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    EBay 2 EBay 2 Document Transcript

    • Updated: 9-29-04 Copyright 2004 by Richard Sias NOTE: YOU MUST E-MAIL THIS ENTIRE REPORT TO DAVE BERGER (the TA) BY 5:00 ON THE MONDAY PRIOR TO YOUR PRESENTATION. Reports not turned in by 5:00 will receive a 20 points/day penalty. PLAGIARISM PLAGIARISM IS CHEATING. The APA Manual (Publication Manual of the American Psychological Association. Washington DC: American Psychological Association. 1995. 292-95) suggest the following principle to avoid plagiarism: Quotation marks should be used to indicate the exact words of another. Summarizing a passage or rearranging the order of a sentence and changing some of the words is paraphrasing. Each time a source is paraphrased, a credit for the source needs to be included in the text. ANYONE ENGAGING IN PLAGIARISM WILL RECEIVE AN "F" IN THE COURSE. GRADING Points Oral Presentation 20 Investment Thesis 15 Rest of front page 5 Company Summary/Competition and Strategy 20 Fundamental Valuation 5 Relative Valuation 10 Technical Analysis 10 Earnings Analysis 5 Analyst Recommendations 5 Institutional Ownership 5 Total 100 Notes: • You should begin your presentation to the class by briefly discussing who the company is, what they do, their competitors, and their strategy. Next focus on why you make the recommendation you do, i.e., your investment thesis. Your investment thesis will likely be driven, in part, by the analyses in the other sections of the report. Be prepared to defend your recommendation. • Your written report is graded on both content and writing style (e.g., grammar, organization, etc.)
    • Notes for getting a good grade on your stock report: Presentation 1. The presentation is 20% of the report grade! Spend some time practicing before you present – know the key points you want to make. 2. Start by telling us what the company does. Make sure you understand how they make money (what do they sell?). In some cases, a company may have a number of divisions and both US and international sales. Focus on the most important divisions. 3. Tell us about the company’s competition and how they differ from their competitors. 4. Tell us why you recommend we buy (or recommend we don’t buy) the security. This section is your investment thesis. 5. If you do not know the answer to a question, it is ok to say so. 6. Do not “read” your report to the class. Although you might need to glance down to follow your notes, look up when talking to the class. Writing 1. Keep font constant (including footnotes). In general, we use Garamond 11 point for text. 2. Make sure you put periods at end of statements, e.g., in the EBO model input statements, “EPS forecasts and long-term growth rate (LTG) are from Reuters (9/7/03).” 3. Remove yellow highlights – replace with dates when necessary, e.g., your report should not say FY1, but rather 12/04 (or whatever). 4. If you do not understand something, do not put it in your report. Do not guess. You need to understand what you put in the report. If, for example, you discuss a new product the company is developing, you need to understand the basics of the product. 5. Spell out numbers less than 10. 6. Use complete sentences. I suggest you read your report out loud to yourself. You will be surprise at the number of errors you catch. 7. Make sure you have subject-verb agreement, e.g., indicators suggest, not indicators suggests…. 8. If you start a sentence with a number, spell it out, e.g., “Twenty-five day moving average…” not “25 day moving average…. 9. Incorporate market expectations into your investment thesis. Example, “10:15 ET MVL: Captain America not built into estimates -- Bear Stearns 22.28 -0.01: Bear Stearns reiterates its Outperform rating following announcement that co has settled their legal dispute with the creator of Captain America. Firm views this news an incremental positive for MVL, that is currently not built into any estimates.”
    • eBay (EBAY) Mike Pankaskie Date: 10/14/04 Consensus Estimate 12/03A 12/04E 12/05E Sector: Consumer Non-Cyclical EPS .98 1.20 1.61 Industry: Internet services P/E 97.06 79.56 59.30 Current Price: 95.47 Long Term Growth Rate: 39% 52 Wk Price Range: 50.63-96.78 Ratio Analysis Co. Indus. Sector SP500 Ave. Daily Vol: 8,488,000 P/E (TTM) 97.06 46.02 27.67 22.57 Beta: 1.7 P/S (TTM) 22.94 7.37 2.82 3.19 Market Cap ($million): 63,110 P/B (MRQ) 16.59 6.67 3.66 4.04 Shares Out (million): 661 ROA (TTM) 10.95 9.97 6.17 7.10 Inst. Hold %: 65.9 EBO Valuation 26.89 Div Yld: N/A Recommendation: Sell Total Debt/Equity: .158 Stop-loss Price: Member S&P 500? Yes Price 6-mo prob 12-mo prob Target Price Investment Thesis Summary • The stock has increased from $55 a share to $95 Fundamental Valuation: a share in the last year. Investors have overacted Negative: using a 12.71% discount rate, eBay’s to the three positive earning surprises in the last EBO valuation is $26.89, approximately 1/3rd of year. its current price. • Analysts expect a long-term growth rate of 39%, Relative Valuation: which seems a little too bullish given that the Neutral: All ratios were neutral except forward company has a 63 billion dollar market P/E ratio, which was slightly bearish. capitalization already. Even if the company is able to grow