Download - Mar 12 2010 Sap
Stock Analyst Program 2010
Driss [email protected]
Jamie [email protected] in Investment Management, Wharton Exchange Fall 2009
March 12, 2010
Winter 2010 Overview Meeting every Friday at 2pm (will strive for a consistent room to meet) We will start with introductory material and finish with an open discussion
Stock Analyst Program 2010
Date Topic Date Topic
Jan 29 Overview, Valuation, Resources to Start Mar 8 Options, ETFs, and Forex Demonstration
Feb 5 What is Price Action?Multiples Analysis
Mar 12 Accounting 101
Feb 12 Stock Screening & Strategy/Money Management Mar 19 TBD
Feb 19 Cancelled: Reading Week Mar 26 Cancelled
Feb 29 Cancelled: Reading Week Apr 2 Final SAP Presentations
Agenda
Research Report Overview
The Annual Report
DCF Mechanics
Red Flags
Looking at a Model
Tips for Sector Picking
How To Start…
Report Commitment
Stock Analyst Program 2010
Research Report Overview
Research Report Composition The key to writing a coherent SAP research report is understanding and articulating an investment time horizon
- Refer to previous reports on the MIC website: Resources > SAP References
Stock Analyst Program 2010
Evaluation Criteria (1)
1. Choice of industry articulated relative to other industries that would be affected by the general economy in a similar way. For example, the drug delivery industry and the drug manufacturing industry are affected by the same external economic conditions; thus it should be clear as to why one versus the other.
2. This would include use of ratios specific to industry, dcf valuation, comps, precedents, etc... This would also include quantifiable identification of relevant catalysts and earnings growth potential specific to the company.
Research Report Evaluation
Industry Analysis 30% Presentation/Research Paper 10%Identification of key metrics and ratios /10% Organization /3.3%Identification of key trends /10% Flow /3.3%Choice and rationale for industry (1) /10% Content /3.3%
Stock Analysis 40% Technical Analysis 20%
Quality of valuation & depth of research (2) /20% Clear investment horizon /5%Investment rationale /20% Entry & exit strategies /15%
Total 100%
Stock Analyst Program 2010
The Annual Report
The Annual Report
• Public Relations Material
• Management Discussion & Analysis (MD&A)• Favourable & Unfavourable Trends• Significant Events/Uncertainties
• Liquidity• Capital Resources (change in mix of resources, commitments for CAPEX)• Results of Operations (sales mix, prices, risk factors)
• Management Statement of Responsibility & Audit Report
• Financial Statements• Balance Sheet, Income Statement, Cash Flow Statement
• Notes
• 5-10 Year Summary of Financial Data
Contents
Stock Analyst Program 2010
Source: Prof. Scott, ACCT 354
The Annual Report
• Balance Sheet: assets – liabilities = shareholder’s equity• At 1 point in time (beginning/end of year)
• Income Statement: revenues – expenses + gains – losses = net income• Over a period of time (1 year)
• Cash Flow Statement: operating/financing/investing activities; explanation of cash changes• Over a period of time (1 year)
The Financial Statements
Stock Analyst Program 2010
The Annual Report – Income StatementStock Analyst Program 2010
The Annual Report – Balance SheetStock Analyst Program 2010
The Annual Report – Cash Flow StatementStock Analyst Program 2010
The Annual Report
• As an analyst, you will go over each of these items (usually looking back several years)
• You can use the Notes to get more information on each line item• This exercise is done to find any ‘red flags’ (problems with the reporting)
• For a quicker analysis, you can find condensed financials• Bloomberg terminal, Yahoo! Finance, Google Finance, GuruFocus (membership
required)
• Along with looking for red flags, the purpose of analyzing the financial statements is to gauge an idea of how the company will perform in the future• To apply a useful multiple• To perform a DCF evaluation
• You will need to use Excel to complete a valuation
The Financial Statements
Stock Analyst Program 2010
The Annual Report
The Financial Statements – Condensed Income Statement
Stock Analyst Program 2010
Source: Guru Focus
The Annual Report
The Financial Statements – Condensed Balance Sheet
Stock Analyst Program 2010
Source: Guru Focus
The Annual Report
The Financial Statements – Condensed Cash Flow Statement
Stock Analyst Program 2010
Source: Guru Focus
The Annual Report
The Financial Statements – Ratios & Per Share Data
Stock Analyst Program 2010
Source: Guru Focus
Red Flags
Red Flags
• Several year trend of declining revenues• Even with increasing margins, long term performance is derived from sales
growth• Rising leverage (debt to equity) and falling interest coverage ratios
