SIA EDUCATIONAL SERIES Spring 2017 Part 1: Fall Semester Review

Transcription

1 SIA EDUCATIONAL SERIES Spring 2017 Part 1: Fall Semester Review February 1, 2017

2 OVERVIEW All critical information is reported by the company in their annual report 10-Q and 10-K: set of interconnected reports released quarterly and annually by public companies Reflect the financial health and performance of the organization Provides data to shareholders to assist them in making informed decisions

3 SELECTED FINANCIAL DATA Provides consolidated summary of financial data o o o o o o o Net sales Net income Earnings per share Dividends per share Shares outstanding Assets Equity Recall: how many years of data is presented here?

4 MANAGEMENT S DISCUSSION & ANALYSIS One of the most important sections pages of critical data and analysis Read every word Management s opinion of financial health and strategy going forward o o Explanation for recent performance Important financial evaluation metrics

5 INCOME STATEMENT Presents operational results over a period of time. Always pull most recently reported data. Revenue Expenses Profit Key concept: Revenue Expenses = Profit Recall: what line-items might depreciation be baked into?

6 BALANCE SHEET Details a company s financial position at a specific point in time ( snapshot ). Assets Liabilities (debt) Equity Key concept: Assets = Liabilities + Equity

7 CASH FLOW STATEMENT Reconciles the inflows and outflows of cash over a period of time. Operating Cash Flow Investing Cash Flow Financing Cash Flow Key concept: Net income cash flow

8 CONNECTING THE STATEMENTS

9 FREE CASH FLOW How much cash does this company s core business generate on a recurring, predictable basis? This is the cash flow available to the shareholders of a company. 2 kinds of FCF, unlevered and levered. Unlevered FCF = EBIT Taxes + D&A CapEx ΔNWC Concepts: Unlevered FCF can be used to pay down debt. Levered FCF is only available to equity investors.

10 COMPETITOR ANALYSIS What industry does the company operate in? Does the company have multiple operating units? Comparable metrics Gross margin Sales / EBITDA growth Price / sales, Price / Book, EV / EBITDA Critical part of fundamental value analysis Often overlooked in SIA stock pitches

11 CONGLOMERATE STUDY Firm vs. Unit Metrics Does it make sense to compare GE to an infrastructure company? We must look at individual operating segments to see how competitive a company is Look in 10K, management presentation, sell-side reports to see individual evaluations

12 BETA Measure of volatility, or systematic risk, of a security in comparison to the whole market Alternatively, how much a stock will rise or fall, on average, when the overall market moves xx% Defensive stocks β < 1 Cyclical stocks β > 1

13 CAPITAL ASSET PRICING MODEL (CAPM) Describes systematic risk and expected return for assets CAPM relates to a company s equity (stock) valuation Expected return will be used to discount levered FCF

14 WEIGHTED AVERAGE COST OF CAPITAL Weighted average of cost of equity and cost of debt WACC = (% equity) * (cost of equity) + (% debt) * (cost of debt) * (1-T) Use this to discount unlevered FCF

15 PRESENT VALUE Money today is worth more than the same amount of money in a year why? PV = FV / (1+R)^T What is R?

16 MULTIPLES METHOD Assumes a sale at the end of the forecast period Assign a multiple to the terminal year data Multiple should be chosen based on public comps Again, comps analysis is critical Historical averages for specific company Common valuation multiples: Price-to-earnings EV/EBITDA (low CapEx) EV/EBIT (high CapEx) If we use EBITDA multiple, what FCF should we use?

17 GORDON GROWTH METHOD The perpetuity growth method assumes that the TV will grow indefinitely What is an appropriate number? Above 3%? TV = terminal year FCF * (1 + G) / (R G) Professionals primarily use P/E and EV/EBITDA: Current EBITDA and FCF data is better Uneven CapEx spending among comps

18 EQUITY VALUE Earnings = $20 P/E multiple = 10x Market capitalization (equity value) = $200 Shares outstanding = 50 Share price = firm s market cap / shares outstanding Share price = $200 / 50 = $4 per share

19 ENTERPRISE VALUE Enterprise Value: measure of firm s entire value We re equity investors

20 EQUITY VALUE FROM ENTERPRISE VALUE EBITDA = $20 EV/EBITDA multiple = 5x Enterprise value = $100 (-) market value of net debt: $10 (15 debt, 5 cash) (-) minority interest, preferred shares: $10 Equity value = $80 Shares outstanding = 20 Share price = $4

21 REVENUE FORECASTING Check MDA and notes to the statements, as well as sellside research reports (via Thomson Reuters) Management will breakdown by segment, product, division, geography Will cover this topic extensively next week when we walk through a DCF model

22 INCOME STATEMENT FORECASTING Can be taken as a simple growth rate 100*(1+G) Bottoms up approach X amount of units and Y price X*Y=Revenue Other line items as % of revenue

23 BALANCE SHEET FORECASTING Often taken as historical % from revenue Allocate capital where it is needed More sales increase need for capacity and inventory

24 REVIEW QUESTIONS What is the cash flow effect of an increase in current liabilities? If you could only analyze 1 statement, which one would you choose? If you could choose 2? What are FCF and why do investors care? What discount rate does CAPM give us? What is WACC? Derive equity value from enterprise value?