at 40% over the next few years, Technical Analysis: surely more competitors will enter the market Slightly Positive: All indicators are positive. and take away market share. However, the price is in the middle of top and middle Bollinger band, suggesting little • Even when using the 39% long-term growth rate movement in the short term. (which seems a little bullish), the EBO Valuation is still only 1/3rd of what the current stock price Earnings Analysis: is. Positive: eBay has been increasing earnings every quarter for the last three years. Also for the last • eBay is a good company that has increased five quarters eBay has beaten analyst earnings earnings in each of the past five quarters. Also, estimates. the company has a lot of growth potential in foreign markets. However eBay’s price seems to Analyst Recommendations: be overvalued and this is why I gave it a sell Neutral: The mean recommendation is a hold. recommendation. There has been little change in analyst recommendation in the last year. Institutional Ownership: Positive: The number of institutional holders has increased by 100 in the last three months. 3
    • Company Summary eBay is essentially an online auction company that brings together buyers and sellers to exchange any type of product, from baseball cards to cars, in an auction format. eBay’s main source of revenue is from the transaction fees they charge to the buyers and sellers. They also collect revenue from companies that want to advertise on their web page. The three main sources of revenue are presented below: R e v unue D is t rub ut io n 8% 3% Transast ions Fees Advert ising Service Revenue 89% Competition and Strategy eBay’s strategy is to provide an online trading community in which the buyer and seller can get the best price possible, with the same safety and security offered when buying and selling a product at a brick and mortar store. eBay has been able to separate itself from other third party online community sites by providing the safest and the most simplistic online trading site to use. They do this by providing high tech software tools and services for presale purpose and after-sale purposes. Examples of the software that they have created or acquired are Pay Pal, Selling Manager Pro and Shipping Calculator. Pay Pal allows a quicker and safer sales transaction, where the buyer and seller transaction is done through email. Selling Manager Pro is a software tool that helps the seller of the good authenticate the product and uses photo enhancement software tools, which can increase seller productivity. Other companies such as Amazon and Yahoo have been able to imitate these software tools, but as eBay was the first to create a third party online trading site that is safe and time-efficient they have more buyers and sellers for more of an efficient market place. Strengths 1. Monopolist power: eBay is the largest competitor with $63 billion in market capitalization. The two other competitors are Yahoo and Amazon, each possessing fewer $65 billion in market capitalization combined. Also, neither Yahoo’s nor Amazon’s primary business is in the third party online trading market place. 2. The growth of eBay: This company has grown from two million users in 1998 to over 95 million users as of December 2003. There is still a lot of growth left in the industry, especially in the foreign market place. Many analysts predict a 40% growth rate over the next ten years. 3. Name recognition: When people want to sell or buy a relatively inexpensive product online, most consumers think of eBay. Weaknesses 1. Security issues: The Pay Pal website has recently been having technical problems which could have an impact on consumer confidence. Security is always an issue with an online site and once consumers lose trust in the security of their transactions, it is hard to regain that trust. 2. No competition: This can also be viewed as a strength, but if the company becomes satisfied with the service it provides and doesn’t continue to invest in new technology that will increase the efficiency of the website, they will lose customers. 4
    • Threats 1. Low barrier of entry: The cost to start an online third party market place is relatively inexpensive compared to a brick and mortar store. A company like Microsoft has the capital, the technology and name recognition to join the industry. 2. Wall Street expects a growth rate of 40% over the next ten years. It is extremely hard for an eight billion dollar market capitalization company to experience such a high rate of growth over a ten-year period. Even if eBay is able to grow at 40 % for the next couple of years, competitors will join the industry and take away some of the market share, making it highly unlikely that eBay will grow at 40% for the long term. Summary eBay was on of the few companies to survive the Dot Com bust, the big question now is whether or not they will be able to survive Wall Street’s high expectations. Historical Revenue and Earnings: Historical Revenue Historical Earnings FY 12/04 FY 12/03 FY 12/02 FY 12/04 FY 12/03 FY 12/02 1st Quarter 756.2 476.5 245.1 .30 .16 .09 2nd Quarter 773.4 509.3 266.3 .28 .14 .10 3rd Quarter NA 530.9 288.8 NA .17 .11 4th Quarter NA 648.4 413.9 NA .21 .14 Total 1529.6 2165.1 1214.1 .58 .68 .44 Revenues have been approximately doubling in the last three years and earnings per share have been increasing at a rapid rate. This should bode well for future stock prices. 5
