Jan 29 2010 Sap

Stock Analyst Program 2010

Driss [email protected]

Jamie [email protected] in Investment Management, Wharton Exchange Fall 2009

January 29, 2009

Agenda

Winter 2010 Overview

Research Report Overview

Macroeconomic Analysis

Industry Analysis

Stock Valuation Methodology• DCF Valuation• Multiples Analysis

Important Ratios

How To Start…


Winter 2010 Overview

Winter 2010 Overview Meeting every Friday at 2pm (will strive for a consistent room to meet) We will start with introductory material and finish with an open discussion


Date Topic Date Topic

Jan 29 Overview, Valuation, Resources to Start Mar 5 More applied valuation

Feb 5 What is price action?Industries & Multiples Analysis

Mar 12 Applied Technical Analysis (equities, commodities, FX)

Feb 12 Stock Picking & Strategy/Money Management Mar 19 TBD

Feb 19 Cancelled: Reading Week Mar 26 TBD

Feb 29 Cancelled: Reading Week Apr 2 Final SAP Presentations

Research Report Overview

Equity Analysis Techniques

Top Down Analysis Bottom Up Analysis

• Investor starts analysis with global economics by observing economic indicators

- GDP growth, Inflation, Interest Rates, Exchange Rates, Productivity and commodity prices

• Investor narrows search down to industry analysis

- In this case sales, price levels, cyclical patterns, local/foreign competition, rates of return and earning per share

• Company analysis involves the use of valuation techniques

- DCF, Industry Comparables and precedents are used to value the company

• Investors analyze individual companies - Emphasis is on company specific or industry specific ratios- Undervalued stocks can be labelled as a strong buy regardless of general macro-trends

• Essentially putting together “story of company and its numbers”

- The story component is composed of company’s business plan, outlook and other qualitative aspects- The quantitative part involves a thorough look at company financials


Research Report Composition The key to writing a coherent SAP research report is understanding and articulating an investment time horizon

- Refer to previous reports on the MIC website: Resources > SAP References


Evaluation Criteria (1)

1. Choice of industry articulated relative to other industries that would be affected by the general economy in a similar way. For example, the drug delivery industry and the drug manufacturing industry are affected by the same external economic conditions; thus it should be clear as to why one versus the other.

2. This would include use of ratios specific to industry, dcf valuation, comps, precedents, etc... This would also include quantifiable identification of relevant catalysts and earnings growth potential specific to the company.

Research Report Evaluation

Industry Analysis 30% Presentation/Research Paper 10%Identification of key metrics and ratios /10% Organization /3.3%Identification of key trends /10% Flow /3.3%Choice and rationale for industry (1) /10% Content /3.3%

Stock Analysis 40% Technical Analysis 20%

Quality of valuation & depth of research (2) /20% Clear investment horizon /5%Investment rationale /20% Entry & exit strategies /15%

Total 100%


Macroeconomic Analysis

Macroeconomic Analysis (1)

Cyclical indicators are a useful tool for anticipating market movements as they help to predict economic activity

- Indicators are usually released monthly in the form of index numbers, quantities, or value

Cycle Significance and Composition The Indicators

• Cycles can be captured through four phases -Expansion, peak, recession, trough • These phases all vary in nature and duration

as they are met under dissimilar circumstances- Policy intervention measures and business responses may differ across the same phases

•There are several indicators that can help us detect and measure the current and subsequent cycles- Leading, lagging, coincident

1. Sourced to “Guide to Economic Indicators”, The Economist.2. Interest rates may also appear in many cases as a lagging indicator, if policy measures taken are reactionary rather than anticipatory.3. Time span (either maximum or minimum) by which the economic indicator usually reverses in trend in terms of total output.

