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Stock Valuation – Fundamental Analysis
Essentials of Corporate FinanceChapters 2, 3, 5, 7
Materials Created by Glenn Snyder – San Francisco State University
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University 2
Topics
What is Fundamental Analysis? Who Performs Fundamental Analysis Fundamental Analysis Process
Data Gathering Building Models Analysis Determining the Business Outlook and Value Buy / Sell Recommendations
Career Advice for a Equity Research Analyst
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University 3
Fundamental Analysis
Fundamental Analysis seeks to determine a company’s outlook based on factors related to the company itself Fundamental analysis includes:
Company Analysis Evaluation of the business model Financial Statement Analysis
Ratio Analysis Cash Flow Analysis Management Analysis
Economic Analysis Economic Forecasts and Trends
Industry Analysis
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Materials Created by Glenn Snyder – San Francisco State University 4
Who Performs Fundamental Analysis? Equity Research Analysts
Produce fundamental analysis to generate investment recommendations
Investors Portfolio Managers make decisions based on the
recommendations of research analysts
February 26, 2007
Materials Created by Glenn Snyder – San Francisco State University 5
Fundamental Analysis Process Prior to making an investment
recommendation, an Equity Analyst conducts fundamental research on a particular company
This process includes Gathering Data Building Models and Analyzing Data Determining the Business Outlook and Value Developing a Recommendation
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Materials Created by Glenn Snyder – San Francisco State University 6
Data Gathering
The first step in fundamental analysis is data gathering. Data sources include:
Company specific publications SEC Filings (e.g. 10K (Annual Report), 8K, Proxy Statements, etc) Company press releases Company website
Media Industry specific publications (e.g. Banking – American Banker) General Media
Wall Street Journal Morningstar Barron’s
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Data Gathering
Additional Data Sources include: Quarterly Analyst Calls Company Presentations Personal Meetings / Conference Calls
Company officers, competitors, industry experts, suppliers, customers, etc.
Financial Databases FactSet Bloomberg Reuters
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Building Models
Equity Research Analysts build economic, industry, and company models that will project a company’s stock price. These models include:
Model Inputs Impacts of Product Releases Seasonality and Trends
Growth and Profitability Dollar and Marginal
Foreseen events (e.g. spin-offs, acquisitions, etc.) Model Outputs
Financial Projections (including dividend projections) Ratio Analysis
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Building Models
The models will reflect the economic, industry, and company information gathered through the various sources identified earlier
The models will be updated periodically or when new, significant information is released to the public
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Analysis
Now the Equity Analyst is ready to analyze the data Economic Forecast and Analysis
PCI and Economic Growth Models Industry Analysis
Trends in Investment Cycles Trends in Technology Advancement Competitiveness of the Industry
Company Forecast and Analysis Financial Projections Peer Comparison Management Analysis
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Materials Created by Glenn Snyder – San Francisco State University 11
Determining the Business Outlook and Value The business outlook is based on factors
related to the current and expected strength of the economy, industry, and company.
The value of the company can be determined by a number of valuation methods: Discounted Cash Flows Dividend Discount Model Asset Valuation Relative Valuation
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Buy / Sell Recommendations
Based on the investment style, objectives, and research conclusions, the Equity Research Analyst provides an investment recommendation: Buy, Sell, or Hold
Investment Style Matters Value Investor
A value investor looks to invest in a security that is trading at a discount to its fair value and looks to sell when it is trading above that value
Growth Investor A growth investor looks to invest in companies with above
average prospects for growth in the future
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Buy / Sell Recommendations
Example: Research Conclusion:
Current Stock Price: $35 Valuation (based on DCF): $35 Outlook: The near to mid-term outlook for the company
is excellent. It should see revenue and earnings growth well above the economic growth, and revenue and earnings growth should outpace the industry growth as well
Recommendation for a Value Manager: Sell Recommendation for Growth Manager: Buy
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Career Advice for a Buy Side Equity Research Analyst Process and detail oriented Strong quantitative skills
Economic, industry, and company modeling Excellent verbal and written communication skills
Presentations and written reports (recommendations) Possess or willing to develop industry knowledge
E.g. Biotechnology, Technology, Healthcare, etc. Graduate level education
MBA and/or Chartered Financial Analyst Designation (CFA) Some large asset management firms will have an
analyst training program Highly Competitive