    • I. Fundamental Valuation PARAMETERS FY1 FY2 Ltg EPS Forecasts 1.20 1.61 39.00% Model 1: 12-year forecasting horizon (T=12). Book value/share (last fye) 7.54 and a 7-year growth period. Discount Rate 12.71% Dividend Payout Ratio 0.00% Next Fsc Year end 2004 Current Fsc Mth (1 to 12) 10 Target ROE (industry avg.) 14.53% Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Long-term EPS Growth Rate (Ltg) 0.3900 0.3900 0.3900 0.3900 0.3900 Forecasted EPS 1.20 1.61 2.24 3.11 4.32 6.01 8.35 Beg. of year BV/Shr 7.540 8.740 10.350 12.588 15.699 20.022 26.033 Implied ROE 0.184 0.216 0.247 0.275 0.300 0.321 (Beg. ROE, from EPS forecasts) 0.159 0.184 0.216 0.247 0.275 0.300 0.321 0.286 0.251 0.216 0.180 0.145 (ROE-r) 0.032 0.057 0.089 0.120 0.148 0.173 0.194 0.159 0.124 0.088 0.053 0.018 (1-k)*(ROEt-1) 0.000 0.159 0.184 0.216 0.247 0.275 0.300 0.321 0.286 0.251 0.216 0.180 1.000 1.159 1.373 1.669 2.082 2.655 3.453 4.561 5.864 7.334 8.915 10.523 0.032 0.066 0.122 0.200 0.309 0.460 0.669 0.724 0.724 0.648 0.475 0.191 0.127 0.127 0.127 0.127 0.127 0.127 0.127 0.127 0.127 0.127 0.127 0.127 0.127 1.127 1.270 1.432 1.614 1.819 2.050 2.311 2.605 2.936 3.309 3.730 4.204 0.000 PV(growth*AROE) 0.03 0.05 0.09 0.12 0.17 0.22 0.29 0.28 0.25 0.20 0.13 0.05 1.03 1.08 1.17 1.29 1.46 1.68 1.97 2.25 2.50 2.69 2.82 2.87 (Assume this yr's AROE forever) 0.22 0.41 0.67 0.98 1.34 1.76 2.28 2.18 1.94 1.54 1.00 0.36 (P/B if we stop est. this period) 1.25 1.49 1.84 2.27 2.79 3.45 4.25 4.44 4.44 4.23 3.82 3.22 10.44 12.43 15.32 18.90 23.31 28.74 35.44 36.99 37.01 35.31 31.88 26.89 7.54 8.74 10.35 12.59 15.70 20.02 26.03 34.39 44.21 55.30 67.22 79.34 1.20 1.61 2.24 3.11 4.32 6.01 8.35 9.83 11.08 11.92 12.13 11.53 0.342 0.390 0.390 0.390 0.390 0.390 0.176 0.128 0.075 0.017 -0.049 Inputs: 1. EPS Forecasts and long-term growth rate are from Reuters (10/14/04) 2. Book value per share is from Reuters (10/14/04) 3. Discount rate: Used a 20 year t-bond rate of 4.91% as the risk-free rate, an expected market return of 9.5%, and Ebays beta was 1.7(from Money Central) yielding a CAPM discount rate of 12.713% [=.0491+1.7(.095-.0491%]. 4. Dividend payout ratio is the trailing twelve months as reported by Reuters. 5. Next fiscal year-end is 2004. 6. Current fiscal month is 10 (October). 7. Target ROE=14.53%, the lagging five year average ROE for the Internet services industry (Reuters). Output and Sensitivity Analysis: 1. Based on these parameters, a 12 year forecasting horizon and a 7 year growth period, the EBO valuation is $26.89. 2. Changing the discount rate to 6.5% (-6.2%), the EBO valuation becomes $95.90. Thus, if the expectations in the model are reached, the return should be approximately 6.5% per year. 3. Changing the growth rate to 50% (+11%), changes the EBO valuation to $37.08. 4. Changing the industry ROE to 30% (+15.57%), changes the EBO valuation to $70.95. When comparing Ebay’s current price of $95.47 to its EBO price of 26.89 using a 12.41% discount rate, the stock seems to be overvalued. In order to have the EBO price match the current price, one of the following must happen: the discount rate would have to be decreased to six and one-half percent, the long-term growth would have to be 78% or the industry’s target ROE rate would have to be 36%. 6
    • II. Relative Valuation Comparables Mean FY2 Earnings Estimate Forward Mean LT PEG P/B ROE Value Ticker Name Mkt Cap Current Price (next fiscal year) P/E Growth Rate (MRQ) 5 yr ave Ratio P/S EBAY eBay 63.11 B 94.71 1.61 58.83 39.15% 1.50 10.69 7.07% 1.51 23.23 AMZN Amazon 15.9 B 39.27 1.37 28.66 31.22% 0.92 NA NA ##### 2.73 YHOO Yahoo 48 B 35.30 0.49 72.04 34.69% 2.08 8.23 3.38% 2.43 15.59 GOOG Google 40.4 B 149.16 2.86 52.15 30.33% 1.72 26.95 NA ##### 16.74 #DIV/0! #DIV/0! ##### Implied Price based on: P/E PEG P/B Value P/S EBAY eBay $0.00 $0.00 #DIV/0! ##### ##### AMZN Amazon $0.00 $0.00 #DIV/0! ##### ##### YHOO Yahoo $0.00 $0.00 #DIV/0! ##### ##### GOOG Google $0.00 $0.00 #DIV/0! ##### ##### High $0.00 $0.00 #DIV/0! ##### ##### Low $0.00 $0.00 #DIV/0! ##### ##### Median $0.00 $0.00 #DIV/0! ##### ##### Indicator Interpretation P/E Bearish: eBay has a forward P/E ratio that is above the majority of its competitors. eBay is either, overvalued or the market believes they will grow faster than there competitors. (risk shouldn’t play much of a role when comparing these four stocks since the future of these companies is so uncertain). PEG (P/E/G) Neutral: eBay has a PEG ratio that is second out of the four competitors. Holding growth constant P/B Slightly Bullish: P/B is second among competitors. Value (P/B/ROE) Neutral: two of the competitors haven’t been around long enough to have a five-year return on equity. P/S Neutral: eBay has the worst P/S ratio, this is expected however, as eBay has a higher profit margin than the four other competitors. Summary Relative valuation shouldn’t play a huge role in valuing the price of the stock since there is really no direct competitor to eBay. Also, many of the competitors haven’t been around that long and their earnings fluctuate so much that it is hard to compare the companies. 7
