valuation-methods

# Knowledge Frameworks — {SKILL_NAME}

This file augments the skill methodology with practitioner frameworks, case precedents,
and sector-specific analysis rubrics from the agentii knowledge base (spec 037).
It is progressively disclosed — loaded on demand, not at skill activation (FR-014).

## How to Use

Before executing the analysis, scan the relevant frameworks below for the target sector
and analysis type. Where a framework applies, incorporate its methodology alongside the
standard protocol. Cite knowledge entries by their `/v/knowledge/{citation_id}` link.

## Practitioner Frameworks

### Fundamental Analysis (L2)
- **Fisher Scuttlebutt Method**: Channel checks, supplier interviews, customer surveys — validate management claims through primary research.
- **Morningstar Moats**: Network effects, switching costs, intangible assets, cost advantage, efficient scale — score competitive durability.
- **Greenblatt Magic Formula**: Rank on earnings yield + ROIC — quantitative screen for quality-at-a-reasonable-price.
- **Mauboussin Expectations Investing**: Price-implied expectations vs. fundamentals — identify the gap.

### Management Assessment
- **CEO/CFO track record**: Past capital allocation decisions, M&A history, share buyback timing.
- **Incentive alignment**: Compensation structure, insider ownership, option grants.

### Sector-Specific Playbooks
- **Healthcare (Pharma/Biotech)**: Pipeline depth analysis, FDA catalyst calendar, patent cliff exposure, drug pricing risk.
- **Technology**: Adoption S-curves, network effects quantification, R&D efficiency, platform ecosystem lock-in.
- **Financials**: Spread analysis (NIM), credit cycle positioning, loan loss reserve adequacy, capital return capacity.
- **Consumer**: Brand strength metrics, unit economics, channel mix trends, customer acquisition cost payback.

## Historical Analogues

When the current situation matches a known pattern, query `search_by_analogue` with the
appropriate `market_regime`/`event_type`/`company_situation` tags. Cite relevant cases as
precedent.

## References

All frameworks sourced from `gold.knowledge_entries` (spec 037). See `contracts/citation-and-memory.md`
for citation format conventions.

# valuation-methods — Methodology Detail

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

## Retrieval Strategy

Follow the retrieval strategy decision tree in `contracts/retrieval.md`. This skill was upgraded from `structured_only` to `unstructured_document_search` scope (2026-06-03) to pull MD&A and risk-factor narrative context alongside XBRL multiples. This skill uses:
- Branch (a) for structured financial metrics via `search_xbrl_facts` with `list_xbrl_concepts` pre-condition for unfamiliar concepts.
- Branch (b) for multi-period unstructured queries spanning 10-K Item 1A risk factors (discount rate justification, beta/delta assumptions), MD&A forward-looking statements (growth rate validation, margin trajectory), and 8-K earnings press releases (valuation catalysts, guidance revisions).
- Branch (c) for single-period document queries via direct `read_source_outline` → `read_source_pages`.
- Branch (d) for simple lookups via `get_company_profile` / `search_earnings_calendar`.

**Layer 1 `secondary_label` allowlist **: prefer `?secondary_label=financial_results_2_02` to anchor valuation against the most recent reported financials before Layer 2. For risk-factor analysis, also query `?secondary_label=other_events_8_01` to surface going-concern and impairment 8-Ks that may affect valuation assumptions.

## Protocol

This skill delivers analyst-grade output via 3 addressable mode(s); invoke with `--mode=<slug>` / `--modes=<slug1>,<slug2>` / `--mode=all` (see [Mode syntax](../../../../docs/commands/MODE_SYNTAX.md). The default invocation (no flag) runs the `essentials_modes` subset declared in this skill's frontmatter. **Sub-skill integrations**: for growth-adjusted valuation, invoke `peg-valuation` as sub-skill . For probability-weighted analysis, use `--mode=scenario` which constructs Bear/Base/Bull cases across all modes .

# valuation-methods — Analyst Mode Definitions

Extracted from SKILL.md for progressive disclosure (US5). The skill body keeps a pointer under `## Methodology → Analyst Modes`.

### Mode: analyst-valuation-methods-comparison

**Display name**: Analyst Valuation Methods Comparison

<!-- ported_from: references/prompts/8/8_1.yaml -->

### Objective

Extract and compare primary valuation methods used by Morgan Stanley and
Jefferies analysts to evaluate the target company, focusing on relative
valuation multiples and methodological approaches across forecast periods.

