would that impact Microsoft's stock? You can simply drag the Microsoft Bing market share trend-line on a chart to see this answer.

Or, modify Pepsi's (NYSE:PEP) market share, and check whether it matters much to PepsiCo's stock if Pepsi continues to lose share in the carbonated drinks market to Coca Cola (NYSE:KO).

The famous money manager Peter Lynch popularized the notion of buying what you know and are familiar with. So if you love Dunkin Donuts coffee, go buy Dunkin Donuts stock.

Trefis provides tools that help you make sense of data quickly, and expects to provide you a reason to reflect before you act.

We move beyond the qualitative notion of "if you love the coffee at Dunkin' Donuts, you should think about buying the stock," to answer quantitative questions like: "If their coffee sales are up 10% next year, but donut sales are down 5%, what happens to the value of the company?"

To cite another example, if you loved your recent visit to Disney (NYSE:DIS) resorts, and are ready to go buy Disney's stock on that impulse, through Trefis we hope to provide a platform where you can spend 10 seconds, and find a reason to pause on your decision. Trefis shows you that the Parks and Resorts business is less than a third of Disney's stock price, and may not be the reason you want to bet on Disney's stock. You can further change drivers like average spend per customer, and number of visitors to see how they impact Disney’s stock.

How might an investor use Trefis to inform his decision to take or not take a position in a stock? Does it offer a comprehensive survey of the different investment considerations around a given equity, or is it meant to be used together with other tools? If the latter, which tools do you find most complementary to Trefis?

Trefis's founders came from engineering and Wall Street backgrounds, and were surprised that they just did not understand even the seemingly familiar companies around them, example: Apple, Google, Coca Cola, Walmart, GE, Ford, Gap, and others. Interestingly, they saw this applied to most people around them.

They found that they often came across information on companies, their products, and markets, from newspapers, online blogs, columns, and in conversations with friends, but saw no easy way to know which parts of a company, or its specific products impact the company most.

For public companies, it was easy to get annual reports and other filings - but a chore to extract insights from those filings. It was even more difficult to understand and relate the products, technologies and markets they were exposed to, with a company's stock price.

You might find this experience applies to you. Disagree?

Consider these questions:

· What percent of Apple's (NASDAQ:AAPL) stock price is from iPhones? (Q: Is it 5%, 25%, or 50%?)

· What percent of Dell's (NASDAQ:DELL) stock price is Dell Notebooks?

· If Bing took half the market share from Google Search (NASDAQ:GOOG), what percentage upside could there be for Microsoft’s (MSFT) stock?

Trefis helps you answer these, and other such questions. We research hundreds of facts to come up with the Trefis price estimate for each company’s stock, in order to provide you with a solid starting point. By putting a well-thought-out stake in the ground, we aim to provide you with a solid start so you can make better informed investment decisions.

Our models are rigorous and deep, but we believe it is equally important to make them fun and easy-to-understand. When you type in a company ticker or name, we show you in a single snapshot what product lines, or parts of a company really matter. You can further see the underlying fundamental drivers of a product’s revenue/expense streams such as pricing, market share, and profit margins, as-well-as modify assumptions and test different scenarios directly from the charts. Want a second opinion? Ask questions and vet your opinions on specific forecasts with experts and friends.

In addition, authors/reporters can embed our modifiable charts within their articles. For example, if I am writing about iPad’s success and its significance to Apple’s business, I can embed charts of iPad units sold and iPad profit margins right within my article. This allows my readers to actually modify the forecast for number of iPad units sold and iPad’s margins and directly see potential impact on Apple’s value, while reading my qualitative arguments. We have seen the user engagement on articles that have these charts embedded go up substantially.

We focus on providing analysis of the most important events relevant to a company similar to what a sell-side shop at a bank might do. Investors interested in following news on a more real-time basis might find it valuable to complement Trefis with their real-time news source to make sense of the news – to see which stories matter, and if they do matter, how much.

Can you share an example of a time Trefis helped you, or a Trefis user, make a better investment decision?

Sure. In fact, one of our users, now an investor in our business, looked at Apple on our platform earlier in the year, was struck by how large the iPhone was as a percent of the Trefis Price estimate. He wanted to understand how we got to it, and could see the key drivers we had for the iPhone business: fundamental drivers like iPhone pricing, market share, and margins. He found our expectation of iPhone market share at about 10% of cell-phones to be really conservative, especially when he plotted it against the competitors, Motorola (MOT) and Nokia (NYSE:NOK), on the chart. He thought a much larger market share for iPhones, closer to 20-30%, was a no-brainer in the long-term. When he adjusted the forecast to 25% market share, he was struck by how large the potential upside could be for the stock if that materialized. He bought the stock, and invested in our business as well.

Has it ever happened that a Trefis Scenario played out just as predicted, but the forecast stock price change didn't materialize, or even went in the opposite direction?

I am sure there are numerous instances when a specific driver’s forecast played out just fine, but the stock price continued to move in the opposite direction. We understand that multiple factors, some quantifiable, and some not so easily tackled, influence a company’s stock price. The Trefis view is a very detailed fundamental model of the business, one of the most rigorous one can find in the industry, yet simple and easy-to-use. However, it is still just a model - an attempted representation of the real company - which is much more complex. By providing a transparent, interactive, and intuitive platform, we hope to empower users to better make sense of companies and the businesses around them.

Besides expanding your stock universe, do you have any other plans to build out Trefis further?

Absolutely, we are working on a number of interesting things you should see in the next few months. Today we see no dearth of information on a company; in fact we believe the information overload is actually part of the problem. We are working on a few interesting enhancements and tools to additionally help users make sense of the information out there, intuitively and quickly.

Thanks Manish!

Have any thoughts, suggestions, or comments for Manish and his team? Tell them, and other SA readers, what you think in the comment stream.