    • III. Technical Analysis Indicator Interpretation Bollinger Bands Price should stay steady: Current price is Between top band and bottom band. Suggest that the stock will stay in its current trading range between $90-$95 a share for the short term. Stochastics Neutral: Because %K is below %D and %K has just recently crossed %D, which is negative. However %K and %D have been increasing over the past month. Moving Averages Positive: Price is above both 25 day and 100 day moving averages. Also The 25 day moving average is above the 100 day moving average and the gap is increasing. MACD Positive: Because 25 day moving average is above 100 day moving average and both have been rising. Regression Positive: The 25 day regression line is upward trending. Price is right at the regression line. PriceROC Positive: Price is currently higher than what it was 100 days ago. The ROC has also been increasing in the last month 8
    • IV. Earnings Analysis Earnings Surprises June 2004 March 2004 December 2003 September 2003 June 2003 (Last qtr) (2 qtrs prior) (3 qtrs prior) (4 qtrs prior) (5 qtrs prior) Estimate .27 .26 .22 .18 .17 Actual .29 .31 .24 .18 .18 Difference .02 .05 .02 0 .01 Mean Earnings Estimates September 2004 December 2004 Dec. 2004 Dec. 2005 LT Growth This Quarter Next Quarter This Fiscal Yr. Next Fiscal Yr. Rate Earnings .27 .33 1.20 1.61 39.15 # Estimates 24 24 26 26 14 Earnings Per Share Estimates Revisions Summary Last Week Last 4 Weeks Revised Up Revised Down Revised Up Revised Down Quarter ending 09/04 2 0 5 0 Quarter ending 12/04 0 0 1 0 Year ending 12/04 2 0 7 0 Year ending 12/05 0 0 2 1 Over the last three quarters, eBay has surpassed Wall Street’s high expectations of substantial growth by beating earnings estimates in each quarter. Also, eBay has been able to increase earnings per share in each of the last five quarters. 9
    • V. Analysts’ Recommendations Current 1 Month Ago 2 Months Ago 1 Year Ago Buy 5 6 5 4 Outperform 8 8 8 6 Hold 12 10 10 5 Underperform 0 0 0 0 Sell 1 1 1 2 No Opinion 0 0 0 2 Mean Rating 2.38 2.28 2.33 2.41 Analyst recommendations have been fairly steady over the last six months, with three downgrades and two upgrades. I’m surprised that more analysts haven’t upgraded the stock with eBay beating earnings estimates over the last three quarters. However, the stock has approximately doubled in the last year and analysts may believe that the market overreacted. 10
    • VI. Institutional Ownership # Holders % Beg. Holders # Shares (000) % Shares Shares Outstanding 6,605,384 100.00% # Institutions/Total Shares 66 -193.26% 435,294,801 65.9 # New Buyers 82 -240.47% # Closed Positions 35 -102.64% # Buyers/3 Mo. Shares Purch. 334 -979.47% 42,034,011 # Sellers/3 Mo. Shares Sold 234 -686.22% 33,739,496 Beg. Total Inst. Positions -34 100.00% 427,000,286 6464.43% # Net Buyers/3 Mo. Net Chg. 100 -293.26% 8,294,515 125.57% Institutional ownership is positive, over the last three months there was a net increase in institutional owners by 100. 11
    • Directions/Help 1. General: You first report should entail approximately 40 hours of work. Subsequent reports are likely to entail 30 hours of work. You need to decide which company to evaluate, closely examine the company’s strategy and competition and determine what will drive the stock price in the future (your “investment thesis”). In addition, you should carefully proofread your reports to ensure a professional presentation. All the information needed for the analysis can be found on our web site or at specific web sites discussed below. Our userid is “cougfund” and password is “gocougs” at all websites where registration is required (with the exception of Harrisdirect). Highlighted sections indicate you need to set dates as appropriate (e.g., if the current fiscal year- end is December 2004, then FY1 should be FY 12/04). 2. Narrowing your Stock Selection a. Enter the site: http://dowjones.investiq.com/dowjones/isec_enhanced.html Select your sector, select United States of America, select minimum market capitalization ($5 bil). You will be given a list of stocks in your sector with a minimum capitalization of $5 bil. Print out this list. b. If you are having problems at the dowjones site in the above link, you can also generate a list of $5B stocks at our broker (harrisdirect). Log into our account at Harrisdirect (http://www.harrisdirect.com/). Click “login” and use account name and password. Click the “Quotes, News and Research” tab. Click “stocks” tab. Click “stock scan” and “select criteria.” Under the “fundamentals” criteria, enter 5000 and 999999999. This will ensure that you only get companies with minimum capitalizations of $5b. Under the “exchange and industry” criteria, select your sector. Note that both sectors and industries are included, so be sure you select the right sector (Harris uses the DJ TMI sectors). Hit “view results.” You will get a list of stocks with market caps greater than $5b in your sector. Hit “edit view” to select the variables you want to see. I like to select market capitalization and then sort by market capitalization (first time you click on it, it will go from small to large, the second time, large to small). c. Narrowing your sector-eligible stock list. Once you have a list