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Fundamental analysis october 2012 Presentation Transcript

  • 1. FundamentalAnalysis Fundamental analysis is a combination of quantitative and qualitative analysis that determines a stock’s value by focusing on a companys actual business and its future prospects.
  • 2. FundamentalAnalysisTwo Most Important Questions: Stocks will make money over the long1. What is being priced in? term provided that earnings are on an2. What is mispriced? uptrend and valuations are cheap.
  • 3. FundamentalAnalysisProcess of forecasting corporate earnings(using a “top down” approach)Macro-economic analysisIndustry analysis (industry lifecycle, competitive environment)Company analysis (strategy, financial statement analysis)
  • 4. FundamentalAnalysisHow to identify strong companies (The Five P’s)PeopleProductPredictabilityPotentialP/E (Valuation)
  • 5. FundamentalAnalysisBenchmarking1. Alternatives2. Competitive advantage
  • 6. FundamentalAnalysis Puregold Savemore Rustans Robinsons Revenues 1000 1500 500 250Gross Margins 15% 12% 10% 8% Operating 10% 8% 5% 3% Margins
  • 7. FundamentalAnalysisInputting numbers through commonly used valuation methodsDCF or Discounted Cash Flow MethodNAV or Net Asset Value MethodRelative Valuation Method
  • 8. Commonly used methods for determining Fair ValueDCF or Discounted Cash Flow • Present value of future free cash flows • FV = CF1/(1+r1) + CF2/(1+r2)2 + CF3/(1+r3)3 + . . . • Higher earnings will lead to higher fair value • Lower interest rates will lead to higher fair value • Can be used on all stocks
  • 9. Commonly used methods for determining Fair Value Example: DCF MethodRequired Rate or Return: 10% Required Rate or Return: 8% Year Cash Flow PV of Cash Flow Year Cash Flow PV of Cash Flow 0 500.0 500.0 0 500.0 500.0 1 600.0 545.5 1 600.0 545.5 2 700.0 578.5 2 700.0 578.5 3 800.0 601.1 3 800.0 601.1 4 900.0 614.7 4 900.0 614.7 5 1,000.0 620.9 5 1,000.0 620.96 and onward 1,100.0 6,830.1 6 and onward 1,100.0 8,382.4Total 10,290.8 Total 11,843.1O/S 1,000.0 O/S 1,000.0FV per share 10.3 FV per share 11.8
  • 10. Commonly used methods for determining Fair ValueNAV or Net Asset Value • Sum of the fair value of assets • Commonly used for property companies and holding companies
  • 11. Commonly used methodsfor determining Fair ValueExample: NAV MethodAsset PhpMil Php/sh % of Total Valuation MethodBPI (33%) 62,630 126.25 23.4% P/BV multipleGlobe (30%) 33,906 68.35 12.7% DCFManila Water (43.3%) 20,832 41.99 7.8% DCFAyala Land (53.5%) 136,714 276 51.1% NAV basedIMI (67.7%) 10,626 21 4.0% DCFTotal for listed subs/affil 264,708 534 99.0%Ayala Automotive 6,844 13.80 2.6% Book valueAG Holdings 4,856 9.79 1.8% Book valueMinus net debt (9,124) (18.39) 3.4%NAV 267,283 538.78 100.0%Outstanding sh (Mil) 496.09Value per shae 538.78Fair value estimate 443.00 (15% discount to NAV)
  • 12. Commonly used methods for determining Fair ValueRelative Valuation Method • An analyst chooses a target valuation multiple and uses that to value stock • Ex. 15X P/E, 1.5X P/BV • Target multiples are usually based on industry average, historical average, adjusted up or down based on EPS growth or ROE
  • 13. Relative Valuation MeasuresP/E & EPS Growth • P/E = Price/Earnings per share (EPS) • EPS = Net income to common/Outstanding shares • General rule: Companies with higher EPS growth deserve to trade at higher P/E
  • 14. Relative Valuation MeasuresExample• Which stock looks cheap? Company EPS Growth P/E• Which stock looks expensive? A 10% 10.0 B 20% 8.0 C 15% 12.0• Company B looks cheap D 8% 15.0• Company D looks expensive
  • 15. Relative Valuation MeasuresP/BV & ROE • P/BV = Price/Book value per share (BV) • BV = Stockholders equity/Outstanding shares • ROE or Return on equity • ROE = Net income/Stockholders equity • General rules: Banks are usually valued using ROE and P/BV; Companies that deliver higher ROE deserve to trade at higher P/BV
  • 16. Relative Valuation MeasuresExample• Which stock looks cheap? Company ROE P/BV• Which stock looks expensive? A 10% 0.8 B 12% 1.4• Company A looks cheap C 8% 2.0• Company C looks expensive D 15% 1.7
  • 17. Determining Fair Value using Relative Valuation MethodExample: Relative Valuation Method• If a company is expected to earn Php5.25 per share next year and its historical average P/E is 9X, the fair value of the stock is: • P = P/E x EPS • = 9 x 5.25 • = 47.25• If a company is expected to have a BV of Php15.00 per share next year and its historical average P/BV is 1.5X while it is expected to maintain an ROE of 12%, the fair value of the stock is: • P = P/BV x BV • = 1.5 x 15.00 • = 22.50
