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PERC 2007: Equity Research Overview and Discussion

PERC 2007: Equity Research Overview and Discussion. Karl C. Mergenthaler JPMorgan Chase. A Good Place to Start. On Bloomberg, Type ITW Equity DES {GO}. Financial Situation and Prospects. Trends Are metrics getting better or worse? How do metrics compare with peers?

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PERC 2007: Equity Research Overview and Discussion

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  1. PERC 2007:Equity Research Overview and Discussion Karl C. Mergenthaler JPMorgan Chase

  2. A Good Place to Start On Bloomberg, Type ITW Equity DES {GO}

  3. Financial Situation and Prospects • Trends • Are metrics getting better or worse? • How do metrics compare with peers? • Can / will metrics get better in the future? • Income Statement • Gross, Operating, and Net Margin • Balance Sheet • Leverage: Net Debt to Total Capital • What is the optimal capital structure? • ROE = (NI / Sales) X (Sales/Assets) X (Assets / Equity) • Cash Flow Statement • Free Cash Flow / Net Income • Bloomberg: ITW equity FA {go} • Historical data in tables and graphs.

  4. Industry and Competitive Analysis Potential Entrants: Barriers to Entry Industry Competitiveness: Rivalry among existing firms Buyers Suppliers Hint: Focus on growth and sustainability of sales and earnings. Substitutes

  5. Industry and Competitive Analysis • Secret to success: Do some original research! • Conduct a survey • Interview a customer • Go to a factory • Visit a store • Analyze raw material costs

  6. Valuation • Key Inputs • Growth Rate: What is driving growth in sales and earnings? • Interest Rate (WACC) • CAPM • Multi-factor Arbitrage Pricing Theory • Add equity risk premium to LT bond yield • Discounted Cash Flow Models • Free Cash Flow Models • Firm lacks stable dividend policy • Dividend policy not related to earnings • FCF is related to profitability • Controlling shareholder perspective • Dividend Discount Models • Firm has dividend history • Dividend policy is related to earnings • Minority shareholder perspective

  7. Valuation • P/E Growth • Compare to Historical and Peer Group • Meaningless if EPS < 0 • Earnings can be volatile • Accounting issues • P/B ROE • BV more stable than EPS • Accounting issues • P/S Op Mgn • Sales not as volatile as EPS • Sales less influenced by accounting choices • High Sales = High Profits • TEV / EBITDA • TEV = Market Cap + Net Debt • Bloomberg: ITW equity RV {go} • Customize with the drop downs.

  8. Recommendation • Investment Recommendation • Buy: Target Price implies at least 15% upside. • Sell: Target Price implies at least 15% downside. • My advice: Take a stand - don’t call it a HOLD. • Investment Risks • What could go wrong? • What could change projections?

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