Fundamental Analysis Valuation

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Fundamental Analysis Valuation
R?I?T Financial Management Association
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What is Fundamental Analysis?

• Discovering the fundamental value of a company
  what is a business worth?
• Analyze
• Financial Strength (ex. Financial statements)
• Past Performance
• Growth Potential
• Management
• Get the grand picture of the company

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Efficient Market Hypothesis

• In an active market that includes many
  well-informed and intelligent investors,
  securities will be appropriately priced and
  reflect all available information.
• If a market is efficient, no information or
  analysis can be expected to result in out
  performance of an appropriate benchmark.

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Efficient Market Hypothesis

• Strong Form Efficiency Share prices reflect all
  information and no one can earn excess returns.
• Semi-strong Form Efficiency Share prices adjust
  within an arbitrarily small but finite amount of
  time and in an unbiased fashion to publicly
  available new information, so that no excess
  returns can be earned by trading on that
  information.
• Weak Form Efficiency Implies that Technical
  analysis techniques will not be able to
  consistently produce excess returns, though some
  forms of fundamental analysismay still provide
  excess returns.

http//en.wikipedia.org/wiki/Efficient_market_hypo
thesis
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Behavioral Finance

• Studies how cognitive or emotional biases, which
  are individual
• or collective, create anomalies in market prices
  and returns that may
• be inexplicable via EMH alone.
• Example Stock Market Crash of 1987

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Where Do I Begin?

• What does the company do?
• How big is it?
• Company Goals
• Financial Health
• Competitive Landscape
• Economic Conditions

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What Does the Company Do?

• Who are they?
• Do they make products or sell services?
• Who are they targeting?

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How Big Is The Company?

• Micro-cap 100 million or less
• Small-cap 100 million to 500 million
• Mid-cap 500 million to 5 billion
• Large-cap 5 billion

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Financial Statements

• Income Statement
• Cash Flow Statement
• Balance Sheet

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The Income Statement

• The purpose of the income statement is to show
  managers and investors whether or not the company
  made or lost money during the period being
  reported.

What does it look like?
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The Cash flow Statement

• A cash flow statement is a financial report that
  shows incoming and outgoing money during a
  particular period.
• http//en.wikipedia.org/wiki/Cash_flow_statementO
  perating_activities

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Statement of Retained Earnings

• Shows the change in retained earnings over time
• The Statement of Retained Earnings uses
  information from the income statement, and
  provides information to the balance sheet.

Ending Retained Earnings Beginning Retained
Earnings Investments - Dividends Paid Net
Income
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The Balance Sheet
It is a snapshot of a companies current financial
position
Assets -Current Assets -Fixed Assets
Liabilities -Current Liabilities -Fixed
Liabilities
Equity
http//en.wikipedia.org/wiki/Balance_sheet
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Show Me the Numbers!
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Price to Sales

• P/S ratio can be used in comparison to other
  companies
• How much is being paid for per share of sales
• If P/S lt 1, it means investors are paying less
  for each unit of sales

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Price to Earnings

• Companies with no growth do not have a P/E ratio
• A high P/E ratio could mean higher growth in the
  future

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Price to Book

• Compares the companys share price to their book
  value
• A low P/B ratio could mean
• Stock undervalued
• Something very wrong

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Gross Profit Margin

• How much do they get to keep?
• Use in comparison to other companies to determine
  who has the highest Gross Profit Margin

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Beta

• A method of measure of risk in comparison to the
  market
• The market has a Beta equal to 1
• Beta gt 1 riskier than the market
• Beta lt 1 less riskier than the market
• Beta or close to 0 is no risk in comparison to
  the market
• Get examples

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Return on Equity (ROE)
Useful to comparing the profitability of a firm
in regards to its competitors.
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Debt Ratio
Debt Ratio gt 1 company has more debt than
assets Debt Ratio lt 1 company has more assets
than debt Used as a tool to measure risk of
companies
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Current Ratio

• Measure of ability to pay short-term liabilities
• Higher ratios means the more capable a company is
  to paying back short-term debt

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Is This Company Profitable?

• Gross Margin/Profit/Income, Net Income
• Look at companys income statement
• Look at historical gross margin
• How much does it sell and how much does the
  company get to keep?
• More income more for future business
  operations, return to investors
• Look for companies to perform better than their
  competitors!
• Citigroup Annual Income Statement

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Stock Performance

• What has the stock price done in the past year? 5
  years? All of its history?
• Does it show solid performance or very volatile
  performance?
• Google Stock Performance
• Yahoo! Stock Performance

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Management

• Is management stable?
• Recent change in management?
• Has change in management affected the stock
  price?
• HP Probe

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Competitive Landscape

• How are they performing in regards to
  competitors?
• Compare to their industry, compare to the overall
  market
• Compare
• Share price
• Profit margins
• Financial ratios
• Strategies
• Target markets

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Dividends

• Defined
• Payments made by a company to its shareholders.
• Important Dates
• Declaration Date
• Date of Record
• Ex-Dividend Date (usually before Date of Record)
• Can be cash, stock, or assets.

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Dividends

• The power of dividends.
• GE 1996 Dividend .35
• GE 2006 Dividend1.00
• Thats a 186 increase in dividends over the
  past 11years!
• Average Annual increase 16.9

• If this were to continue, a share of GE bought
  today, would yield a 4.08 dividend ten years
  from now.

_at_13 3.00 per share
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Dividends
Not always a good thing?

• Can indicate lack of growth
• Dividend may be unsustainable
• The effects of cutting a dividend

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Stock Splits

• Ordinary stock splits occur when a publicly held
  company distributes more stock to holders of
  existing stock.
• 2-for-1 is when a company simply issues one
  additional share for every one outstanding.
• The company's net assets didn't increase, only
  the number of outstanding shares.
• Companies issue splits to make the stock more
  attractive to investors whether it be an ordinary
  split or a reverse split.
• http//invest-faq.com/articles/stock-split.html

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Stock Buybacks

• Income Statement

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A Nastie Examplefor tying the importance of
financial statements together
http//finance.yahoo.com/q?ststy
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Benchmarking How do we compare?

• The most widely accepted benchmark is the
  performance of the Standard and Poors 500 Index.
  

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Benchmarking Continued

• SP 500 used to compare stock performance of a
  single firm against the 500 largest American
  publicly traded companies
• Only useful when the company in consideration is
  equivalent in size and stature to the components
  of this index.
• For example, one would not wish to compare the
  performance of a BB stock against the SPX

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ANF up 300 in past five years
Standard and Poors Fortune 500 Index up less
than 50 in past five years
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Other Methods of Benchmarking

• Financial ratios used to compare a firms
  financial performance to a competitors
• Popular ratios are Profit Margin, Return on
  Assets, Inventory Turnover, and the Quick Ratio

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Key Ratios, using the Industry as a Benchmark
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ANF and the Competitive Landscape
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Where to Invest?
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How Can I Find More Information?

• Yahoo! Finance
• MSN Money Central
• Hoovers Online through RIT
• Mergent Online through RIT
• Investext
• SP NetAdvantage through RIT
• SmartMoney.com
• Annual Reports

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