 - comparative_analysis
 - executive_summary
 - jefferies_analysis
 - morgan_stanley_analysis

### Mode: comprehensive-valuation-summary-analysis

**Display name**: Comprehensive Valuation Summary Analysis

<!-- ported_from: references/prompts/8/8_1_1.yaml -->

### Objective

Extract and summarize comprehensive valuation methodologies from Morgan Stanley
and Jefferies analysts, covering both relative valuation multiples and absolute
valuation models (DCF) with detailed parameter extraction and analysis.

 - comparative_valuation_analysis
 - executive_summary
 - jefferies_valuation
 - morgan_stanley_valuation

### Mode: valuation-assumptions-extraction

**Display name**: Valuation Assumptions Extraction

<!-- ported_from: references/prompts/8/8_1_2.yaml -->

### Objective

Extract and analyze detailed valuation assumptions used in absolute valuation
models (DCF, intrinsic value models) by Morgan Stanley and Jefferies analysts,
focusing on key financial modeling parameters and methodology drivers.

 - comparative_assumption_analysis
 - executive_summary
 - jefferies_assumptions
 - morgan_stanley_assumptions

<!-- END port-dimension-prompts methodology + modes -->

# valuation-methods — Output Structure (full template)

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

The final deliverable MUST be written as a markdown file to the workspace using the convention :

```
{ticker}/{YYYY-MM-DD_HHMM}_valuation-methods_{affix}.md
```

Where `affix` is a short descriptive slug (e.g., `multiples-and-models`, `dcf-walk`, `comps-table`, `sotp-summary`). Examples:

- `LLY/2026-05-25_1430_valuation-methods_multiples-and-models.md`
- `NVDA/2026-05-25_1545_valuation-methods_dcf-walk.md`

The path is RELATIVE to the agent's invocation cwd. Skills MUST NOT write under absolute paths.

**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`.

# TIER Equity Research Workflow — Institutional Consensus

Methodology from professional equity research training frameworks, now incorporated into CFA Institute Level II curriculum (2024). All text is an original paraphrase.

---

## The TIER Workflow

TIER is a structured 4-step equity research process designed to produce investment recommendations with explicit catalysts, price targets, and differentiation from consensus. It is the institutional standard for professional equity research workflow.

### T — Target Realistic Prices

**Objective**: Establish a well-supported price target range.

**Process**:
1. Build financial forecasts (income statement, balance sheet, cash flow)
2. Apply the appropriate valuation methodology using the structured selection framework
3. Derive a price target range (upper bound, lower bound, central estimate)
4. Document the key assumptions that drive the target

**Price Target Format**: Not a single number. A range reflecting the uncertainty in key assumptions. The width of the range communicates conviction.

### I — Identify & Forecast Catalysts

**Objective**: Determine what will cause the market to accept the investment thesis.

**Process**:
1. Identify all potential catalysts within the investment horizon
2. Classify: Scheduled (earnings, FDA dates) vs. Conditional (M&A, restructuring) vs. Macro-triggered
3. Assess each catalyst: specificity, magnitude, probability
4. Calendar the catalysts — what happens when
5. Determine: which catalyst is the primary one that will drive repricing?

**Key Question**: "What specific event will cause the market to agree with my thesis, and when will that happen?"

### E — Ensure Ideal Entry Point

**Objective**: Differentiate from consensus, check risks, and document the thesis.

**Process**:
1. **FaVeS Differentiation Check**: In what specific ways is this thesis different from consensus?
   - **F**orecast: Are my EPS/cash flow estimates different from consensus?
   - **V**aluation: Am I using a different valuation methodology or multiple?
   - **S**entiment: Is market sentiment mispricing this stock relative to fundamentals?
2. **Risk Check**: What would invalidate the thesis? Set explicit invalidation thresholds.
3. **Bias Check**: Am I anchoring on a prior view? Confirm the thesis is evidence-driven, not narrative-driven.
4. **Document the Thesis**: Write the thesis BEFORE entering the position. The documented thesis is the standard against which post-trade analysis is measured.

