Investment Analysis University of Winnipeg Investment Group Investment

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Investment Analysis University of Winnipeg Investment Group

Investment Analysis University of Winnipeg Investment Group

Investment Philosophy Growth: The expectation that a company possesses the capabilities to grow astronomically

Investment Philosophy Growth: The expectation that a company possesses the capabilities to grow astronomically through time Value: The analytics that determine if a company is trading below, equal, or over its fundamental value

Return on Investment Stock appreciation: Shares in the company gain value Dividends: The company

Return on Investment Stock appreciation: Shares in the company gain value Dividends: The company pays you a return on your invested capital Share Buyback: The company buys back shares, returning your capital, and increasing the stock price

What to look for? Objective: Purpose for analyzing a company Quantitative: The numbers, ratios,

What to look for? Objective: Purpose for analyzing a company Quantitative: The numbers, ratios, indicators that measure the stock Qualitative: The research into all information/facts about the company and non number measures Thesis: Overall findings and beliefs about a company/investment Conclusion: Recommendation of findings and action plan

Qualitative • Sector Analysis • Organizational review • Management review • Production analysis •

Qualitative • Sector Analysis • Organizational review • Management review • Production analysis • Competition outlook • Environment Scan • Legislation/Taxation

Sector Outlook • How predictable is this industry? • How profitable is the industry?

Sector Outlook • How predictable is this industry? • How profitable is the industry? • What growth opportunities exist? • Is it consistent? • Are there risks/hurdles ahead? • What supply/demand forces exist and how does it change?

Organization • What contracts/guaranteed sales are in place? • How do they hedge risk/earnings?

Organization • What contracts/guaranteed sales are in place? • How do they hedge risk/earnings? • What territories do they operate in? • How are the relations with government, suppliers, employees, competitors? • Who are the consumers?

Management • What is the vision/mission? • What are their beliefs, characteristics? • How

Management • What is the vision/mission? • What are their beliefs, characteristics? • How much of the company does management own? • What kind of organization/culture do they foster? • What are their incentives/pay packages?

Production/Productivity • How is production set up? How efficient are they? • What are

Production/Productivity • How is production set up? How efficient are they? • What are the logistics involved? • How are the work forces set up? North America/Overseas, unionized, non-unionized? • Stable or volatile workforces?

Competition • What competitors are similar? • Are they in the same target markets?

Competition • What competitors are similar? • Are they in the same target markets? • How does their strategy differ? • Who is winning in what market? • How much of a threat are they?

Environment Scan • What territories do they operate in? • How do the workforces

Environment Scan • What territories do they operate in? • How do the workforces differ via location? • What are the community relations like? • How good is the infrastructure in place? • How good are the distribution systems?

Legislation/Taxation • How friendly are the governments? • What kind of government incentives are

Legislation/Taxation • How friendly are the governments? • What kind of government incentives are in place? • How stable is the political system? • How favorable is legislation on the industry? • What kind of tax rates are in place? What kind of deductions exist?

Valuation - Quantitative Valuation Metrics Income Statement Balance Sheet Cash Flow Statement Growth Rates

Valuation - Quantitative Valuation Metrics Income Statement Balance Sheet Cash Flow Statement Growth Rates Risk Analysis Trading Characteristics

Valuation Metrics P/E Ratio: The measure of a firm's value relative to its earnings

Valuation Metrics P/E Ratio: The measure of a firm's value relative to its earnings Market Capitalization: The trading value of the company Book Value: The value of a company’s assets (assets - liabilities) ● Market to Book Ratio: (Market cap / Book Value) Stock Price: Present value of future cash flows

Income Statement Snapshot of a company's earnings Analysis of revenues/expenses/efficiency Net Profit Margin: The

Income Statement Snapshot of a company's earnings Analysis of revenues/expenses/efficiency Net Profit Margin: The percentage of revenue left after all expenses have been deducted from sales (Net income / Revenue) Earnings Per Share (EPS): (Total net income / Common shares) Snapshot of quarter / year growth

Balance Sheet Snap shot of company's assets and liabilities Current Ratio: (Current Assets /

Balance Sheet Snap shot of company's assets and liabilities Current Ratio: (Current Assets / Current Liabilities) Quick Ratio: (Current Assets - Inventory) / Current Liabilities Return On Equity: The amount of net income returned as a percentage of shareholder equity (Earnings / Total Equity)

Balance Sheet (continued) • Common shares outstanding-Increasing or Decreasing? • Debt- Lots or none?

