Applied Investment Management XXIII Ad i B d P t ... › assets › 4944 › fall_2006_aim_xxiii...Applied Investment Management XXIII Ad i B d P t tiAdvisory Board Presentation Discussion

Applied Investment Management XXIII Ad i B d P t tiAdvisory Board Presentation

Discussion Materials04 December 2006

AgendaAgenda• Section 1: Portfolio Investment Objectives and Guidelines

• Section 2: Economic Environment

S i 3 S i A l i• Section 3: Security Analysis

• Section 4: Portfolio Performance Evaluation

• Section 5: Other Activates

S i 6 C l i• Section 6: Conclusion

AIM XXIII Advisory Board PresentationAIM XXIII Advisory Board Presentation 2

Portfolio Investment Objectives and GuidelinesSection 1


Course OverviewPortfolio Investment Objectives and Guidelines

Course Overview

Actively engaged in hands-on portfolio management from the asset allocation decision to individual stock

l i d fi ll f li fselection and finally to portfolio performance evaluation


Legacy PortfolioPortfolio Investment Objectives and Guidelines

Legacy Portfolio• Each stock in the portfolio is assigned to an analyst in

MMay

• Each class begins with updates on newsworthyEach class begins with updates on newsworthy company items

• Reports are delivered throughout the first half of the semester

• Portfolio decisions are held at semester’s end– Exceptions made in some cases


p

Second StocksPortfolio Investment Objectives and Guidelines

Second Stocks• Analysts choose a stock that may be a good fit for the

f li di h i fportfolio according to their preference

• Analysts provide updates on newsworthy items for these companies in addition to first stock responsibilitiesresponsibilities

R t d t th d f O t b d d i• Reports are due at the end of October and during November


Portfolio DecisionsPortfolio Investment Objectives and Guidelines

Portfolio Decisions• Analysts discuss the reasonableness of each other’s

i f h l ’ iassumptions after each analyst’s presentation

• Analysts make recommendations, and the class debates the merits of each stock

• Portfolio decisions consist of an up-or-down majority tvote

hi k l b 21 t


• This process took place November 21st

Investment PhilosophyPortfolio Investment Objectives and Guidelines

Investment Philosophy• Portfolio is part of University’s endowment

– Fiduciary relationship– Prudent person rule

P i bj i• Primary objectives– Outperform S&P 500

Grow value of portfolio for future classes– Grow value of portfolio for future classes

• Long-term focus (3-5 years)• Constant monitoring of performance• Constant monitoring of performance

– Daily reports on company news


Investment PhilosophyPortfolio Investment Objectives and Guidelines

Investment Philosophy• Investment universe

– U.S. equities– Traded on major exchanges

C i ’ l t li ith th f th U i it– Companies’ values must align with those of the University

• Portfolio construction• Portfolio construction– Benchmarks

• S&P 500 (Primary)S&P 500 (Primary)• Russell 2000 and Russell 1000 (Secondary)

– Sector weighting should approximate benchmark


– No position may exceed 10% of portfolio

Additi l I f tiPortfolio Investment Objectives and Guidelines

Additional Information

W k i k W d f h• We are stock pickers• We are long-term

investors

• We do not focus on the value vs. growth decisioninvestors

• We are a long-only portfolio

• We are not day traders• We do not hold short

itip• We maintain a small

cash position

positions• We do not maintain

margin positionsmargin positions• We do not hedge• We do not trade ADRs


Market Capitalization ProfilePortfolio Investment Objectives and Guidelines

• Target guideline allocations Market Capitalization Profile

– 65% Large Cap (>$5 billion in market capitalization)– 35% Middle ($1 to $5 billion) and Small Cap (<$1 billion)

+/ 10% boundary– +/– 10% boundary– Allocations at portfolio managers’ discretion

• Rationale– Offers opportunity to achieve diversification in the pp y

portfolio while maintaining an acceptable risk level


Portfolio Investment Objectives and Guidelines

Market Capitalization ProfileAIM XXIII Portfolio as of 11/24/06

Market Capitalization ProfileAIM XXII Portfolio as of 4/24/06AIM XXI Portfolio as of 11/28/05

Mid and Small Cap

23%

Mid and Small Cap

46%

Mid and Small Cap

50%

Large Cap77%

Mid and Small Cap Stocks as of 11/24/06Cabelas

Large Cap54%

Mid and Small Cap Stocks as of 4/24/06Bluegreen

Large Cap50%

Mid and Small Cap Stocks as of 11/28/05AMCOL International Cabelas

Getty ImagesIxiaPetsmartSothebysTupperware Brands

BluegreenCiti TrendsHeadwatersIxiaInternational SpeedwayHeadwatersH Mill

AMCOL InternationalCheesecake FactoryCiti TrendsEdwards LifesciencesHeadwatersInternational SpeedwayI i Herman Miller

PetsmartQuiksilverSanderson FarmsStandard ParkingTupperware Brands

IxiaMulti Fineline ElectronicsPetsmartSanderson FarmsSpartan MotorsUnivision Communications


