SAP First Meeting (Fall 2008)

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  • SAP First Meeting (Fall 2008)

    1. 1. Stock Analyst Program Fall 2008 Farid Guindo MIC VP Portfolio Management October 17 th 2008
    2. 2. Executive Summary <ul><li>SAP Overview </li></ul><ul><ul><li>Current Portfolio Overview </li></ul></ul><ul><ul><li>How to Play & Win the Game </li></ul></ul><ul><li>Valuation Methodologies </li></ul><ul><ul><li>DCF Valuation </li></ul></ul><ul><ul><li>Comparables Method </li></ul></ul><ul><ul><li>Precedent Transactions </li></ul></ul><ul><li>Investment Styles </li></ul><ul><ul><li>Value Investing </li></ul></ul><ul><ul><li>Growth Investing </li></ul></ul><ul><ul><li>GARP </li></ul></ul><ul><ul><li>Momentum </li></ul></ul><ul><li>Appendix </li></ul>Stock Analyst Program 2008
    3. 3. SAP Overview
    4. 4. SAP Portfolio Current Holdings Stock Analyst Program 2008
    5. 5. Current MIC Portfolio <ul><li>Bottom line: Performance be better! </li></ul>Stock Analyst Program 2008
    6. 6. Current MIC Portfolio Benchmark Returns versus MIC portfolio MIC Portfolio CDN T-Bills S&P/TSX S&P 500 DJIA Stock Analyst Program 2008                    
    7. 7. How to Play the Game <ul><li>This year the SAP program will be comprised of the following: A weekly trading </li></ul><ul><li>challenge alongside a final stock pitch at semester end </li></ul>Semester End Stock Pitch <ul><li>Research report composition </li></ul><ul><li>Presentation ~5 minutes </li></ul><ul><ul><li>- Present key ideas and rationale </li></ul></ul><ul><li>Important dates </li></ul><ul><li>Evaluation Procedure </li></ul><ul><ul><li>Valuation </li></ul></ul><ul><ul><li>comprehensiveness </li></ul></ul><ul><ul><li>Relative ranking </li></ul></ul><ul><ul><li>Consistency </li></ul></ul><ul><ul><li>80% weight including 30 % </li></ul></ul><ul><ul><li>for presentation </li></ul></ul><ul><li>Composed of 4 weekly sessions starting on Oct 27 th ending on November 17 th </li></ul><ul><ul><li>- Send ideas on the Sunday preceding the start of the week </li></ul></ul><ul><li>Evaluation Procedure </li></ul><ul><ul><li>The market will determine the winner </li></ul></ul><ul><ul><li>Total of 20% weight to final overview </li></ul></ul>The Trading Challenge Stock Analyst Program 2008
    8. 8. 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 2008
    9. 9. Stock Valuation Methodologies
    10. 10. Overview <ul><li>Valuation methodologies are not mutually exclusive and in fact are more effective when employed simultaneously </li></ul><ul><ul><li>Sector coverage is important in determining which methodology to use and what to take into account </li></ul></ul>Stock Analyst Program 2008
    11. 11. Valuation Methodologies <ul><li>Determine the stream of revenue being generated </li></ul><ul><li>Derive weighted average cost of capital (WACC) for firm or </li></ul><ul><li>rate of return specific to asset </li></ul><ul><li>Risk cash flows according to WACC </li></ul><ul><ul><li>Assumes time value of money </li></ul></ul><ul><ul><li>General assumptions on terminal value are used </li></ul></ul>Discounted Cash Flow (DCF) Comparable Transactions Precedent Transactions <ul><li>Determine from past transactions similarities i.e. industry composition, level of risk, size of the transaction </li></ul><ul><li>Filtering through the assumptions being used for the precedent transaction allows transparency in your own valuation </li></ul><ul><li>The more transactions the better </li></ul><ul><ul><ul><li>-Relevant private transactions may or may not be available for use </li></ul></ul></ul><ul><li>Develop case studies for the most relevant transactions to determine an appropriate range to use </li></ul><ul><ul><li>- Put more weight on transactions with similar assumptions </li></ul></ul><ul><li>Determine the relevant industry classification </li></ul><ul><ul><li>Use of industry based ratios </li></ul></ul><ul><ul><li>If specific industry does not exist, work backwards </li></ul></ul><ul><li>Relative comparisons are key; company vs. company & company vs. industry average </li></ul><ul><li>Gives a brief idea of where company lies and who key competitors are </li></ul><ul><ul><li>- Allows us to determine best/worst of breed </li></ul></ul>Stock Analyst Program 2008