  • 18. Valuation MeasuresDIV Yield • Div Yield = Dividend per share/Price • Salary as an investor • Stocks with high dividend yield are usually considered attractive for conservative investors looking for income, assuming that the company’s earnings outlook is positive • Most high dividend yielding stocks are utility companies with slower earnings growth
  • 19. High Dividend YieldingStocks High Dividend Yielding Stocks* Ticker Company Div Yield MER Meralco 4.70% SCC Semirara 4.50% AEV Aboitiz Equity 3.30% GLO Globe Telecom 5.50% TEL PLDT 7.00% *Regularly check investment guide for updates
  • 20. Where to getInformation Strategy Reports Investment Guide
  • 21. Strategy Reports Discuss the factors affecting the stock market Answer the question “Should I be bullish or bearish and why? ” Provide suggestions on how investors should respond to these factors Ex. Buy aggressively; wait for pullbacks; sell Provide an opinion on which sectors and stocks would be most affected by factors affecting the market Ex. Focus on growth stocks; avoid mining stocks; list of best picks
  • 22. Strategy ReportsCOLing the Shots • Monthly strategy reports • Focused on relevant issues for the monthPhilippine Market Strategy • Semi-annual strategy reports • Focused on longer term relevant issues (past six months, next six to twelve months)
  • 23. How to findthe StrategyReports
  • 24. Investment Guide The investment guide is appropriate for investors who prefer to use a “bottom up” approach A guide that provides most of the important fundamental information needed by investors on companies that are part of COL’s coverage list Information included: • Current stock information (Price, Outstanding Shares, Market Capitalization) • Recommendation (Rating, Fair Vale Estimate) • Earnings (Revenues, Net Income, EPS, Growth) • Financial Ratios (Net Margin, ROE, LTD/E) • Valuation (P/E, P/BV, Dividend Yield, PEG)
  • 25. How tofind theInvestmentGuide
  • 26. How to useInvestment GuideMost important pieces of informationMarket CapCOL Rating / Target PriceP/E & EPS GrowthP/BV & ROEDiv Yield
  • 27. Market CapMarket Cap or Market Capitalization • Price x outstanding shares • Measure of size • Important because larger companies are usually more liquid compared to smaller companies • Liquid stocks can be easily bought or sold, size of portfolio will not be a problem • Ex. Ayala Land vs. Vista Land
  • 28. COL Rating / Target PriceCOL Rating / Target Price • Analyst recommendation on the stock, either BUY, SELL or HOLD • Determined by estimating the fair value of a company in light of its future earnings potential (evaluation of earnings growth outlook and valuation)
  • 29. Two types of stocks generally earn a “BUY”rating in our Investment Guide Earnings Valuation Up Down Cheap BUY (Type 1) BUY (Type 2) Expensive HOLD SELL
  • 30. Cheap Stocks withgrowing earnings Type 1: This type of stock usually trades at low relative P/E despite high EPS growth, or low relative P/BV despite high ROE; upside to the target price is high This is the most preferred type of stock to buy Ex. DMCI (2009), ICTSI (2005), Security Bank (2005)
  • 31. Cheap Stocks withgrowing earnings Type 2: This type of stock trades at very attractive valuations, but earnings are usually weak in the short term Ex. Semirara (SCC), Philippine market (2008) There are pros and cons in buying this type of stocks
  • 32. Cheap Stocks with growing earningsPros:• Earnings weakness usually only short term in nature • Ex. Demand drops due to cyclical reasons such as bear market, high raw material prices, negative impact of weather disturbances, temporary delays in operations• Valuations are usually very attractive (significant upside to fair value estimate)• Can be accumulated over a long period of time
  • 33. Cheap Stocks with growing earningsCons:• Prices might take a while to recover• Negative news flow might lead to further drop in share prices in the short term• Actual developments could be much worse than expected (ex. Cebu Pacific)
  • 34. Using the Invest GuideStep 1: Create a shortlist of stocks to buy• Ex. List down all the stocks that have a BUY rating and still have an upside potential of >20%Step 2: Diversify• Choose companies that belong to different sectors• Ex. One property stock, one bank, one power, etc.