Leading Indicators Peak/Trough Value recovery (2)

Interest rates (3)≈ 18 months

Business Confidence ≈ 8-16 monthsStock Market ≈ 8-16 monthsHousing Starts ≈ 8-16 monthsCompany Financial Surpluses ≈ 8-16 monthsConsumer Credit ≈ 6 monthsCar Sales ≈ 6 monthsManufacturing orders ≈ 6 monthsRetail Sales ≈ 2-3 months

Coincident Indicators

GDP ≈ 1-2 months

Lagging Indicators

Manufacturing capacity utilisation ≈ 1 monthJob vacancies ≈ 3 monthsEarnings growth ≈ 4 monthsProductivity & Unemployment ≈ 6 monthsInflation ≈ 6 months


Macroeconomic Analysis cont’d. An alternative approach to using economic indicators is to use them as directional devices in terms of specific industries in light of their broader macro-economic implications

Alternative Measures (1)

1. Sourced to “Guide to Economic Indicators”, the Economist.2. The producer price index may overstate cost pressures when above average discounts are offered during a recession, or understate cost pressures when inflation is

rapid.ly increasing

* *2 Gold Price Oil Prices Baltic Dry Index Producer & Wholesale prices (2)

Measures Market Price of gold Market Price of Crude OilDemand for shipping capacity versus supply of dry bulk carriers

Input prices of goods

SignificanceServes as both an input cost, and as a global store of value

Serves as both an input cost, ouput price, and measure of geo-political risk.

Provides price of shipping materials by sea, seen as both a cost to commodity producers and price for carriers

Serves as a leading indicator for future cost pressures

Measurement $ per ounce $ per barrelPrice weighted of cost across various vessels

Monthly index numbers

Sources Bloomberg, Reuters Bloomberg, Reuters Bloomberg, Baltic Exchange Bloomberg, Reuters

Macro-Economic Implications

Increasing trends may lead to contractions, lowering trends, may point towards recovery

Increasing trends may be caused by supply cuts or demand increases, whereas decreasing trends may indicate demand reduction and stable geopolitical risk

Measures indirectly global demand and supply for commodities

Shows the restraints or expansion in terms of domestic production costs

Industry Specific Implications

Rise/Fall in revenue for gold producers

Rise/Fall in revenue for oil supply chain

Indicator of cost of operating a vesselUsually released in relation to a particular business segment


