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The PBSN Finance Executive
Who We Are
Goals1. Learn basic finance acumen   Career guidance   Personal investing2. Teach tools to valuate an equity at a beginn...
Stock Pitch UtilityWhy do we try to determine the intrinsic value of a stock? To buy undervalued stocks as an investor D...
Value Investing
Value Investing Seeks companies that are undervalued by the financial markets Key Assumptions:   Stocks can be neglecte...
Value Investing Criteria High margin of safety (33%) Low trading multiples: P/E < 15, P/B < 1.5 Healthy balance sheet a...
Stock Pitch Structure
Picking a Company What do you like? What do you understand? Read the news, Seeking Alpha, Motley Fool, ThomsonONE Consum...
Overview and Business Model    Overview                     What is the business?                          Metrics Busine...
Investment Thesis    Overview                     Why is this a good company to buy? Business ModelInvestment Thesis     ...
Internal    Overview                    Internal: Business ModelInvestment Thesis                     Who runs the busine...
External    Overview                    External: Business ModelInvestment Thesis                     What is the conditi...
Catalysts and Risks    Overview                    Catalysts are specific events that will occur that support your thesis ...
Accounting Basics
Why are Financial Statements Important? Allows investors and creditors to use the financial information provided to  eval...
Filings Annual Report   Includes financial statements, company performance, etc. and is intended for   shareholders and ...
Income Statement Measures financial performance over a period of time Shows a business incurs its revenues and expenses ...
Balance Sheet Shows a financial position at a specific point in time Fundamental balance sheet equation:   Assets = Lia...
Statement of Cash Flows Cash inflows and outflows over a period of time Cash impact of the operations and decisions of a...
Flow Through Question How does a $10 decrease in depreciation affect all the financial statements?
Flow Through Question          How does a $10 decrease in depreciation affect all the financial statements?Income Statemen...
Market Value vs. Book ValueBook Value                                  Market Value• price paid for a particular asset    ...
Equity vs. Enterprise ValueEquity Value                              Enterprise Value• also the market capitalization of t...
Capital Structure                    Debt or Equity?
Ratio Analysis Used to analyze the historical trends and compare these trends to that of  the industryCategories: Profit...
Ratio ExamplesProfitability         Investment      Liquidity            Stability/Leverage   Growth                      ...
Comparable Companies
Comparable Companies Analysis What is a multiple?   An expression of market value relative to a key statistic to relate ...
Common Multiples      Enterprise Multiples      Equity Multiples      Enterprise Value/Sales    Price/Earnings      Enterp...
Multiples: An Example Price to Earnings (P/E) multiple Example   Price per Share = $12   Share Count = 1,000,000   Ma...
Multiples: An Example Price to Earnings (P/E) multiple Example   Price per Share = $12   Share Count = 1,000,000   Ma...
Trailing vs. Forward Trailing   Compares the current value of a metric to its historical values   TTM : Trailing Twelve...
An Example                                           Comparable Companies Analysis                Share       Market      ...
Selecting Comps Peer group:   Similar size   Same region   Same industry
Selecting Comps Company Documents   Management Information Circulars   Company presentations   Annual and quarterly re...
Selecting Comps: An Example
Selecting Comps: An Example Found at www.sedar.com (or www.edgar.com for American companies)   Go to ‘Search Database’  ...
Discounted Cash Flow Analysis
The Discounted Cash Flow Analysis A company is worth the present value of all of its future cash flows Can reveal how th...
Present ValueWhat do we need? 1. Value of Forecasted Cash Flows         Free Cash Flows for   Free Cash Flows beyond     ...
Free Cash FlowThe cash available after laying out money related to operations andexpanding its asset base             Sale...
Free Cash Flow       EBIT (1-t)      • Account for the effect of tax        +D&A           • Not a cash item       - CapEX...
Forecasting ModelMid-Year Convention           Y                    Historical Period               CAGR                  ...
Operating Model Assumptions Analyst estimates Items as a % of historical basis of sales Items historically identical G...
Terminal ValueTotal value of all cash flows beyond the operating model time period1. Exit Multiple Method         Used fo...
Forecasting ModelMid-Year Convention           Y                    Historical Period               CAGR                  ...