    12. 12. Investment Styles
    13. 13. Summary of Various Investment Styles <ul><li>Based on the stock’s intrinsic value </li></ul><ul><ul><li>- Low PE, P/BV, P/CF multiples </li></ul></ul><ul><ul><li>- Long term time horizon </li></ul></ul>Value Investing Growth Investing Contrarian Investing GARP Investing <ul><li>Personal risk preference, time horizon, and skill set determine the best investment </li></ul><ul><li>style to employ </li></ul><ul><li>Seeking future growth potential and earnings strength </li></ul><ul><li>A hybrid combination of growth and value strategies </li></ul><ul><ul><li>Brought to main stream use by Peter </li></ul></ul><ul><ul><li>Lynch </li></ul></ul><ul><ul><li>- Emphasis on the PEG ratio </li></ul></ul><ul><li>Goes against conventional market wisdom </li></ul><ul><ul><li>- Crowd behaviour creates mispricings </li></ul></ul>Stock Analyst Program 2008
    14. 14. A Closer Look at Value Investing <ul><li>Both Graham and Buffet are fundamental value investors who use long term strategies to benefit from relatively cheap companies </li></ul>1. Sourced to John Reese, Todd Glassman; “Market Gurus.” Stock Analyst Program 2008 Time Horizon Risk Level Effort
    15. 15. Fundamental Value Investing Benjamin Graham Warren Buffet 1. Sourced to John Reese, Todd Glassman; “Market Gurus.” Stock Analyst Program 2008
    16. 16. Growth Investing Time Horizon Risk Level Effort <ul><li>“ Buy High, Sell even Higher!”, according to O’Neil the best of breed companies are supposed to be expensive </li></ul><ul><ul><li>- His strategy involves continuously monitoring your investments </li></ul></ul>1. Sourced to John Reese, Todd Glassman; “Market Gurus.” Stock Analyst Program 2008
    17. 17. A look at Growth Investing William O’Neal <ul><li>In addition to his “growth metrics” O’Neal also looks for potential catalysts within the company’s industry or within the company as a driver for growth </li></ul>1. Sourced to John Reese, Todd Glassman; “Market Gurus.” Stock Analyst Program 2008
    18. 18. Value versus Growth Relative Price Performance Chart 1. Sourced to Bloomberg Financial. Both Value and Growth index are from BARRA. Stock Analyst Program 2008
    19. 19. Growth at a Reasonable Price (GARP) Time Horizon Risk Level Effort <ul><li>Lynch combines growth and value strategies in his investment thesis </li></ul><ul><ul><li>Emphasize on what you already know </li></ul></ul><ul><ul><li>Known for PEG ratio: determines if stock is fairly priced relative to growth </li></ul></ul>1. Sourced to John Reese, Todd Glassman; “Market Gurus.” Stock Analyst Program 2008
    20. 20. Against Conventional Wisdom Time Horizon Risk Level Effort <ul><li>Dreman goes after out of favour companies whose stock have taken a serious beating </li></ul>1. Sourced to John Reese, Todd Glassman; “Market Gurus.” Stock Analyst Program 2008
    21. 21. Fundamental Value Investing <ul><li>David Dreman looks for contrarian indications as signals to buy </li></ul>David Dreman 1. Sourced to John Reese, Todd Glassman; “Market Gurus.” Stock Analyst Program 2008
    22. 22. Appendix
    23. 23. DCF – Methodology <ul><li>First determine WACC = D/V * R d (1-T) + E/V * R e </li></ul><ul><ul><ul><li>- Use target (optimal) D/E ratio </li></ul></ul></ul><ul><ul><ul><li>- Beta  CAPM </li></ul></ul></ul><ul><ul><ul><li>- R d (1-T)  discuss importance of tax shield </li></ul></ul></ul><ul><li>Mechanics of FCFF </li></ul><ul><ul><li>FCFF = EBIT(1-T) – CAPEX + NCC +- Δ NWC </li></ul></ul><ul><ul><ul><li>- Explain that CAPEX and NWC are all cash sources/uses that don’t affect EBIT, therefore we must adjust. </li></ul></ul></ul><ul><li>Analyze historical performance to come up with future set of assumptions (COGS, SG&A, R&D, “DEP”, “CAPEX”, “NWC” as a % sales) </li></ul><ul><ul><li>- Therefore, we need to use revenue as a driver, and determine its growth from year to </li></ul></ul><ul><ul><li>year during our explicit forecast period (5-10 yrs) </li></ul></ul>The Discounted Cash Flow Method 1. Sourced to Vault Career Guide, “Finance Interviews”. Stock Analyst Program 2008