Date ET Release For Consensus Prior

2-Mar 08:30 a.m. Personal Income Jan -0.30% -0.20%

2-Mar 08:30 a.m. Personal Spending Jan 0.30% -1.00%

2-Mar 08:30 a.m. Core PCE Jan 0.10% 0.00%

2-Mar 10:00 a.m. Construction Spending Jan -1.50% -1.40%

2-Mar 10:00 a.m. ISM Index Feb 34 35.6

3-Mar 10:00 a.m. Pending Home Sales Jan -3.00% 6.30%

3-Mar 02:00 p.m. Auto Sales Feb NA NA

3-Mar 02:00 p.m. Truck Sales Feb NA NA

4-Mar 08:15 a.m. ADP Employment Change Feb -613K -522K

4-Mar 10:00 a.m. ISM Services Feb 41.3 42.9

4-Mar 10:30 a.m. Crude Inventories 27-Feb NA 717K

4-Mar 02:00 p.m. Fed Beige Book NA

5-Mar 08:30 a.m. Productivity-Rev. Q4 1.60% 3.20%

5-Mar 08:30 a.m. Unit Labor Costs Q4 3.40% 1.80%

5-Mar 08:30 a.m. Initial Claims 28-Feb NA NA

5-Mar 10:00 a.m. Factory Orders Jan -2.10% -3.90%

6-Mar 08:30 a.m. Average Workweek Feb 33.3 33.3

6-Mar 08:30 a.m. Hourly Earnings Feb 0.30% 0.30%

6-Mar 08:30 a.m. Nonfarm Payrolls Feb -615K -598K

6-Mar 08:30 a.m. Unemployment Rate Feb 7.90% 7.60%

6-Mar 02:00 p.m. Consumer Credit Jan -$4.0B -6.6B

10-Mar 10:00 a.m. Wholesale Inventories Jan NA -1.40%

11-Mar 10:30 a.m. Crude Inventories 6-Mar NA NA

11-Mar 02:00 p.m. Treasury Budget Feb NA NA

12-Mar 08:30 a.m. Initial Claims 7-Mar NA NA

12-Mar 08:30 a.m. Retail Sales Feb NA 1.00%

12-Mar 08:30 a.m. Retail Sales ex-auto Feb NA 0.90%

12-Mar 10:00 a.m. Business Inventories Jan NA -1.30%

13-Mar 08:30 a.m. Export Prices ex-ag. Feb NA NA

13-Mar 08:30 a.m. Import Prices ex-oil Feb NA NA

13-Mar 08:30 a.m. Trade Balance Jan NA -$39.9B

13-Mar 10:00 a.m. Mich Sentiment-Prel Mar NA NA

16-Mar 09:15 a.m. Capacity Utilization Feb NA NA

16-Mar 09:15 a.m. Industrial Production Feb NA NA

Date ET Release For Consensus Prior

17-Mar 08:30 a.m. Building Permits Feb NA NA

17-Mar 08:30 a.m. Core PPI Feb NA NA

17-Mar 08:30 a.m. Housing Starts Feb NA NA

17-Mar 08:30 a.m. PPI Feb NA NA

18-Mar 08:30 a.m. Core CPI Feb NA NA

18-Mar 08:30 a.m. CPI Feb NA NA



19-Mar 10:00 a.m. Leading Indicators Feb NA NA

19-Mar 10:00 a.m. Philadelphia Fed Mar NA NA

23-Mar 10:00 a.m. Existing Home Sales Feb NA NA

24-Mar 08:30 a.m. Durable Orders Feb NA NA

25-Mar 10:00 a.m. New Home Sales Feb NA NA



27-Mar 08:30 a.m. Personal Income Feb NA NA

27-Mar 08:30 a.m. Personal Spending Feb NA NA

27-Mar 09:55 a.m. Mich Sentiment-Rev Mar NA NA

31-Mar 09:00 a.m. Consumer Confidence Mar NA NA

31-Mar 09:45 a.m. Chicago PMI Mar NA NA

1-Apr 10:00 a.m. Construction Spending Feb NA NA

1-Apr 10:00 a.m. ISM Index Mar NA NA

1-Apr 10:35 a.m. Crude Inventories 27-Mar NA NA

1-Apr 02:00 p.m. Auto Sales Mar NA NA

1-Apr 02:00 p.m. Truck Sales Mar NA NA

2-Apr 08:30 a.m. Initial Claims 28-Mar NA NA

2-Apr 10:00 a.m. Factory Orders Feb NA NA

3-Apr 08:30 a.m. Average Workweek Mar NA NA

3-Apr 08:30 a.m. Hourly Earnings Mar NA NA

3-Apr 08:30 a.m. Nonfarm Payrolls Mar NA NA

3-Apr 08:30 a.m. Unemployment Rate Mar NA NA

3-Apr 10:00 a.m. ISM Services Mar NA NA

1. Sourced to Wall Street Journal’s market data center.

Economic Calendar Stock Analyst Program 2010

Industry Analysis

Pick A Sector GICS: Global Industry Classification Standard (MSCI Barra)10 sectors > 24 industry groups > 68 industries > 154 sub-industries


Sector # Sector Market Allocation

10 Energy 11.03%

15 Materials 7.42%

20 Industrials 9.98%

25 Consumer Discretionary 8.56%

30 Consumer Staples 10.15%

35 Health Care 9.54%

40 Financials 21.62%

45 Information Technology 12.01%

50 Telecommunication Services 5.08%

55 Utilities 4.66%

Visit http://www.mscibarra.com/products/indices/gics/gics_structure.html

Industry Analysis

• Evaluate competitive position of industry relative to others• Nature of industry? Regulation? Importance of innovation and technological

development? Which economic forces have biggest impact?