of stocks in your sector with at least $5b capitalization, you may be able to narrow down the list by focusing on one industry within your sector. Take a look at the current portfolio spreadsheet (handed out in class each week), and see if there are industries that account for a substantial portion of the sector, but that we hold few stocks. For example, in the financial sector, banks make up about 40% of the sector. Do we currently hold any banking stocks? It is up to you to decide which stock to evaluate. One possible way to further narrow the list is to select msn’s top ranked stocks at http://moneycentral.msn.com/investor/srs/srstopstocks.asp. This link allows you to see the stocks msn ranks highest within each sector. (Note, however, that msn sector definitions do match perfectly with DJ sector definitions.) 12
    • If you do not want to screen stocks according to some criteria, you can skip to #3. In addition, you can go to a number of different “stock screening sites” to further refine your security selection. Several screening sites allow you to restrict screens to certain sectors. NOTE, HOWEVER, THAT DIFFERENT SITES DEFINE SECTORS DIFFERENTLY (e.g., Kimberly Clark is defined as a “Basic Industry Sector” by Reuters, but “Consumer Non-cyclicals” by Dow Jones, and “Consumer Staples” by Zacks). Here are some suggestions for screening sites (that include a “sector” screen): d. If you want to screen on fundamental data such as P/B, Analysts’ forecasts, Changes in Institutional ownership, etc., I recommend you use Zacks. Begin by clicking this link: http://www.zacks.com/research/screening/. Then select “Go to the Custom Screener now.” i. Begin by setting “Select Category” to “Company Descriptors.” Then on the right- hand side, select the sector (you may have to run a couple of sectors in different screens to get the DJ sectors). Also select “Market Cap” “>=” and enter 5000 (i.e., 5,000 million is 5 bil). ii. Hit the “Click to Screen” button. On the left hand side, you will see the number of companies that are in the sector and greater than $5b cap (i.e., the number of companies that meet the screen). Under that you will see the criteria you’ve selected. For example, if you pick the “Basic Materials” sector and min cap of $5b, it will tell you 33 companies meet the criteria (on 8/21/03). iii. Select another category (on the drop down menu right above “# of companies”) and choose your criteria. Hit “Click to Screen” again. For example, I picked EPS Surprises and set “Average EPS Surprise (Last 4 Quarters)” to “>=” 10. If you are not sure what a variable means (e.g., Average EPS Surprise), click on it for a definition. After hitting click to screen, the # of companies moves from 33 to five. Thus, there are only five companies that meet all three criteria (Basic Industries, $5b, EPS surprise greater than 10%). iv. Now click “Run Report.” Zacks will give you a list of information you can request for these five companies. Select the items you want and click “Submit Query” at the bottom of the report. Zacks will return the companies and any information you requested. e. Reuter’s screening tool is also very powerful (link: http://www.investor.reuters.com/StockEntry.aspx?target=/stocks, select “ideas and screening” then “power screener”). Personally, I prefer Zacks only because the sectors seem to match up better with DJ TMI. Note – you need to log in to use Reuter’s (cougfund/gocougs). 3. Page 1 (summary page) a. Top left-hand box 13
    • i. Sector/Industry: If you printed out the list from 1a (above), then you can pull sector and industry off the list. If you did not print out the results, then determine sector and industry from http://dowjones.investiq.com/dowjones/isec_enhanced.html. Select your sector, select United States of America, select minimum market capitalization ($5 bil). You will be given a list of stocks in your sector with a minimum capitalization of $5 bil. In addition, the sector and industry will be given. As noted above, different sites use different sector and industry definitions. If you use the dowjones site, you can ensure you get the right (i.e., the DJ-TMI) sector and industry. ii. Log into Harris direct (www.harrisdirect.com). Enter “Quotes, News and Research.” Enter the ticker and select “Go.” Next select “S&P Stock Reports” (from left hand side). On the top right-hand corner will say the security’s weight in the S&P 500, if the stock is a member of the S&P 500 (e.g., ABC has an approximate 0.06% weighting in the S&P 500). iii. Alternatively, you can download an alphabetical list of the companies that make up the S&P 500 at: http://www2.standardandpoors.com/spf/xls/index/sp500.xls. iv. All other variables in top LH table can be found at http://moneycentral.msn.com/investor/research/welcome.asp. Enter ticker, then hit “company report” under “Research” on left hand side of screen. b. Top right-hand box i. TTM refers to trailing 12 months, FY1 is next fiscal year, FY2 is the following fiscal year. Replace this notation with calendar notation (e.g., 12/03A, 12/04E, 12/05E for December 2003 actual, December 2004 estimated, etc.). ii. Put in appropriate EPS figures. All data for this section is available from http://www.investor.reuters.com. Enter ticker in box and hit “Go.” 1. Get TTM P/E from “Ratios” (on left-hand side under Financial Info). Determine TTM earnings by dividing current price by TTM P/E. Date for TTM will be quarter prior to next earnings forecast. For example, Boeing’s next forecast is for qtr 9/04, therefore, TTM ends 6/04. 