Balance Sheet (continued) • Common shares outstanding-Increasing or Decreasing? • Debt- Lots or none? Quality debt or bad debt? • Assets- Quality of assets • Goodwill: Acquisition Price-fair value=Acquisition premium

Cash Flow Statements • Most useful statement of all three • Investors/companies need free

Cash Flow Statements • Most useful statement of all three • Investors/companies need free cash flow to be paid dividends or reinvestment for growth • Snapshot of Income, operating, investing, and financing activities • Operating: How efficient are operations? How much cash are we generating?

Cash Flow (continued) • Investing: How much are we investing? How good are we

Cash Flow (continued) • Investing: How much are we investing? How good are we at it? • Dividends: How much dividends are we paying? • Equity: How much stock are we issuing or buying back? • Debt: How much debt are we taking on? What are we using it for? • Net cash: Do we have free cash left over? Or are we consistently borrowing or selling equity to sustain the company?

Growth Rates • Important concept in Finance, always want your money to grow •

Growth Rates • Important concept in Finance, always want your money to grow • Sales>15 • EPS>15 • Cash Flow>15 • Equity>15 • ROIC>15

Risk Analysis • Standard Deviation: Average measure of volatility • Volatility: Degree of variation

Risk Analysis • Standard Deviation: Average measure of volatility • Volatility: Degree of variation in trading price • Beta: Risk of security in relation to the market • Historical variations in price

Trading Charactersitics • Price volatility: Daily movement of price • Prince Range: Range of

Trading Charactersitics • Price volatility: Daily movement of price • Prince Range: Range of prices security is trading between for a given period of time • Volume: Total amount of shares traded for a period of time or day • Average volume: Average amount of shares traded in a day

Trading Characteristics (continued) • Bid: Highest Price on a market to purchase security •

Trading Characteristics (continued) • Bid: Highest Price on a market to purchase security • Ask: Lowest price on a market to sell a security • Spread: Difference between Bid-Ask

Putting it all Together • • • Objective-What was our initial purpose for the

Putting it all Together • • • Objective-What was our initial purpose for the analysis? Quantitative-Do the numbers make sense? Qualitative- Does the background check look positive? Calculation- Calculate the expected stock price Thesis- Recommendation of findings Conclusion-Action or implementation of findings

Appendix Example • Valuation • Margin of Safety • Sticker Price • Actual Price

Appendix Example • Valuation • Margin of Safety • Sticker Price • Actual Price • Thesis • Conclusion

Value of Company • • • Stock Price= EPS x P/E ratio Ex: Equitable

Value of Company • • • Stock Price= EPS x P/E ratio Ex: Equitable Group EPS=7. 17 P/E=12 Current Price=$57. 50 EPS Growth Rate=20% 5 year EPS estimate=17. 9 5 year stock price estimate=$214. 8 Discounted to present time=$106. 80

Sticker Price & Margin of Safety • Sticker Price= Actual Value of Company •

Sticker Price & Margin of Safety • Sticker Price= Actual Value of Company • MOS= Expected Value-current stock price or stock premium represented as a percentage • EQB Sticker Price=$106. 80 • Actual Price= $57. 50 • EQB MOS= (106. 80/57. 5)-1= 85% undervalued

Thesis • Equitable group is a great company with a strong earnings track record

Thesis • Equitable group is a great company with a strong earnings track record and potential for future growth • Bull company to hold for long term appreciation • Targeted hold rate is 5 -10 years with a review every 6 months

Conclusion • Recommended “Buy” at $57. 50 -$75 a share • Hold until at

Conclusion • Recommended “Buy” at $57. 50 -$75 a share • Hold until at least $106. 60 • Recalculate target price given new time outlook and earnings potential once security reaches price target