1. Valuation Ratios commonly seen summary statistics commonly seen summary statistics a simplistic valuation approach a simplistic valuation approach a great way to sell stock to doctors a great way to sell stock to doctors consequently, not a bad way to pick stocks! consequently, not a bad way to pick stocks!

2. P/E and P/B ratios Industry Dave & Busters Darden Panera Bread Lone Star Book value/shr 13.387.125.5720.54 EPS 2002.411.31.811.30 EPS 2003.801.421.001.37 5 yr growth 17.5%20%14%35%9.0% EPS growth 95%8.4%23%5.4% ROE 2002 14.1%3.1%18.4%14.5%6.3% P/B2.5.842.77.71.1 P/E18.627.414.453.216.7

3. P/E and P/B ratios 18.6 P/E 2.5 P/B Dogs Turnarounds or Recovering Dogs Shooting Stars Harvestersor Fallen Stars value glamour Panera Darden DB Lone Star

4. The precise P/B ratio suppose ROE’ is constant and book value grows at g% forever. The P/B ratio is about “profitable growth”

5. The precise P/E ratio If RI t is a perpetuity, and dividend payout is zero, then and the “forward” P/E ratio is The P/E ratio is about “growth” (not necessarily profitable).

6. More on the P/E ratio When is  RI positive? When is  RI positive? Another simple model: if NI growing perpetuity and 100% dividend payout, then Another simple model: if NI growing perpetuity and 100% dividend payout, then For r=.10 and g=.05, P/E = 20. For r=.10 and g=.05, P/E = 20. is this a reasonable benchmark? is this a reasonable benchmark? what if payout < 100%? MM principle. what if payout < 100%? MM principle. P = NI/(r-g)

7. historical P/E ratio

8. historical P/B ratio

9. Prof. Services Information Hotel/RestaurantHealthcare Mining Manufacturing Retail Construction Utilities Finance/Insurance

10. dogs, recovering dogs, shooting stars and fallen stars P/E P/B ford caremike amazon starbucks goodyear ashland oil

11. Can you make $ with this? buy dogs, sell glamour

12. pissing on the PEG ratio Heuristic is “Sell if PEG > 1 and Buy if PEG 1 and Buy if PEG < 1” If PEG =1 then Price = 100 * growth * NI 1

13. A PEG example 100 *.15 * 2.14 = $32/share

14. But why is PEG =1 the relevant benchmark? define “abnormal earnings” as and assume that D 1 = 0 so that ae 2 = NI 2 – (1+r e )NI 1.

15. a valid PEG ratio define abnormal earnings as define abnormal earnings as if ae t+1 is a perpetuity growing at rate g, t>2. and h = (NI 2 – NI 1 )/NI 1, then If r e =10% and g=0 then

16. a valid PEG ratio If r e =10% and g=0 then If r e =10% and g=0 then PEG = 1 PEG = 1 can rewrite as can rewrite as

17. Project Strategy analysis Strategy analysis Briefly describe company Briefly describe company Discuss sustainability of high/low profitability Discuss sustainability of high/low profitability DON’T cut-and-paste from the 10K DON’T cut-and-paste from the 10K Accounting Analysis Accounting Analysis Identify any distortions Identify any distortions Discuss how distortions will play out in forecasts Discuss how distortions will play out in forecasts Reclassify financial statement items to improve forecasting Reclassify financial statement items to improve forecasting Financial analysis Financial analysis Compare with past and peers to guide forecast assumptions Compare with past and peers to guide forecast assumptions Forecasting Forecasting JUSTIFY! JUSTIFY! Look at industry reports, something outside the firm’s own statements Look at industry reports, something outside the firm’s own statements Valuation Valuation Compare to the market price Compare to the market price Do some sensitivity analysis Do some sensitivity analysis 15-minutes, no more than 10 pages (including tables) 15-minutes, no more than 10 pages (including tables)

18. seconds Global Economy Domestic Economy Economic Sector Industry Company Domestic Economy Economic Sector Industry Company days hours minutes nano-seconds Where to invest your time