2. Select “estimates” (under “Analysis” on left-hand side) to get FY1 and FY2 EPS estimates. Be sure to use annual, not quarterly estimates. Compute FY1 and FY2 P/E as current price/FY1 and current price/FY2. iii. Forecasted long-term growth rate can be pulled directly from http://www.investor.reuters.com/ “estimates” (under “Analysis”). iv. All other ratios on top right-hand box can be pulled directly from http://www.investor.reuters.com/ “Ratios.” Note, however, that “valuation ratios” are the default (which includes P/E, P/S, and P/B). To get ROA, you must select “Mgt Effectiveness” in the box titled, “Ratios” on the left-hand side of the screen. v. EBO valuation is from your fundamental valuation (“Lee spreadsheet”). vi. YOUR Recommendation can be Strong Buy, Buy, Hold, Underperform, or Sell. vii. Stop-loss price is the price at which you think we should sell if the stock starts to tank. Historically, we’ve used about 20 percent below the current price. viii. The target price is up to you (where do you think the stock is going?). Standard and Poor’s 12-month target price is available from www.harrisdirect.com. Enter “Quotes, News and Research.” Enter the ticker and select “Go.” Next select “S&P 14
    • Stock Reports” (from left hand side). On the top right-hand corner will state their target price. ix. Use the Price Acceptability Tester (reality check) at http://www.riskgrades.com/retail/pat/Zoltar.cgi to compute the probability (based on the stocks’ historical return distribution) of reaching the target price in the next six months and next year. To use the price acceptability tester (PAT), put in the symbol, the target price and the period, hit calculate. The likelihood will show up in the graph. PAT is based on historical risk and return data. Specifically, the expected return is the industry return over the past 7 years. The firm’s volatility is estimated as a decaying average of its historical volatility. FYI, the “riskgrade” of a stock is relative to a score of 100 for a well-diversified international index. c. Bottom left-hand box Investment thesis – Why do you make the recommendation you do? Make a list of what you believe are the key determinants (or “value drivers”) as to the future value of this stock. A good place to start is to see what others are saying about the stock (i.e., other analyst reports). Log into Harris direct (www.harrisdirect.com). Enter “Quotes, News and Research.” Enter the ticker and select “Go.” Then select the “S&P stock reports.” After reading the S&P report, select “CSFB Research” and read recent CSFB research reports – these reports are often very useful for generating ideas for your investment thesis. This is one of the hardest, and most important, parts of the report. You should do this section only after you have evaluated the company’s strategy and competition. Focus on why you think the price will rise or fall in the future. For example, reporting that the company is the largest in its industry does not tell us anything about what you think will happen to the stock price. Alternatively, reporting that the company will spin-off unprofitable divisions over the next year will likely influence what will happen to the stock price. Make sure this section is well thought-out. In addition, be sure to incorporate market expectations. For example, if a company recently announced good news and you believe the market overreacted, then you would forecast a price decline. Alternatively, if the market underreacted to the good news, then you would forecast a price increase. If you believe the market reacted correctly to the good information (i.e., efficient markets), then it really tells you nothing about how the price should move in the future. d. Bottom right-hand box Summarize your analyses. Begin each with sign of indicator (i.e., positive, negative, or neutral – see example reports). 4. Page 2/3 – Company Summary/Competition and Strategy/Historical Revenue and Earnings (maximum of two pages): a. Company Summary – provide a brief description of the company including a list of major divisions. There are many sources for this information. I recommend you start with Harris direct (www.harrisdirect.com). Enter “Quotes, News, & Research.” Enter the ticker and 15
