Stock Valuation Fundamental Analysis Essentials of Corporate

Stock Valuation – Fundamental Analysis Essentials of Corporate Finance Chapters 2, 3, 5, 7 Materials Created by Glenn Snyder – San Francisco State University December 28, 2006

Topics n n n What is Fundamental Analysis? Who Performs Fundamental Analysis Process q q q n 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 n Fundamental Analysis seeks to determine a company’s outlook based on factors related to the company itself q Fundamental analysis includes: n Company Analysis q q n Economic Analysis q n February 26, 2007 Evaluation of the business model Financial Statement Analysis § 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? n Equity Research Analysts q n Produce fundamental analysis to generate investment recommendations Investors q 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 n Prior to making an investment recommendation, an Equity Analyst conducts fundamental research on a particular company n This process includes q q 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 n The first step in fundamental analysis is data gathering. q Data sources include: n Company specific publications q q q n Media q q February 26, 2007 SEC Filings (e. g. 10 K (Annual Report), 8 K, Proxy Statements, etc) Company press releases Company website Industry specific publications (e. g. Banking – American Banker) General Media § Wall Street Journal § Morningstar § Barron’s Materials Created by Glenn Snyder – San Francisco State University 6

Data Gathering n Additional Data Sources include: q q q Quarterly Analyst Calls Company Presentations Personal Meetings / Conference Calls n q Company officers, competitors, industry experts, suppliers, customers, etc. Financial Databases n n n February 26, 2007 Fact. Set Bloomberg Reuters Materials Created by Glenn Snyder – San Francisco State University 7

Building Models n Equity Research Analysts build economic, industry, and company models that will project a company’s stock price. q These models include: n Model Inputs q q q n Model Outputs q q February 26, 2007 Impacts of Product Releases Seasonality and Trends § Growth and Profitability § 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 n The models will reflect the economic, industry, and company information gathered through the various sources identified earlier n 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 n Now the Equity Analyst is ready to analyze the data q Economic Forecast and Analysis n q Industry Analysis n n n q PCI and Economic Growth Models Trends in Investment Cycles Trends in Technology Advancement Competitiveness of the Industry Company Forecast and Analysis n n n 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 n The business outlook is based on factors related to the current and expected strength of the economy, industry, and company. n The value of the company can be determined by a number of valuation methods: q q 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 n Based on the investment style, objectives, and research conclusions, the Equity Research Analyst provides an investment recommendation: q n Buy, Sell, or Hold Investment Style Matters q Value Investor n q 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 n 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 12

Buy / Sell Recommendations n Example: q Research Conclusion: n n n q q 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 n n Process and detail oriented Strong quantitative skills q n Excellent verbal and written communication skills q n E. g. Biotechnology, Technology, Healthcare, etc. Graduate level education q n Presentations and written reports (recommendations) Possess or willing to develop industry knowledge q n Economic, industry, and company modeling MBA and/or Chartered Financial Analyst Designation (CFA) Some large asset management firms will have an analyst training program q Highly Competitive February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University 14