Weighted Average Cost of CapitalFirm’s cost of capital, will be discount rate usedUse market value instead of book value t...
Capital Asset Pricing Model Cost of Equity is how much return stockholders expect from company Risk Free Rate: 10 or 20 ...
Cost of Debt Cost of debt is the yield the company could raise in the public market Getting Cost of Debt:   Use a Bloom...
Discounting Those Cash Flows Discount Year 1   Discount Year 2   Discount Year 3   Discount Year 4   Discount Year 5      ...
Enterprise to EquityWe have arrived at enterprise value        Enterprise Value     • How much to take over the entire com...
Intrinsic ValueTreasury Stock Method: count number of “in-the-money” call options todetermine the diluted shares outstandi...
Sensitivity Do a two-way table with exit multiple/perpetuity rate and your WACC (most sensitive calculations)            ...
Other Popular Valuations Precedent Transaction   Use whenever applicable Leveraged Buy-Out Model   Use in private equi...
The PBSN Finance Executive
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PBSN Super Day Presentation

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  • Sometimes companies have low multiples for a reason. Multiples reflect what investing populace believes about a certain stock.Growth can already be “priced in”, which is why we look at multiples
  • Brief explanation of businessExplain capital structure, organization, existence of unique sharesWhere do their revenues come from? Who are their customers? What are their key drivers? Porters five forces is a good tool here
  • Don’t just say “management is good”, give specific examples of what they’ve done. Where did they work before?Look at historical balance sheet to show if behaviour has been historical or notShareholder value returned?Do they have skin in the game?Liquidity of both stock and business?
  • These future cash flows is what we are concerned about, it is what we as shareholders have access to
  • This is the figure that can be used to help increase shareholder value
  • Business will grow sales in line with current operations
  • Accounts for capital structure, so each WACC has different inputs based on amount of debt and shares it hasTypical WACC is about 5-10%, higher WACC means it’s more costly to take out cash.Higher WACC means you will have a lower company value because it will be discounted back more
  • Beta is fluctuation with market. You are supposed to unlever betas of comparables and then relever with our company’s capital structure, but too time consuming
  • Only use interest bearing debt (no accounts payable, or short term)We are looking for the after tax cost of debt; tax can distort our decisionDo NOT overinflate debt… it reduces WACC and makes it less conservative
  • Enterprise value is how much it would take to buy the entire company (including debt and cash)Enterprise value is for both creditors and shareholders, we are ONLY concerned about shareholdersEnterprise value is capital structure neutral (if you issue equity to pay off your debt, EV stays the same)Minority interest is a % of the business we have a less than 50% stake in that we do not own. Rarely public companies
  • Some apply a “liquidity” discount at the end. DO NOT DO THIS, the problems of management/illiquidity should be baked into the other business model assumptions
  • Transcript of "PBSN Super Day Presentation"

    1. 1. The PBSN Finance Executive
    2. 2. Who We Are
    3. 3. Goals1. Learn basic finance acumen  Career guidance  Personal investing2. Teach tools to valuate an equity at a beginner level  Value Investing, Basic Accounting, Comparables, Discounted Cash Flow  Searching for intrinsic value of an equity
    4. 4. Stock Pitch UtilityWhy do we try to determine the intrinsic value of a stock? To buy undervalued stocks as an investor Determine merger/acquisition price Determine price for stock issuance
    5. 5. Value Investing
    6. 6. Value Investing Seeks companies that are undervalued by the financial markets Key Assumptions:  Stocks can be neglected and value discrepancy can exist  Entry point in short run does not matter  Efficient market hypothesis in the long run
    7. 7. Value Investing Criteria High margin of safety (33%) Low trading multiples: P/E < 15, P/B < 1.5 Healthy balance sheet and low amount of debt Predictable free cash flows Simple, understandable business model Defensible economic moat