### R — Review Performance & Thesis

**Objective**: Maintain a dynamic assessment as new information arrives.

**Process**:
1. Maintain a dynamic comparable company table
2. After each catalyst event: did it resolve as expected? If yes, thesis intact. If no, reassess.
3. After each earnings report: track KPIs against thesis assumptions
4. Periodic review: even without a catalyst event, review thesis validity at regular intervals
5. **When to exit**: Catalyst resolved as expected (target approach) → take profits. Catalyst failed → exit immediately regardless of P&L. Thesis assumptions violated → exit. Better opportunity identified → rotate capital.

---

## SHARE Valuation Method Selection

SHARE is the embedded framework for selecting and applying the appropriate valuation methodology. It is not a valuation formula — it is a method-selection framework that ensures the valuation approach matches the business model.

### S — Select Optimal Valuation Method

The method must match the business model:

| Business Model | Primary Method | Rationale |
|---------------|:---:|------|
| Stable, mature, profitable | P/E (DCF cross-check) | Earnings are the primary value driver |
| Capital-intensive | EV/EBITDA, EV/EBIT | Capital structure and D&A distort P/E |
| High-growth, pre-profit | EV/Revenue, DCF | Earnings not yet meaningful |
| Financial services | P/B, P/TBV, Dividend Discount | Balance sheet is the business |
| Asset-heavy, cyclical | P/NAV, EV/EBITDA (normalized) | Cycle-average earnings |

### H — Historical & Current Data Review

- Review the company's own historical trading multiples (3-5 year range)
- Review sector median multiples and their historical range
- Review precedent transaction multiples (if relevant)
- Understand WHY the company trades where it does vs. its own history

### A — Adjust Multiples for Price Targets

- Adjust sector median multiples for company-specific factors: growth premium/discount, margin quality, ROIC differential, leverage, liquidity
- Derive justified forward multiples
- Apply to forward estimates (consensus or independent, depending on FaVeS differentiation)

### R — Range of Multiples & Price Targets

- Upper bound: Bull case estimates × upper-quartile or justified premium multiple
- Lower bound: Bear case estimates × lower-quartile or justified discount multiple
- Central: Base case estimates × justified multiple
- The range width signals conviction — narrow range = high conviction

### E — Evaluate as Circumstances Change

- Reassess multiples and targets after each catalyst event and earnings report
- Update the comparable company set as peers' businesses evolve
- The price target is a living estimate, not a static number

---

## ENTER Research Quality Gate

Before presenting any investment recommendation, apply the ENTER quality check:

- **E**vidence: Is every claim supported by specific, citable evidence?
- **N**umbers: Are all financial projections internally consistent? Cross-checked?
- **T**hesis: Is the variant view clearly articulated and differentiated from consensus?
- **E**xpectations: Is the expectations gap quantified (not just "the stock looks cheap")?
- **R**isk: Is the key risk identified and an invalidation threshold set?

---

## FaVeS Differentiation Check

The FaVeS framework ensures every thesis is explicitly differentiated from consensus. A thesis without differentiation is not a thesis — it is a description.

| Dimension | Consensus | My View | Evidence |
|-----------|-----------|---------|----------|
| **F**orecast | What EPS/revenue does consensus expect? | What do I expect? | KPI trends, management guidance analysis, industry data |
| **V**aluation | What multiple does the market apply? | What multiple is justified? | ROIC analysis, growth sustainability, peer comparison |
| **S**entiment | What is the market narrative? | Why is the narrative wrong? | Earnings call tone, analyst report language, positioning data |

A thesis is valid only when at least one of F, V, or S is DIFFERENT from consensus AND supported by specific evidence. A thesis where all three align with consensus is not an investment opportunity — it is a consensus description.

---

## Integration with Agentii Platform

TIER maps to the agentii skill ecosystem as follows:

- **T (Target)**: `valuation-methods` + `trade-template` (price target derivation with SHARE)
- **I (Identify Catalysts)**: `qualitative-filtering` (catalyst identification)
- **E (Ensure Entry)**: `qualitative-filtering` (FaVeS variant view) + `risk` (invalidation thresholds)
- **R (Review)**: `trading-as-business` (post-trade analysis)

TIER provides the **institutional consensus workflow** that orchestrates across these individual skills. It answers the question: "What is the professional process for converting raw analysis into an investment recommendation?"

