Investment Analysis GroupAnalyst Workshop I

Hosted by:

Chris Lau

Sushil Bathija

Overview

� Introduction to stocks and the market

� Big picture: Analyzing a company

� Financial Statements and Ratios

� Foundations of a Valuation

IntroductionØWhat are (financial) securities?§ Debt: bonds, loans

§ Equity: stocks, shares

§ Derivatives: options, swaps, futures

ØDebt versus equity

ØWhat are stocks/shares?§ Investments/Ownership

ØWhat is the role of the stock market?

BankingNet user of funds

i.e. companies & us

Net saver of funds

i.e. mom dad & us

Personal Loans, Student Loans, Mortgages, Lines of Credit, Credit Card Loans, Collateralized Loans

Savings and Checking Accounts, Certificates of Deposits (CDs), Money Market Accounts, (Mutual Funds, Pension Funds)

Commercial Bank

Investment Bank

Stocks, Bonds, SecuritizedLoans, Treasuries

i.e. Individual & Institutional Investors

i.e. Companies, REITs, Governments

Equity, Debt

They act as the PRIMARY market for capital raising…

The stock market is a SECONDARY market

Risk & ReturnØWhy are there so many different types

of securities?§ Concept of a risk averse investor

• More risk, more return REQUIRED• The concept of beta (correlation & volatility)

§ Importance of time horizon• When is the money needed?

Required Return

Risk Free Return

+ Premium for Risk

Required Return

The Market: Easy Way Out

Ø Definition of market§ Mirror the economy

Ø Concept of an efficient market§ Information

Analyzing InvestmentsØWhat is there to know?

ØThe big picture§ Company profile, history, management

ØResearch, research, and more research§ Where to begin?

ØWhat is financial analysis?

Ingredients of AnalysisØCompany overview§ History, management

ØProducts

Ø Industry analysis

ØCompetitor analysis

ØRatio analysis

ØValuation

Company AnalysisØQualitative factors

ØQuantitative factors

ØAnalysis

ØPredictions/Projections

ØEvaluation

Fundamental Analysis

Top-down vs. Bottom-up?Recommendation

Valuation

Analysis

Research

Qualitative Factors

Quantitative Factors&

Qualitative FactorsØ News reports

Ø Press releases

Ø S&P reports

Ø Other sources

Ø Determine qualityof the business operation, future prospects, past performance

Ø Based on common sense and intuition –therefore highly subjective but very important

Quantitative FactorsØGDP

ØOverall economic indicators

ØCensus bureau

ØDepartment of commerce

ØFinancial statements

Financial StatementsØWhy are they important?

ØHow are they used?

ØWho uses them?

ØHow do we get them?

ØWhat are they like?

Importance Of F/SØ In order to make informed prudent

decisions, we need:§ Information

§ Transparency

§ Accountability

Usage Of F/SØAnalytical tool

ØManagement report card

ØEarly warning signal

ØBasis of prediction

ØMeasure of accountability

Users Of F/SØShareholders and investors

ØManagers and employees

Ø Lenders and suppliers

ØCustomers

ØGovernment and regulatory agencies

Obtaining F/SØAll listed (public) companies are

required to submit:§ Audited annual reports (10-K)

§ Unaudited quarterly reports (10-Q)

Ø Importance of the Securities and Exchange Commission (SEC)

Obtaining F/SØSources§ www.sec.gov

§ EDGAR (Electronic Data Gather & Retrieval)

§ Other web sites• www.quicken.com

• cbs.marketwatch.com• www.hoovers.com

§ Bloomberg

Structure Of F/SØBalance sheet

Ø Income statement

ØCash flow statement

Analysis Tool: RatiosØQuantitative

ØGood for comparisons (relative analysis)

ØCan combine components from different statements

ØReflect quality of management team

Warning: Garbage In, Garbage Out (GIGO)

Ratio AnalysisØCan be separated into 5 types:§ Liquidity (current, quick)

§ Asset management (inventory, asset TO)

§ Debt (debt or gearing, debt-equity)

§ Profitability (ROA, ROE, margins)

§ Market (P/E, P/B, BVPS)

ExampleØCurrent Ratio

or simply...

Current Assets

Current Liabilities

Cash + A/R + Inventories

A/P + Accruals + N/P + ST Debt

First Look At ValuationØ Importance of cash flows

Ø Idea of discounting

ØRelative valuation

Cash FlowsØWhy is it so important?

ØCash flows to investors = dividends

ØValue of any investment is the sum of the present values of all expected cash flows

ØTime value of money

Time Value Of MoneyØGiving up a dollar today means giving

up the opportunity to earn interest on the dollar

Ø FV = PV(1+i)n

§ FV = future value

§ PV = present value

§ i = interest

§ n = number of periods

Constant Growth DDMØDividend Discount Model

ØPV = FV/(1+i)n

ØV0 = D1/(1+k)n

§ V0 = Value today

§ D1 = dividend next year

Required Returns RevisitedØRequired return (k) = risk free return +

premium for risk

Ø k = return on risk free investment + (market premium) * beta

k = krf + (km - krf)*b

Next WorkshopØMore depth, more coverage, more detail

ØMore on dividend discount model

Ø Free cash flow (to equity) model

ØRelative valuation (or comparables)

Next StepsØBest way to improve:

JUST DO IT!