Professional Documents
Culture Documents
Northwestern University
Pitching a Stock
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– Need I articulate??
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Pitching a Stock
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Pitching a Stock
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Pitching a Stock
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Technical Analysis
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June 23
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Five steps:
1) Overview of firm and its strategies
2) Evaluate structure of industry
3) Evaluate firm’s economic position
4) Predict future course of firm
5) Valuation of firm
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Fundamental Analysis
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D) Age of firm
- Firm’s economic life cycle
[Start up, emerging growth, established
growth, maturity, decline]
E) Current operating strategy
- Growth (organic or via acquisition)
- Restructuring
- Downsizing
- Diversifying
- Steady state
F) Management (quality, strengths, experience,
reputation)
G) Corporate governance (quality, red flags)
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C) Growth profile
- Historical, current and projected rates of growth
D) Seasonal or cyclical patterns
- Sensitivity to business cycle?
E) Regulatory environment
- Established agencies
• FDA, EPA, FDIC, NRC, FAA, etc.
- SEC, Sarbanes-Oxley, the next Eliott Spitzer, etc.
F) Sensitivity to macroeconomic conditions
- Interest rates, inflation, consumer confidence
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I) Drivers of business
- What drives success in industry?
- What drives stock price/returns of firms
in industry?
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Share price
Value driver
Examples
Retail: Gross margin (sales less cost of goods sold)
Same store sales per square foot
Homebuilders: Interest rates
Demographics (e.g., household formation)
Credit availability
Consumer confidence
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Value drivers
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Operating
Margins
29%
27%
25%
17%
4% 6% 8% 10% 12%
Sales Growth
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Industry Characteristics:
- Protracted downturn (2001 – 2005 )
- Top 10 carriers’ losses (5 consecutive years):
• 2005: $ 27 billion loss on $ 97 billion revenues
• 2004: $ 10 billion loss on $ 91 billion revenues
- Heavily regulated
- Highly unionized
• Poor labor relations common
- Major cost components
• Labor ( 25 – 32 % of total costs in 2006)
• Fuel ( 26 % of total costs in 2006)
- Capital intensive
- Highly levered
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A) Financial position
- Balance sheet analysis
• Types of assets (tangible, intangible, current, long term)
• Nature of liabilities (maturity structure, off-balance-sheet)
• Capital structure (leverage)
• Components of residual equity
B) Profitability
- Income statement analysis
• Operating revenues and expenses
• Profit margins
• Nonrecurring or unusual items
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C) Cash flow
- Statement of cash flows analysis
• Cash from operations
• Cash from investing activities
• Cash from financing activities
D) Time series (firm through time)
E) Cross-section (firm relative to competitors)
F) Risks
- Economic – macroeconomic risks
- Business – risk of not earning cost of capital
- Financial – risk of not meeting financial obligations
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a) Valuation model
b) Sensitivity analysis
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E(FCFt ) E(TVT )
T
V0 = ∑ (1 + k )t
+
(1 + k )T
t =1
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E(FCFt ) E(TVT )
T
V0 = ∑ (1 + k )t
+
(1 + k )T
t =1
– Often estimated as a perpetuity, usually with growth
– Terminal values are often filled with heroic
assumptions
– Terminal value may dominate calculation of firm
value
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E(FCFT )(1 + g )
E(TVT ) =
(k − g )
– Perpetuity with growth
– g is growth rate of FCF in perpetuity
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⎛E ⎞ ⎛D ⎞
k = WACC t = k E,t ⎜⎜ t ⎟ + k D,t ⎜ t
⎟ ⎜V
⎟
⎟
⎝ Vt ⎠ ⎝ t ⎠
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⎛E ⎞ ⎛D ⎞
WACC t = k E,t ⎜⎜ t ⎟ + k D,t ⎜ t
⎟ ⎜V
⎟
⎟
⎝ Vt ⎠ ⎝ t ⎠
Where:
kEt = cost of equity capital at time t
kDt = after tax cost of debt capital at time t
Et = market value of equity at time t
Dt = market value of debt at time t
Vt = market value of the levered firm at time t = Et + Dt
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RECOMMENDATION
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Multiples Analysis
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Multiples Analysis
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Multiples Analysis
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Computations (Means):
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Stock Picking/Pitching
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Stock Picking/Pitching
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• Quick overview
• Importance of understanding the firm’s
story
• Importance of understanding the
industry and its key value drivers
• Importance of in-depth financial analysis
• No quick, back of the envelope answers
• Peter Lynch estimates that the top stock
pickers are right 60% of the time
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