FUNDAMENTAL

STOCK ANALYSIS

1
 Definition

 Fundamental analysts believe

securities are priced according to
fundamental economic data.

 Technical analysts think investor behavior

and supply and demand factors play the
most important role.

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 Definition
 Fundamental analysis - a method of
measuring a security's intrinsic value by
examining related economic and
financial factors.
Fundamental analysts study anything
that can affect the security's value:
macro to micro economic factors
qualitative and quantitative factors

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 Valuation Philosophies
 Investors’ understanding of risk premiums:
Investors are almost always risk-averse.
 The time value of money:
Everyone agrees on this basic principle.
 The importance of cash flows:
Most investment research deals with
predicting future corporate earnings.
 The tax factor:
The tax code is complicated and not all
investments are taxed equally.

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 Valuation Philosophies
 Economy, Industry and Company (EIC)
analysis:
 The analyst first considers conditions in
the overall economy (market risk),
 then determines which industries are the
most attractive in light of the economic
conditions (using Porter’s competitive
strategy analysis framework, for example),
 and finally identifies the most attractive
companies within the attractive
industries.
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 Valuation Philosophies

Insert Figure 7-1 here.

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 Value vs. Growth Investing

The Value Approach to Investing

 A value investor believes that securities

should be purchased only when the
underlying fundamentals (macroeconomic
information, industry news, and a firm’s
financial statements) justify the purchase.

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 Value vs. Growth Investing

The Growth Approach to Investing

 Growth investors seek steadily growing
companies. There are two factions:
 Information traders are in a hurry; they
believe information differentials in the
marketplace can be profitably exploited.
 True growth investors are more willing to
wait, but they share the belief that good
investment managers can earn above-
average returns for their clients.

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 Intrinsic Value

 Financial analysists believe that the

stock price of does not reflect its true
value.
Fundamental analysis assists in
estimating the intrinsic value of stocks

×
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 Qualitative Factors

Intra-Factors
Intangibles of the Company
Business Model
Competitive Advantage
Management of the Company
Corporate Governance
Financial and Information Transparency
Structure of the Board of Directors

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 Qualitative Factors

Inter-Factors
Industry
Customers
Market Share
Growth of Industry
Competition
Regulations

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 Price-earnings ratio (P.E.)

Earning per share (EPS) is current income divided by the total number
of outstanding shares.

Example) Company A:
100 million pesos
Current income: 100 million pesos ＝
EPS (pesos) ＝ 100
Total no. of outstanding shares: 1 million 1 million shares pesos

The ratio which compares this EPS to share price is called the price-earnings
ratio (PER). It is an indicator which shows how many times higher the share
price is to earnings per share and a typical indicator when considering
undervalue and overvalue.

(Example) Company A:
Share price: 1,500
EPS: 100 pesos
pesos
P.E. ＝ ＝ 15 times
Share price: 1,500
pesos EPS (100 pesos)

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 Price-earnings ratio (P.E.)

The Island Corporation stock is currently

trading at P50 a share and its earnings per
share for the year is P5. Island’s P/E ratio
would be calculated like this:

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 Price-to-book value ratio (PBR)
Book value per share (BPS) is net assets* divided by the total number
of outstanding shares.
*Actually calculated using numbers derived from a detailed definition by Enforcement of the Companies Act.
(Example) Company A:
1 billion pesos
Net assets: 1 billion pesos
BPS (pesos) ＝ ＝ 1,000 pesos
Total no. of outstanding shares: 1million 1 million shares

The value which compares this number to share price is called the price-to-
book value ratio (PBR). A price-to-book value ratio under 1 means the
share price is lower than the dissolution value on the books.

(Example) Company
A: BPS: 1,000 share price: 1,500 pesos
pesos PBR ＝ ＝ 1.5 times
BPS (1,000 pesos)
Share price: 1,500 pesos

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  ABC company's assets is valued at P40,000,000
and its liabilities is at P20,000,000. The current
total outstanding stocks\shares of ABC is 500,000
.

1. Compute for the Book Value Per Share

2. Assuming that the current market price of the same
stock in the market is at 200, what is the PBR

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 PRICE TO BOOK RATIO
A P/B ratio of less than 1.0 can indicate that a stock
is undervalued, while a ratio of greater than 1.0 may
indicate that a stock is overvalued.
 Below are the reasons that undercut the reliability of
book values for any major analysis:
Book values normally ignore intangible assets’ fair
value.
Book values represent historical values. The
current fair value of the assets may be much
different from the balances in the balance sheet, as
explained above.
Future growth potential in earnings is also not
considered in the book values.
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 Return on
equity (ROE)
Earnings per share (EPS) Book value per share (BPS)
Current income divided by the total no. of outstanding Net assets* divided by the total no.
shares. of outstanding shares.
(Example) Company A: (Example) Company A:
Current income: 100 million pesos Net assets: 1 billion pesos
Total no. of outstanding shares: 1million Total no. of outstanding shares: 1million
(net assets)
( (current income)
1 billion
100 million pesos
EPS(pesos) ＝ ＝ 100 pesos BPS (pesos) ＝ pesos ＝ 1,000 pesos
(total no. of (total no. of
outstanding outstanding shares)
shares) 1 million 1 million shares
shares

The value which compares this EPS (earnings per share) and BPS (book value
per share) is called the rate of return on equity (ROE). This uses shareholders’
equity to show how much a company has increased earnings, and a high ROE
means that the company is being managed that much more efficiently.

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 Dividend yield
The dividend yield or dividend-price ratio of a share is the dividend per share, divided
by the price per share. It is also a company's total annual dividend payments divided
by its market capitalization, assuming the number of shares is constant.
Most Recent Full-Year Dividend
Current Dividend Yield (%)
= ×100
Current Share Price

(Example) CompanyA:
Annual dividends per share: 30pesos RECORD DATE – date where stockholders to be
Share price: 1,500 pesos entitled of dividends are identified and recorded.

30 pesos EX-DATE – three working days before the record

DIV = X100 date.
1,500 pesos PAYMENT DATE – date where dividends will be
finally paid to stockholders.
= 2.0%

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1. You are given the following information:
Stockholders’ equity = P1,250; price/earnings ratio =
5; shares outstanding = 25; and market/book ratio =
1.5. Calculate the market price of a share of the
company’s stock. P75

2. Given the following information, calculate the

market price per share of C1 Inc.: P4
Net income P200,000.00
Earnings per share P2.00
Stockholders’ equity P2,000,000.00
Market/Book ratio 0.20

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