• Increasing risk has to be compared to the change in earnings/earnings quality• Rising accounts receivable as percentage of sales• Frequent changes of legal council, auditors or external board members• High turnover rate of key management• Increasing earnings but decreasing cash flow from operations
Trends
Stock Analyst Program 2010
Red Flags
• Cookie jar accounting• Recording liabilities instead of expensing items when performance is low• Write down the liability in subsequent periods when performance is high• “Income smoothing” happens because earnings are understated in good years
and overstated in bad ones• Example: create “reserve reversals” which are funds companies set aside for
future events. In good years, increase reserve reversals, and, in bad ones, write down reserve reversals instead of expensing same period costs
• Big bath charges• GAAP requires companies to estimate costs they will eventually incur in
restructuring charges• A company can take a large initial write off in the first year and later on write-
up the charge because the expense was less than anticipated
Tactics
Stock Analyst Program 2010
DCF Mechanics
DCF Mechanics
Discounted Cash Flow Method
Stock Analyst Program 2010
DCF Mechanics
• 1) Determine unlevered FCF’s each year using assumptions driven off of revenue
• 2) Determine TV at last year of forecast period (2015 or 2020 usually)• 1) Growing perpetuity (used in following example)
• Assumes constant growth rate (2-3%)• 2) Terminal multiple
• Assumes an exit multiple of an operating metric like EBITDA or FCF, to determine a value for the enterprise at that point in time
• 3) Bring everything back to present value (discount using WACC), add cash, subtract debt and divide by the number of common shares outstanding to arrive at an appropriate share price as determined by your analysis
• 4) Perform a sensitivity analysis
Discounted Cash Flow Method
Stock Analyst Program 2010
Looking at A Model
Looking at a Model
Assumptions
Stock Analyst Program 2010
Source: Jamie Tucker Calculations
•LT sales growth: conservative metric is GDP growth for country of operations, may also use analyst consensus estimates for the firm, or your own vindications
•Public Market Cap = Share Price x Shares Outstanding
•Debt: market values preferred, often use BV as proxy; can estimate MV by using Interest Expense/Cost of Debt
•Beta: from Bloomberg, or any other financial website
•Risk premium: 6.5% is good historical default
•Risk-free: 10 year Treasury rate (if American)
Looking at a Model
Projections Through 2013 (Based on Own Inputs)
Stock Analyst Program 2010
Source: Jamie Tucker Calculations
Looking at a Model
Projections Through 2024 (Based on Model)
Stock Analyst Program 2010
Source: Jamie Tucker Calculations
Looking at a Model
Terminal Value – Perpetual Growth
Stock Analyst Program 2010
Source: Jamie Tucker Calculations
Looking at a Model
Sensitivity Analysis
Stock Analyst Program 2010
Source: Jamie Tucker Calculations
Think of how many estimations you make to arrive at a share price…sensitivity analysis is a must!
Tips for Sector Picking
Tips for Sector Picking
Performance During Latest Bear Market Rallies
Stock Analyst Program 2010
Source: Breakfast with Dave (Gluskin Sheff)
Tips for Sector Picking
Performance During Latest Bear Market Selloffs
Stock Analyst Program 2010
Source: Breakfast with Dave (Gluskin Sheff)
How to Start…
How to Start…
• Macroeconomy• David Rosenberg, Chief Economist & Strategist, Gluskin Sheff
• Go to GluskinSheff.com to sign up for morning newsletters (often bearish)• SeekingAlpha.com > The Macro View (can e-mail subscribe)• Economist.com > Business and Finance
• Industry Analysis [VPN required]• http://www.mcgill.ca/library/library-findinfo/subjects/management/industry/ >
NetAdvantage > Industry Reports• Or, > Mergent Online > Industry Reports
• Bloomberg terminal: RSE <go> > Search by Industry• SeekingAlpha.com > Stocks & Sectors
• Company Analysis• Finviz.com > Screener• Google.com/finance > Screener• http://www.mcgill.ca/library/library-findinfo/subjects/management/industry/ >
ValueLine [old school, but great info in one page]• Bloomberg terminal: ‘ticker’ <go> > Fundamentals & Estimates > ANR
Important Resources
Stock Analyst Program 2010
Date Topic Date Topic
Jan 29 Overview, Valuation, Resources to Start Mar 5 Options, ETFs, and Forex Demonstration
Feb 5 What is Price Action?Multiples Analysis
Mar 12 Accounting 101
Feb 12 Stock Screening & Strategy/Money Management Mar 19 TBD
Feb 19 Cancelled: Reading Week Mar 26 Cancelled
Feb 29 Cancelled: Reading Week Apr 2 Final SAP Presentations
Winter 2010 Overview Meeting every Friday at 2pm (will strive for a consistent room to meet)
Stock Analyst Program 2010