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Analyst Program (AP) Introductory Meeting Wednesday, September 15th Phil Garrett : Co-Director of the Analyst Program Mike Coyne: Co-Director.

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Presentation on theme: "Analyst Program (AP) Introductory Meeting Wednesday, September 15th Phil Garrett : Co-Director of the Analyst Program Mike Coyne: Co-Director."— Presentation transcript:

1 Analyst Program (AP) Introductory Meeting Wednesday, September 15th Phil Garrett : Co-Director of the Analyst Program Mike Coyne: Co-Director of the Analyst Program

2 Agenda About the Analyst Program Investing lessons Our investment philosophy The AP process Quick Presentation and DCF run through

3 About the Analyst Program Analyst Program began mid-Spring of 2005 as part of the SIAs overall objective of educating its members Goal: Educate members about how to value businesses and conduct a proper stock pitch presentation Target Analyst Program Members: – Serious SIA members with a genuine interested in equity markets – Willing to meet weekly – Willing to engage in equity research – Want to expand their investment education beyond the classroom Structure: – Divide members into groups of 3-4 Associates and one Lead Analyst – Each group screen for stocks and present their company to the organization – Two groups per week will will present for minutes each – After each presentation there will be a minute Q&A (Members are encouraged to do some of their own research prior to the meeting to help formulate some questions)

4 Who Should Join? Genuine interest in equity markets and investing Desire to learn more about investing and company analysis Willing to dedicate their time and hard work in order help the organization meet its goals Willing to learn and apply classroom knowledge to real world situations Prior financial experience/knowledge is NOT mandatory!!!

5 Member Expectations and Criteria Protect committed analyst program members –When one person drops out of the program at the last minute; it jeopardizes the whole groups presentation Make a difference –Dont just come so you can put SIA on your resume, add value, be interactive, and learn as much as you can No necessary experience or concentrated major to participate in the program, just a little effort and willingness to learn –We welcome all majors and all investing experience levels If accepted into the program; stay committed The application is due: – to: Application can be found on the SIA website:

6 Benefits Learn about business and investing – How to analyze a business – Current events/economic conditions – What makes a good/bad investment Gain the experience of managing an investment portfolio – Great for resume/interviews – Apply knowledge to personal portfolio – Exposure to public speaking Meet other students with similar interests as you

7 Our Investment Philosophy Our philosophy is of the value investing school of thought We want to buy companies where expectations are out of touch with business fundamentals Our goal is to buy great companies at a great/cheap price We want to buy a dollar for fifty cents We intend to hold our positions mid to long-term (Not day traders!)

8 Current Holdings

9 Lessons 1.A good stock and a good business are not the same thing They can be the same thing, but not always Stocks are priced based on expectations, and expectations can differ, so stock prices move around when business fundamentals may not This means that actual stock prices often times will differ on what they should actually be worth

10 Lessons 2.QVC Investing Quality Value Catalyst

11 Lessons 3. Buying things at a large discount to fair value allows information risk to be alleviated DO NOT mistake this for simply picking the cheapest stocks and doing no research Too much information to sift through, will cause you to miss opportunities

12 Presentation Outline Investment recommendation up-front –3 reasons you like the company What the company does –More importantly, how do they make money Relevant industry information Whats the key debate around your stock What the market thinks about this issue Why the markets wrong about this issue Why the company is undervalued Catalysts to make your investment thesis come true Risks to your investment thesis Anything else you think is relevant (Fundamental data, management, charts, etc.)

13 What to look for in a business? Barriers to entry! Good business model to look forBP Bad business model to look forMost small biotech stocks Also: –Hopefully very low goodwill –Low debt/equity (not a necessity, but preferable) Great Resources to Use –Investor Relations part of company website for presentations –SEC 10-K Filing Business Description Managements Discussion and Analysis

14 How to Find Undervalued Companies Initial Screen – Price/Earnings Ratio less than 20 – Price/Book value less than or equal to Industry Average Discounted Cash Flow (DCF) – Compare per share fair value to actual price per share

15 Price/Earnings Investopedia: A valuation ratio of a company's current share price compared to its per-share earnings How to calculate: SIA Criteria: Less than 20 Further Explanation: See Handout

16 Price/Book Ratio Investopedia: A ratio used to compare a stock's market value to its book value. How to calculate: SIA Criteria: Less than or equal to industry average Further Explanation: See Handout

17 Yahoo Finance Website: Stock Screener –Criteria Industry Averages Annual Reports –Financial Statements –Management Discussion and Analysis Competitors

18 Discounted Cash Flow (DCF) Tutorial

19 Present Value Time Value of Money: A dollar today is worth more than a dollar tomorrow –A dollar today can be invested to earn a rate of return or interest What is todays dollar worth tomorrow (future value)? What is tomorrows dollar worth today (present value)? FV = PV(1+i) N

20 Time Value: Example You are given $5,000 and decide to invest it in the stock market for 10 years and expect an average annual rate of return of 10%. What is that $5,000 worth 10 years from now? Likewise…

21 What is a Business Worth? A business is worth the present value of the expected future cash flows of the business. A company's stock price is a reflection of the market's consensus expectation regarding the value of the equity in the business. Ex. Disney (DIS): $34.14 Share Price x 1.77B Shares Outstanding = $66.31B Market Capitalization or Market Value of Equity Is the market always right?

