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 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.
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
• 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,
Notes for getting a good grade on your stock report:
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
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.
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
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.
Positive: The number of institutional holders has
increased by 100 in the last three months.
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
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.
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
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.
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.
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.
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.
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
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
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%
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%.
II. Relative Valuation
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! ##### #####
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
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
III. Technical Analysis
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
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
PriceROC Positive: Price is currently higher than what it was 100 days ago. The ROC has also
been increasing in the last month
IV. Earnings Analysis
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.
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.
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
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
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
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.)
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
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
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
3. Page 1 (summary page)
a. Top left-hand box
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
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
Stock Reports” (from left hand side). On the top right-hand corner will state their
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
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
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
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
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)
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
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
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
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.”
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
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
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:
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
Move “Bollinger Bands” from the Available Indicators box to the Selected
Move “Fast Stochastic Oscillator” from the Available Indicators box to the Selected
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.
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
Chart 2: Exponential Moving Average
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
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.