Tupperware BrandsWebsense

Univision CommunicationsWaters Corporation

Economic EnvironmentSection 2


E i R t O tliEconomic Environment

Economic Report Outline• Domestic economic analysis

C t l i F d l R iti i t t t– Central issue: Federal Reserve position on interest rates– Analysis of inflationary economic indicators

• Inflationary measures• Energy• Labor market

– Analysis of economic growthAnalysis of economic growth• Housing• Trade deficit/international influences

GDP• GDP

• Potential impact on portfolio


I t t R t R t T dEconomic Environment

Interest Rates: Recent Trends• Fed Funds Rate: 5.25%

I fl tiFederal Funds Rate (Target)

– Inflationary pressures• 2 years of rate hikes

– Economic growth 4%

5%

6%

g– Housing market– Energy

0%

1%

2%

3%

• Economic uncertaintyInflationary pressures not yet in Fed’s comfort zone

0%1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Fed Meetings

– Inflationary pressures not yet in Fed s comfort zone– Future decisions based on incoming economic data


Th F d’ T P i i I fl iEconomic Environment

The Fed’s Top Priority: Inflation“All members agreed that the risks to achieving the g ganticipated reduction in inflation remained of greatest

concern.”

Notes from Federal Reserve Board Committee On Open Market Operations Meetings of October 24-25, 2006.


I fl ti MEconomic Environment

Inflation Measures• Inflation driven to PCE and Core CPI

2003-Present

“uncomfortably high” levels by higher

Energy prices 5.0%

6.0%

7.0%

8.0%

ange

– Energy prices– Materials prices and

wagesSh lt t

1.0%

2.0%

3.0%

4.0%

YoY

% C

h

– Shelter costs

• Moderately offset

0.0%

Jan-03

Apr-03

Jul-03

Oct-03

Jan-04

Apr-04

Jul-04

Oct-04

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

PCE CORE CPIyrecently by falling energy prices

Source: St. Louis Fed


I fl ti L di I di tEconomic Environment

Inflation: Leading Indicators

U it L b C t i i• Unit Labor Costs rising– Wages rising– Productivity laggingng

e

• Produces inflationary

oY %

Cha

n

pressure– May be moderated by

strong corporate profits

Yo


I fl ti L b M k tEconomic Environment

Inflation: Labor Market• October unemployment: 4.4% - lowest level since May 2001

• Labor costs: Up 5.3% YoY – fastest increase in 16 yearsSource : Bureau of Labor Statistics


• Productivity: Up 1.3% YoY – slowest growth since 1997

I fl ti L b M k t O tl kEconomic Environment

Inflation: Labor Market OutlookUnemployment– Expected to average out at 4.75% through 2007

L b d i iLabor productivity– Projected 2.0% increase YoY in 2007

Increase as workforce thins– Increase as workforce thins

Labor costsLabor costs– Increase at slower rate as unemployment rises towards

natural rate


I fl ti EEconomic Environment

Inflation: EnergyOil

• Spike in spring/summer

• 20% decline since July 2006 peak

• Prices relatively flat YoY

• Eased geopoliticalfactors

• Positive weather


I fl ti E (C t’d)Economic Environment

Inflation: Energy (Cont’d)Natural Gas

• 40% decrease from August to September 2006

• 50% increase from September to October of 2006

• Temperature sensitive

• Positive weather• Positive weather


I fl ti E O tl kEconomic Environment

Natural Gas

Inflation: Energy OutlookOil

• Storage of inventories • Winter weather forecasts

• OPEC production- 1.2 million bbl/d cutback- Further cutbacks

i

• Non-OPEC countries production• Oil demand during heating season

• Estimates- Stay below $9 per million BTU- 20%-50% decrease YoY- Increases from 2006 to 2007

• Estimates- 2006: $61-$67 a barrel

- 5%-15% increase YoY- 2007: $62-$68 a barrel Increases from 2006 to 2007- 2007: $62-$68 a barrel

- Flat YoY


I fl ti O tl kEconomic Environment

Inflation Outlook• Inflationary concerns will continue to drive Fed

monetary policy going forwardmonetary policy going forward

• Inflation expected to continue trending down towards a• Inflation expected to continue trending down towards a more “comfortable” level (2%)

• Decrease driven by– Moderate energy prices– Cooling labor market– Moderate economic growth


E i G thEconomic Environment

Economic Growth• Slower economic growth may influence Fed decisions

i f dgoing forward

• Economic growth significantly influenced by– Housing market slowdown

C i– Consumption– International influences


E i G th H iEconomic Environment

Economic Growth: Housing

• Aggressive price• Aggressive price-appreciation and higher mortgage interest rates decreased the affordabilitydecreased the affordability of housing

• Lower demand and large• Lower demand and large supply has put downward pressure on home prices

– Inventory build-upSource : National Realtors Association Inventory build-up– Cut back on residential

investment

Source : National Realtors Association


E i G th H iEconomic Environment

Economic Growth: Housing

H i ’ t ib ti t• Housing’s contribution to economic growth peaked last year and is now subtracting from overall geconomic activity– Residential investment

reduced Q3 GDP growth by 1 1 ppgrowth by 1.1 pp

• Limited evidence of multiplier effects on consumer spending or aggregate employment


