Stock Valuation

Fundamental Analysis
Essentials of Corporate Finance
Chapters 2, 3, 5, 7

Materials Created by Glenn Snyder San Francisco State University

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

February 26,

Materials Created by Glenn Snyder San

Fundamental Analysis

Fundamental Analysis seeks to determine a

companys outlook based on factors related to the
company itself

Fundamental analysis includes:

Company Analysis

Economic Analysis

Evaluation of the business model

Financial Statement Analysis

Ratio Analysis
Cash Flow Analysis
Management Analysis
Economic Forecasts and Trends

Industry Analysis

February 26,

Materials Created by Glenn Snyder San

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

February 26,

Materials Created by Glenn Snyder San

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

February 26,

Materials Created by Glenn Snyder San

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

February 26,

Industry specific publications (e.g. Banking American Banker)

General Media

Wall Street Journal

Morningstar

Barrons
Materials Created by Glenn Snyder San

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

February 26,

Materials Created by Glenn Snyder San

Building Models

Equity Research Analysts build economic, industry,

and company models that will project a companys
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

February 26,

Financial Projections (including dividend projections)

Ratio Analysis

Materials Created by Glenn Snyder San

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

February 26,

Materials Created by Glenn Snyder San

Analysis

Now the Equity Analyst is ready to analyze the data

Economic Forecast and Analysis

Industry Analysis

PCI and Economic Growth Models

Trends in Investment Cycles
Trends in Technology Advancement
Competitiveness of the Industry

Company Forecast and Analysis

Financial Projections
Peer Comparison
Management Analysis

February 26,

Materials Created by Glenn Snyder San

10

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

February 26,

Materials Created by Glenn Snyder San

11

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

February 26,

Materials Created by Glenn Snyder San

12

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:

February 26,

Materials Created by Glenn Snyder San

Buy

13

Career Advice for a Buy Side

Equity Research Analyst

Process and detail oriented

Strong quantitative skills

Excellent verbal and written communication skills

E.g. Biotechnology, Technology, Healthcare, etc.

Graduate level education

Presentations and written reports (recommendations)

Possess or willing to develop industry knowledge

Economic, industry, and company modeling

MBA and/or Chartered Financial Analyst Designation (CFA)

Some large asset management firms will have an

analyst training program

Highly Competitive

February 26,

Materials Created by Glenn Snyder San

14