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  • From last evaluation excel sheet
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Jan 29 2010 Sap Jan 29 2010 Sap Presentation Transcript

  • Stock Analyst Program 2010 Driss Kaitouni [email_address] Jamie Tucker [email_address] Honours in Investment Management, Wharton Exchange Fall 2009 January 29, 2009
  • Agenda
    • Winter 2010 Overview
    • Research Report Overview
    • Macroeconomic Analysis
    • Industry Analysis
    • Stock Valuation Methodology
      • DCF Valuation
      • Multiples Analysis
    • Important Ratios
    • How To Start…
    Stock Analyst Program 2010
  • Winter 2010 Overview
  • Winter 2010 Overview
    • Meeting every Friday at 2pm (will strive for a consistent room to meet)
    • We will start with introductory material and finish with an open discussion
    Stock Analyst Program 2010 Date Topic Date Topic Jan 29 Overview, Valuation, Resources to Start Mar 5 More applied valuation Feb 5 What is price action? Industries & Multiples Analysis Mar 12 Applied Technical Analysis (equities, commodities, FX) Feb 12 Stock Picking & Strategy/Money Management Mar 19 TBD Feb 19 Cancelled: Reading Week Mar 26 TBD Feb 29 Cancelled: Reading Week Apr 2 Final SAP Presentations
  • Research Report Overview
  • Equity Analysis Techniques Top Down Analysis Bottom Up Analysis
    • Investor starts analysis with global economics by observing economic indicators
      • - GDP growth, Inflation, Interest Rates, Exchange Rates, Productivity and commodity prices
    • Investor narrows search down to industry analysis
      • - In this case sales, price levels, cyclical patterns, local/foreign competition, rates of return and earning per share
    • Company analysis involves the use of valuation techniques
      • - DCF, Industry Comparables and precedents are used to value the company
    • Investors analyze individual companies
      • Emphasis is on company specific or industry specific ratios
      • Undervalued stocks can be labelled as a strong buy regardless of general macro-trends
    • Essentially putting together “story of company and its numbers”
      • The story component is composed of company’s business plan, outlook and other qualitative aspects
      • The quantitative part involves a thorough look at company financials
    Stock Analyst Program 2010
  • Research Report Composition
    • The key to writing a coherent SAP research report is understanding and articulating an investment time horizon
      • - Refer to previous reports on the MIC website: Resources > SAP References
    Stock Analyst Program 2010
  • Evaluation Criteria (1)
    • Choice of industry articulated relative to other industries that would be affected by the general economy in a similar way. For example, the drug delivery industry and the drug manufacturing industry are affected by the same external economic conditions; thus it should be clear as to why one versus the other.
    • This would include use of ratios specific to industry, dcf valuation, comps, precedents, etc... This would also include quantifiable identification of relevant catalysts and earnings growth potential specific to the company.
    Research Report Evaluation Stock Analyst Program 2010
  • Macroeconomic Analysis
  • Macroeconomic Analysis (1)
    • Cyclical indicators are a useful tool for anticipating market movements as they help to predict economic activity
      • - Indicators are usually released monthly in the form of index numbers, quantities, or value
    Cycle Significance and Composition The Indicators
    • Cycles can be captured through four phases
      • Expansion, peak, recession, trough
    • These phases all vary in nature and duration as they are met under dissimilar circumstances
      • - Policy intervention measures and business responses may differ across the same phases
    • There are several indicators that can help us detect and measure the current and subsequent cycles
    • - Leading, lagging, coincident
    • Sourced to “Guide to Economic Indicators”, The Economist.
    • Interest rates may also appear in many cases as a lagging indicator, if policy measures taken are reactionary rather than anticipatory.
    • Time span (either maximum or minimum) by which the economic indicator usually reverses in trend in terms of total output.
    Stock Analyst Program 2010
  • Macroeconomic Analysis cont’d.
    • An alternative approach to using economic indicators is to use them as directional devices in terms of specific industries in light of their broader macro-economic implications
    Alternative Measures (1)
    • Sourced to “Guide to Economic Indicators”, the Economist.
    • The producer price index may overstate cost pressures when above average discounts are offered during a recession, or understate cost pressures when inflation is rapid.ly increasing
    Stock Analyst Program 2010
    • Sourced to Wall Street Journal’s market data center.
