Fundamental

Analysis
Fundamental analysis is a combination of quantitative
and qualitative analysis that determines a stocks
value by focusing on a company's actual business and
its future prospects.

Fundamental
Analysis

Two Most Important Questions:

1.

What is being priced in?

2.

What is mispriced?

Stocks will make money over the long

term provided that earnings are on an
uptrend and valuations are cheap.

Fundamental
Analysis
Process of forecasting corporate earnings
(using a top down approach)
Macro-economic analysis
Industry analysis (industry lifecycle, competitive environment)
Company analysis (strategy, financial statement analysis)

Fundamental
Analysis
How to identify strong companies (The Five Ps)
People
Product
Predictability
Potential
P/E (Valuation)

Fundamental
Analysis
Benchmarking
1.

Alternatives

2.

Competitive advantage

Fundamental
Analysis
Puregold

Savemore

Rustans

Robinsons

Revenues

1000

1500

500

250

Gross Margins

15%

12%

10%

8%

Operating
Margins

10%

8%

5%

3%

Fundamental
Analysis
Inputting numbers through commonly used valuation methods
DCF or Discounted Cash Flow Method
NAV or Net Asset Value Method
Relative Valuation Method

Commonly used methods

for determining Fair Value
DCF 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

Commonly used methods

for determining Fair Value
Example: DCF Method
Required Rate or Return:

10%

Required Rate or Return:

8%

Cash Flow PV of Cash Flow

Year

Cash Flow

PV of Cash Flow

Year

500.0

500.0

500.0

500.0

600.0

545.5

600.0

545.5

700.0

578.5

700.0

578.5

800.0

601.1

800.0

601.1

900.0

614.7

900.0

614.7

1,000.0

620.9

1,000.0

620.9

6 and onward

1,100.0

6,830.1

6 and onward 1,100.0

8,382.4

10,290.8
1,000.0

Total
O/S

11,843.1
1,000.0

Total
O/S
FV per share

10.3

FV per share

11.8

Commonly used methods

for determining Fair Value
NAV or Net Asset Value
Sum of the fair value of assets
Commonly used for property companies and holding companies

Commonly used methods

for determining Fair Value
Example: NAV Method
Asset

PhpMil

Php/sh

% of Total

Valuation Method

BPI (33%)

62,630

126.25

23.4%

P/BV multiple

Globe (30%)

33,906

68.35

12.7%

DCF

Manila Water (43.3%)

20,832

41.99

7.8%

DCF

Ayala Land (53.5%)

136,714

276

51.1%

NAV based

IMI (67.7%)

10,626

21

4.0%

DCF

Total for listed subs/affil

264,708

534

99.0%

Ayala Automotive

6,844

13.80

2.6%

Book value

AG Holdings

4,856

9.79

1.8%

Book value

Minus net debt

(9,124)

(18.39)

3.4%

NAV

267,283

538.78

100.0%

Outstanding sh (Mil)

496.09

Value per shae

538.78

Fair value estimate

443.00

(15% discount to NAV)

Commonly used methods

for determining Fair Value
Relative 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

Relative Valuation
Measures
P/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

Relative Valuation
Measures
Example

Which stock looks cheap?

Which stock looks expensive?

Company B looks cheap

Company D looks expensive

Company
A
B
C
D

EPS Growth
10%
20%
15%
8%

P/E
10.0
8.0
12.0
15.0

Relative Valuation
Measures
P/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

Relative Valuation
Measures
Example
Which stock looks cheap?
Which stock looks expensive?
Company A looks cheap
Company C looks expensive

Company
A
B
C
D

ROE
10%
12%
8%
15%

P/BV
0.8
1.4
2.0
1.7

Determining Fair Value using

Relative Valuation Method
Example: 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

Valuation Measures
DIV 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 companys
earnings outlook is positive
Most high dividend yielding stocks are utility companies with slower
earnings growth

High Dividend Yielding

Stocks
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

Where to get
Information

Strategy Reports
Investment Guide

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

Strategy Reports
COLing the Shots
Monthly strategy reports
Focused on relevant issues for the month
Philippine Market Strategy
Semi-annual strategy reports
Focused on longer term relevant issues (past six months, next six to twelve
months)

How to find
the Strategy
Reports

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 COLs 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)

How to
find the
Investment
Guide

How to use
Investment Guide
Most important pieces of information
Market Cap
COL Rating / Target Price
P/E & EPS Growth
P/BV & ROE
Div Yield

Market Cap
Market 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

COL Rating / Target Price

COL 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)

Two types of stocks generally earn a BUY

rating in our Investment Guide
Earnings
Valuation
Cheap

Up
BUY (Type 1)

Down
BUY (Type 2)

Expensive

HOLD

SELL

Cheap Stocks with

growing 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)

Cheap Stocks with

growing 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

Cheap Stocks with

growing earnings
Pros:

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

Cheap Stocks with

growing earnings
Cons:
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)

Using the Invest Guide

Step 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.

Using the Invest Guide

Step 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.)

Using the Invest Guide

Step 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?

How to
find the
Company
Snapshots

How to
find the
Company
Snapshots

Example:
Company
Snapshot of
SM Prime

How to
find the
Company
Reports

Analyzing stocks that are not part of

COLs 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 companys valuation cheap or expensive relative to the market and
its peers?

Sources of Information
PSE 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 available
Newspaper Reports

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

Appendix

Definition of Financial Terms

Market 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 shares

P/E = Price/ EPS

The lower the better, although companies with higher EPS growth can justify
trading at higher P/E

Definition of Financial Terms

PEG = 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 better

Div Yield or Dividend Yield

Div Yield = Dividend per share/Price

Similar to interest on deposits, the higher the better

Definition of Financial Terms

P/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/BV

ROE or Return on Equity

ROE = Net income/Stockholders equity

The higher the better

Definition of Financial Terms

Net Profit Margin = Net income/Revenues

The higher the better

CFO or Cash Flow from Operations

CFO = Net income + Depreciation and other non cash expenses (income)
Change in working capital
Has to be positive

LTD/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 the
industry

Keeping You Ahead.