# valuation-methods — Tool Fallbacks

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

| Tool | Failure Mode | Fallback Action | Coverage Annotation |
|------|-------------|-----------------|---------------------|
| `read_source_pages` | SQL error / PROXY_ERROR | Use `search_keyword_in_source(document_id, keyword)` if document_id known; otherwise `search_documents` with same query | "source file unavailable; used keyword search instead" |
| `read_source_deep_outline` | PROXY_ERROR / 404 | Use lightweight `read_source_outline` and flag `deep_outline_degraded: true` | "deep outline unavailable; used lightweight page map instead" |
| `read_source_outline` | PROXY_ERROR / 404 | Use `list_sources` for document-level metadata | "page map unavailable; used document listing instead" |
| `list_xbrl_concepts` | Timeout / 503 | Use direct `search_xbrl_facts` with standard US-GAAP concepts (Revenues, NetIncomeLoss, EarningsPerShareDiluted, OperatingIncomeLoss, Assets) | "concept discovery skipped due to timeout; using standard US-GAAP concepts" |
| `get_company_fiscal_calendar` | Cross-validation failed | Use XBRL-derived period grid from `search_xbrl_facts` `period_end` dates | "fiscal calendar mismatch; using XBRL-derived period grid" |
| `search_unified` | Intermittent error | Use parallel `search_documents` + `search_xbrl_facts` with the same query | "unified search unavailable; used parallel document + XBRL search" |
| `batch_search` | PROXY_ERROR | Use sequential individual calls (one per sub-query) | "batch search unavailable; used sequential calls" |

Tool errors are retried ONCE with the fallback action before escalating to the retrieval gaps failure policy. If both Layer 2 and Layer 3 tools are unavailable, enter document access degradation mode (structured data + metadata only, flag output as degraded).

# Non-GAAP Methodology for Valuation

## Protocol

### Step 1: Identify and Classify Non-GAAP Adjustments
Non-GAAP disclosures split broadly into two categories: non-recurring items and non-cash items. Non-recurring items under GAAP must meet the "unusual or infrequent" threshold, but most items appearing in non-GAAP reconciliations (restructuring expenses, asset impairments, gains/losses on sale, transaction fees, severance costs) do not formally qualify. The non-GAAP label gives companies substantial leeway beyond GAAP to present what they consider non-recurring. As a result, analyst scrutiny is essential.

For each non-GAAP adjustment disclosed, classify it as: (1) truly non-recurring and removable, (2) recurring but non-cash and requiring different treatment, or (3) a recurring operating item that should NOT be excluded. Restructuring charges appearing every year are not non-recurring -- they represent normal operating costs of a business undergoing continuous change. Companies that habitually identify non-recurring expenses signal low earnings quality and typically trade at compressed multiples, since analysts question the integrity of the denominator (EBIT, EBITDA, EPS).

### Step 2: Normalize EBITDA with the Top-Down Approach
Two methods exist for deriving normalized EBITDA. The bottom-up approach starts with GAAP net income and adds back individually identified non-GAAP items plus D&A. This is simpler but embeds GAAP line-item distortions and can misalign add-backs. The preferred top-down approach strips all non-GAAP items and D&A from each individual expense category (COGS, S&M, R&D, G&A) before summing to EBITDA. This forecasts EBITDA directly rather than via add-backs, reducing forecasting error. The cost: expense allocation assumptions are required when the company does not disclose which operating line contains each non-GAAP item. When forced to allocate, document the assumption (e.g., "unallocated depreciation assumed entirely in R&D") and test sensitivity.

### Step 3: Quantify SBC Dilutive Impact for Valuation
The debate on SBC treatment centers on whether it constitutes a genuine economic cost. The argument against adding back SBC holds that it represents a real transfer of value from existing shareholders to employees -- ignoring it overstates sustainable earnings. The argument for adding it back treats SBC as a non-cash expense analogous to D&A. Regardless of the income statement treatment, the dilutive impact on per-share metrics must be quantified: outstanding options and RSUs increase the fully diluted share count via the treasury stock method. When capitalizing SBC (e.g., for software development), the amortization of previously capitalized SBC flows through the I/S as a non-cash charge that must also be normalized. For valuation, present both GAAP EPS and adjusted EPS, clearly reconciling the share count and tax impacts.