    • select “Go.” Select “S&P Stock Reports.” See “Business Summary” section (about the middle of the report). Alternatively, Reuters (http://www.investor.reuters.com/), provides a nice business description (enter ticker, select “Go,” select “Company Profile,” then select “Full Description”). Be sure to include divisional breakdown of revenue and earnings. These numbers are usually available from the company’s quarterly reports (10Qs or 10Ks). These reports are usually available from their corporate websites. Alternatively, you can get the data from http://moneycentral.msn.com/investor/research/welcome.asp (enter ticker, click “Go”, select “SEC Filings,” then select the most recent 10Q or 10K). FYI, 10Q is the company’s quarterly report (filed three time a year), and 10K is the company’s annual report. b. Competition and Strategy – Who are the company’s major competitors? How does the company differentiate itself from other companies?, e.g., How is their strategy unique? Focus on the company’s strategy and how they differentiate themselves in the industry. For example, how does Ford differ from other automakers? This is one of the hardest and most important parts of the report. Spend some time looking around (on the web) to learn about the company, the competition, and the industry. There are no easy answers to these questions. Begin with Harris direct (www.harrisdirect.com). Enter “Quotes, News & Research,” enter ticker, select “Go.” Select “S&P stock reports,” then select the “Industry Outlook.” I also recommend the company’s own website and competitors’ websites. You may also determine the competitors at http://finance.yahoo.com/. Enter the ticker, select “competitors” from menu on left-hand-side. c. Historical revenue and earnings. The information for this table (earnings history) is available from MSN money (http://moneycentral.msn.com/home.asp, enter the ticker, select “Go,” hit “Financial Results”). Discuss any patterns in revenue and earnings. 5. Page 4 – Fundamental (EBO) Analysis Use the spreadsheet provided by Professor Charles Lee to value the security. Click here to get the EBO Valuation Spreadsheet (excel file). Be sure to SAVE THE SPREADSHEET TO YOUR COMPUTER BEFORE you make changes. To copy the spreadsheet into your word document – select the cells you want to copy and hit “edit copy” (or CTRL C), in Word, hit “edit” “paste special” and choose “picture.” Note to “see” the picture, make sure Word’s view (view menu) is on “Print Layout.” Instructions for the spreadsheet: a. Fill in all Yellow cells b. EPS forecasts: Take FY1, FY2 and LTG (fiscal year 1, fiscal year 2, and long-term growth rates) from the top right-hand box on summary sheet (first page) 16
    • c. Book value/share (last fye): Use http://www.investor.reuters.com/ - enter ticker, select “Go,” select “Financial Statements.” The default is the income statement, thus, you next need to select “Balance Sheet,” from the “in Financial Statements” (in the top right corner). Use “Total Equity” (book value of equity) and “Total Common Shares Outstanding” for the LAST FISCAL YEAR-END (YOU NEED TO SELECT THE ANNUAL BALANCE SHEET). Divide “Total Equity” by “Total Common Shares Outstanding” to get book value/share. d. Discount Rate: Use the CAPM to estimate the discount rate (r=rf+β(E(rm)-rf)). Assume the appropriate risk-free rate is the 20 year t-bond rate. The current 20 year T-bond rate is available from the Fed at www.federalreserve.gov. Select the most recent H.15 release. Pull the rate from the most recent “20-year” under “U.S. government securities.” Note, a rate of 5.4 means 5.4% in the CAPM (i.e., rf=0.054). You recorded beta in the top LH box. The historical market return is around 12%. Many argue, however, that, high current valuations suggest the expected future market risk premium is lower. I recommend an estimate of the expected return on the market (E(rm)) of 9 to 10%. Assuming, for example, an expected market return of 9.5%, I estimate Boeing’s required rate of return as 0.054+0.54(0.095-0.054)=7.614%. e. Dividend Payout Ratio: Use www.investor.reuters.com (enter ticker, select “Go,” select “Ratios,” select “Dividends” from “in Ratios” box) for dividend payout rate (TTM for company). In the case of negative earnings, divide DPS by (6% X total assets per share). f. Next fiscal year-end: The year corresponding to the next fiscal year-end. g. Current fiscal month: The month of the current fiscal year. For example, if the firm’s fiscal year ends in June, then July would be “1” and May would be “11.” h. Target ROE (industry avg.): Use www.investor.reuters.com (enter ticker, select “Go,” select “Ratios,” select “Management Effectiveness” from “Ratios” box) – Return on Equity (5 yr. Avg.) for INDUSTRY. i. Implied Price: This is the present value (TODAY) of future cash flows to shareholders (i.e., the firm’s fundamental value). EACH number in this row is an estimate of the price TODAY. The number varies based on how many periods we specifically forecast. Professor Lee’s spreadsheet goes out 12 years. Thus, the best estimate of price is the last price forecast (i.e., cell P29). Discuss the inputs, i.e., how did you get the values you used (see example reports)? Discuss the output and sensitivity analysis. For the sensitivity analysis, try a few different discount rates, growth rates and industry ROE to see how sensitive the EBO valuation is to changes in these parameters. Holding everything else equal, find the discount rate that gets you the current market price. If all your expectations are realized, this is the rate you should earn on the stock. See the Boeing example. 6. Page 5 – Relative Valuation Click here for the relative valuation spreadsheet. SAVE the spreadsheet to your disk before you begin editing. After you complete the spreadsheet (instructions are given below), copy the spreadsheet into your document and discuss the relative valuation of your company. To copy the spreadsheet into your word document– select the cells you want to copy and hit “edit copy” (or CTRL C), in Word, hit “edit” “paste special” and choose “picture.” 17
