Agenda
Program Overview
Presentation Overview
Macroeconomic Analysis
Industry Analysis
Stock Valuation Methodology• DCF Valuation• Multiples Analysis
How To Start…
Stock Analyst Program 2011
Program Overview
Program OverviewWe will start each meeting with material and finish with an open discussionAfter all the “basics” are taught, we will have student guest speakers and then stock pitching days
Stock Analyst Program 2011
Date Topic
Nov 12 Overview, Ways to Value, Key Resources
Nov 26 Accounting 101
Jan Multiples Analysis
Jan Stock Screening Methods
Presentation 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
Stock Analyst Program 2011
Presentation Composition
The key to writing a coherent research report is understanding and articulating an investment thesis
Stock Analyst Program 2011
Or, you could build bottom up, and focus solely on in-depth company analysis
Macroeconomic Analysis
Macroeconomic Analysis
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
Stock Analyst Program 2011
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
Stock Analyst Program 2011
Industry Analysis
Pick a Sector GICS: Global Industry Classification Standard (MSCI Barra)10 sectors > 24 industry groups > 68 industries > 154 sub-industries
Stock Analyst Program 2011
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 Analyst Program 2011
Stock Valuation Methodology
Stock Analyst Program 2011
Valuation methodologies are not mutually exclusive and more effective when used to validate one another
Valuation Methodology
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 2011
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
Stock Analyst Program 2011
DCF- Methodology
Discounted Cash Flow Method
Stock Analyst Program 2011
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
Discounted Cash Flow Method
Stock Analyst Program 2011
DCF- Methodology
Discounted Cash Flow Method
Stock Analyst Program 2011
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
Multiples Analysis- Methodology
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
Stock Analyst Program 2011
Multiples Analysis- Methodology
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
Stock Analyst Program 2010
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
Stock Analyst Program 2011
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
Stock Analyst Program 2011