1 Module 7 Fundamental Analysis. 2 Module 7 - Learning Objectives Define fundamental analysis. Differentiate between fundamental, technical and speculative.
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2 Module 7 - Learning Objectives Define fundamental analysis. Differentiate between fundamental, technical and speculative analysis. Define income statement and its major components. Define balance sheet and its major components. Define cash flow statement and its major components. Analyze and evaluate key measures in a company’s income statement, balance sheet, and cash flow statement. Evaluate a company’s products and market position. Evaluate a company’s management. Explain earnings estimates and how they can be used to evaluate a company. Download financial statements from financial websites and evaluate an investment.
3 What Is Fundamental Analysis? Fundamental analysis: Looking for hidden value in a company. Technical analysis: Discerning patterns in price charts. Speculative investing: Playing the odds. Some finance types believe that none of these work. The market is “efficient” and stocks are priced at what they’re worth.
4 How Do You Do Fundamental Analysis? SEC documents on the company Company websites Library (Value Line, Standard and Poor’s, periodical databases) Business press (Wall Street Journal, New York Times, Forbes, Fortune, and Business Week) Financial websites
5 What are you looking for? Growth in top line Growth in bottom line Upcoming products that might grow the company New markets that may grow the company Management that is good at growing the company In short, growth
6 What can you find at a company website? Let’s try www.boeing.com
7 Product and Market Strong brand franchise in its market Market leader - largest share of sales Growth New products in the pipeline
8 Product and Market? AT&T EMC Amgen Time Warner
9 Management CEO, CFO, and COO Good management team Good track record Compensation Buying or selling company stock
10 Financial Statements Accounting is the language of business Companies are required to report their financials according the accounting standards Publicly-listed companies need to file their financials with the SEC The main financial statements: –Income Statement –Balance Sheet –Cash Flow Statement
11 Income Statement Activity for the year - revenues and expenses
16 Evaluating Income Statements Merck is a major drug company. Here are its revenues, earnings before taxes, and basic earnings per share for the past four years. Calculate the growth rates in sales Calculate the operating margin. Calculate the growth rates in earnings per share. What does each of these tell you about Merck?
20 Calculate Pfizer’s growth in operating cash flow. What does it tell you about the company?
21 Earnings Projections Forecast or prediction of what the company will do in the next two years Detailed analysis of the company Create a financial model (income statement, balance sheet and cash flow statement) for the company Basis of where analysts think stock price will be in the next two years.