  • 35. Using the Invest GuideStep 3: Determine your preferences • Growth, value or income • Growth – high EPS growth • Value – high capital appreciation potential, low P/E, low P/BV • Income - high dividend yield • Liquidity • Active traders with large portfolio – go for larger market cap stocks • Long term investors – can invest in smaller market cap stocks • Names • Major shareholders (Ayala, Aboitiz, Sy, Gokongwei, MVP, etc.) • Brands (Jollibee, SM, Meralco, etc.)
  • 36. Using the Invest GuideStep 4: Validate your preferences• Questions that you need to answer: • What does the company do? • How does it generate profits? If it has numerous lines of business, how are revenues/operating profits broken down? • Who are its major shareholders? • What is its earnings track record? • What are the drivers of future earnings growth? • Does the company have the resources to execute its growth plans? • By how much will earnings grow in the next few years? • Is there anything that I should be worried about?
  • 37. How tofind theCompanySnapshots
  • 38. How tofind theCompanySnapshots
  • 39. Example:CompanySnapshot ofSM Prime
  • 40. How tofind theCompanyReports
  • 41. Analyzing stocks that are not part of COL’s average list• Questions that you need to answer: • What does the company do? • How does it generate profits? If it has numerous lines of business, how are revenues/operating profits broken down? • Who are its major shareholders? What is their reputation? • What is its earnings track record? • What are the drivers of earnings growth? • Does the company have the resources to execute its growth plans? • By how much will earnings grow in the next few years? • Is there anything that I should be worried about? • Is the company’s valuation cheap or expensive relative to the market and its peers?
  • 42. Sources of InformationPSE Website• Focus on company disclosure, especially 17A (annual report) and 17Q (quarterly report)Company Website• Learn more about what the company does• Sometimes, the company would have press releases, presentations availableNewspaper Reports
  • 43. How to Stay Updated Continuously read COL research products Morning notes • Summary of important news that could affect the market or certain stocks updated on a daily basis • Also include new reports on stocks that we cover (updates, or analysis of the impact of new developments on profitability and valuation, change in recommendation) • New buy or sell ideas are shared Weekly Strategy reports
  • 44. Appendix
  • 45. Definition of Financial TermsMarket Cap or Market Capitalization• Market Cap = Price x Outstanding shares• Measure of size• Usually, larger companies are more liquid (easier to buy and sell)EPS or Earnings Per Share• EPS = Net income/Outstanding sharesP/E = Price/ EPS• The lower the better, although companies with higher EPS growth can justify trading at higher P/E
  • 46. Definition of Financial TermsPEG = P/E ÷ EPS Growth• Although technically flawed, it is commonly used as a short cut way to make P/E comparable to growth• The lower the betterDiv Yield or Dividend Yield• Div Yield = Dividend per share/Price• Similar to interest on deposits, the higher the better
  • 47. Definition of Financial TermsP/BV or Price to Book Value• BV = Stockholders equity/Outstanding shares• P/BV = Price/BV• Commonly used in valuing banks• The lower the better, although companies with higher ROEs can justify higher P/BVROE or Return on Equity• ROE = Net income/Stockholders equity• The higher the better
  • 48. Definition of Financial TermsNet Profit Margin = Net income/Revenues• The higher the betterCFO or Cash Flow from Operations• CFO = Net income + Depreciation and other non cash expenses (income) – Change in working capital• Has to be positiveLTD/E or Long Term Debt to Equity Ratio• LTD/E = Long term debt/Stockholders equity• The lower, the more conservative; Should be compared to other peers in theindustry
  • 49. Keeping You Ahead.