E i G h H i O l kEconomic Environment

Economic Growth: Housing Outlook• First stage of correction is ending

• However,– Prices: Average Selling Price (ASP) will continue to fall – Demand: Stabilizing in response to lower mortgage rates and

lower priceslower prices– Supply: Builders will reduce construction

• Residential investment will reduce 1pp from GDP growth in 2007


g

E i G th T d D fi itEconomic Environment

Economic Growth: Trade DeficitUnited States Trade Deficit (Annualized)

$2 500• Trade deficit still

$1 000

$1,500

$2,000

$2,500

Dol

lars

substantial• Trade deficit leveling

ff

$500

$0

$500

$1,000

Bill

ions

of D off

– Depreciating U.S. dollar

(539) (584) (650) (642) (643)(648)(621)-$1,000

-$500

Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006

Exports Imports Balance of Payments

– Strong performance of exports

• Deficit less of a drag gon the economySource: Federal Reserve Bank of St. Louis


E i G th GDPEconomic Environment

Economic Growth: GDP• Economy has entered the transition phase in the expansionary cycle

GDPG

4%

6%

8%

Cha

nge

0%

2%

4%

Perc

enta

ge

• Q3 GDP 2.2%, down from 2.6% in Q2 and 5.6% in Q1

0%Q4

2002Q1

2003Q2

2003Q3

2003Q4

2003Q1

2004Q2

2004Q3

2004Q4

2004Q1

2005Q2

2005Q3

2005Q4

2005Q1

2006Q2

2006Q3

2006

Source: Department of Commerce

Q , Q Q– Interest sensitive consumer sectors and the housing correction drive

decreased expenditures– On the other hand a solid job market healthy capital expenditures and


On the other hand, a solid job market, healthy capital expenditures and decline in unemployment signal strong economic fundamentals

E i G th GDP O tl kEconomic Environment

Economic Growth: GDP Outlook• Moderate economic expansion

– 2006E: 3.3% YoY– 2007E: 2.6% YoY

GDP

4%

6%

hang

e

2%

Perc

enta

ge C

h

0%Q1 2006 Q2 2006 Q3 2006 Q4 2006E Q1 2007E Q2 2007E Q3 2007E Q4 2007E

Source: Department of Commerce and Moody’s Estimates


I t t R t O tl kEconomic Environment

Interest Rates: Outlook• Will Fed raise or lower interest rates?

– Inflation out of Fed’s comfort zone– Slowing economy

• Interest rate changesF d ill ti t l t h d– Fed will continue to leave rates unchanged

– Rate cut expected early to mid 2007• High interest rates force inflation to subside• High interest rates force inflation to subside• Lower rates boost a sluggish economy


P tf li I tEconomic Environment

Portfolio Impact• Portfolio analyzed in light of economic forecast by sector

A l d h b i f f f d i bl• Analyzed on the basis of four forecasted variables– Moderate energy prices– Easing labor marketg– Housing market correction– Flat interest rates

• Impact on sector based on forecast– Positive– Neutral – Negative


P tf li I t (C t’d)Economic Environment

Portfolio Impact (Cont’d)• Sector impacts

Consumer discretionary and consumer staples– Consumer discretionary and consumer staples

SectorModerate

Energy PricesEasing Labor

MarketHousing

CorrectionFlat Interest

RatesConsumer Discretionary

Coach, Tupperware, Cabela'sHigher unemployment and slower increases in wages drag sector

Moderate Easing Labor Housing Flat Interest Sector Energy Prices Market Correction RatesConsumer Staples

SyscoStaples remain resilient


p



Healthcare and information technology– Healthcare and information technology

SectorModerate


MarketHousing


RatesHealthcare

Medtronic, Amgen, Unitedhealth Group, Gilead SciencesMost income comes from 3rd party insurers

Moderate Easing Labor Housing Flat Interest Sector Energy Prices Market Correction RatesInformation Technology

Dell, Ixia, SymantecThe sector remains highly sensitive to the labor sector for future growth


The sector remains highly sensitive to the labor sector for future growth



E d t i l– Energy and materials

SectorModerate


MarketHousing


RatesEnergy

BJ Services, Exxon, XTOModerate energy price increases will positively benefit sector to offset labor costs

Moderate Easing Labor Housing Flat Interest Sector Energy Prices Market Correction RatesMaterials

Barrick Gold


Gold acts as inflationary hedge



Financials– Financials

SectorModerate


MarketHousing


RatesFinancialsFinancials

Citigroup, Moody's, Morgan Stanley, Western Union, McGraw HillIncreased productivity benefits sector while interest rate environment hurts sector


Security AnalysisSection 3


AIM Research ProcessSecurity Analysis

• Company background analysisI d l i

AIM Research Process

• Industry analysis• Fundamental analysis

Business and financial risk measures– Business and financial risk measures– Growth and DuPont analysis

• Earnings forecasts and beta estimationEarnings forecasts and beta estimation• Final valuation

– DCF– Multiples

• Technical analysis


Citi Trends: OverviewSecurity Analysis

• Discount retailer of urban fashion apparel

Citi Trends: Overview

• Formed through reorganization of Allied Department Stores in 1999

• Refocused strategy: urban fashion market, value-pricing, and efficient store model266 i S h /Mid A l i• 266 stores in Southeast/Mid-Atlantic

