The football field chart is a useful graphical tool utilized in investment banking and corporate finance when conducting valuation analysis, particularly discounted cash flow (DCF) modeling. It provides a visual representation of the range of potential values or outcomes based on varying key assumptions and allows bankers and investors to assess the sensitivity of their valuation to changes in key inputs.
In DCF analysis, there are several key variables that drive the ultimate valuation, including sales growth rates, profit margins, capital expenditures, discount rates and terminal growth rates. By flexibly changing these assumptions within reasonable high and low ranges, one can determine a range of potential values rather than a single point estimate. The football field chart plots these different valuation scenarios on the y-axis against the various DCF model assumptions on the x-axis, with the base case scenario valuation in the middle.
This enables the analyst to easily visualize the potential upside or downside risk in their valuation depending on how the key variables play out relative to projections. Additionally, the football field chart allows easy comparison of the DCF valuation range to relevant benchmarks like the 52-week trading range of the stock. This provides perspective on how attractive the current trading price is relative to the derived intrinsic value range. Overall, the football field is a useful sensitivity analysis tool for investment banking teams and investors when conducting diligence on valuation.
Football field charts present DCF valuation ranges and sensitivity analysis
The football field chart is a graphical presentation format that allows investment bankers and equity analysts to visualize the sensitivity of a DCF valuation to changes in key value driver assumptions. Its key benefit is demonstrating the potential upside or downside in valuation based on pessimistic versus optimistic projections.
In constructing a football field chart, the y-axis shows the range of potential enterprise values or share prices resulting from the DCF analysis under different scenarios. The x-axis shows the key value drivers, such as revenue growth rates, profit margins, capex, tax rates, and discount rates. For each value driver, the banker determines a reasonable range based on historical performance, management projections and industry benchmarks.
By flexibly changing the assumptions within this range, the banker can rerun the DCF analysis to determine the impact on valuation. The base case is plotted in the middle of the football field, while the low and high valuation scenarios are plotted at either end representing conservative and optimistic assumptions. This quickly shows whether the valuation is more sensitive to downside or upside assumptions.
Additionally, relevant benchmarks can be plotted as horizontal lines on the chart, most commonly the current share price and 52-week trading range. This allows assessing if the DCF value range represents an attractive investment opportunity relative to the current valuation. If the entire range exceeds the current price, it signals potential undervaluation.
Football fields facilitate scenario analysis and comparison to market data
In addition to sensitivity analysis, football field charts enable bankers to conduct scenario analysis by modeling different combinations of assumptions. For example, one scenario could represent a high-growth, high-risk case by combining optimistic revenue growth, margin expansion and CAPEX assumptions. Another bear case could combine low growth with margin compression.
This flexibility allows the banker to model a range of potential strategic and market outcomes and understand the difference in valuation under these scenarios. The ability to visually represent multiples valuation ranges for different scenarios side-by-side makes it easy to compare and contrast the implications.
Furthermore, the football field allows easy comparison of the DCF range not only to the current market price, but also historical trading ranges and multiples ranges for peer companies. This provides perspective on whether the valuation range is relatively high or low compared to benchmarks. Observing where the current market price falls within the DCF range and 52-week band shows whether there is alignment between the fundamental valuation and market value.
Football fields are useful communication tools for investment recommendations
A key advantage of football field charts is their ease of preparation in Excel and visual nature, which makes them effective communication tools for investment bankers to convey their analysis and recommendations. The football field summarizes the key valuation takeaways on a single page graphical view rather than being buried in the depths of a lengthy Excel model.
Bankers will often use football fields when presenting valuation analysis to clients and senior management as part of buy-side or sell-side advisory. The chart communicates the analyst’s perspective on the most likely valuation range based on their projections, along with upside / downside risk, in a snapshot. This condenses large amounts of complex analysis into a simple graphical format for decision-making.
Equity research analysts also frequently incorporate football fields in their research reports and models to communicate their investment theses and price targets. The charts demonstrate the analyst’s conviction in their base case valuation along with potential risk to their views. Distilling the key analytical assumptions and scenarios into a football field provides transparency for investors behind the analyst’s modeling and recommendations.
Best practices for developing useful football field charts
When building football fields, analysts should follow certain best practices to maximize their utility. First, the valuation ranges should be realistic and driven by company-specific operating dynamics, not arbitrary percentages. The DCF scenarios should tie to a detailed operating model output, not guesstimates. Second, the key value drivers chosen as variables should have the most influence on valuation based on sensitivity analysis. Not all DCF inputs warrant inclusion.
Additionally, the low and high ranges need to represent plausible scenarios based on reasonable pessimism and optimism. Excessively wide ranges reduce usefulness. Further, given football fields condense complex analysis into a simple chart, thorough documentation of the underlying assumptions, scenarios and DCF model mechanics is essential.
From a visual perspective, clearly labeling the chart axes, valuation ranges, scenarios and benchmarks enhances readability. Avoid cluttering the field with too many ancillary data points. Finally, football fields should focus on the most important valuation outputs and conclusions rather than incorporating immaterial analyses.
In summary, football field charts are graphical presentation tools used by investment bankers and equity analysts to illustrate DCF valuation ranges and sensitivity. They allow flexible scenario analysis by changing key value driver assumptions and compare the output ranges to current valuation benchmarks, providing perspectives on upside/downside risks and potential under/over-valuation.