Security Analysis PPT - Value Investing

8/20/2019 Security Analysis PPT - Value Investing

1/24

Value Investing


2/24

Sources of Value

Growth of EPS Growth of volume Growth of margin

Quality of EPS Growth – RoE

Higher margin Operating leverage Financial leverage

Volume

Growth

Price

everageOperating

everage

Financial

everage


3/24

Framewor! to "naly#e Sources of Value $ Quality

Quality of %usiness Profit pool Value &igration 'ominant mar!et share (iche Opportunities

ow competitive intensities )ompetitive a*vantages – Pro*ucer or )onsumer Favora+le *eman* supply *ynamics

Quality of &anagement

,n-uestiona+le integrity 'emonstra+le competency Growth min*set


4/24

Framewor! to "naly#e Sources of Value $ Growth

Earning Growth Volume growth Reali#ation growth Higher capacity utili#ation Higher capital utili#ation

Valuation Growth Growth in earnings Growth in multiples


5/24

Framewor! to "naly#e Sources of Value – Quality

vis$.$vis Growth


6/24

Framewor! to "naly#e Sources of Value $

ongevity

E/ten*ing )ompetitive "*vantage Perio*

'elaying &ean Reversion of Growth Rate (ew stream of organic growth 0u*icious inorganic growth


7/24

Framewor! to "naly#e Sources of Value – S 1 P

Si#e Si#e of sales Si#e of mar!et capitali#ation

Price

ower multiples


8/24

Emergence of Value

RoE 2 345


9/24

En*urance of Value

RoE 2 345


10/24

Value Investing


11/24

%ottom$up "pproach of 6nvestment7 Four "spects Financial "spects 8hat is the return on e-uity9

8hat is the company:s ;owner earnings


12/24

Financial "spects=

Focus on ROE rather than EPS EPS can grow +ecause of reinveste* earnings)alculation of ROE shoul* have certain a*>ustments

to reflect the return from the +usiness operations&ar!eta+le securities shoul* +e value* at cost

not at mar!et value E/clu*es capital gains 1 losses E/clu*e e/tra or*inary items

ROE shoul* +e attractive without *e+t7 everage

woul* increase the ris! of failure8orry of companies which is re-uiring too much

of capital


13/24

)hanging the )apital Structure7 Facts

)urrent Propose*

"ssets ?@AAA@AAA ?@AAA@AAA

'e+t A B@AAA@AAA

E-uity ?@AAA@AAA B@AAA@AAA

'CE Ratio A 3

Share Price DA DA

Shares 6ssue* BAAAAA DAAAAA

6nterest Rate 3A5 3A5


14/24

)hanging the )apital Structure7 Facts

)urrent Structure Recession (ormal E/pansion

E%6 4AAAAA 3@AAA@AAA 3@4AA@AAA

6nterest A A A

(6 4AAAAA 3@AAA@AAA 3@4AA@AAA

ROE D45 3D4A5 3?45

EPS 3D4 D4A I4

Propose* Structure Recession (ormal E/pansion

E%6 4AAAAA 3@AAA@AAA 3@4AA@AAA

6nterest BAA@AAA BAA@AAA BAA@AAA(6 3AAAAA AAAAA 3@3AA@AAA

ROE D45 345 D4A5

EPS A4A IAA 44A


15/24

Financial "spects= Owner earnings EPS is starting point for *etermining the economic value

of the +usiness not the en* (ot all earnings are create* e-ual7 "sset heavy +usiness

coul* report erratic earnings (et cash flow Jincome after ta/es plus *epreciation@

*epletion@ amorti#ation@ an* other non$cash chargesK is

not always +etter measure 6t coul* +e goo* to measure net cash flow for

companies which has large investment in the

+eginning an* smaller outlays latter on )ompanies that re-uires ongoing capital e/pen*itureL

net cash flow coul* +e miss$lea*ing )apital e/pen*iture is an e/pense li!e la+or an* capital Owner earning is *efine* as (et income M *epreciation M *epletion M amorti#ation

– amount of capital e/pen*iture an* a**itional

wor!ing capital re-uire*


16/24

Financial "spects=

Profit &arginsRevenue growth is not enough@ sales has to

convert into profit'eclining gross margin is a warning signal

(on$operating e/penses nee*s to +e controlle*he one *ollar premiseGoal is to invest in companies that generate at

least one *ollar in mar!et value from the one

*ollar retaine* earnings


17/24

,n*erstan*ing the (um+ers in Financial Statements=

Financial statements are full of assumptions an* estimates ;Soft Facts< vis$.$vis ;Har* Facts<

8hat are the assumption in the num+er9 "re there any estimates in the num+ers9

8hat is the +ias an* implications *ue to assumptions an*

estimates Profit is an estimateNNN

Gross profit7 How much is enough9 8hat is the +enchmar!9 How to +enchmar!9 8hat is the tren*9