• Identify companies within the industry that look promising• Examples: strong market position, low cost player, differentiator, innovator

• Can you understand the dynamics of your chosen industry?• Example: financials versus consumer discretionary

Important Considerations


Stock Valuation Methodology


Valuation methodologies are not mutually exclusive and more effective when used to validate one another

Valuation Methodology

* Often not available

4

Current Share Price: €16.25(1)

____________________Note:(1) Share price at end of trading session of 30 March 2009 as provided by Bloomberg(2) Based on target prices issued by brokers since December 2008(3) Multiples based on historical trading statistics. EBITDA estimates as per broker consensus(4) Transaction multiples based on comparable deals

Strong fundamentals suggest upside potential of current share price

Ferrovial share price has been battered in equity markets

High financial gearing

Market cyclicality in certain parts of company

Exposure to construction industry and global liquidity freeze

Perceived risk of default of BAA

Expectation of damaged traffic scenario in European Airports

Five Year CDS suggests only 40% probability of BAA default

Target range at low end of trading multiples and at 50% discount to SoTP Base Case

Share Price (in EURm)

Last 3 Months (1)

Last 6 Months (1)

2009E EBITDA (3)

2010E EBITDA (3)

Transaction multiples

2008E EBITDA (4)

SOTP Base Case

Concensus Analyst Estimates(2)

Trading multiples

Trading Range

€ 16

€ 100

€ 57

€ 39

€ 43

€ 40

€ 16

€ 115

€ 97

€ 61

€ 64

€ 75

€ 31

€ 20

€ 0 € 25 € 50 € 75 € 100 € 125

Target Range: - €€4343 €€5050

Valuation MethodologyStock Analyst Program 2010

Valuation Methodology

• Determine the stream of revenue being generated• Derive weighted average cost of capital (WACC) for firm or rate of return specific to asset• Risk cash flows according to WACC

• Assumes time value of money • General assumptions on terminal value are used

Discounted Cash Flow (DCF) Precedent Transactions

• Determine from past transactions similarities i.e. industry composition, level of risk, size of the transaction• Filtering through the assumptions being used for the precedent transaction allows transparency in your own valuation• The more transactions the better

• Relevant private transactions may or may not be available for use

• Develop case studies for the most relevant transactions to determine an appropriate range to use

• Put more weight on transactions with similar assumptions

• Determine the relevant industry classification • Use of industry based ratios • If specific industry does not exist, work backwards

• Relative comparisons are key; company vs. company & company vs. industry average • Gives a brief idea of where company lies and who key competitors are

• Allows us to determine best/worst of breed

Comparable Transactions


DCF- Methodology

Discounted Cash Flow Method


DCF- Methodology

• Determine unlevered FCF’s each year using assumptions driven off of revenue

• Determine TV at last year of forecast period (2015 or 2020)• 1) Growing perpetuity

• Assumes constant growth rate (2-3%) – not really used• 2) Terminal multiple

• Assumes an exit multiple of an operating metric like EBITDA or FCF, to determine a value for the enterprise at that point in time

• Bring everything back to present value at WACC, add cash, subtract debt and divide by the number of common shares outstanding to arrive at an appropriate share price as determined by your analysis



DCF- Methodology



LINK DATA

UK Risk-free rate 4.6%

UK Market Risk Premium 7.1%

SourceBloomberg 9/24/08

Shares Outstanding (in millions) 9.29

Market Capitalisation (in millions) 128.2

Beta 1.29

Corporate Tax Rate 35.0%

Interest Rate on Debt 5.2%

Base Case Long Term Growth Rate 4.0%

2007 Implied Ratios

Implied Current Asset/Revenues 29.4%

Implied Investments/ Current Assets 2.9%

Implied Inventory/Current Assets 5.4%

Implied Accounts Receivable/ Current Assets91.7%

Implied Current Liablities/Revenues 86.9%

WACC8.0% 8.5% 9.0% 9.5% 10.0% 10.5% 11.0% 11.5% 12.0%

1.00% £13.4 £12.2 £11.1 £10.2 £9.3 £8.6 £7.9 £7.3 £6.71.75% £14.4 £13.0 £11.8 £10.7 £9.8 £9.0 £8.2 7.584 6.9922.50% £15.7 £14.1 £12.6 £11.4 £10.4 £9.5 £8.6 7.927 7.2843.25% £17.4 £15.4 £13.7 £12.3 £11.1 £10.0 £9.1 8.332 7.6274.00% £19.7 £17.1 £15.1 £13.4 £11.9 £10.7 £9.7 8.818 8.0354.75% £23.1 £19.6 £16.9 £14.8 £13.1 £11.6 £10.4 9.413 8.5265.00% £24.6 £20.7 £17.7 £15.4 £13.5 £12.0 £10.7 9.641 8.7135.75% £31.2 £25.0 £20.7 £17.6 £15.2 £13.3 £11.7 10.45 9.3656.50% £44.2 £32.6 £25.6 £20.9 £17.6 £15.0 £13.1 11.49 10.197.25% £83.4 £49.3 £34.6 £26.5 £21.2 £17.6 £15.0 12.91 11.29