• IPO May 2005• Market Capitalization: $555.62 M


Citi Trends: Revenue ForecastSecurity Analysis

Citi Trends: Revenue Forecast

Projected Stores Comparable Store SalesProjected Stores

200250300350400

ro o

f Sto

res

p

10%

15%

20%

t Inc

reas

e

050

100150

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Year

Num

ber

0%

5%

2000 2001 2002 2003 2004 2005 2006 2007

Year

Perc

ent

Stores Linear (Stores)

Year

Comp Store Sales

• Revenue growth slows from 25% to 15% in five years


Citi Trends: Continuing ValueSecurity Analysis

Citi Trends: Continuing ValueCV

NOPLAT $56,366g 7.00%ROIC 13.00%WACC 11 05%

All value in the CV

Slower growth in perpetuity

WACC 11.05%CV $642,346Discounted $342,498

Intrinsic ValueIntrinsic Value

Value of Operations $328,418Entity Value $373,793Debt Value $88,318Debt Value $88,318Equity Value $285,475Shrs. Outstanding 14,069Intrinsic Value $20.29Share Price $45.59


Share Price $45.59

Citi Trends: ValuationSecurity Analysis

Citi Trends: Valuation

F C h Fl $20 29 67% $13 59

Analysis Value Weight Contribution to Weighted Average

Free Cash Flow $20.29 67% $13.59Price to Earnings 41.52 33 13.70 Total $27.30M k P i $45 59Market Price $45.59Downside 67.0%Recommendation SELL


Western Union: OverviewSecurity Analysis

• Global leader in money transfer and consumer payments business

Western Union: Overview

business• Two primary business segments

– Consumer-to-consumer (C2C)C b i (C2B)– Consumer-to-business (C2B)

• TTM revenues of $4.4 Bn– C2C: 82%– C2B: 15%– Other 3%

• Market Cap - $16.5 Bnp $


Western Union: Overview (cont’d)Security Analysis

• Spun-off from First Data in February 2006B t di O t b 2nd

Western Union: Overview (cont’d)

– Began trading October 2nd

• Largest footprint in a fast-growing, global industry– Over 270,000 agent locations in 200 countries/territoriesg– Global migrant population expected to grow rapidly– WU well positioned in major emigration countries

• India China Mexico and Philippines• India, China, Mexico, and Philippines

• Most recognizable and trusted name• Cash cow

– Operating margins above 30%– Low reinvestment needs


Western Union: Free Cash FlowSecurity Analysis

Western Union: Free Cash Flow

(in millions) 2007 2008 2009 2010 2011 Annuity CV

FCF: 849.95$ 1,080.26$ 1,318.69$ 1,425.50$ 1,659.17$ 13,377.03$ 48,112.55$

DCF (at WACC of 11 6%): 761 62$ 867 40$ 948 81$ 936 48$ 8 686 88$ 9 277 61$DCF (at WACC of 11.6%): 761.62$ 867.40$ 948.81$ 936.48$ 8,686.88$ 9,277.61$

Sum of DCF's: 21,478.80$ plus cash: 1,327.60$

Entity Value: 22,806.40$ minus Liabilities: 3,977.60$minus Liabilities: 3,977.60$

Equity Value: 19,306.80$ Shares Outstanding: 764

Intrinsic Value: 25.27$ per share


Western Union: ValuationSecurity Analysis

Western Union: Valuation


Free Cash Flow $25.27 100% $25.27Book Value (0.75) 0% - Total $25.27$Market Price $22.57Upside 12.0%Recommendation BUYRecommendation BUY


Bluegreen Corp: Division AnalysisSecurity Analysis

• Communities division– 35% of revenues 44% profits

Bluegreen Corp: Division Analysis

– 35% of revenues, 44% profits– “Horizontal development”– 50-75 miles from cities

• Resorts division• Resorts division− 65% of revenues, 56% profits– 115,000 Vacation Club members– Global exchange network

• Market Capitalization: $421 M• Revenue (ttm): $621 M


Bluegreen Corp: Industry AnalysisSecurity Analysis

• Timeshares

Bluegreen Corp: Industry Analysis

– Impressive growth over past 10-15 years– Growth fueled by entry of well-known

companiescompanies• Marriott, Hilton, Walt Disney

– Increasing competitiong p• Evidenced by increasing SG&A as %

of sales for Bluegreen


Bl egreen Corp: Val ationSecurity Analysis

Bluegreen Corp: Valuation

Free Cash Flow $11.86 50% $5.93


ee Cas ow $ .86 50% $5.93Price to Earnings 9.18 25% 2.30 Price to Sales 12.92 10% 1.29 Price to Book 12 13 10% 1 21Price to Book 12.13 10% 1.21 Book Value 10.83 5% 0.54 Total $11.27M k t P i $13 62Market Price $13.62Downside 20.9%Recommendation SELL


Symantec: OverviewSecurity Analysis

• Computer storage and security products

Symantec: Overview

• Five business segments– Consumer products– Enterprise security– Data protection - VERITAS

Storage and server management VERITAS– Storage and server management - VERITAS– Services