    8. 8. Stock Pitch Structure
    9. 9. Picking a Company What do you like? What do you understand? Read the news, Seeking Alpha, Motley Fool, ThomsonONE Consumer Media and Financial Natural Retail Healthcare Technology Industrials Real Estate Telecom Institutions Resources Goods
    10. 10. Overview and Business Model Overview  What is the business? Metrics Business Model Ticker PBSNInvestment Thesis  Basic numbers and company statistics IPO Date Sep-11 Current Price $50.00 Internal  What do they do? Be thorough! Target Price $10.00 External Revenues $500 MM Valuation Market Cap $1000 MM Catalysts Risks
    11. 11. Investment Thesis Overview  Why is this a good company to buy? Business ModelInvestment Thesis  Give a couple of reasons that summarize the best features Internal  “Summary” slide of what you’ll say External Valuation  Why is the market wrong? Catalysts Risks
    12. 12. Internal Overview Internal: Business ModelInvestment Thesis  Who runs the business? Management team? Internal  Examine balance sheet and debt maturity External Valuation  Microeconomic factors, company specific Catalysts Risks
    13. 13. External Overview External: Business ModelInvestment Thesis  What is the condition of this industry? Internal  What is going on in the macroeconomy that affects this business? External Valuation  Activity of competitors? Catalysts Risks
    14. 14. Catalysts and Risks Overview Catalysts are specific events that will occur that support your thesis Business ModelInvestment Thesis  E.g. drug release, new movement to China, new legislation Internal Risks are things that prevent your investment thesis from being realized External Valuation  E.g. currency risk, business risk, management sucks Catalysts Risks
    15. 15. Accounting Basics
    16. 16. Why are Financial Statements Important? Allows investors and creditors to use the financial information provided to evaluate:  Financial conditions  Asset investments  Operating results  Potential problems  Projections  Equity  Etc.
    17. 17. Filings Annual Report  Includes financial statements, company performance, etc. and is intended for shareholders and other interested parties 10-K  More detailed annual report  Released annually 10-Q  Released quarterly
    18. 18. Income Statement Measures financial performance over a period of time Shows a business incurs its revenues and expenses Revenues - COGS = Gross Profit - Expenses = EBIT - Interest - Taxes = Profit
    19. 19. Balance Sheet Shows a financial position at a specific point in time Fundamental balance sheet equation:  Assets = Liabilities + Owner’s Equity Shows asset investments and how they are supported, revealing a lot about the company’s financial health
    20. 20. Statement of Cash Flows Cash inflows and outflows over a period of time Cash impact of the operations and decisions of a business Shows how well positioned a company is to fund its future growth through existing operations Important to note sources and uses of cash as well as the matching of these sources and uses
    21. 21. Flow Through Question How does a $10 decrease in depreciation affect all the financial statements?
    22. 22. Flow Through Question How does a $10 decrease in depreciation affect all the financial statements?Income Statement: Operating income would increase by $10 With a 40% tax rate, net income would increase by $6Cash Flow Statement: Net income goes up by $6 and depreciation decreased by $10 Subtract the non-cash depreciation increase ($4)Balance Sheet: Fixed assets increase by $10, but cash is down $4 (assets are up by $6) Increase of $3 from net income flows to retained earnings to balance (A = L + E)
    23. 23. Market Value vs. Book ValueBook Value Market Value• price paid for a particular asset • current price of the asset• historical cost • determined by demand and supply of the• price shown on a balance sheet market• useful to help track profits and losses • is a more accurate value of the asset’s current value
    24. 24. Equity vs. Enterprise ValueEquity Value Enterprise Value• also the market capitalization of the • enterprise value = market capitalization +company preferred equity + minority interest + net• value attributable to shareholders debt (total debt – cash and cash equivalents)
    25. 25. Capital Structure Debt or Equity?