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Sensitivity Analysis

DCF- Methodology



Revenue

Attendance 17.40 18.97 20.67 22.53 24.56 26.77 29.18 31.81 34.67 37.79 41.19 44.90 48.94 50.90

Sponsorship 15.70 17.11 18.65 20.33 22.16 24.16 26.33 28.70 31.28 34.10 37.17 40.51 44.16 45.93

Broadcast 28.70 31.28 34.10 37.17 40.51 44.16 48.13 52.46 57.19 62.33 67.94 74.06 80.72 83.95

Merchandise 5.20 5.67 6.18 6.73 7.34 8.00 8.72 9.51 10.36 11.29 12.31 13.42 14.63 15.21

Other 7.10 7.74 8.44 9.19 10.02 10.92 11.91 12.98 14.15 15.42 16.81 18.32 19.97 20.77

Total 74.1 80.8 88.0 96.0 104.6 114.0 124.3 135.5 147.7 160.9 175.4 191.2 208.4 216.8

Operating Costs

Payroll 50.92 56.01 61.62 67.78 74.56 82.01 90.21 99.23 109.16 120.07 132.08 145.29 159.82 166.21

Stadium Operating Expenses 16.38 17.04 17.72 18.43 19.16 19.93 20.73 21.55 22.42 23.31 24.25 25.22 26.22 27.27

Other 1.80 1.87 1.95 2.02 2.11 2.19 2.28 2.37 2.46 2.56 2.66 2.77 2.88 3.00

Total 69.10 74.92 81.28 88.23 95.82 104.13 113.22 123.16 134.04 145.95 158.99 173.28 188.92 196.48

EBITDA 5.00 5.85 6.76 7.73 8.77 9.88 11.06 12.30 13.61 14.99 16.43 17.93 19.49 20.27

Depreciation 2.20 2.29 2.38 2.47 2.57 2.68 2.78 2.90 3.01 3.13 3.26 3.39 3.52 3.66

EBIT 2.80 3.56 4.38 5.26 6.20 7.21 8.27 9.41 10.60 11.86 13.17 14.55 15.97 16.61

Interest 2.26 2.46 2.69 2.93 3.19 3.48 3.79 4.13 4.50 4.91 5.35 5.83 6.36 6.61

Taxes 0.19 0.38 0.59 0.82 1.05 1.30 1.57 1.85 2.13 2.43 2.74 3.05 3.37 3.50

Net Income 0.35 0.71 1.10 1.52 1.96 2.42 2.91 3.43 3.96 4.52 5.09 5.66 6.25 6.50

DCF- Methodology



AssetsCurrent Assets: Cash and Equivalents 26.29 33.51 41.98 51.39 61.98 74.01 87.33 102.23 118.75 137.16 157.34 179.54 204.02 218.25 Investments, available for sale 0.63 2.34 2.55 2.77 3.02 3.30 3.59 3.92 4.27 4.65 5.07 5.53 6.03 6.27 Inventory - Merchandise 1.17 4.34 4.73 5.15 5.62 6.12 6.67 7.27 7.93 8.64 9.42 10.27 11.19 11.64 Accounts Receivable 19.99 74.10 80.77 88.03 95.96 104.59 114.00 124.27 135.45 147.65 160.93 175.41 191.20 198.85 Total Current Assets 21.79 23.75 25.89 28.22 30.76 33.53 36.54 39.83 43.42 47.33 51.58 56.23 61.29 63.74Property and Equipment, Net 55.78 56.92 58.11 59.35 60.64 61.98 63.37 64.82 66.32 67.89 69.51 71.21 72.97 74.80Intangible Assets, Net 49.35 49.35 49.35 49.35 49.35 49.35 49.35 49.35 49.35 49.35 49.35 49.35 49.35 49.35