    24. 24. DCF – Methodology (cont’d) The Discounted Cash Flow Method <ul><li>Determine FCFF’s each year using assumptions driven off of revenue </li></ul><ul><li>Determine TV at last year of forecast period </li></ul><ul><ul><ul><ul><li>1) Growing perpetuity </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>- Assumes constant growth rate (2-3%) – not really used </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>2) Terminal multiple </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>- Assumes an exit multiple of an operating metric like EBITDA or FCFF, to determine a value for the enterprise at that point in time </li></ul></ul></ul></ul></ul><ul><li>Bring everything back to present value at WACC </li></ul><ul><li>Now we have the value of the enterprise (Enterprise Value = Net Debt + Equity + Minority Interest) </li></ul>1. Sourced to Vault Career Guide, “Finance Interviews”. Stock Analyst Program 2008
    25. 25. DCF – Methodology (cont’d) The Discounted Cash Flow Method <ul><li>Now we have the value of the enterprise (Enterprise Value = Net Debt + Equity + Minority Interest) </li></ul><ul><li>In order to determine Equity value, we must first subtract Net Debt & Minority Interest </li></ul><ul><li>At this point we have Equity Value </li></ul><ul><ul><li>- Divide by Shares Outstanding to obtain PPS </li></ul></ul><ul><li>Sensitivity analysis provides for flexibility in model </li></ul><ul><ul><li>- WACC / Growth Rates / Terminal Multiples </li></ul></ul>1. Sourced to Vault Career Guide, “Finance Interviews”. Stock Analyst Program 2008
    26. 26. Precedent Transactions – Basic Steps <ul><li>1. Find historical take-overs in industry </li></ul><ul><ul><li>Again, look for similar size if possible, and most recent first </li></ul></ul><ul><li>2. Try to cover at least on economic cycle in terms of precedent transactions, as some take-over premiums might reflect a take-over boom in an industry </li></ul><ul><li>3. Multiply relevant multiple (P/E, EV/EBITDA, EV/Sales, etc.) by company’s figure to obtain firm’s value in event of a take-over </li></ul>Precedent Transactions Method 1. Sourced to Vault Career Guide, “Finance Interviews”. Stock Analyst Program 2008
    27. 27. Relative Valuation – Basic Steps <ul><li>1. Determine the target company’s EPS, EBITDA, or Sales for current year and possibly forward year (using analyst estimates) </li></ul><ul><ul><li>- Always use recurring income </li></ul></ul><ul><li>2. Determine the set of comparable companies (comp universe) and their trading multiples (based on recurring figures!) </li></ul><ul><ul><li>Similar companies based on industry, size, business model, risk, capital structure – anything you can control for </li></ul></ul><ul><li>3. Multiply average industry multiple by current or forward performance to determine the relative value of the firm </li></ul>Precedent Transactions Method 1. Sourced to Vault Career Guide, “Finance Interviews”. Stock Analyst Program 2008
    28. 28. IMPORTANT RATIOS <ul><li>EPS = NET INCOME / SHARES OUSTANDING </li></ul><ul><li>P/E = STOCK PRICE/ EPS </li></ul><ul><li>OPERATING MARGIN=OPERATING INCOME/TOTAL SALES </li></ul><ul><li>ROA = EBIT/TOTAL ASSETS </li></ul><ul><li>ROE = N.I.-PREF. DIV./S. EQUITY </li></ul><ul><li>CASH/PRICE = FREE CASH FLOW/STOCK PRICE </li></ul><ul><li>A/R TURNOVER = SALES ON ACCOUNT/AVERAGE SALES </li></ul><ul><li>INVENTORY TURNOVER = COGS/AV. INV. </li></ul><ul><li>TIMES INTEREST EARNING =EBIT/INT. </li></ul><ul><li>CURRENT RATIO = CURRENT ASSET/LIABILITY </li></ul><ul><li>OPERATING CASH FLOW TO SHORT TERM LIQUIDITY = CASH FLOW/ CURRENT MATURITIES </li></ul>Stock Analyst Program 2008
    29. 29. Resources Brokers News Sources Literature Stock Analyst Program 2008
    30. 30. Important Dates Ø  Sunday, Oct. 26 th First Day for Trading Challenge the following Monday - E-mail your trade for the week Ø Monday, Oct. 27th: Stock Analyst Program Stock Selection Deadline - E-mail me your stock picks for the Research Report - This date was revised from the 20 th to the 27 th Ø  Monday, Nov. 3rd: Stock Analyst Program Mid-Analysis Meeting, time and location TBA Ø  Friday, Nov. 21st: Stock Analyst Program Final Meeting and Presentations, time and location The Following Dates are Important Stock Analyst Program 2008
    31. 31. Contact Information Office Hours: Fridays from 1:00 pm to 3:00 pm in BRONF 038 Email: [email_address] Stock Analyst Program 2008

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