    26. 26. Ratio Analysis Used to analyze the historical trends and compare these trends to that of the industryCategories: Profitability Investment utilization Liquidity Stability Growth
    27. 27. Ratio ExamplesProfitability Investment Liquidity Stability/Leverage Growth Utilization• Vertical Analysis • Inventory • Current Ratio • Net Worth to • Sales Growth• Return on Assets Turnover • Acid Test Assets • Profit Growth• Return on Equity • Fixed Asset • Age of • Debt to Assets • Asset Growth Turnover Receivables • Debt to • EBITDA Growth • Total Asset • Age of Inventory Capitalization Turnover • Age of Accounts • Debt to Equity Payble • Lon-Tem Debt Interest Coverage
    28. 28. Comparable Companies
    29. 29. Comparable Companies Analysis What is a multiple?  An expression of market value relative to a key statistic to relate to that value Advantages Disadvantages Useful Simplistic Relevant Static Simple Difficult to compare
    30. 30. Common Multiples Enterprise Multiples Equity Multiples Enterprise Value/Sales Price/Earnings Enterprise Value/EBITDA Price/Book Value Enterprise Value/EBIT Price/Sales
    31. 31. Multiples: An Example Price to Earnings (P/E) multiple Example  Price per Share = $12  Share Count = 1,000,000  Market Capitalization = $ 12,000,000  Net Income = $3,000,000 Price per Share Market Capitalization OR Earnings per Share Net Income
    32. 32. Multiples: An Example Price to Earnings (P/E) multiple Example  Price per Share = $12  Share Count = 1,000,000  Market Capitalization = $ 12,000,000  Net Income = $3,000,000 Price per Share Market Capitalization OR Earnings per Share Net Income Price /Earnings = 4.0x
    33. 33. Trailing vs. Forward Trailing  Compares the current value of a metric to its historical values  TTM : Trailing Twelve Months Forward  Compares the current value of a metric to its projected values  Use consensus estimates (from ThomsonONE, Bloomberg, etc.)
    34. 34. An Example Comparable Companies Analysis Share Market LTM 2013E 2014E LTM 2013E 2014E Price Capitalization EV/EBITDA EV/EBITDA EV/EBITDA Price/EPS Price/EPS Price/EPS Company A $15.00 $1,675 8.1 7.8 7.4 15.1 14.5 14.1 Company B $20.00 $2,230 6.6 6.5 6.4 12.3 12.1 11.5 Company C $12.00 $1,523 7.2 7.3 7.1 16.5 16.3 15.4 Company D $10.00 $1,084 7.7 6.9 6.9 12.8 12.2 12.1 Company E $18.00 $985 6.5 6.3 5.9 11.2 10.8 10.1 Mean 7.22 6.96 6.74 13.58 13.18 12.64 Median 7.2 6.9 6.9 12.8 12.2 12.1
    35. 35. Selecting Comps Peer group:  Similar size  Same region  Same industry
    36. 36. Selecting Comps Company Documents  Management Information Circulars  Company presentations  Annual and quarterly reports Other Resources  Google Finance  ThomsonOne  Bloomberg
    37. 37. Selecting Comps: An Example
    38. 38. Selecting Comps: An Example Found at www.sedar.com (or www.edgar.com for American companies)  Go to ‘Search Database’  Search  Company Name: ‘Royal Bank of Canada’  Document Type :‘Proxy Circular  Open latest Management Information Circular  Key word search: ‘Comparator Group’
    39. 39. Discounted Cash Flow Analysis
    40. 40. The Discounted Cash Flow Analysis A company is worth the present value of all of its future cash flows Can reveal how the drivers work such as margins, growth Strengths:  Extremely useful when no other pure play companies exist  Utility as a sanity check Weaknesses:  Heavily assumption based and easily manipulated  Forecasting future projections is extremely difficult
