Stock Valuation – Fundamental Analysis

1. Stock Valuation – Fundamental Analysis Essentials of Corporate Finance Chapters 2, 3, 5, 7 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 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 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 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 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 Materials Created by Glenn Snyder – San Francisco State University

7. 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 Materials Created by Glenn Snyder – San Francisco State University

8. 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 Materials Created by Glenn Snyder – San Francisco State University

9. 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 Materials Created by Glenn Snyder – San Francisco State University

10. 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 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 Materials Created by Glenn Snyder – San Francisco State University

12. 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 Materials Created by Glenn Snyder – San Francisco State University

13. 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 Materials Created by Glenn Snyder – San Francisco State University

14. 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 Materials Created by Glenn Snyder – San Francisco State University