# reverse-dcf — Methodology Detail

Extracted from SKILL.md for progressive disclosure (US5).

## Retrieval Strategy

Follows the retrieval strategy decision tree in `contracts/retrieval.md`. Primary branch: **(a) Structured Data Query**. Resolve the canonical ticker first (exact → fuzzy alias → share-class) before any data call.

## Protocol

1. **Inputs**: current stock price from `get_realtime_quote(ticker)`. Shares outstanding and latest financials from `search_xbrl_facts`.
2. **Set up DCF model**: standard DCF with UFCF = EBIT × (1-T) + D&A - Capex - ΔWC. Terminal value via Gordon Growth Model.
3. **Solve for implied growth rate**: iterate growth rate until DCF fair value = current market price (within 1% tolerance).
4. **Solve for implied terminal margin**: if solving for margin, iterate terminal EBITDA/FCF margin instead.
5. **Solve for implied WACC**: if solving for WACC, iterate WACC until DCF = market price (reveals market-implied discount rate).
6. **Compare to benchmarks**:
 - Implied growth vs. consensus estimates (from `search_earnings_calendar`)
 - Implied growth vs. historical CAGR (from XBRL)
 - Implied margin vs. current margin + historical trend
 - Implied WACC vs. CAPM-derived WACC
7. **Assessment**: flag when market prices in >20% above consensus (potentially overvalued) or >20% below consensus (potentially undervalued).
8. **Output**: per with YAML frontmatter .

# reverse-dcf — Analyst Mode Definitions

Derived from the skill's own methodology structure (scripts/mode_backfill.py, spec 046 M1).

### Mode: preflight

**Objective**: Preflight analysis per the skill's methodology (see SKILL.md sections).

### Mode: triggers

**Objective**: Triggers analysis per the skill's methodology (see SKILL.md sections).

### Mode: defaults

**Objective**: Defaults analysis per the skill's methodology (see SKILL.md sections).

### Mode: methodology

**Objective**: Methodology analysis per the skill's methodology (see SKILL.md sections).

### Mode: retrieval-scope

**Objective**: Retrieval Scope analysis per the skill's methodology (see SKILL.md sections).

# reverse-dcf — Output Structure (full template)

Extracted from SKILL.md for progressive disclosure (US5). The skill body keeps a compact summary under `## Output Structure`.

1. **Executive Summary** — implied growth rate, comparison to consensus, market sentiment assessment
2. **Inputs** — current price, shares outstanding, current financials, WACC assumptions
3. **Implied Growth Rate** — solved growth rate, comparison to consensus LTG and historical CAGR
4. **Implied Terminal Margin** — solved terminal EBITDA/FCF margin vs. current and historical margins
5. **Market Expectation Assessment** — is the market pricing in aggressive (>20% above consensus), reasonable (within ±20%), or pessimistic (>20% below consensus) assumptions?
6. **Sensitivity** — implied growth at varying WACC (±1%, ±2%)
7. **Coverage Gaps & Citations**

**Citations & memory**: follow `contracts/citation-and-memory.md` — ≥1 citation per 200 words; every material fact, table row, and metric is immediately followed by its inline clickable `https://agentii.ai/v/{ticker}/{citation_id}/{N}` link; a bottom **Citations** section provides a non-duplicative roll-up index; the closing TUI reply includes a compact **Key Citations** list (headline 5–10 facts) of clickable `/v/` URLs; and append the run to `agentii.md` per `contracts/agentii-md-schema.md`.

# Reverse DCF & PVGO — Institutional Methodology

Methodology synthesized from institutional investment research; all text is an original paraphrase.

---

## The Core Insight

A stock price is a set of embedded assumptions about future free cash flows. The conventional DCF asks: "Given my assumptions about growth, margins, and risk, what is the stock worth?" The Reverse DCF asks the opposite and far more useful question: "Given the current stock price, what growth, margin, and return assumptions is the market pricing in?"

The Reverse DCF is therefore not a valuation tool — it is an expectations diagnostic. It reveals what must happen for the current price to be justified.

---

## Reverse DCF Methodology

### Step 1: Set Up the Base Model

Build a standard 2-stage DCF:
- Stage 1: Explicit forecast period (5-10 years, typically 5 years)
- Stage 2: Terminal value using perpetuity growth method

### Step 2: Fix Known Parameters

Lock in the observable inputs:
- **Current revenue**: Trailing twelve months
- **Current margins**: EBIT margin, tax rate
- **WACC**: Estimated per cost of capital methodology
- **Current invested capital**: From balance sheet
- **Current share count**: Diluted shares outstanding

### Step 3: Solve for the Implied Variable

Set the DCF enterprise value equal to the current enterprise value and solve for the unknown:

**Implied revenue CAGR**: What growth rate justifies the current price, assuming margins and returns are sustainable?

**Implied terminal growth rate**: What perpetuity growth rate justifies the current price, assuming explicit-period forecasts are reasonable?

