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Presentation Procedure

Presentation Procedure. By: Phil Garrett. Overview. Choosing a Company Evaluating a Company Presenting a Company Typical Mistakes. Choosing a Company. The Student Investment Association is a value fund Your pitch should be focused around why this company is undervalued

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Presentation Procedure

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Presentation Transcript

  1. Presentation Procedure By: Phil Garrett

  2. Overview • Choosing a Company • Evaluating a Company • Presenting a Company • Typical Mistakes

  3. Choosing a Company • The Student Investment Association is a value fund • Your pitch should be focused around why this company is undervalued • Look for companies that are trading with a low price/book ratio (P/B) and a low price/earnings ratio (P/E) relative to their peers • Choose a small- to mid-cap company • Market Capitalizations from $500 MM - $5 B • Less analyst coverage • The size effect

  4. Choosing a Company • Benjamin Graham • Investing with a Margin of Safety • Invest in a company whose stock price is trading at a significant discount to its intrinsic value • Look for unpopular or out-of-favor companies • Mr. Market • AAPL 52 wk range: $196.89 - $364.90 Shares Outstanding: 921.28 MM • $154.8 B • A low P/E and P/B ratio does not ALWAYS mean the company is undervalued • Look for companies that have a high Return on Invested Capital

  5. Evaluating a Company • Read through a company’s financial statements (10-K,10-Q) and transcript from the earnings call • Analyze the company’s industry • Porter’s 5 Forces • Competition: who are their competitor, how competitive is the industry • New Entrants: what are the barriers to entry, is it easy to enter the industry • Substitutes: What are the substitutes, is it for consumers to substitute their product • Power of Suppliers: Who are their suppliers, can they control the pricing • Power of Buyers: Who are their buyers, can they control the pricing • What are other factors that affect the industry • Government regulation • Commodity prices • Seasonality

  6. Evaluating a Company • Assess the company’s strategy • What is their competitive advantage • Low cost leaders, differentiation • What is their plan for the future • Is the company sustainable, why • What risk and success factors they must manage • Analyze the company’s profitability and risk • Use financial ratios and compare them over time and against competitors and the industry • Use any industry specific measures • Same store sales, FFO, EBITDAR

  7. Evaluating a Company • Analyzing a company’s profitability and risk cont’d • Has the company’s margins increase, decreased or maintain • What is the company’s ROA and ROE • Is the ROE greater than the cost of equity • What does their short-term liquidity look like • Current/quick ratios, Days in Inventory, Days A/R outstanding, Days A/P outstanding • What does their long-term liquidity look like • Debt to Equity ratio, Interest Coverage ratio • Compare these factors for the company over the past several year and currently against its competitors

  8. Evaluating a Company • Forecasting future performance • The information gather in prior steps • Management guidance • Use analyst reports to get ideas about how others think about the company. • Don’t use them as your own work • Valuation • SIA provides a sample Discounted Cash Flow model on the website • Use that to input historical data and your forecasted projections to value the company • Take a step back and think “does this make sense?”

  9. Discounted Cash Flow • The value of any resource is the present value (PV) of the future payouts discounted at a rate reflective of the risk of the payouts • Then to value the company, we project the future free cash flows to equity and discount them to present value. • It’s hard to project the free cash flows reliably after 5 years • Use the terminal value method to capture the present value of the free cash flows into perpetuity • Use the cost of equity as the discount rate because we are looking at the FCF to equity • The cost of equity is calculated using CAPM

  10. Discounted Cash Flow • We project firm growth through revenue and the rest of the components in the DCF model are percentages of revenue. • The terminal value is a large part of the company’s value – be conservative with estimate • The long-term growth rate shouldn’t grow faster than GDP • When using CAPM it is better to use historical averages rather current values. • Historical average risk-free rate: 6% • Historical average market risk premium: 5.6% • Be able to logically back each of your projections

  11. Presenting a Company • Build your presentation around selling the 3 main reason, your investment thesis, we should invest in this company • Try to boil down the information to relevant facts surrounding your company • Present both the 3 main reason and 3 biggest risks to the company • Try to anticipate possible questions surround your investment and risks reasons and cover them in the presentation

  12. Presenting a Company • Investment overview (1 slide) • Have your recommendation and 3 main reasons to invest • Company overview • Briefly cover how this company makes money • Industry overview • Cover key industry information relevant to your investment thesis • What is the issue surrounding the company • Why is the company trading at these low multiples • Why is the company undervalued • Why is the market wrong

  13. Presenting a Company • What is going to make you investment thesis come true • Why should we invest in this company • What are risks to your investment thesis • Why might the company no be undervalued • Your valuation • Briefly walk us through your projections and your thought process behind choosing these projections

  14. Typical Mistakes • Presenting an overview of the company instead of focusing on the relevant facts regarding why we should invest • Knowing who a company’s management is and what is the revenue break down is important, but shouldn’t be presented unless it affects your investment thesis • Making a decision about a company before evaluating it • Don’t base the facts around your decision, base your decision around the facts. • As you evaluate the company, if information doesn’t look like you expected then change your decision or company.

  15. Typical Mistakes • Just because it’s in the news doesn’t mean it is relevant • Unless the news story affects your investment thesis, it shouldn’t be included • Not explaining what key terms are • If you weren’t comfortable using the term before you research the company then it probably should be explained • Forgetting about the efficient market hypothesis • The reason for buying or selling a stock shouldn’t be based on an event • The reason should be based on the market’s under or over reaction to it

  16. Questions?

  17. Appendix

  18. Ratios • Price to Earnings • Current stock price / TTM EPS • Price to Book • Current stock price / (Total Assets – Intangible assets – Liabilities) • Return on Invested Capital • How well is the company using its money to generate returns • (Net Income – Dividends) / Total Capital • Total Capital includes long-term debt, common and preferred shares, additional paid-in capital

  19. DCF Formulas • Free Cash Flow to Equity • FCFE = NI + D/A – ΔNWC – Cap Ex • FCFE = CF from Operations – Cap Ex • Terminal Value • Terminal FCFE / (Cost of Equity – Growth Rate) • CAPM • Cost of Equity = Risk-Free + Beta * Market Risk Premium

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