    41. 41. Present ValueWhat do we need? 1. Value of Forecasted Cash Flows Free Cash Flows for Free Cash Flows beyond forecasted period forecasted period 2. Value of Terminal Value 3. Weighted Average Cost of Capital 4. Present Value of Forecasted Cash Flows 5. Present Value of Terminal Value
    42. 42. Free Cash FlowThe cash available after laying out money related to operations andexpanding its asset base Sales • Top line of revenue, starting figure - COGS • Operational expenses - SG&A • Operational expenses = EBITDA • Earnings Before Interest, Tax, D&A - D&A • Not a use of cash = EBIT • EBIT, good proxy for cash flow
    43. 43. Free Cash Flow EBIT (1-t) • Account for the effect of tax +D&A • Not a cash item - CapEX • Deduct costs that are needed to expand asset base • Net Working Capital accounts for changes in balance - Increase in NWC sheet Free Cash Flow • What is available to us
    44. 44. Forecasting ModelMid-Year Convention Y Historical Period CAGR Projection Period 2009 2010 2011 (09 - 11) 2012 2013 2014 2015 2016 2017Sales $3,567.0 $4,827.0 $5,662.0 26.0% $5,034.4 $5,487.5 $5,926.4 $6,400.6 $6,848.6 $7,328.0 % growth NA 35.3% 17.3% (11.1%) 9.0% 8.0% 8.0% 7.0% 7.0%COGS 2,282.0 2,565.0 3,223.0 58.0% 3,428.9 3,731.5 4,030.0 4,352.4 4,657.1 4,983.0Gross Profit $1,285.0 $2,262.0 $2,439.0 37.8% $1,605.4 $1,756.0 $1,896.5 $2,048.2 $2,191.6 $2,345.0 % margin 36.0% 46.9% 43.1% 31.9% 32.0% 32.0% 32.0% 32.0% 32.0%SG&A 380.0 376.0 357.0 8.2% 412.8 450.0 486.0 524.8 561.6 600.9EBITDA $905.0 $1,886.0 $2,082.0 51.7% $1,192.6 $1,306.0 $1,410.5 $1,523.3 $1,630.0 $1,744.1 % margin 25.4% 39.1% 36.8% 23.7% 23.8% 23.8% 23.8% 23.8% 23.8%Depreciation & Amortization 587.0 664.0 772.0 14.6% 735.0 801.2 865.3 934.5 999.9 1,069.9EBIT $318.0 $1,222.0 $1,310.0 103.0% $457.6 $504.8 $545.2 $588.9 $630.1 $674.2 % margin 8.9% 25.3% 23.1% 9.1% 9.2% 9.2% 9.2% 9.2% 9.2%Taxes 56.0 132.0 434.4 162.0 178.7 193.0 208.5 223.0 238.7EBIAT $262.0 $1,090.0 $875.6 82.8% $295.6 $326.1 $352.2 $380.4 $407.0 $435.5Plus: Depreciation & Amortization 587.0 664.0 772.0 14.6% 735.0 801.2 865.3 934.5 999.9 1,069.9Less: Capital Expenditures 60.0 108.0 193.0 2.4% 595.2 (131.7) (142.2) (153.6) (164.4) (175.9)Less: Increase in Net Working Capital (33.1) (32.3) (34.9) (33.0) (35.3)Unlevered Free Cash Flow $962.5 $1,042.9 $1,126.4 $1,209.6 $1,294.2 Total $5,635.6
    45. 45. Operating Model Assumptions Analyst estimates Items as a % of historical basis of sales Items historically identical Growth of the economy
    46. 46. Terminal ValueTotal value of all cash flows beyond the operating model time period1. Exit Multiple Method  Used for most companies with a tangible exit period  Multiply terminal year EBITDA by LTM EV/EBITDA2. Gordon Growth Method  Used for largest companies that could “grow indefinitely”  Apply growth rate to terminal year cash flow in perpetuity  Terminal FCF * (1+ Growth Rate)/(Discount Rate – Growth Rate)3. Liquidation Value  Book value of company, the most conservative approach
    47. 47. Forecasting ModelMid-Year Convention Y Historical Period CAGR Projection Period 2009 2010 2011 (09 - 11) 2012 2013 2014 2015 2016 2017Sales $3,567.0 $4,827.0 $5,662.0 26.0% $5,034.4 $5,487.5 $5,926.4 $6,400.6 $6,848.6 $7,328.0 % growth NA 35.3% 17.3% (11.1%) 9.0% 8.0% 8.0% 7.0% 7.0%COGS 2,282.0 2,565.0 3,223.0 58.0% 3,428.9 3,731.5 4,030.0 4,352.4 4,657.1 4,983.0Gross Profit $1,285.0 $2,262.0 $2,439.0 37.8% $1,605.4 $1,756.0 $1,896.5 $2,048.2 $2,191.6 $2,345.0 % margin 36.0% 46.9% 43.1% 31.9% 32.0% 32.0% 32.0% 32.0% 32.0%SG&A 380.0 376.0 357.0 8.2% 412.8 450.0 486.0 524.8 561.6 600.9EBITDA $905.0 $1,886.0 $2,082.0 51.7% $1,192.6 $1,306.0 $1,410.5 $1,523.3 $1,630.0 $1,744.1 % margin 25.4% 39.1% 36.8% 23.7% 23.8% 23.8% 23.8% 23.8% 23.8%Depreciation & Amortization 587.0 664.0 772.0 14.6% 735.0 801.2 865.3 934.5 999.9 1,069.9EBIT $318.0 $1,222.0 $1,310.0 103.0% $457.6 $504.8 $545.2 $588.9 $630.1 $674.2 % margin 8.9% 25.3% 23.1% 9.1% 9.2% 9.2% 9.2% 9.2% 9.2%Taxes 56.0 132.0 434.4 162.0 178.7 193.0 208.5 223.0 238.7EBIAT $262.0 $1,090.0 $875.6 82.8% $295.6 $326.1 $352.2 $380.4 $407.0 $435.5Plus: Depreciation & Amortization 587.0 664.0 772.0 14.6% 735.0 801.2 865.3 934.5 999.9 1,069.9Less: Capital Expenditures 60.0 108.0 193.0 2.4% 595.2 (131.7) (142.2) (153.6) (164.4) (175.9)Less: Increase in Net Working Capital (33.1) (32.3) (34.9) (33.0) (35.3)Unlevered Free Cash Flow $962.5 $1,042.9 $1,126.4 $1,209.6 $1,294.2 Total $5,635.6
    48. 48. Weighted Average Cost of CapitalFirm’s cost of capital, will be discount rate usedUse market value instead of book value to reflect actual valuationWACC = % of Equity in Capital Structure * Cost of Equity+ % of Debt in Capital Structure * Cost of Debt (1 – tax)Capital Structure = Long Term Debt/Long Term Debt + Equity
    49. 49. Capital Asset Pricing Model Cost of Equity is how much return stockholders expect from company Risk Free Rate: 10 or 20 U.S Treasury Yield Beta: Google Finance Expected Market Return: 5-10%
    50. 50. Cost of Debt Cost of debt is the yield the company could raise in the public market Getting Cost of Debt:  Use a Bloomberg Terminal and look it up  Apply a % spread based on its credit rating on top of risk-free rate (Yahoo)  If no credit rating, a synthetic risk can be derived from its financial ratios (interest coverage)  Look at current yield of bonds (Morningstar)  If no debt, base it on comparables Then use (1-t) to account for the effect of tax  Usually historical basis  Can weight taxes in different regions based on income yielded
    51. 51. Discounting Those Cash Flows Discount Year 1 Discount Year 2 Discount Year 3 Discount Year 4 Discount Year 5 Discount Cash flow by 1 Cash flow by 2 Cash flow by 3 Cash flow by 4 Cash flow by 5 Terminal Value year years years years years
    52. 52. Enterprise to EquityWe have arrived at enterprise value Enterprise Value • How much to take over the entire company - Debt • Debt would make it more difficult for us to pay - Minority Interest • Our stake in another company, does not affect us - Preferred Shares • We do not own them + Cash • Would “help buy the company” = Equity Value • Also known as Market Capitalization
    53. 53. Intrinsic ValueTreasury Stock Method: count number of “in-the-money” call options todetermine the diluted shares outstandingEquity Value/Number of Shares Outstanding = Stock Price
    54. 54. Sensitivity Do a two-way table with exit multiple/perpetuity rate and your WACC (most sensitive calculations) Implied Share Price Exit Multiple 8.9x 9.4x 9.9x 10.4x 10.9x 12.0% 56.33 54.35 54.35 56.33 60.30 12.5% 57.31 55.29 55.29 57.31 61.37 WACC 13.0% 57.31 55.29 $55.29 57.31 61.37 13.5% 56.33 54.35 54.35 56.33 60.30 14.0% 54.43 52.54 52.54 54.43 58.23
    55. 55. Other Popular Valuations Precedent Transaction  Use whenever applicable Leveraged Buy-Out Model  Use in private equity or acquisition is likely Net Asset Value Model  Use for REITs, natural resources Dividend Discount Model  Use for dividend focused companies, FIG Real Options Valuation  Use for companies with multiple decisions and to impress your friends
    56. 56. The PBSN Finance Executive
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