1. Stock Valuation – Fundamental Analysis
Essentials of Corporate Finance
Chapters 2, 3, 5, 7
Materials Created by Glenn Snyder – San Francisco State University

2. Materials Created by Glenn Snyder – San Francisco State University
Topics
What is Fundamental Analysis?
Who Performs Fundamental Analysis
Fundamental Analysis Process
Data Gathering
Building Models
Analysis
Determining the Business Outlook and Value
Buy / Sell Recommendations
Career Advice for a Equity Research Analyst
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University

3. Materials Created by Glenn Snyder – San Francisco State University
Fundamental Analysis
Fundamental Analysis seeks to determine a company’s outlook based on factors related to the company itself
Fundamental analysis includes:
Company Analysis
Evaluation of the business model
Financial Statement Analysis
Ratio Analysis
Cash Flow Analysis
Management Analysis
Economic Analysis
Economic Forecasts and Trends
Industry Analysis
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University

4. Who Performs Fundamental Analysis?
Equity Research Analysts
Produce fundamental analysis to generate investment recommendations
Investors
Portfolio Managers make decisions based on the recommendations of research analysts
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University

5. Fundamental Analysis Process
Prior to making an investment recommendation, an Equity Analyst conducts fundamental research on a particular company
This process includes
Gathering Data
Building Models and Analyzing Data
Determining the Business Outlook and Value
Developing a Recommendation
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University

6. Materials Created by Glenn Snyder – San Francisco State University
Data Gathering
The first step in fundamental analysis is data gathering.
Data sources include:
Company specific publications
SEC Filings (e.g. 10K (Annual Report), 8K, Proxy Statements, etc)
Company press releases
Company website
Media
Industry specific publications (e.g. Banking – American Banker)
General Media
Wall Street Journal
Morningstar
Barron’s
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University

7. Materials Created by Glenn Snyder – San Francisco State University
Data Gathering
Additional Data Sources include:
Quarterly Analyst Calls
Company Presentations
Personal Meetings / Conference Calls
Company officers, competitors, industry experts, suppliers, customers, etc.
Financial Databases
FactSet
Bloomberg
Reuters
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University

8. Materials Created by Glenn Snyder – San Francisco State University
Building Models
Equity Research Analysts build economic, industry, and company models that will project a company’s stock price.
These models include:
Model Inputs
Impacts of Product Releases
Seasonality and Trends
Growth and Profitability
Dollar and Marginal
Foreseen events (e.g. spin-offs, acquisitions, etc.)
Model Outputs
Financial Projections (including dividend projections)
Ratio Analysis
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University

9. Materials Created by Glenn Snyder – San Francisco State University
Building Models
The models will reflect the economic, industry, and company information gathered through the various sources identified earlier
The models will be updated periodically or when new, significant information is released to the public
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University

10. Materials Created by Glenn Snyder – San Francisco State University
Analysis
Now the Equity Analyst is ready to analyze the data
Economic Forecast and Analysis
PCI and Economic Growth Models
Industry Analysis
Trends in Investment Cycles
Trends in Technology Advancement
Competitiveness of the Industry
Company Forecast and Analysis
Financial Projections
Peer Comparison
Management Analysis
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University

11. Determining the Business Outlook and Value
The business outlook is based on factors related to the current and expected strength of the economy, industry, and company.
The value of the company can be determined by a number of valuation methods:
Discounted Cash Flows
Dividend Discount Model
Asset Valuation
Relative Valuation
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University

12. Buy / Sell Recommendations
Based on the investment style, objectives, and research conclusions, the Equity Research Analyst provides an investment recommendation:
Buy, Sell, or Hold
Investment Style Matters
Value Investor
A value investor looks to invest in a security that is trading at a discount to its fair value and looks to sell when it is trading above that value
Growth Investor
A growth investor looks to invest in companies with above average prospects for growth in the future
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University

13. Buy / Sell Recommendations
Example:
Research Conclusion:
Current Stock Price: $35
Valuation (based on DCF): $35
Outlook: The near to mid-term outlook for the company is excellent. It should see revenue and earnings growth well above the economic growth, and revenue and earnings growth should outpace the industry growth as well
Recommendation for a Value Manager: Sell
Recommendation for Growth Manager: Buy
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University

14. Career Advice for a Buy Side Equity Research Analyst
Process and detail oriented
Strong quantitative skills
Economic, industry, and company modeling
Excellent verbal and written communication skills
Presentations and written reports (recommendations)
Possess or willing to develop industry knowledge
E.g. Biotechnology, Technology, Healthcare, etc.
Graduate level education
MBA and/or Chartered Financial Analyst Designation (CFA)
Some large asset management firms will have an analyst training program
Highly Competitive
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University