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Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
Mar 12 2010 Sap
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Mar 12 2010 Sap

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  • From last evaluation excel sheet
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    • 1. Stock Analyst Program 2010 Driss Kaitouni [email_address] Jamie Tucker [email_address] Honours in Investment Management, Wharton Exchange Fall 2009 March 12, 2010
    • 2. Winter 2010 Overview <ul><li>Meeting every Friday at 2pm (will strive for a consistent room to meet) </li></ul><ul><li>We will start with introductory material and finish with an open discussion </li></ul>Stock Analyst Program 2010 Date Topic Date Topic Jan 29 Overview, Valuation, Resources to Start Mar 8 Options, ETFs, and Forex Demonstration Feb 5 What is Price Action? Multiples Analysis Mar 12 Accounting 101 Feb 12 Stock Screening & Strategy/Money Management Mar 19 TBD Feb 19 Cancelled: Reading Week Mar 26 Cancelled Feb 29 Cancelled: Reading Week Apr 2 Final SAP Presentations
    • 3. Agenda <ul><li>Research Report Overview </li></ul><ul><li>The Annual Report </li></ul><ul><li>DCF Mechanics </li></ul><ul><li>Red Flags </li></ul><ul><li>Looking at a Model </li></ul><ul><li>Tips for Sector Picking </li></ul><ul><li>How To Start… </li></ul><ul><li>Report Commitment </li></ul>Stock Analyst Program 2010
    • 4. Research Report Overview
    • 5. Research Report Composition <ul><li>The key to writing a coherent SAP research report is understanding and articulating an investment time horizon </li></ul><ul><ul><li>- Refer to previous reports on the MIC website: Resources > SAP References </li></ul></ul>Stock Analyst Program 2010
    • 6. Evaluation Criteria (1) <ul><li>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. </li></ul><ul><li>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. </li></ul>Research Report Evaluation Stock Analyst Program 2010
    • 7. The Annual Report
    • 8. The Annual Report <ul><li>Public Relations Material </li></ul><ul><li>Management Discussion & Analysis (MD&A) </li></ul><ul><ul><li>Favourable & Unfavourable Trends </li></ul></ul><ul><ul><li>Significant Events/Uncertainties </li></ul></ul><ul><ul><ul><li>Liquidity </li></ul></ul></ul><ul><ul><ul><li>Capital Resources (change in mix of resources, commitments for CAPEX) </li></ul></ul></ul><ul><ul><ul><li>Results of Operations (sales mix, prices, risk factors) </li></ul></ul></ul><ul><li>Management Statement of Responsibility & Audit Report </li></ul><ul><li>Financial Statements </li></ul><ul><ul><li>Balance Sheet, Income Statement, Cash Flow Statement </li></ul></ul><ul><li>Notes </li></ul><ul><li>5-10 Year Summary of Financial Data </li></ul>Contents Source: Prof. Scott, ACCT 354 Stock Analyst Program 2010
    • 9. The Annual Report <ul><li>Balance Sheet: assets – liabilities = shareholder’s equity </li></ul><ul><ul><li>At 1 point in time (beginning/end of year) </li></ul></ul><ul><li>Income Statement: revenues – expenses + gains – losses = net income </li></ul><ul><ul><li>Over a period of time (1 year) </li></ul></ul><ul><li>Cash Flow Statement: operating/financing/investing activities; explanation of cash changes </li></ul><ul><ul><li>Over a period of time (1 year) </li></ul></ul>The Financial Statements Stock Analyst Program 2010
    • 10. The Annual Report – Income Statement Stock Analyst Program 2010
    • 11. The Annual Report – Balance Sheet Stock Analyst Program 2010
    • 12. The Annual Report – Cash Flow Statement Stock Analyst Program 2010