• Market Cap - $20 Bn• Market Cap - $20 Bn


Symantec: Overview (Cont’d)Security Analysis

• Strengths

Symantec: Overview (Cont’d)

– Strong management– Strong product base (especially Consumer AV Software)

St h fl f b i ti– Strong cash flows from subscription revenue

• ThreatsMicrosoft’s entry into AV Market– Microsoft s entry into AV Market

– Microsoft’s new Vista OS– Commoditization of AV Software?Commoditization of AV Software?– Inability to fully integrate Veritas


Symantec: PE MultiplesSecurity Analysis

Currently Trading at:* 17x

Symantec: PE Multiples

y gPeers*

McAfee (MFE) 19xMicrosoft (MSFT) 20xSoftware Industry Average 22x

Historically 25x

20x FY07E $28 6020x FY07E $28.60

*Based on 2007 estimated earnings


Based on 2007 estimated earnings

Symantec: ValuationSecurity Analysis

Symantec: Valuation

C t ib ti t

Free Cash Flow $26.11 55% $14.36


Price to Earnings 28.60 25% 7.15 Price to Sales 24.16 10% 2.42 Price to Book 34 74 10% 3 47Price to Book 34.74 10% 3.47 Total $27.40Market Price $20.15Upside 36.0%Recommendation BUY


Armor Holdings: OverviewSecurity Analysis

• Aerospace & Defense divisionA i d f t t t US Milit

Armor Holdings: Overview

– Armoring and safety systems to US Military– Sole provider of Armored Humvees

• Products division– Brand name safety and protective products to government agencies, law

enforcement, etc.

• Mobile Security division• Mobile Security division– Armored cars for heads of state, wealthy individuals, banks & money

services, etc.

• Market Cap: $1.98 Bn


Security Analysis

Armor Holdings: Business MixArmor Holdings: Business Mix


Armor Holdings: EPS ForecastSecurity Analysis

Armor Holdings: EPS Forecast

TTM 2007 2008 2009 2010 2011TTM 2007 2008 2009 2010 2011Revenue Growth 23.0% 66.0% -10.0% -10.0% -8.0% -8.0%

Margins:Gross 21.0% 18.0% 20.0% 19.5% 19.5% 19.5%

Operating 13.2% 11.2% 13.2% 12.1% 11.7% 11.4%Net 9.3% 6.0% 7.4% 7.0% 6.9% 6.8%

• Armor relies heavily on US military action overseasDemocratic control of Congress

EPS $5.04 $5.26 $5.76 $4.84 $4.25 $3.83

– Democratic control of Congress– Expiration of Humvee Contracts

• Recent acquisition of Stewart & Stevenson


Armor Holdings: ValuationSecurity Analysis

Armor Holdings: Valuation

Analysis Value Weight Contribution to

Free Cash Flow $54.41 60% $32.65Price to Earnings 63.18 40% 25.27 Total $57 92

Analysis Value WeightWeighted Average

Total $57.92Market Price $54.34Upside 6.6%Recommendation BUY

• Decision process– Desire to invest in companies with strong earnings growth

Recommendation BUY

Desire to invest in companies with strong earnings growth– Risk of inability to secure replacement contract

• Final decision


– DO NOT BUY

Getty Images: OverviewSecurity Analysis

• World’s leading provider of imagery, film footage, and di i l i

Getty Images: Overview

digital services• Primary customers

– Advertising agencies, corporations, news companies

• 3 main lines of businessS k h h (80%)– Stock photography (80%)

– Editorial (15%)Film (5%)– Film (5%)

• Market Cap: $2.64 Bn


Getty Images: SWOTSecurity Analysis

• StrengthsM k t l d d fi t

Getty Images: SWOT

– Market leader and first mover in the industry

– Business model– Website– Product offering (quantity and

quality)quality)• Weaknesses

– Revenues tied to a cyclical yindustry

– Exposed to exchange rate fluctuations


fluctuations

Getty Images: SWOT (Cont’d)Security Analysis

• Opportunities

Getty Images: SWOT (Cont’d)

– International markets– Video advertising

N b it– New website

• ThreatsCompetition from Corbis– Competition from Corbis and Jupitermedia

– Downturn in the advertising industry

– Strengthening dollar


Getty Images: DuPont AnalysisSecurity Analysis

Getty Images: DuPont Analysis

1999 2000 2001 2002 2003 2004 2005 TTMNet Margin

-27.4 -34.9 -21.1 4.6 12.2 17.1 20.4 20.2Margin

TAT 0.26 0.44 0.45 0.45 0.43 0.43 0.44 0.49Leverage 1.28 1.62 1.67 1.54 1.46 1.36 1.34 1.36

ROE -9.1% -24.8% -15.9% 3.2% 7.7% 10.0% 12.0% 13.5%


Getty Images: ValuationSecurity Analysis

Getty Images: Valuation

Contribution to

P/E $56.71 10% $5.67P i t S l 66 79 10% 6 68


Price to Sales 66.79 10% 6.68 Price to EBIT 64.45 10% 6.45 Price to EBITDA 59.35 10% 5.94 Free Cash Flow 50.79 60% 30.47 Total $55.21Market Price $44.33Market Price $44.33Upside 19.7%Recommendation BUY