Total Assets 153.21 163.53 175.33 188.31 202.74 218.86 236.60 256.23 277.84 301.73 327.79 356.32 387.63 406.140.49 0.50 0.52 0.53 0.54 0.55 0.56 0.57 0.57 0.58 0.58 0.58 0.59 0.58

Liabilities & Shareholders' EquityCurrent Liabilities: Accounts Payable 64.40 70.20 76.52 83.40 90.91 99.09 108.00 117.73 128.32 139.87 152.46 166.18 181.14 188.39Total Current Liablities 64.40 70.20 76.52 83.40 90.91 99.09 108.00 117.73 128.32 139.87 152.46 166.18 181.14 188.39Long-Term Debt and deferred interest, net of current portion43.08 46.89 51.28 55.85 60.81 66.34 72.24 78.73 85.78 93.59 101.98 111.13 121.23 126.00 Total Liabilities 107.48 117.09 127.79 139.25 151.72 165.42 180.25 196.45 214.10 233.47 254.44 277.31 302.37 314.38 Total Stockholders' (Deficit) equity 45.73 46.44 47.54 49.06 51.02 53.44 56.35 59.78 63.74 68.26 73.35 79.01 85.26 91.76

Total Liablities and stockholders' Equity 153.21 163.53 175.33 188.31 202.74 218.86 236.60 256.23 277.84 301.73 327.79 356.32 387.63 406.14

DCF- Methodology



Current Market Share Price 13.80Market value of debt 54.09Cost of Equity 13.68%Cost of Debt 5.25%Debt/Value 0.30WACC 10.63%

Free Cash FlowsProfit after tax 0.71 1.10 1.52 1.96 2.42 2.91 3.43 3.96 4.52 5.09 5.66 6.25 6.50Add back Depreciation 2.29 2.38 2.47 2.57 2.68 2.78 2.90 3.01 3.13 3.26 3.39 3.52 3.66Add back after tax interest on debt 1.60 1.75 1.90 2.07 2.26 2.46 2.68 2.93 3.19 3.48 3.79 4.13 4.30Add back increase in current liabilities 5.80 6.32 6.88 7.51 8.18 8.92 9.73 10.59 11.55 12.58 13.72 14.96 7.25Subtract decrease in current assets (1.96) (2.14) (2.33) (2.54) (2.77) (3.02) (3.29) (3.58) (3.91) (4.26) (4.64) (5.06) (2.45)Subtract increase in fixed assets (3.43) (3.57) (3.71) (3.86) (4.01) (4.18) (4.34) (4.52) (4.70) (4.88) (5.08) (5.28) (5.49)Total Annual Free Cash Flows 5.00 5.84 6.74 7.71 8.76 9.88 11.11 12.39 13.79 15.27 16.84 18.52 13.76

Free CashflowsFCF 5.00 5.84 6.74 7.71 8.76 9.88 11.11 12.39 13.79 15.27 16.84 18.52 13.76Terminal Value 215.78

Total 5.00 5.84 6.74 7.71 8.76 9.88 11.11 12.39 13.79 15.27 16.84 18.52 229.54

NPV 124.98Add Cash 26.29Value of Firm 151.27Subtract Debt (54.09)Equity Value 97.18

Value per Share £10.5

Multiples Analysis- Methodology

Multiples Analysis



PE MultiplePE ratio = Share Price/EPSRationale - How many times does the company trade at compared to its Net Profit per share

EV/EBITEV = Enterprise Value = Market Cap. + MV of debt (actuality the BV of debt)Market value of the firm less debt compared to its net income

EV/EBITDAMV of the firm less debt compares with its approximate measure of cash valueDepreciation and Amortization – non-cash items added back to EBIT

EV/BV of AssetsMV of the firm less debt compared to its asset value on the booksNow looking at an asset base value of the firm compared to the market value adjusted for debt

