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Security Analysis

Security Analysis . The Role of the Cash Flow Statement. Balance Sheet Review . Identify Financial Risk (Leverage) Identify Value in Distressed Situations (Stocks Near or Below Net Cash) Confirm Quality of EPS Growth (EPS vs BV Growth)

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Security Analysis

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  1. Security Analysis The Role of the Cash Flow Statement

  2. Balance Sheet Review • Identify Financial Risk (Leverage) • Identify Value in Distressed Situations (Stocks Near or Below Net Cash) • Confirm Quality of EPS Growth (EPS vs BV Growth) • Identify Competitive Advantage (Asset Turnover and Cash Conversion Cycle)

  3. Cash Flow Statement • What Does It Do? • Why Do We Care?

  4. What does it Do? • Provides Info As To Differences in Timing Between Revenue and Expense Recognition Under GAAP and the Associated Cash Inflows and Outflows • Shows If and How Company Generated or Consumed Cash – and serves as the basis for estimating FCFE

  5. Why Else Do We Care? • Depicts Ability of a Company to Pay Bills • Shows Ability to Self Finance Growth • Provides Clues to Future EPS Surprises • Shows Changes in Operating Efficiency

  6. Krispy Kreme Statement of Cash Flows as Reported Sales 665,592 491,549 394,354 35% PERIOD ENDING 1-Feb-04 2-Feb-03 3-Feb-02 Net Income 57,087   33,478   26,378   70% Operating Activities, Cash Flows Provided By or Used In Depreciation 19,723   12,271   7,959   Adjustments To Net Incom 49,363   20,723   14,361   Changes In Accounts Receivable (17,629) (7,390) (13,317) 238% Changes In Liabilities (2,130) (420) 5,488   Changes In Inventories (3,804) (7,866) (3,977) 16% Changes In Other Operating Activities (7,057) 240   (682) Total Cash Flow From Operating Activities 95,553   51,036   36,210   87% Investing Activities, Cash Flows Provided By or Used In Capital Expenditures (79,649) (83,196) (37,310) Investments 21,670   358   7,877   Other Cash flows from Investing Activities (128,262) (11,736) (22,830) Total Cash Flows From Investing Activities (186,241) (94,574) (52,263) Financing Activities, Cash Flows Provided By or Used In Dividends Paid -   -   -   Sale Purchase of Stock 19,518   6,708   21,335   Net Borrowings 64,458   44,861   5,636   Other Cash Flows from Financing Activities (4,462) 2,268   3,960   Total Cash Flows From Financing Activities 79,514   53,837   30,931   Effect Of Exchange Rate Changes -   -   -   Change In Cash and Cash Equivalents ($11,174) $10,299   $14,878

  7. Krispy Kreme Cash Flow Without Financing Activities

  8. Lucent Technologies 1999 Income Statement

  9. Lucent Cash Flow Statement 1998/1999 1998 1999

  10. Cash From Operations

  11. CFO to Earnings Ratio

  12. Operating Margins

  13. Operating Asset Turnover

  14. Days Sales Outstanding

  15. Inventory Turnover

  16. Capital Expenditures to Depreciation Ratio

  17. Loan Loss Reserves

  18. Cash Flow Statement Conclusions: • Shows Ability to Pay Bills • Shows Ability to Self Finance • Shows FCF available to Shareholder • Provides Clues to Future EPS Surprise • Shows Changes in Operational Efficiency

  19. Stock Selection • Diligence Process • No One Route to the Truth • Takes Time…But It Accelerates with Experience • Two Decisions: Do I Like This Company and Do I Like this Price

  20. Investment Process • Sources of Ideas: Companies, Peers, Technical Personnel, Publications, New Low List • Examine Company Financials and Management Discussion of Results • Assess Return on Capital versus Cost of Capital

  21. Diligence Process • Look at Company Growth and Margin Prospects By Business Line • Evaluate Competitive Advantage and its Trajectory • Quick Valuation Check • Look for “Scuttlebutt” (Suppliers, Competitors, Employees, Customers)

  22. Due Diligence • Articulate Key Investment Controversies • More Extensive Valuation Analysis • Meet Management • If You Can’t Understand an Issue at any Point, Move On

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