    • 13. The Annual Report <ul><li>As an analyst, you will go over each of these items (usually looking back several years) </li></ul><ul><li>You can use the Notes to get more information on each line item </li></ul><ul><ul><li>This exercise is done to find any ‘red flags’ (problems with the reporting) </li></ul></ul><ul><li>For a quicker analysis, you can find condensed financials </li></ul><ul><ul><li>Bloomberg terminal, Yahoo! Finance, Google Finance, GuruFocus (membership required) </li></ul></ul><ul><li>Along with looking for red flags, the purpose of analyzing the financial statements is to gauge an idea of how the company will perform in the future </li></ul><ul><ul><li>To apply a useful multiple </li></ul></ul><ul><ul><li>To perform a DCF evaluation </li></ul></ul><ul><li>You will need to use Excel to complete a valuation </li></ul>The Financial Statements Stock Analyst Program 2010
    • 14. The Annual Report The Financial Statements – Condensed Income Statement Source: Guru Focus Stock Analyst Program 2010
    • 15. The Annual Report The Financial Statements – Condensed Balance Sheet Source: Guru Focus Stock Analyst Program 2010
    • 16. The Annual Report The Financial Statements – Condensed Cash Flow Statement Source: Guru Focus Stock Analyst Program 2010
    • 17. The Annual Report The Financial Statements – Ratios & Per Share Data Source: Guru Focus Stock Analyst Program 2010
    • 18. Red Flags
    • 19. Red Flags <ul><li>Several year trend of declining revenues </li></ul><ul><ul><li>Even with increasing margins, long term performance is derived from sales growth </li></ul></ul><ul><li>Rising leverage (debt to equity) and falling interest coverage ratios </li></ul><ul><ul><li>Increasing risk has to be compared to the change in earnings/earnings quality </li></ul></ul><ul><li>Rising accounts receivable as percentage of sales </li></ul><ul><li>Frequent changes of legal council, auditors or external board members </li></ul><ul><li>High turnover rate of key management </li></ul><ul><li>Increasing earnings but decreasing cash flow from operations </li></ul>Trends Stock Analyst Program 2010
    • 20. Red Flags <ul><li>Cookie jar accounting </li></ul><ul><ul><li>Recording liabilities instead of expensing items when performance is low </li></ul></ul><ul><ul><li>Write down the liability in subsequent periods when performance is high </li></ul></ul><ul><ul><li>“ Income smoothing” happens because earnings are understated in good years and overstated in bad ones </li></ul></ul><ul><ul><li>Example: create “reserve reversals” which are funds companies set aside for future events. In good years, increase reserve reversals, and, in bad ones, write down reserve reversals instead of expensing same period costs </li></ul></ul><ul><li>Big bath charges </li></ul><ul><ul><li>GAAP requires companies to estimate costs they will eventually incur in restructuring charges </li></ul></ul><ul><ul><li>A company can take a large initial write off in the first year and later on write-up the charge because the expense was less than anticipated </li></ul></ul>Tactics Stock Analyst Program 2010
    • 21. DCF Mechanics
    • 22. DCF Mechanics Discounted Cash Flow Method Stock Analyst Program 2010
    • 23. DCF Mechanics <ul><li>1) Determine unlevered FCF’s each year using assumptions driven off of revenue </li></ul><ul><li>2) Determine TV at last year of forecast period (2015 or 2020 usually) </li></ul><ul><ul><li>1) Growing perpetuity ( used in following example ) </li></ul></ul><ul><ul><ul><li>Assumes constant growth rate (2-3%) </li></ul></ul></ul><ul><ul><li>2) Terminal multiple </li></ul></ul><ul><ul><ul><li>Assumes an exit multiple of an operating metric like EBITDA or FCF, to determine a value for the enterprise at that point in time </li></ul></ul></ul><ul><li>3) Bring everything back to present value (discount using 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 </li></ul><ul><li>4) Perform a sensitivity analysis </li></ul>Discounted Cash Flow Method Stock Analyst Program 2010