    Economic Calendar Stock Analyst Program 2010
  • Industry Analysis
  • Pick A Sector
    • GICS: Global Industry Classification Standard (MSCI Barra)
    • 10 sectors > 24 industry groups > 68 industries > 154 sub-industries
    Visit http://www.mscibarra.com/products/indices/gics/gics_structure.html Stock Analyst Program 2010 Sector # Sector Market Allocation 10 Energy 11.03% 15 Materials 7.42% 20 Industrials 9.98% 25 Consumer Discretionary 8.56% 30 Consumer Staples 10.15% 35 Health Care 9.54% 40 Financials 21.62% 45 Information Technology 12.01% 50 Telecommunication Services 5.08% 55 Utilities 4.66%
  • Industry Analysis
    • Evaluate competitive position of industry relative to others
      • Nature of industry? Regulation? Importance of innovation and technological development? Which economic forces have biggest impact?
    • Identify companies within the industry that look promising
      • Examples: strong market position, low cost player, differentiator, innovator
    • Can you understand the dynamics of your chosen industry?
      • Example: financials versus consumer discretionary
    Important Considerations Stock Analyst Program 2010
  • Stock Valuation Methodology
    • Valuation methodologies are not mutually exclusive and more effective when used to validate one another
    Valuation Methodology * Often not available Stock Analyst Program 2010
  • 4 Current Share Price: €16.25 (1) ____________________ Note: (1) Share price at end of trading session of 30 March 2009 as provided by Bloomberg (2) Based on target prices issued by brokers since December 2008 (3) Multiples based on historical trading statistics. EBITDA estimates as per broker consensus (4) Transaction multiples based on comparable deals Strong fundamentals suggest upside potential of current share price
    • Ferrovial share price has been battered in equity markets
      • High financial gearing
      • Market cyclicality in certain parts of company
      • Exposure to construction industry and global liquidity freeze
      • Perceived risk of default of BAA
      • Expectation of damaged traffic scenario in European Airports
    • Five Year CDS suggests only 40% probability of BAA default
    • Target range at low end of trading multiples and at 50% discount to SoTP Base Case
    Target Range: - € 43 € 50 Valuation Methodology Share Price (in EURm) Last 3 Months (1) Last 6 Months (1) 2009E EBITDA (3) 2010E EBITDA (3) Transaction multiples 2008E EBITDA (4) SOTP Base Case Concensus Analyst Estimates (2) Trading multiples Trading Range € 16 € 100 € 57 € 39 € 43 € 40 € 16 € 115 € 97 € 61 € 64 € 75 € 31 € 20 € 0 € 25 € 50 € 75 € 100 € 125 Stock Analyst Program 2010
  • Valuation Methodology
    • Determine the stream of revenue being generated
    • Derive weighted average cost of capital (WACC) for firm or rate of return specific to asset
    • Risk cash flows according to WACC
      • Assumes time value of money
      • General assumptions on terminal value are used
    Discounted Cash Flow (DCF) Precedent Transactions
    • Determine from past transactions similarities i.e. industry composition, level of risk, size of the transaction
    • Filtering through the assumptions being used for the precedent transaction allows transparency in your own valuation
    • The more transactions the better
      • Relevant private transactions may or may not be available for use
    • Develop case studies for the most relevant transactions to determine an appropriate range to use
      • Put more weight on transactions with similar assumptions
    • Determine the relevant industry classification
      • Use of industry based ratios
      • If specific industry does not exist, work backwards
    • Relative comparisons are key; company vs. company & company vs. industry average
    • Gives a brief idea of where company lies and who key competitors are
      • Allows us to determine best/worst of breed
    Comparable Transactions Stock Analyst Program 2010
  • DCF- Methodology Discounted Cash Flow Method Stock Analyst Program 2010
  • DCF- Methodology
    • Determine unlevered FCF’s each year using assumptions driven off of revenue
    • Determine TV at last year of forecast period (2015 or 2020)
      • 1) Growing perpetuity
        • Assumes constant growth rate (2-3%) – not really used
      • 2) Terminal multiple