Build A Bear Workshops: OverviewSecurity Analysis

• The conceptB ild t ff d i l t il

Build-A-Bear Workshops: Overview

– Build-your-own stuffed animal retailer– Niche market player in experiential retail space

• Cash flow driversCash flow drivers– Incremental sales in new stores– Franchise fees and royalties on international locations

• Capital structure– $656 million market capitalization

N di i l l d b– No traditional long term debt– Significant operating leases


Build A Bear: Fundamental AnalysisSecurity Analysis

Build-A-Bear: Fundamental Analysis

Du Pont Components

• Leverage swing attributable to 2004

u o Co po e s

12

14

%

1.2

1.4

IPO• Drastic slowing/

l f fit6

8

10

12

age

& N

PM %

0.6

0.8

1

1.2

apita

l T/O

reversal of profit margin and turnover growth 0

2

4

Lev

era

0

0.2

0.4

Ca

2002 2003 2004 2005 TTM

Leverage NPM Capital T/O


Build A Bear: Fundamental Analysis (Cont’d)Security Analysis

Change In Same Store Sales

Build-A-Bear: Fundamental Analysis (Cont’d)

Compared to Same Quarter in Previous Year

25%

30%

15%

20%

25%

ge

0%

5%

10%

Cha

ng

-10%

-5%

1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06


Build A Bear: ValuationSecurity Analysis

Build-A-Bear: Valuation

Free Cash Flow $28 53 70% $19 97


Free Cash Flow $28.53 70% $19.97Price to Earnings 28.28 15% 4.24 Price to Book 31.11 15% 4.67 T t l $28 88Total $28.88Market Price $29.43Downside 1.9%Recommendation DO NOT BUY


Gilead Sciences: OverviewSecurity Analysis

Gilead Sciences: Overview• World-leader in HIV retroviral treatments

– Principal source of sales revenue (77%)

• Large cash reserves used to purchase royalty interests• Large cash reserves used to purchase royalty interests owned by third parties and for acquisitions

– Acquired Myogen, Inc. for $2.5 Bn (cash) in 4th quarter of 2006Acquired Myogen, Inc. for $2.5 Bn (cash) in 4th quarter of 2006 to expand into the cardiovascular disease arena

• HIV products sold at-cost in 97 developing countries


Gilead Sciences: BackgroundSecurity Analysis

• Major HIV products

Gilead Sciences: BackgroundSales Breakdown by Product

– Truvada: Fixed-dose combination of Viread and Emtriva (once-a-day)At i l St d l th

10.31%

0.37%0.07%

– Atripla: Stand-alone therapy combining Truvada and Bristol-Meyers’ Sustiva (July 2006) 43.04%

2.62%

12.20%

• Growing royalty revenue from Roche’s sales of Tamiflu

– Continued orders for pandemicContinued orders for pandemic readiness (globally)

31.38%

Viread Truvada Emtriva

AmBisome Hepsera Vistide


DaunoXome

Security Analysis

Gilead Sciences: Market AnalysisGilead Sciences: Market Analysis• High unmet need

16% d i A i– 16% covered in Asia– 13% in Eastern Europe and

Central Asia

50

Milli

on

Estimated Number of People living with HIV Globally

– 12% in the Caribbean

30

40M

0

10

20


1986 1992 1996 20060

1988 1990 1994 20021998 2000 2004

Gilead Sciences: Market (Cont’d)Security Analysis

Gilead Sciences: Market (Cont’d)

10 000

12,000Estimated Total Annual Resources Available for HIV/AIDS

(N li d)• AIDS to become the 3rd

leading cause of death

6,000

8,000

10,000

S $

milli

on

Signing of Declaration of Commitment on

HIV/AIDS

leading cause of death worldwide

I d h l d

0

2,000

4,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

U• Increased awareness has led to reforms for its prevention and treatment

2,500

3,000

3,500 Gilead Sales and Net Income

2,500

3,000

3,500• Funds and need have led to

sharp increase in sales

500

1,000

1,500

2,000

US

$ m

illion

500

1,000

1,500

2,000

US

$ m

illion

• Revenues for 2005 represented a 53% increase

AIM XXIII Advisory Board PresentationAIM XXIII Advisory Board Presentation 71-500

01996 1997 1998 1999 2000 2001 2002 2003 2004 2005 E2006

Sales Net Income

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006-500

0E

represented a 53% increase from 2004

Security Analysis

Gilead Sciences: Technical AnalysisGilead Sciences: Technical Analysis

Moving Averages (50 d(50 day vs. 200 day)

5 Year Chart5-Year Chart

Bearish


Bullish

Gilead Sciences: ValuationSecurity Analysis

Gilead Sciences: Valuation

Free Cash Flow $73.74 75.0% $55.30


Free Cash Flow $73.74 75.0% $55.30Price to Earnings 64.30 15.0% 9.64 Price to EBIT 80.52 2.5% 2.01 Price to Sales 70 11 2 5% 1 75Price to Sales 70.11 2.5% 1.75 Price to Book 79.85 5.0% 3.99 Total $72.71Market Price $67.86Upside 7.1%Recommendation BUY