### Step 4: Compute Non-GAAP Diluted Shares Correctly
Non-GAAP diluted shares typically equal GAAP diluted shares, but diverge in one critical scenario: when a net loss exists under GAAP but net income exists on a non-GAAP basis. Under GAAP, a net loss means diluted shares equal basic shares because including dilutive securities would be anti-dilutive (a loss divided by more shares produces a better result). However, if non-GAAP adjustments turn the loss into income, dilutive securities must be accounted for: non-GAAP diluted shares will exceed GAAP diluted shares.

A second divergence arises from convertible note hedging strategies. When a company issues convertible notes and simultaneously enters call option hedges, GAAP requires reflecting the dilution from the convertible feature without recognizing offsetting hedge shares until exercised. Companies may present non-GAAP diluted shares that net the hedge benefit, producing a lower share count than GAAP. Analysts should independently verify the hedge economics and determine which share count best reflects economic reality.

### Step 5: Treat Tax Impacts Consistently with Non-GAAP Adjustments
Each non-GAAP adjustment carries a tax effect. When excluding a pre-tax expense, also exclude the associated tax shield. The tax impact equals the non-GAAP item multiplied by the marginal tax rate. Companies with volatile effective tax rates often present a normalized tax rate reconciliation alongside non-GAAP earnings. When projecting non-GAAP earnings forward, apply a steady-state marginal rate rather than the historical volatile GAAP rate. Ensure the bridge from non-GAAP net income to GAAP net income explicitly shows: non-GAAP items (subtracted), plus the tax impact of those items (added back as a tax shield reversal).

### Step 6: Anchor Valuation Multiples to Normalized Metrics
Non-GAAP adjustments directly affect valuation multiples. If a company carries chronic "non-recurring" charges, normalized EBITDA will be lower than reported adjusted EBITDA, producing a higher effective multiple. Price the company on the normalized metric, not the management-adjusted figure. For companies with significant SBC, compute both EV/EBITDA (which ignores SBC dilution) and price-to-earnings on fully diluted, SBC-expensed EPS. The gap between the two signals how much value transfer is occurring through equity compensation. A wide gap warrants a discount to peer multiples.

## Key Formulas

- **Adjusted EBITDA (Top-Down)**: Revenue - COGS(ex-Non-GAAP, ex-D&A) - S&M(ex-Non-GAAP) - R&D(ex-Non-GAAP, ex-D&A) - G&A(ex-Non-GAAP)
- **Tax Impact of Non-GAAP Items**: Non-GAAP Pre-Tax Adjustment x Marginal Tax Rate (subtract from GAAP tax to get normalized tax)
- **Non-GAAP Diluted Shares (Loss-to-Income Case)**: Basic shares + dilutive securities (treasury stock method) -- GAAP diluted would equal basic shares
- **Normalized Net Income Bridge**: Non-GAAP NI - SBC - Amortization of Purchased Intangibles - Restructuring + Tax Shield on Excluded Items = GAAP NI

## Practitioner Standards

- Apply consistent exclusion criteria across periods. Cherry-picking only negative items while retaining positive non-recurring gains creates an upward bias in adjusted earnings.
- When non-recurring charges appear in 3+ consecutive years, reclassify them as recurring operating expenses regardless of management's characterization.
- Always compute the effective tax rate on non-GAAP pre-tax income using the normalized rate, not the GAAP rate distorted by valuation allowances and NOL adjustments.
- For the treasury stock method, use the average share price during the period, not the period-end price.
- Never double-count add-backs: if the income statement already excludes SBC and amortization (non-GAAP I/S), the CFS must not add them back again, or the model will not balance.
- Prefer the top-down EBITDA approach when company disclosures allow allocation; otherwise, use bottom-up but flag the uncertainty.

## Data Integration

This methodology leverages:
- **SEC Filings**: Earnings press releases (8-K Item 2.02) for non-GAAP reconciliations; 10-K footnotes for SBC valuation assumptions, lease commitments, and restructuring details
- **XBRL Facts**: `search_xbrl_facts()` for GAAP vs. non-GAAP line items; share count disclosures for diluted EPS calculation
- **Market Data**: Current share price for treasury stock method; peer multiples for earnings-quality discount assessment
- **Knowledge Base**: `search_investment_cases()` for precedent non-GAAP adjustment patterns by sector