valuation

1. Stock Valuation –
Fundamental Analysis
Essentials of Corporate Finance
Chapters 2, 3, 5, 7
Materials Created by Glenn Snyder – San Francisco State University

2. February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University 2
Topics
 What is Fundamental Analysis?
 Who Performs Fundamental Analysis
 Fundamental Analysis Process
 Data Gathering
 Building Models
 Analysis
 Determining the Business Outlook and Value
 Buy / Sell Recommendations
 Career Advice for a Equity Research Analyst

3. February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University 3
Fundamental Analysis
 Fundamental Analysis seeks to determine a
company’s outlook based on factors related to the
company itself
 Fundamental analysis includes:
 Company Analysis
 Evaluation of the business model
 Financial Statement Analysis
 Ratio Analysis
 Cash Flow Analysis
 Management Analysis
 Economic Analysis
 Economic Forecasts and Trends
 Industry Analysis

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Who Performs Fundamental Analysis?
 Equity Research Analysts
 Produce fundamental analysis to generate
investment recommendations
 Investors
 Portfolio Managers make decisions based on the
recommendations of research analysts

5. February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University 5
Fundamental Analysis Process
 Prior to making an investment
recommendation, an Equity Analyst conducts
fundamental research on a particular
company
 This process includes
 Gathering Data
 Building Models and Analyzing Data
 Determining the Business Outlook and Value
 Developing a Recommendation

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Data Gathering
 The first step in fundamental analysis is data
gathering.
 Data sources include:
 Company specific publications
 SEC Filings (e.g. 10K (Annual Report), 8K, Proxy Statements, etc)
 Company press releases
 Company website
 Media
 Industry specific publications (e.g. Banking – American Banker)
 General Media
 Wall Street Journal
 Morningstar
 Barron’s

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Data Gathering
 Additional Data Sources include:
 Quarterly Analyst Calls
 Company Presentations
 Personal Meetings / Conference Calls
 Company officers, competitors, industry experts,
suppliers, customers, etc.
 Financial Databases
 FactSet
 Bloomberg
 Reuters

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Building Models
 Equity Research Analysts build economic, industry,
and company models that will project a company’s
stock price.
 These models include:
 Model Inputs
 Impacts of Product Releases
 Seasonality and Trends
 Growth and Profitability
 Dollar and Marginal
 Foreseen events (e.g. spin-offs, acquisitions, etc.)
 Model Outputs
 Financial Projections (including dividend projections)
 Ratio Analysis

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Building Models
 The models will reflect the economic,
industry, and company information gathered
through the various sources identified earlier
 The models will be updated periodically or
when new, significant information is released
to the public

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Analysis
 Now the Equity Analyst is ready to analyze the data
 Economic Forecast and Analysis
 PCI and Economic Growth Models
 Industry Analysis
 Trends in Investment Cycles
 Trends in Technology Advancement
 Competitiveness of the Industry
 Company Forecast and Analysis
 Financial Projections
 Peer Comparison
 Management Analysis

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Determining the Business Outlook and
Value
 The business outlook is based on factors
related to the current and expected strength
of the economy, industry, and company.
 The value of the company can be determined
by a number of valuation methods:
 Discounted Cash Flows
 Dividend Discount Model
 Asset Valuation
 Relative Valuation

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Buy / Sell Recommendations
 Based on the investment style, objectives, and
research conclusions, the Equity Research Analyst
provides an investment recommendation:
 Buy, Sell, or Hold
 Investment Style Matters
 Value Investor
 A value investor looks to invest in a security that is trading at a
discount to its fair value and looks to sell when it is trading
above that value
 Growth Investor
 A growth investor looks to invest in companies with above
average prospects for growth in the future

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Buy / Sell Recommendations
 Example:
 Research Conclusion:
 Current Stock Price: $35
 Valuation (based on DCF): $35
 Outlook: The near to mid-term outlook for the company
is excellent. It should see revenue and earnings growth
well above the economic growth, and revenue and
earnings growth should outpace the industry growth as
well
 Recommendation for a Value Manager: Sell
 Recommendation for Growth Manager: Buy

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Career Advice for a Buy Side Equity
Research Analyst
 Process and detail oriented
 Strong quantitative skills
 Economic, industry, and company modeling
 Excellent verbal and written communication skills
 Presentations and written reports (recommendations)
 Possess or willing to develop industry knowledge
 E.g. Biotechnology, Technology, Healthcare, etc.
 Graduate level education
 MBA and/or Chartered Financial Analyst Designation (CFA)
 Some large asset management firms will have an
analyst training program
 Highly Competitive