    • Note to “see” the picture, make sure Word’s view (view menu) is on “Print Layout.” Relative valuation spreadsheet instructions a. Go to www.harrisdirect.com and log in. Click “login” and use account name and password. Click the “Quotes, News & Research” tab, click the “stocks” tab. Click “StockScan” and “select criteria.” Under the “fundamentals” criteria, enter 2000 and 999999999. This will ensure that you only get companies with capitalizations of at least $2b (for comparison). Under the “exchange and industry” criteria, select your industry. Note that both sectors and industries are included, so be sure you select the right industry (e.g., pick industrial services not industrial). Be sure to click the box next to industry. Hit “view results.” You will get a list of stocks with market caps greater than $2b in your sector. Hit “edit view” and select market capitalization. Then sort by market capitalization (first time you click on it, it will go from small to large, the second time, large to small). Pick the 4 stocks that are closest in market capitalization to your stock for comparison. Note: YOU HAVE SOME FLEXIBILITY HERE. USE YOUR JUDGEMENT. IF YOU SEE OTHER STOCKS THAT YOU THINK ARE BETTER FOR COMPARABLES (E.G., THE STOCKS YOU DISCUSS IN THE COMPETITION ANALYSIS) USE THEM. b. Fill in ticker, company name, and market capitalization fields in spreadsheet. c. Go to www.investor.reuters.com and enter the first comparison ticker, select “Go.” Enter the current price in the spreadsheet. d. Click on “Estimates” and enter: i. mean FY2 earnings estimate ii. mean LT growth rate e. Click on “Ratios” and enter the data for: i. P/B (MRQ) ii. P/S (TTM) iii. ROE (5 yr average, under “Management Effectiveness” in “Ratios”). f. Repeat steps for a total of five stocks (the four comparables and “your” stock). 7. Page 6 – Technical Analysis Insert three charts here. All Charts are from http://www.pcquote.com/ Click on the above link, enter your ticker in the “Symbol” box, and select the following options: Duration=6 months Frequency=Daily Type=Line Chart 1: Hit the “Select Technical Indicators” link Uncheck the “Volume” box Empty the “Selected Indicators” box (click on each indicator and then the left arrow) Move “Bollinger Bands” from the Available Indicators box to the Selected Indicators box 18
    • Move “Fast Stochastic Oscillator” from the Available Indicators box to the Selected Indicators box Select (highlight) the Fast Stochastic Oscillator and under the “Set parameters for” enter 25, 1, 25 (i.e., %k is over past 25 days, 1 means no smoothing function, and %d is 25 day moving average of %k). Select (highlight) Bollinger Bands and set parameters to 50 and 2.5 (i.e., moving average price over past 50 days and 2.5 standard deviations of moving average volatility over past 50 days) Once a chart is shown, right-click on the chart and “save picture as” to a directory on your computer. Then, once in MS-Word, “insert picture.” Chart 2: Empty the “Selected Indicators” box Select “Exponential Moving Average” (EMA) Select “Exponential Moving Average” AGAIN – it should appear in the “Selected Indicators” box TWICE. Select “MACD” Set the parameters for the first EMA to 25 (25 day moving average) Set the parameters for the second EMA to 100 (100 day moving average) Set the parameters for the MACD to 25, 100, 15 (25 day EMA, 100 day EMA and 15 day MA of MACD for the signal line). Right click chart and “save picture as” to a directory on your computer. Chart 3: Empty the “Selected Indicators” box Select “Linear Regression Channel.” Set parameters to 25 (i.e., regression based on last 25 days) Select “Price Rate of Change.” Set parameters to 100 (i.e., the percent change in the price over the past 100 trading days) Right click chart and “save picture as” to a directory on your computer. Chart 1: Bollinger Bands Fast Stochastics Chart 2: Exponential Moving Average MACD Chart 3: Linear Regression Channel Price Rate of Change (momentum) Briefly discuss each indicator in the table at the bottom of the page. For help in interpreting the indicators see: http://www.pcquote.com/globals/charts/indicators_help_poptemplate.php 8. Page 7 – Earnings Analysis 19
    • Fill out the table. The information (earnings surprises, earnings estimates, and EPS revisions) is available at www.investor.reuters.com (under “estimates”). Discuss your analysis at the bottom of the page. 9. Page 8 – Analysts’ Recommendations Fill out the table. All information for earnings is available at www.investor.reuters.com (under “Recommendations”). Discuss your analysis at the bottom of the page. 10. Page 9 – Institutional Ownership Click here to download the “institutional ownership” spreadsheet. Fill out the YELLOW shaded cells based on the information at www.investor.reuters.com (“Institutional Holders”). Discuss your analysis at the bottom of the page. 11. A few other random thoughts: a. See where to find suggestions about what stocks to buy to get some ideas about what stocks to buy. You may also get ideas for your investment thesis from these sites. MSN money is one of my favorites for investment ideas (http://moneycentral.msn.com/home.asp). b. www.vectorvest.com is an interesting site. 20