22 Discount Rate The interest rate at which you discount expected future cash flows to the present Efficient Market Hypothesis uses Beta as a measure of risk by quantifying the stock's volatility (up and down movements) relative to the market. – Since the stock price reflects the PV of future cash flows, the more volatile the stock price, the more uncertain the future performance of the business. – This 'extra risk' is reflected in a higher Cost of Equity. (Risk/Return) Capital Asset Pricing Model (CAPM): Cost of Equity = R f + β * (E(R m ) – R f )

23 Free Cash Flow – Equity (FCFE) Net Income adjusted for all non-cash sources of revenue and expense, less capital expenditures – Ex. Subtract all revenue paid for on credit, and add all expenses paid for on credit – Add back depreciation – largest non-cash expense The cash that is left for shareholders after debt-holders have been paid and necessary reinvestment has been made FCFE is what we care about!

24 Free Cash Flow – Equity (FCFE) Net Income Add: Depreciation Less: Capital Expenditures (CAPEX) = Free Cash Flow to Equity Multiple by the Discount Factor = PV of Free Cash Flow to Equity (what the company is worth)

25 Forecasting Cash Flows Historical performance is not important in terms of business value, but is important in terms of predicting future performance. The trickiest part of business valuation – Future performance is unknowable Things to consider when predicting the future: – Every projection should be backed by a rational argument – The strongest arguments will include both quantitative and qualitative support

26 Where to find the data? On-line –Edgar ( earch.html) –Yahoo Finance, or Reuters File Looking for? –10-K: Annual Filing –10-Q: Quarterly Filing Important Sections –Part I: (Business/Risk Factors) –Part II: Management Discussion and Analysis of Financial Condition Consolidated Statements of Financial Position

27 Introduction to the DCF Model Four main sections of the DCF Model 1.Historical Values 2.Future Projections 3.Discount Rate & Perpetuity Growth 4.Comparison of the Fair Value to the Current Market Price Variables to change within the Model – Blue cells change – Black cells DO NOT change

28 Example: How to use the Model Six Step Process 1.Screen for the company 2.Find the financial data 3.Input the historical data into the model 4.Make future projections based upon research and information within the 10-K/10-Q 5.Apply the Discount Rate & Perpetuity Growth 6.Compare the Fair Value to the Current Market Price

29 Step 1: Screen for the Company Go to Yahoo Finance –Website: –On the left margin click on Stock Research -> Screener –Screen initially for: Price to Earnings (P/E) ratio no greater than 20 –Secondary Screen Price to Book less than 1.5 – 2.0 Debt to Equity Ratio less than 1.5 – 2.0 Current Ratio greater or equal to 1.0

30 Step 2: Find the Financial Data Use: –Edgar ( –Yahoo Finance, or Reuters Search for the 10-K/Annual Data 10-K –Financial data found in Part II of Consolidated Statements of Financial Position

31 Step 3: Input Historical Data into the Model Input historical data for the past five years Historical Data that we are looking for: –Revenues –Net Income –Depreciation –Capital Expenditures (CAPEX) –Change in Net Working Capital Note: Revenues and Net Income will be found on the Income Statement, Depreciation and CAPEX will be found on the Cash Flow Statement, and change in NWC capital will be found on the Balance Sheet

32 Step 4: Make Projections Need to forecast in the areas of (blue text): –Revenue Growth Rate –Net Income Margin –Depreciation as a % of Sales –CAPEX as a % of Sales

33 Step 5: Apply a Discount Rate and Perpetuity Growth Discount Rate: –Use CAPM analysis to find discount rate Perpetuity Growth –Assumed the company is a Going Concern –Use a rate at or below GDP growth plus inflation –Used: 3%

34 Step 6: Compare the Fair Value to the Current Market Price Fair Value $14,559,310 Shs. Outstanding (thousands) 216,000 Per Share Fair Value $67.40 Current Share Price $66.75 Margin % 1.0%

35 Quick DCF Run Through Finds the cash flows to a business available to stockholders in the future discounted into todays dollars Net Income –Plus Depreciation –Less Capital Expenditures This is what we use for our DCF model Note: Earnings are NOT the same as cash flows, and often times they will be different! Use 3% perpetuity growth rate Only change the blue numbers! BE CONSERVATIVE!

36 Lead Analyst Position Responsibilities: –Oversee operations within the respective group –Supervise stock selection, research, and presentation development –Accountable for groups attendance on the presentation date –Ensure the quality of the presentation and information to meet SIA AP standards How to become an Lead Analyst: –Must have at least one semester of AP experience –Sign up at tonights meeting Or Mike Coyne regarding your interest at: We will be holding a brief meeting for all lead analyst to discuss further expectations, and best practices

37 Additional Info. If you have any questions regarding the presentation or the Analyst Program please dont haste to send us an Phil Garrett: Mike Coyne: For more information please visit the website listed below The applications are on the SIA website:

38 Questions? Phil Garrett (Co-Director of the Analyst Program) Mike Coyne (Co-Director of the Analyst Program) For more information, visit: Questions or Comments:

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