Company Analysis Villanova Equity Society
How to analyze a company • Basic Information • Business Overview • Fundamental Analysis • Comparative Analysis • Recent Developments • Formulate an Investment Thesis
What drives stock prices? Earnings Expectations Drive Stock Prices • Therefore, it is important to compile information that will help us predict earnings for a company • Pick the stocks that have strong earnings potential that trade at a reasonable price that will provide the highest expected return • Stocks will have a high expected return if they are trading at lower multiples than what their future earnings would imply
Market Expectations • Determine this by evaluating financial ratios: • Price-to-earnings ratios • Price-to-book ratios • These indicate what investors are willing to pay for a company’s earnings • The higher the multiple, the higher the expectations for a company’s future earnings
Example • Apple Computer (AAPL) • Price per share: $51.85 • EPS: $1.56 • Next year’s estimated EPS: $ • P/E Ratio: 33.24 • IBM • Price per share: $83.58 • EPS: $4.74 • PE Ratio: 17.63 What is the market telling us? Is this justified?
How do we select a portfolio? Objective of Portfolio Management • Achieve the highest possible return for a certain level of risk. • Select the stocks with the highest expected return • Among the stocks with the highest expected return, we want to select a portfolio of stocks with low correlations with one another. • Therefore, we can reduce the risk of the portfolio while maintaining a high expected return.
Basic Information First things to Identify • Market Capitalization • Industry • Recent Stock Price • 52 Week High/Low • YTD Performance • Dividends, Dividend Yields • Earnings Estimates All of this information can be easily found using basic online services, such as: • Yahoo! Finance (finance.yahoo.com) • Wall Street Journal Online (www.wsj.com) • Moneycentral.msn.com • MarketLine – available through your Library account • Or, you can use the tools in the Lab • Bloomberg • Reuters
Business Overview • What to know: • Lines of Business • What industry is the company in? • Who are its competitors? • Business Segments • How is the company organized? • Major Products / Services • What is the company’s competitive advantage? • Major Customers • Company must list any customers that compose >10% of revenues • Geographic presence • % of Sales in each geographic region • Major Assets
Business Overview - continued 2 ways to do this: • Simple Way • Read summaries from Yahoo! Finance, WSJ.com, MSN, Bloomberg • MarketLine – available through your Library account • Bloomberg, Reuters stations in the Finance Lab • Better Way • SEC Filings – Read latest 10K report for the company • Full Description – all assets, segments, customers, products, services, business strategy • http://www.sec.gov/edgar/searchedgar/companysearch.html • Type in Ticker Symbol – Search for most recent 10K report
Fundamental Analysis • Objective is to evaluate the strength of the company • Analyze financial statement • Analyze financial metrics • Identify the trends in the business
Financial Statement Analysis • Where to find them • 1) SEC Filings • Manually enter data into Excel • Go through 10K’s and 10Q’s to get historical financial information • More sophisticated data • 2) Market Insight • A paid subscription service provided by Standard & Poors • Simplified financial statements that can be downloaded into Microsoft Excel. • You can access this through your library account as library.villanova.edu • Go to Company -> Enter Ticker Symbol -> Excel Analytics • Download Annual and Quarterly Income Statements
Things to consider - Basics • Revenues • Are sales growing? • At what rate? Faster or slower than its peers? • Compare current quarters with year ago quarterly results • Gross Profit • Amount of profit before considering administrative and overhead costs • Are gross profit margins rising or falling? • Gross Profit as a % of sales should be rising as sales increase • Operating Profit • Evaluate as a % of sales • Are SG&A expenses rising or falling as a % of sales.
Other things to consider… • Analyst expectations: • Is the company reporting EPS and Revenues higher or lower than what analysts are expecting? • Are analysts raising or lowering estimates? • What is happening in the economy that could affect the company’s earnings? • Macroeconomic issues: GDP growth, inflation, consumer spending, changes in interest rates, etc. • Company-specific issues: New product introductions, competitive pressure, pricing power, product shortages, higher raw material prices, etc.
Comparative Analysis • Our Director of Research will update our “Comp Sheets” and send them to each team • Things to look for: • Price/Earnings Ratios • Does the company have a higher P/E ratio than its peers? Is this justified? • Earnings Expectations • Which companies in an industry are expected to have the highest/lowest growth rates? • Which companies do we think are capable of reaching these target? Based on this analysis, does our company appear undervalued or overvalued when compared to its industry? Undervalued if: • Lower P/E than industry, but earnings will grow at the same rate • Same or slightly higher P/E as industry, but earnings will grow at a much faster rate
Recent Developments What to know: • Results of quarterly reports • Read 10Q’s, Company press releases • Find this in SEC filings, company websites, Bloomberg, Yahoo!Finance, WSJ.com • Management’s Discussion and Analysis section with 10Q’s, 10K’s • Compare results with analyst recommendations • Company Press Releases • Company website, Yahoo!, Bloomberg, WSJ • Summarize important news at the company • Change in Analyst Recommendations • Reuters, Bloomberg, WSJ, Yahoo!
Formulate a Thesis • Since we have all of this information, we can make an investment decision