Recommendation BUY

Portfolio Performance EvaluationSection 4


E al ation ApproachPortfolio Performance Evaluation

Evaluation Approach• In comparison to S&P 500 (benchmark)

S t ll ti– Sector allocations– Absolute performance– Risk

• Beta• Standard deviation

– Risk-adjusted performance• Sharpe ratio• Alpha

– Attribution analysisy

• Focus on risk-adjusted performance• Look at long-term returns


Market Capitali ation Breakdo nPortfolio Performance Evaluation

Market Capitalization Breakdown

Portfolio Portfolio

7754%65%> $5 Billi

23%46%35%< $5 Billion

Percentage (As of 11/15)

Percentage (As of 05/15)

Portfolio TargetsMarket Capitalization

%Market Cap Breakdown

100%100%100%Total

77%54%65%> $5 Billion

%05/15 Market Capitalization

BreakdownCurrent Market Capitalization

Breakdown23%

46% 54%

77%


AIM Portfolio vs BenchmarkPortfolio Performance Evaluation

AIM Portfolio vs. Benchmark(As of 11/27/06)

P/E Div Yield EPS Growth Debt/Equity

S&P 500 16.61 1.82% 19.32% 1.17

AIM Portfolio 17 58 0 90% 29 04% 1 13AIM Portfolio 17.58 0.90% 29.04% 1.13Source: Mellon


AIM P tf li P f S&P 500Portfolio Performance Evaluation

AIM Portfolio Performance vs. S&P 500(As of 10/31/06)

16%

18%

15.41%14.16%

8%

10%

12%

14%

11.22%

9.46%

13.16%14.16%

9.46%

7.77%

2%

4%

6%

8%

5.39%

Since Inception5 Year3 Year1 Year

0%

A S& 00


AIM S&P 500Source: Mellon

D ll G th AIM P tf li S&P 500Portfolio Performance Evaluation

Dollar Growth: AIM Portfolio vs. S&P 500(As of 10/31/06)

$4.00$3 8

$3.00

$3.50$3.78

$2.00

$2.50$2.22

$1.00

$1.50

1996 1998 2000 2002 2004 2006

AIM S&P 500Source: Mellon


Risk Adjusted PerformancePortfolio Performance Evaluation

Risk Adjusted Performance

Sh R ti S( ) (R R ) / StdD ( )• Sharpe Ratio: S(p) = (Rp - Rf ) / StdDev(p) – Measures our portfolio’s return over the risk-free rate per

unit of risk, as defined by its standard deviationunit of risk, as defined by its standard deviation

• Alpha: R = Rf + β x ( R - Rf ) + αAlpha: Rp Rf + β x ( Rm Rf ) + α– Measures our portfolio’s return in excess of expected returns

adjusted for our portfolio’s risk


Ri k Adj t d P f Sh R tiPortfolio Performance Evaluation

Risk-Adjusted Performance: Sharpe Ratio(As of 10/31/06)

0.43

0.52

0.5

0.6

0.43

0.28

0 18

0.340.29

0.3

0.4

0.18

0.02

0.15

0

0.1

0.2

0

1 Year 3 Years 5 Years Since Inception

AIM S&P 500


Source: Mellon

Ri k Adj t d P f Al hPortfolio Performance Evaluation

Risk-Adjusted Performance: Alpha(As of 10/31/06)

3.934.9

456

0.35

0123

-1.5-2-10

1 Year 3 Years 5 Years Since Inception

Source: Mellon


Portfolio Performance Evaluation

AIM Portfolio Return vs S&P 500(As of 10/31/06)

AIM Portfolio Return vs. S&P 500

1 Year 3 Years 5 YearsSince

InceptionC l i 84 86 93 91Correlation .84 .86 .93 .91Beta 1.30 1.28 1.14 1.21

Source: MellonSource: Mellon


P f Att ib tiPortfolio Performance Evaluation

Performance Attribution(As of 10/31/06)

2.02% 1.95%

1.5%2.0%

2.5%

0.07%

-0.18%

0.46% 0.42%

0 5%0.0%

0.5%

1.0%

Benc

hmar

k

-0.44%0.18%

-1.00%

-2.0%

-1.5%

-1.0%

-0.5%

% O

ver

B

-2.33%-3.0%

-2.5%2.0%

1 Year 3 Year 5 Year


Allocation Selection InteractionSource: Mellon

P tf li S t All tiPortfolio Performance Evaluation

Portfolio Sector Allocation(As of 11/15/06)


Source: Mellon

Portfolio vs S&P 500Portfolio Performance Evaluation

Portfolio vs. S&P 500 (As of 11/15/06)

40 40

30

35

io 20

30

15

20

25

%of

Tot

al P

orto

fi

10

% R

eturn

5

10

%

-10

0

0Financials Healthcare Utilities Discretionary Staples Energy Information

TechMaterials Telecom Industrials

-20

Portfolio Weight Target Weight Target Return Portfolio Return


Source: Mellon

I di id l St k R tPortfolio Performance Evaluation

Individual Stock Returns

Top 5 Individual Performers(As of 11/28/06)

Top 5 Individual Performers

Stock Return (TTM or *HPR)( )

Morgan Stanley (MS) 35.4%

Exxon Mobil (XOM) 27.1%( )

