1. Contemporary Investments: Chapter 13 Chapter 13 COMPANY ANALSYSIS: LOOKING FORWARD Is there a long-term relationship between earnings and stock prices? How are earnings calculated? What are the simple quantitative methods for forecasting earnings? How are business models used to forecast earnings? What are some of the other financial variables the analyst needs to estimate?

2. Contemporary Investments: Chapter 13 Earnings and stock prices Long term relationship between stock prices and earnings Relationship between earnings announcements and stock prices

3. Contemporary Investments: Chapter 13 Figure 13.1 – Earnings and Stock Prices for Johnson & Johnson

4. Contemporary Investments: Chapter 13 Earnings and earnings forecasts Measuring earnings per share –Number of shares outstanding –Basic earnings per share Definition Continuing and discontinued operations –Diluted measures of earnings per share

5. Contemporary Investments: Chapter 13 Earnings forecasts Consensus forecasts Earnings surprises Management forecasts

6. Contemporary Investments: Chapter 13 Forecasting earnings Approaches to forecasting earnings –Qualitative forecasts –Quantitative forecasts –Bottom-up forecasts –Top-down forecasts

7. Contemporary Investments: Chapter 13 Forecasting earnings- Cont. Trend based forecasts –Assumptions behind trend based forecasts –Average compound growth rate –Trend based regression

8. Contemporary Investments: Chapter 13 Figure 13.2 – Earnings per Share for Kohl’s Corporation

9. Contemporary Investments: Chapter 13 Figure 13.3 – Actual vs. Predicted Earnings per Share

10. Contemporary Investments: Chapter 13 Business models What is a business model Understanding the business Total revenues (Sales) Operating expenses and operating profit Net income and earnings per share

11. Contemporary Investments: Chapter 13 Business models- Cont. Sensitivity analysis –What is the purpose of sensitivity analysis –How to conduct a sensitivity analysis

12. Contemporary Investments: Chapter 13 Forecasting other financial variables Dividends –Dividend payout ratio –Stability of dividends versus earnings Cash flow Required return

13. Contemporary Investments: Chapter 13 Figure 13.6 – Earnings and Dividends for Johnson & Johnson

14. Contemporary Investments: Chapter 13 Cash flow –Differences between cash flow and earnings –Free cash flow –Operating cash flow

15. Contemporary Investments: Chapter 13 Required return –Required return versus expected return –Estimating required return