Download 3-Stock Valuation-Fundamental Analysis

Stock Valuation –
Fundamental Analysis
Essentials of Corporate Finance
Chapters 2, 3, 5, 7
Materials Created by Glenn Snyder – San Francisco State University
Topics
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What is Fundamental Analysis?
Who Performs Fundamental Analysis
Fundamental Analysis Process
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Data Gathering
Building Models
Analysis
Determining the Business Outlook and Value
Buy / Sell Recommendations
Career Advice for a Equity Research Analyst
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University
2
Fundamental Analysis
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Fundamental Analysis seeks to determine a
company’s outlook based on factors related to the
company itself
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Fundamental analysis includes:
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Company Analysis
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Economic Analysis
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Evaluation of the business model
Financial Statement Analysis
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Ratio Analysis
Cash Flow Analysis
Management Analysis
Economic Forecasts and Trends
Industry Analysis
Materials Created by Glenn Snyder – San Francisco State University
3
Who Performs Fundamental Analysis?
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Equity Research Analysts
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Produce fundamental analysis to generate
investment recommendations
Investors
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Portfolio Managers make decisions based on the
recommendations of research analysts
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University
4
Fundamental Analysis Process
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Prior to making an investment
recommendation, an Equity Analyst conducts
fundamental research on a particular
company
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This process includes
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Gathering Data
Building Models and Analyzing Data
Determining the Business Outlook and Value
Developing a Recommendation
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University
5
Data Gathering
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The first step in fundamental analysis is data
gathering.
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Data sources include:
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Company specific publications
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Media
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February 26, 2007
SEC Filings (e.g. 10K (Annual Report), 8K, Proxy Statements, etc)
Company press releases
Company website
Industry specific publications (e.g. Banking – American Banker)
General Media
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Wall Street Journal
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Morningstar
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Barron’s
Materials Created by Glenn Snyder – San Francisco State University
6
Data Gathering
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Additional Data Sources include:
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Quarterly Analyst Calls
Company Presentations
Personal Meetings / Conference Calls
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Company officers, competitors, industry experts,
suppliers, customers, etc.
Financial Databases
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February 26, 2007
FactSet
Bloomberg
Reuters
Materials Created by Glenn Snyder – San Francisco State University
7
Building Models
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Equity Research Analysts build economic, industry,
and company models that will project a company’s
stock price.
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These models include:
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Model Inputs
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Model Outputs
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February 26, 2007
Impacts of Product Releases
Seasonality and Trends
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Growth and Profitability
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Dollar and Marginal
Foreseen events (e.g. spin-offs, acquisitions, etc.)
Financial Projections (including dividend projections)
Ratio Analysis
Materials Created by Glenn Snyder – San Francisco State University
8
Building Models
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The models will reflect the economic,
industry, and company information gathered
through the various sources identified earlier
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The models will be updated periodically or
when new, significant information is released
to the public
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University
9
Analysis
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Now the Equity Analyst is ready to analyze the data
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Economic Forecast and Analysis
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Industry Analysis
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PCI and Economic Growth Models
Trends in Investment Cycles
Trends in Technology Advancement
Competitiveness of the Industry
Company Forecast and Analysis
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February 26, 2007
Financial Projections
Peer Comparison
Management Analysis
Materials Created by Glenn Snyder – San Francisco State University
10
Determining the Business Outlook and
Value
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The business outlook is based on factors
related to the current and expected strength
of the economy, industry, and company.
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The value of the company can be determined
by a number of valuation methods:
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Discounted Cash Flows
Dividend Discount Model
Asset Valuation
Relative Valuation
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University
11
Buy / Sell Recommendations
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Based on the investment style, objectives, and
research conclusions, the Equity Research Analyst
provides an investment recommendation:
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Buy, Sell, or Hold
Investment Style Matters
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Value Investor
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A value investor looks to invest in a security that is trading at a
discount to its fair value and looks to sell when it is trading
above that value
Growth Investor
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February 26, 2007
A growth investor looks to invest in companies with above
average prospects for growth in the future
Materials Created by Glenn Snyder – San Francisco State University
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Buy / Sell Recommendations
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Example:
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Research Conclusion:
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Current Stock Price:
$35
Valuation (based on DCF): $35
Outlook: The near to mid-term outlook for the company
is excellent. It should see revenue and earnings growth
well above the economic growth, and revenue and
earnings growth should outpace the industry growth as
well
Recommendation for a Value Manager: Sell
Recommendation for Growth Manager: Buy
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University
13
Career Advice for a Buy Side Equity
Research Analyst
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Process and detail oriented
Strong quantitative skills
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Excellent verbal and written communication skills
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E.g. Biotechnology, Technology, Healthcare, etc.
Graduate level education
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Presentations and written reports (recommendations)
Possess or willing to develop industry knowledge
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Economic, industry, and company modeling
MBA and/or Chartered Financial Analyst Designation (CFA)
Some large asset management firms will have an
analyst training program
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Highly Competitive
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University
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