        • Assumes an exit multiple of an operating metric like EBITDA or FCF, to determine a value for the enterprise at that point in time
    • Bring everything back to present value at WACC, add cash, subtract debt and divide by the number of common shares outstanding to arrive at an appropriate share price as determined by your analysis
    Discounted Cash Flow Method Stock Analyst Program 2010
  • DCF- Methodology Discounted Cash Flow Method Sensitivity Analysis Stock Analyst Program 2010
  • DCF- Methodology Discounted Cash Flow Method Stock Analyst Program 2010
  • DCF- Methodology Discounted Cash Flow Method Stock Analyst Program 2010
  • DCF- Methodology Discounted Cash Flow Method Stock Analyst Program 2010
  • Multiples Analysis- Methodology Multiples Analysis Stock Analyst Program 2010
  • Multiples Analysis- Methodology PE Multiple PE ratio = Share Price/EPS Rationale - How many times does the company trade at compared to its Net Profit per share EV/EBIT EV = Enterprise Value = Market Cap. + MV of debt (actuality the BV of debt) Market value of the firm less debt compared to its net income EV/EBITDA MV of the firm less debt compares with its approximate measure of cash value Depreciation and Amortization – non-cash items added back to EBIT EV/BV of Assets MV of the firm less debt compared to its asset value on the books Now looking at an asset base value of the firm compared to the market value adjusted for debt Multiples Analysis Stock Analyst Program 2010
  • Multiples Analysis- Methodology Issues with multiples - Hard to find truly comparable peer firms – subjectivity… - Dependence on accounting policies – GAAP, AASB etc…differ according to jurisdiction - Cyclicality of earnings, timing of year end - Discriminates against firms with negative equity - Hard to conduct sensitivity analysis - ranges Multiples Analysis Stock Analyst Program 2010
  • Important Ratios
  • Important Ratios Activity Ratios Liquidity Ratios 1. Sourced to CFA institute, Financial Statement Analysis. Stock Analyst Program 2010
  • Important Ratios Solvency Ratios Profitability Ratios 1. Sourced to CFA institute, Financial Statement Analysis. Stock Analyst Program 2010
  • Important Ratios Performance Ratios Coverage Ratios 1. Sourced to CFA institute, Financial Statement Analysis. Stock Analyst Program 2010
  • How to Start…
  • How to Start…
    • Macroeconomy
      • David Rosenberg, Chief Economist & Strategist, Gluskin Sheff
        • Go to GluskinSheff.com to sign up for morning newsletters (often bearish)
      • SeekingAlpha.com > The Macro View (can e-mail subscribe)
      • Economist.com > Business and Finance
    • Industry Analysis [VPN required]
      • http://www.mcgill.ca/library/library-findinfo/subjects/management/industry/ > NetAdvantage > Industry Reports
        • Or, > Mergent Online > Industry Reports
      • Bloomberg terminal: RSE <go> > Search by Industry
      • SeekingAlpha.com > Stocks & Sectors
    • Company Analysis
      • Finviz.com > Screener
      • Google.com/finance > Screener
      • http://www.mcgill.ca/library/library-findinfo/subjects/management/industry/ > ValueLine [old school, but great info in one page]
      • Bloomberg terminal: ‘ticker’ <go> > Fundamentals & Estimates > ANR
    Important Resources Stock Analyst Program 2010
  • How to Start…
    • DCF Starting point
      • Bloomberg terminal: 3) Fundamentals & Estimates > FA
      • Company 10-K and 10-Q filings (available at edgar.com)
      • Analyst reports (Thomson Investext)
        • Often have DCF analysis built into reports
        • http://research.thomsonib.com/gaportal/login.asp [VPN necessary]
    • Multiples starting point
      • Bloomberg terminal: 3) Fundamentals & Estimates > RV
      • Finviz.com > Screener
    Important Resources Stock Analyst Program 2010
  • Other Useful Resources Stock Analyst Program 2010
  • Research Report Composition
    • Meeting every Friday at 2pm (will strive for a consistent room to meet)
    Date Topic Date Topic Jan 29 Overview, Valuation, Resources to Start Mar 5 More applied valuation Feb 5 What is price action? Industries & Multiples Analysis Mar 12 Applied Technical Analysis (equities, commodities, FX) Feb 12 Stock Picking & Strategy/Money Management Mar 19 TBD Feb 19 Cancelled: Reading Week Mar 26 TBD Feb 29 Cancelled: Reading Week Apr 2 Final SAP Presentations Stock Analyst Program 2010