Operative profit JE%6K is the !ey to health an* it measures he *eman* for the pro*uct an* services

he company:s efficiency in *elivering pro*uct an* services %an!ers@ ven*ers 1 investors loo! at these num+ers

(et profit an* how to fi/ it Re*uce the )OGS an* G1" e/penses 6mprove the revenue

Pricing (ew mar!ets


18/24

ypes of Ratios= Profita+ility ratio Gross margin Gross profit C Revenue

Operating margin Operating profit C Revenue (et profit margin (et profit C Revenue Return on assets (et profit C otal assets 6mplications of RO" +eing too high in comparison to

in*ustry stan*ar*s9 6s it renewing the asset for the future or not9 6s there anything more=case of EnronNNN

Return on e-uity (et profit C Sharehol*ers e-uity everage ratios

'e+t$to$e-uity ratio otal lia+ilities C Sharehol*ers e-uity 6nterest coverage ratio Operating profit C "nnual interest

charges i-ui*ity ratio )urrent ratio )urrent assets C )urrent lia+ilities

Quic! ratio )urrent assets – 6nventories C )urrent lia+ilities


19/24

ypes of Ratios=

Efficiency ratio 'ays in inventory "verage inventory C )OGS per *ay 6nventory turns IA C 'ays in inventory 'ays sales outstan*ing En*ing "CR C Revenue per *ay 'ays paya+le outstan*ing En*ing "CP C Revenue per *ay

Property@ Plant@ an* E-uipment JPPEK urnover Revenue C PPE otal "sset urnover Revenue C otal assets

8hich ratios are important for which +usiness9 he power of percentage of sales

Ratio relation ship E/ample RO" (et income C "ssets RO" (et income C Revenue T RevenueC"ssets RO" (et profit margin T "sset turnover ratio


20/24

%usiness "spects= " simple an* un*erstan*a+le +usiness 6nvest in +usiness which one un*erstan*s

Operate with in one:s circle of competency 6t is e/tremely *ifficult to pre*ict the future of a +usiness if

one *oes not un*erstan* it 6nvestment success is not a matter of how much you

!now@ +ut how realistically you *efine what you *o not

!now )onsistency 6f a company has *elivere* over a long perio* of time it

woul* *eliver in future

urnaroun* an* restructuring har*ly wor!s Favora+le long term prospects Pro*ucts or services are nee*e* or *esire* Pro*ucts or services has no su+stitutes Pro*ucts or services is not regulate*

%usiness that has survive* economic *ownturn


21/24

&anagement "spects=Rationality in *ecision ma!ing " company generating average or +elow average

return with e/cess cash canL)ontinue to invest in su+$optimal pro>ects 6t can +uy growth through ac-uisition 6t can return the money to sharehol*ers

Raising *ivi*en*s7 "ssumes that the investorscan generate +etter returns somewhere else

%uy$+ac! of shares – 'ou+le whammy for

un*er value* companies

)apital allocation *ecisionHow are the management allocating the

earnings9 6s reinveste* earnings giving return higher than

cost of capital9


22/24

&anagement "spects= )an*i* communication with the sharehol*ers Report financial results genuinely

"*mit mista!es an* *iscuss the failure openly 6s it possi+le for a professionally manage* company9

he institutional imperatives %lin* imitation of the competitor Hi*e +ehin* the failures of the competitor

E/cessive focus on short$term &anagement ethics Honest an* straight forwar* Financial reporting )orporate governance

E/ecutive compensation "ccounting of stoc! options

)an one really put a value on management9 )ompare the annual reports an* o+serve the change Footnotes communicate – ,nintelligi+le footnotes %lowing the trumpet of success an* hi*ing the failure


23/24

Value "spects=

)alculate what the +usiness is worth ,se the ''& +y using the appropriate information

%uy at a attractive price

Putting it together= he +usiness aspects is focuse* on pre*icta+ility of +usiness &anagement aspects focuse* on companies that are well run ogether the +usiness an* goo* management woul* give you

a goo* sense of future earning potential

Financial aspects woul* help you calculate the value Value woul* gui*e you ma!e the investment


24/24

http7CCwwwmotilaloswalcomCFinancial$ServicesCResearchC'etaile*$ReportC6n*ia$Strategy$

ReportC3III4C$C

http7CCwwwmotilaloswalcomCFinancial$ServicesCResearchC'etaile*$ReportCValuations$

Han*+oo!C3ID?I

http7CCwwwmotilaloswalcomCFinancial$ServicesCResearchC'etaile*$ReportC8ealth$)reation$

Stu*yC334I?

http7CCwwwmotilaloswalcomCFinancial$ServicesCResearchC'etaile*$ReportC8ealth$)reation$

Stu*yCU3

http7CCwwwmotilaloswalcomCFinancial$ServicesCResearchC'etaile*$ReportC)ompany$

,p*atesC3DAAC4ID4U

Documents

Security Analysis PPT - Value Investing