McDonalds Corp. (MCD) 22.0%

PetSmart Inc (PETM) 19 5%PetSmart Inc. (PETM) 19.5%

Coach Inc. (COH) 17.9%*


Source: Mellon and CapitalIQ

I di id l St k R t (C t’d)Portfolio Performance Evaluation

Individual Stock Returns (Cont’d)

B tt 5 I di id l P f

(As of 11/28/06)

Bottom 5 Individual Performers

Stock Return (TTM or *HPR)Stock Return (TTM or *HPR)

Ixia (XXIA) (29.1%)

United Health Group Inc. (UNH) (21.2%)p ( ) ( )

Dell Inc. (DELL) (11.4%)

BJ Services Co. (BJS) (10.4%)

Tupperware Brands Corp. (TUP) (5.1%)*

Source: Mellon and CapitalIQ


P tf li T tiPortfolio Performance Evaluation

Portfolio TransactionsSells Buys Increases

Standard Parking Sotheby’s PetSmartStandard Parking Sotheby s PetSmartBluegreen Cabela’sCitiTrends Getty ImagesSanderson FarmsHeadwaters

SMALL CAP HeadwatersWebsenseQuiksilverInt'l SpeedwayHerman Miller

<$5bil

Herman MillerAnnheuser-Busch Whirlpool Barrick Gold

XTO Energy UnitedHealthGilead Sci. DellM G Hill

LARGE CAP $5bil

Source: Mellon

McGraw HillSymantecWestern Union

>$5bil


Portfolio Performance Evaluation

Portfolio Performance S mmar

• Short Term

Portfolio Performance Summary

Short Term– Performance gap narrowing– Increasing beta, decreasing alphag g p

• Long Term– Outperform benchmark (S&P 500) on year-over-year returns– Outperform benchmark on risk-adjusted basis– Positive alpha


Other ActivitiesSection 5


T iOther Activities

• Chicago – Early SeptemberTrips

– William Blair & Company (Investment Bank)• Case study on Cabela’s IPO

Th E iti (R l E t t I t t Fi )– Thor Equities (Real Estate Investment Firm)• Tour of the Palmer House• Learned about real estate investment approachLearned about real estate investment approach

– Madison Dearborn Partners (Private Equity) • Emphasis on examining R&D when analyzing a p g y g

company– Alliance Capital (Asset Management Firm)


• Received insights on potential stocks

T i (C t’d)Other Activities

• New York – Mid NovemberTrips (Cont’d)

– S-Squared Technology (Hedge Fund)• Exclusively technology and life sciences

F t k t it h Gil d• Focus on stock opportunity such as Gilead – Nasdaq (Public Exchange)

• Largest U S electronic stock marketLargest U.S. electronic stock market• Discussed aggressive growth strategies

– Mason Capital Management (Hedge Fund)p g ( g )• Learned about investment strategies


T i (C t’d)Other Activities

• New York – Mid NovemberTrips (Cont’d)

– Sterling Stamos (Hedge Fund)• Investment company with a broader mandate

I i ht di f t i t t t fl t ti• Insight regarding future interest rate fluctuations– The Blackstone Group (Private Equity)

• Investment side / advisory sideInvestment side / advisory side• Stressed the importance of meeting with and assessing

management when valuing a company– Goldman Sachs (Investment Bank)

• Asset and private wealth management


S kOther Activities

• Sankaty Advisors (Hedge Fund)Di t d d bt d tibl b d fi

Speakers

– Distressed debt and convertible bond firm– Fundamental analysis

• Todd Martin (Investment Firm)Partner, Martin Capital Management– Emphasized presence of overconfidence bias– Discussed various people that can aid investment process

• Company management• Company management• Company employees• Competitors


• Suppliers

N l ttOther Activities

• ObjectivesNewsletter

– Allow AIM alumni to stay up-to-date – Provide quarterly overview of present portfolio

• Current newsletter points of interestNew stocks and new portfolio– New stocks and new portfolio

– AIM alumni updates– New York trip reviewNew York trip review– Economic snapshots– AIM XXIII analysts’ future plans


AIM W b itOther Activities

• Website addresshtt // i d d

AIM Website

– http://aim.nd.edu• E-Mail address

aim@nd edu– [email protected]• Specific areas of interest

– Analysts and alumniy– Publications– Portfolio– News


Section 6Conclusions

Special ThanksConclusions

Special Thanks

The AIM Advisory BoardThe AIM Advisory BoardIncluding those who could not make the trip


Conclusions

Special Thanks (Cont’d)• The Notre Dame Investment Office

Special Thanks (Cont’d)

• AIM Professors– Jerry Langleyy g y– Scott Malpass– Frank ReillyFrank Reilly– Ed Trubac

• Also to Rachel Karnafel for her supporting ff t


efforts

Cl i R kConclusions

Closing Remarks

Please join us for dinner at the Morris Inn!Please join us for dinner at the Morris Inn!


Documents

Applied Investment Management XXIII Ad i B d P t ... › assets › 4944 › fall_2006_aim_xxiii...Applied Investment Management XXIII Ad i B d P t tiAdvisory Board Presentation Discussion