**Implied EBIT margin**: What steady-state margin justifies the current price, assuming current growth expectations?

**Implied ROIC**: What return on capital justifies the current price, assuming current growth and margin assumptions?

### Step 4: Compare to Independent Assessment

The analyst's independent fundamental assessment produces a range of reasonable values for each variable. The gap between the implied value and the independent assessment is the expectations gap.

---

## PVGO Decomposition

### The Framework

Enterprise value can be decomposed into two components:

```
Enterprise Value = Steady-State Value + Present Value of Growth Opportunities (PVGO)
```

**Steady-State Value** = NOPAT / WACC

This is the value of the company if it never grows again — simply sustaining current profits into perpetuity. It represents the "no-growth" or "steady-state" value.

**PVGO** = Enterprise Value − Steady-State Value

This is the portion of the current stock price that depends on FUTURE value creation — growth, margin improvement, new products, market expansion.

### Interpretation

| PVGO as % of EV | Interpretation |
|:---:|------|
| < 20% | The market prices minimal future value creation. The company is valued primarily on current earnings power. Common for mature, slow-growth industries. |
| 20-50% | Moderate growth expectations. The market prices some improvement but not transformation. |
| 50-80% | High growth expectations. The majority of the stock price depends on future outcomes that have not yet materialized. |
| > 80% | Extreme growth expectations. The stock is almost entirely a bet on the future. Common for pre-profit, high-growth companies. |

A PVGO above 80% is not automatically overvalued — but it means the investment thesis is almost entirely about whether growth expectations will be met, not about current business quality.

---

## Math of Value and Growth

### The Fundamental Principle

Growth creates value ONLY when the return on invested capital exceeds the cost of capital. If ROIC = WACC, growth adds zero value regardless of how fast the company expands.

```
Value Created by Growth = (ROIC − WACC) / (WACC − g) × New Investment
```

When ROIC > WACC: faster growth → more value created. Each dollar of investment generates returns above the opportunity cost.

When ROIC = WACC: growth is value-neutral. The company is a treadmill — it can run faster or slower but never goes anywhere.

When ROIC < WACC: faster growth → more value DESTROYED. Each dollar of investment generates returns below the opportunity cost. This is the trap of "growth at any cost."

### The Walmart 1972-1986 Case

Walmart generated negative free cash flow for 15 consecutive years while its stock compounded at 29% annually against the S&P 500's 11%. Every year, Walmart invested more than it earned — yet it was building one of the greatest value-creation machines in corporate history because its ROIC averaged 18%, far above its cost of capital.

The first profile (profitable, growing, dividend-paying) and the second profile (negative FCF, rising debt, dwindling cash) describe the SAME company. The difference between a Ponzi scheme and a growth compounder is not free cash flow — it is ROIC relative to WACC.

---

## The One Job Framework

### The Investor's Single Task

The one job of an equity investor is to take advantage of gaps between expectations and fundamentals.

**Expectations**: The future free cash flows the company must deliver to justify today's stock price. Revealed by Reverse DCF.

**Fundamentals**: The company's actual business trajectory. Assessed through independent analysis of KPIs, competitive position, industry dynamics, and management quality.

**The Gap**: Tomorrow's outcomes that are different from today's perceptions lead to revisions in expectations — and revisions in expectations are the source of excess returns.

### The Consensus Disconnect Framework

The thesis structure:
```
The market believes [consensus expectation, quantified via Reverse DCF].
We believe [independent fundamental assessment, based on KPI/competitive evidence].
This will converge when [specific catalyst] occurs within [timeframe],
generating approximately [expected return] against a risk of [key downside].
```

This framework applies at every level:
- **Company level**: Consensus revenue growth vs. our KPI-based assessment
- **Sector level**: Consensus sector margins vs. our competitive dynamics assessment
- **Macro level**: Market-priced economic regime vs. our leading-indicator assessment

---

## Expectations vs. Fundamentals: The Horse Racing Analogy

Expectations are like the odds on the tote board at a racetrack. Fundamentals are the result of the race. Handicappers know two things:

1. You don't make money by betting on favorites — you make money by spotting mispriced odds.
2. The odds change as new information arrives — the pari-mutuel system continuously updates.

The equity market operates the same way. The current stock price reflects the consensus expectation. Alpha comes from identifying where the consensus is wrong and WHY — not from knowing things the market already knows.

---

## Scenario Analysis and Expectations

Expectations are inherently uncertain. The appropriate way to handle this uncertainty is through scenario analysis:

1. **Base Case (55%)**: Consensus estimates adjusted by variant view
2. **Bull Case (20%)**: All catalysts materialize; multiple expansion
3. **Bear Case (25%)**: Catalyst failure; multiple contraction

The probability-weighted expected value is the fair value estimate. The Reverse DCF applied to each scenario reveals what each scenario implies about the company's fundamentals. This creates a three-dimensional expectations map, not a single point estimate.