Build and manage your own virtual portfolio Compete with other McCombs students Top three winners receive prizes in January Register at usiteam.org/events Fall Portfolio Challenge $5$5 entry fee
Announcements Pitch a stock to a panel of industry professionals Network with investors across the country Win $2500 in cash prizes Saturday October 19 SP www.usiteam.org/events T HE T EXAS S TOCK P ITCH C OMPETITION 2013
Announcements Workshops Every Thursday 7-8PM SAC2.120 Topic this week: Comps Analysis
Announcements Free Wall Street Journal digital access for paid members Contact firstname.lastname@example.org to receive login information email@example.com
Japanese Energy Demand Whats driving the clean energy rally? Desire to cut fossil fuel consumption China-EU trade dispute
Cutting Alternative Consumption Saudi Arabia could invest 109B into solar to reduce domestic oil consumption Japan is looking to fill the void left by a struggling nuclear program and stop using costly LNG imports
University Securities Investment Team Argan, Inc. (NYSE: AGX) Manideep Ravi Danial Bhatti Kristi Sparrow Carl Koehler September 24, 2013
Strategic Capital Group Company Overview Holdings Company in NE United States Gemma Power Systems Southern Maryland Cable Designs and builds power plants Natural gas, shale, and alternative energy
Strategic Capital Group Investment Thesis Under the radar of most investors Current projects have very high potential Special cash dividend ($0.75) recently announced Market Cap = 299.12 M Current Stock Price = 21.34 Beta = 1.04 Current Ratio = 2.77 52 wk Hi/Low = 13.90-21.90
Strategic Capital Group The Moxie Plants Two natural gas power plants in the Marcellus Shale Region of Pennsylvania Believed to hold the largest amount of natural gas in the United States Zero delivery costs East Coast is a high demand market
Strategic Capital Group Industry and Market Overview Engineering, Procurement & Construction Unbundling of natural gas for consumers Heavily based on long-term contracts Capital Intensive Competing with very large firms Competitive bid environment
Strategic Capital Group Risks & Mitigating Factors
Strategic Capital Group Management Management owns 11% of shares in the company Executive compensation is heavily skewed towards equity Committed to taking only high-margin projects CEO & Chairman – Rainier Bosselmann CFO – Arthur Trudel
Strategic Capital Group Competitors Argan Company Comparables CompanyTickerMarket CapLTM EPSCurrent Stock PriceP/EEV/EBITDA Michael BakerBKR392.2M0.9140.544.519.5x Matrix Service CompanyMTRX483.3M0.918.3820.428.3x MYR Group, Inc.MYRG505.9M1.6224.214.945.7x Metka Group SAMTKAF609.9M1.4714.359.765.5x Tutor Perini CorpTPC943.1M2.3820.268.516.4x Dycom IndustriesDY930M1.0428.0626.987.8x Argan, Inc.AGX302.1M2.2421.519.603.1x Avg:20.856.61x Discount:54%53%
Strategic Capital Group Valuation 201120122013201420152016 Revenue$182,592.0$141,850.0$278,635.0$282,641.0$423,961.5$466,357.65 Cost of Sales$153,469.0$118,748.0$226,900.0$231,765.6$351,888.0$389,408.6 Gross Profit$29,123.0$23,102.0$51,735.0$50,875.38$72,073.46$76,949.01 Gross Margin15.9%16.3%18.6%18.0%17.0%16.5% SG&A Expenses$12,129.0$11,186.0$14,350.0$16,958.5$23,317.9$25,649.7 EBIT$16,994.0$11,916.0$37,385.0$33,916.9$48,755.6$51,299.3 EBIT Margin9.3%8.4%13.4%12.0%11.5%11.0% NOPAT$11,046.1$7,745.4$23,265.0$22,046.0$31,691.1$33,344.6 D&A$992.0$789.0$765.0$741.0$717.0$693.0 CapEx$580.0$1,738.0$7,229.0$1,512.0$1,230.0$1,726.0 FCF$11,458.1$6,796.4$16,801.0$21,275.0$31,178.1$32,311.6 Present Value of Cash Flows$19,699.1$26,730.2$25,650.0 Terminal Value $ 387,738.9 Enterprise Value $ 335,967.8 Assumptions WACC8% Tax Rate35.0% Exit Multiple12.00x Share Price $ 21.54 Calculations Enterprise Value $ 335,967.8 Less Net Debt $ (37,926.0) Equity Value $ 373,893.8 Shares Outstanding14,017 Value Per Share $ 26.67 Implied Discount23.84%
Important Dates Thursday, Sept. 26, 7-8PM- SCG Workshop #2 SAC 2.120 Saturday, October 12: Last day to register for TXSP www.usiteam.org/events Saturday, October 19: Texas Stock Pitch Competition
Announcements Saturday October 19 SP www.usiteam.org/events T HE T EXAS S TOCK P ITCH C OMPETITION 2013
Lecture: Multiples Analysis Objectives What is a multiple? How is a multiple calculated? How is a multiple used? How do you evaluate a multiple?
Accounting in 2 minutes Revenue -Cost of Goods Sold Gross Profit -Operating Expenses Operating Profit -Taxes Earnings Price per unit x units sold Cost of the inputs associated with the product Literally the cost of the goods you sell Cost of input per unit x units sold Costs not associated with producing the good Ex.) salaries paid to accountants or executives The final residual profit after all expenses and taxes have been taken out Also known as net income, net profit
Stock Price AAPL $467.41 per share LNKD $243.90 per share If we want to invest in cheap stocks (buy-low-sell-high), which would you invest in?
Stock price is arbitrary! A company wants to sell a bunch of stock onto a stock exchange to raise money (IPO) The company needs to raise $100 million The company gets to choose the stock price it wants to issue the stock at 1 million shares @ $100 each 10 million shares @ $10 each 100 million shares @ $1 each 1 billion shares @ $0.10 each Price is only used to gauge how much you make off a buy-and-sell trade. It is NOT a determinant of value
Back to multiples We want to figure out if an investment is cheap
Relative Valuation Example Your exotic friend asks you to go buy this fruit youve never seen for him, but to not spend too much for him. The fruit is only sold by one vendor and costs $5 each, but you have no idea if thats a good price. What do you do? You compare it to other things that are like it, namely, other fruit! You can refine your search further by comparing to other fruit that look and taste like it.
Relative Valuation Example You look around and find a vendor who has a similar looking, but slightly larger fruit. You look around and find a vendor who has a similar looking, but larger fruit, selling for $10 each. $5 each $10 each In order to standardize the price and eliminate the factor of size, we can calculate the price per pound
Relative Valuation Much in the way price is arbitrary for fruit until you standardize it per unit of weight, stock price can be standardized per unit of earnings Price per share Earnings per share Total earnings / total shares = Tells you how much you pay per dollar of earnings Investors tend to want to pay less for a dollar of earnings like paying less per pound of fruit =
Price to Earnings Example AAPL =11.7x LNKD $243.90 $476.41 $40.82 $.37 =676.6x
Interpreting a P/E Multiple Lower isnt always better –For better, safer, growing companies, investors are willing to pay a higher multiple –Sometimes a higher multiple indicates expectation the company will grow into it Cheap has two meanings –You can get a good price –But that also means you could be getting bad quality
Multiples Used Price per share Earnings per share Price per share Book value per share How much you pay per dollar of earnings How much you pay per dollar of resources of the business Price per share Cash Flow per share Like P/E, but using cash flow (different from earnings) Enterprise Value EBITDA Like P/E, but using better measurements of price and a proxy for cash flow/earnings. Most popular multiple
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