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?

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

How do we know what investors expect for a stock?

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 companys earnings
The higher the multiple, the higher the expectations for a companys future earnings

Example
Apple Computer (AAPL)
Price per share: $51.85 EPS: $1.56 Next years 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 of stocks?

How do we select a portfolio?

Objective of Portfolio Management
Achieve the highest possible return for a certain level of risk.

1. Select the stocks with the highest expected return 2. 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

Example Finance.Yahoo.Com

Business Overview
What to know:
Lines of Business
What industry is the company in? Who are its competitors? How is the company organized? What is the companys competitive advantage? Company must list any customers that compose >10% of revenues % of Sales in each geographic region

Business Segments Major Products / Services Major Customers Geographic presence

Major Assets

Business Overview - continued

2 ways to do this:
1.Simple Way
Read summaries from Yahoo! Finance, WSJ.com, MSN, Bloomberg MarketLine available through your Library account Bloomberg, Reuters stations in the Finance Lab

2.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/company search.html Type in Ticker Symbol Search for most recent 10K report

Business Overview - continued

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 10Ks and 10Qs 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

SEC Filings manually import into Excel

Market Insight Example

Output into your model

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 companys 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? 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?

Earnings Expectations

Based on this analysis, does our company appear undervalued or overvalued when compared to its industry?
Undervalued if: 1. Lower P/E than industry, but earnings will grow at the same rate 2. 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 10Qs, Company press releases Find this in SEC filings, company websites, Bloomberg, Yahoo!Finance, WSJ.com Managements Discussion and Analysis section with 10Qs, 10Ks 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