    • 24. Looking at A Model
    • 25. Looking at a Model Assumptions Source: Jamie Tucker Calculations <ul><li>LT sales growth: conservative metric is GDP growth for country of operations, may also use analyst consensus estimates for the firm, or your own vindications </li></ul><ul><li>Public Market Cap = Share Price x Shares Outstanding </li></ul><ul><li>Debt: market values preferred, often use BV as proxy; can estimate MV by using Interest Expense/Cost of Debt </li></ul><ul><li>Beta: from Bloomberg, or any other financial website </li></ul><ul><li>Risk premium: 6.5% is good historical default </li></ul><ul><li>Risk-free: 10 year Treasury rate (if American) </li></ul>Stock Analyst Program 2010
    • 26. Looking at a Model Projections Through 2013 (Based on Own Inputs) Source: Jamie Tucker Calculations Stock Analyst Program 2010
    • 27. Looking at a Model Projections Through 2024 (Based on Model) Source: Jamie Tucker Calculations Stock Analyst Program 2010
    • 28. Looking at a Model Terminal Value – Perpetual Growth Source: Jamie Tucker Calculations Stock Analyst Program 2010
    • 29. Looking at a Model Sensitivity Analysis Source: Jamie Tucker Calculations Think of how many estimations you make to arrive at a share price…sensitivity analysis is a must! Stock Analyst Program 2010
    • 30. Tips for Sector Picking
    • 31. Tips for Sector Picking Performance During Latest Bear Market Rallies Source: Breakfast with Dave (Gluskin Sheff) Stock Analyst Program 2010
    • 32. Tips for Sector Picking Performance During Latest Bear Market Selloffs Source: Breakfast with Dave (Gluskin Sheff) Stock Analyst Program 2010
    • 33. How to Start…
    • 34. How to Start… <ul><li>Macroeconomy </li></ul><ul><ul><li>David Rosenberg, Chief Economist & Strategist, Gluskin Sheff </li></ul></ul><ul><ul><ul><li>Go to GluskinSheff.com to sign up for morning newsletters (often bearish) </li></ul></ul></ul><ul><ul><li>SeekingAlpha.com > The Macro View (can e-mail subscribe) </li></ul></ul><ul><ul><li>Economist.com > Business and Finance </li></ul></ul><ul><li>Industry Analysis [VPN required] </li></ul><ul><ul><li>http://www.mcgill.ca/library/library-findinfo/subjects/management/industry/ > NetAdvantage > Industry Reports </li></ul></ul><ul><ul><ul><li>Or, > Mergent Online > Industry Reports </li></ul></ul></ul><ul><ul><li>Bloomberg terminal: RSE <go> > Search by Industry </li></ul></ul><ul><ul><li>SeekingAlpha.com > Stocks & Sectors </li></ul></ul><ul><li>Company Analysis </li></ul><ul><ul><li>Finviz.com > Screener </li></ul></ul><ul><ul><li>Google.com/finance > Screener </li></ul></ul><ul><ul><li>http://www.mcgill.ca/library/library-findinfo/subjects/management/industry/ > ValueLine [old school, but great info in one page] </li></ul></ul><ul><ul><li>Bloomberg terminal: ‘ticker’ <go> > Fundamentals & Estimates > ANR </li></ul></ul>Important Resources Stock Analyst Program 2010
    • 35. Winter 2010 Overview <ul><li>Meeting every Friday at 2pm (will strive for a consistent room to meet) </li></ul>Date Topic Date Topic Jan 29 Overview, Valuation, Resources to Start Mar 5 Options, ETFs, and Forex Demonstration Feb 5 What is Price Action? Multiples Analysis Mar 12 Accounting 101 Feb 12 Stock Screening & Strategy/Money Management Mar 19 TBD Feb 19 Cancelled: Reading Week Mar 26 Cancelled Feb 29 Cancelled: Reading Week Apr 2 Final SAP Presentations Stock Analyst Program 2010

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