Multiples Analysis



Issues with multiples

- Hard to find truly comparable peer firms – subjectivity…- Dependence on accounting policies – GAAP, AASB etc…differ according to jurisdiction- Cyclicality of earnings, timing of year end- Discriminates against firms with negative equity- Hard to conduct sensitivity analysis - ranges

Multiples Analysis


Important Ratios

Important Ratios

Activity Ratios Liquidity Ratios

𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟= 𝑎𝑛𝑛𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠

𝑑𝑎𝑦𝑠 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 = 365𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟

𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟= 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

𝑑𝑎𝑦𝑠 𝑜𝑓 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑜𝑛 ℎ𝑎𝑛𝑑= 365𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟

𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟= 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠

𝑓𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟= 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑒𝑡 𝑓𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠

𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟= 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜= 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑞𝑢𝑖𝑐𝑘 𝑟𝑎𝑡𝑖𝑜= 𝐶𝑎𝑠ℎ+ 𝑚𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠+ 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝑐𝑎𝑠ℎ 𝑟𝑎𝑡𝑖𝑜= 𝑐𝑎𝑠ℎ+ 𝑚𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝑑𝑒𝑓𝑒𝑛𝑠𝑖𝑣𝑒 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙 = 𝑐𝑎𝑠ℎ+ 𝑚𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐.+𝑟𝑒𝑐.𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑑𝑎𝑖𝑙𝑦 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑠

𝑐𝑎𝑠ℎ 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑐𝑦𝑐𝑙𝑒= ሺ𝑑𝑎𝑦𝑠 𝑠𝑎𝑙𝑒𝑠 𝑜𝑢𝑡.ሻ + ሺ𝑑𝑎𝑦𝑠 𝑜𝑓 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑜𝑛 ℎ𝑎𝑛𝑑ሻ

− (# 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠)

1. Sourced to CFA institute, Financial Statement Analysis.


Important Ratios

Solvency Ratios Profitability Ratios

𝑑𝑒𝑏𝑡− 𝑡𝑜− 𝑒𝑞𝑢𝑖𝑡𝑦= 𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡𝑡𝑜𝑡𝑎𝑙 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠′𝑒𝑞𝑢𝑖𝑡𝑦

𝑑𝑒𝑏𝑡− 𝑡𝑜− 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 = 𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡+ 𝑡𝑜𝑡𝑎𝑙 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠′𝑒𝑞𝑢𝑖𝑡𝑦

𝑑𝑒𝑏𝑡 𝑡𝑜 𝑎𝑠𝑠𝑒𝑡𝑠= 𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒= 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦

𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒= 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 𝑎𝑛𝑑 𝑡𝑎𝑥𝑒𝑠𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠

𝑓𝑖𝑥𝑒𝑑 𝑐ℎ𝑎𝑟𝑔𝑒 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒= 𝐸𝐵𝐼𝑇 & 𝑙𝑒𝑎𝑠𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠+ 𝑙𝑒𝑎𝑠𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠

𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒𝑟𝑒𝑣𝑒𝑛𝑢𝑒

𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = 𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡𝑟𝑒𝑣𝑒𝑛𝑢𝑒

𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = 𝐸𝐵𝐼𝑇𝑟𝑒𝑣𝑒𝑛𝑢𝑒

𝑝𝑟𝑒𝑡𝑎𝑥 𝑚𝑎𝑟𝑔𝑖𝑛 = 𝐸𝐵𝐼𝑇𝑟𝑒𝑣𝑒𝑛𝑢𝑒

𝑅𝑂𝐴= 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑎𝑠𝑠𝑒𝑡𝑠= 𝐸𝐵𝐼𝑇𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦= 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦



Important Ratios

Performance Ratios Coverage Ratios

𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑡𝑜 𝑟𝑒𝑣𝑒𝑛𝑢𝑒= 𝐶𝐹𝑂𝑛𝑒𝑡 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 𝐶𝑎𝑠ℎ 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑎𝑠𝑠𝑒𝑡𝑠= 𝐶𝐹𝑂𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝐶𝑎𝑠ℎ 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦= 𝐶𝐹𝑂𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦

𝐶𝑎𝑠ℎ 𝑡𝑜 𝑖𝑛𝑐𝑜𝑚𝑒= 𝐶𝐹𝑂𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒 𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒= 𝐶𝐹𝑂− 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 # 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒𝑠

𝐷𝑒𝑏𝑡 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒= 𝐶𝐹𝑂𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒= 𝐶𝐹𝑂+ 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑖𝑑+ 𝑡𝑎𝑥𝑒𝑠 𝑝𝑎𝑖𝑑𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑖𝑑

𝑅𝑒𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 = 𝐶𝐹𝑂𝑐𝑎𝑠ℎ 𝑝𝑎𝑖𝑑 𝑓𝑜𝑟 𝑙𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑎𝑠𝑠𝑒𝑡𝑠 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑦𝑚𝑒𝑛𝑡= 𝐶𝐹𝑂𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑝𝑎𝑖𝑑

𝐼𝑛𝑣.& 𝑓𝑖𝑛.= 𝐶𝐹𝑂𝑐𝑎𝑠ℎ 𝑜𝑢𝑡𝑓𝑙𝑜𝑤𝑠 𝑓𝑟𝑜𝑚 𝐼𝑛𝑣 & 𝐹𝑖𝑛 𝑎𝑐𝑡𝑖𝑣.



How to Start…

How to Start…

• Macroeconomy• David Rosenberg, Chief Economist & Strategist, Gluskin Sheff

• Go to GluskinSheff.com to sign up for morning newsletters (often bearish)• SeekingAlpha.com > The Macro View (can e-mail subscribe)• Economist.com > Business and Finance

• Industry Analysis [VPN required]• http://www.mcgill.ca/library/library-findinfo/subjects/management/industry/ >

NetAdvantage > Industry Reports• Or, > Mergent Online > Industry Reports

• Bloomberg terminal: RSE <go> > Search by Industry• SeekingAlpha.com > Stocks & Sectors

• Company Analysis• Finviz.com > Screener• Google.com/finance > Screener• http://www.mcgill.ca/library/library-findinfo/subjects/management/industry/ >

ValueLine [old school, but great info in one page]• Bloomberg terminal: ‘ticker’ <go> > Fundamentals & Estimates > ANR

Important Resources


How to Start…

• DCF Starting point• Bloomberg terminal: 3) Fundamentals & Estimates > FA• Company 10-K and 10-Q filings (available at edgar.com)• Analyst reports (Thomson Investext)

• Often have DCF analysis built into reports• http://research.thomsonib.com/gaportal/login.asp [VPN necessary]

• Multiples starting point• Bloomberg terminal: 3) Fundamentals & Estimates > RV• Finviz.com > Screener

Important Resources


Other Useful Resources

b Resource WebsiteBMO InvestorlineInteractive Brokers www.interactivebrokers.ca/en/main.phpQuestrade www.questrade.com/

Discount Brokers TradeFreedom www.tradefreedom.com/en/home/E-trade www.etrade.caBMO Investorline www.bmoinvestorline.comTD -Greenline www.tdwaterhouse.ca/discountbrokerage/index.jsp

b Resource Book/PublicationFed Stats www.fedstats.govCommerce Department, US Census Bureau www.economicindicators.gov, www.bea.gov

Macro-economic Analysis Treasury www.ustreas.govFederal Reserve www.federalreserve.govWSJ Market Data http://online.wsj.com/mdc/page/marketsdata.html

b Resource Web-Site

Bloomberg Financial www.bloomberg.com The Wall Street Journal www.wsj.com

News sources The Economist www.economist.com/financeCNBC www.cnbc.comCNN www.edition.cnn.com/businessThe Motley Fool www.fool.com/Reuters Financial www.reuters.com/finance


Date Topic Date Topic

Jan 29 Overview, Valuation, Resources to Start Mar 5 More applied valuation

Feb 5 What is price action?Industries & Multiples Analysis

Mar 12 Applied Technical Analysis (equities, commodities, FX)

Feb 12 Stock Picking & Strategy/Money Management Mar 19 TBD

Feb 19 Cancelled: Reading Week Mar 26 TBD

Feb 29 Cancelled: Reading Week Apr 2 Final SAP Presentations

Research Report Composition Meeting every Friday at 2pm (will strive for a consistent room to meet)
