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Meeting Agenda
Announcements Market Overview: Economics Update Lecture: Multiples Analysis Portfolio Update Pitch: INTC Important Dates
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Announcements
•Build and manage your own virtual portfolio• Compete with other McCombs students
• Top three winners receive prizes in January
Register at usiteam.org/even
ts
Fall Portfolio Challenge
$5entry fee
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Announcements
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Announcements
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Announcements
Free Wall Street Journal digital access for paid members
Contact [email protected] to receive login information
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Announcements
The Suggestion Box
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Economics Update
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3 Main Metrics
• Adjusted Civilian Unemployment Rate• Inflation• GDP
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26.5%
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Lecture: Multiples Analysis
ObjectivesWhat is a multiple?How is a multiple calculated?How is a multiple used?How do you evaluate a multiple?
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Accounting in 2 minutes
Revenue
-Cost of Goods Sold
Gross Profit
-Operating Expenses
Operating Profit
-Taxes
Earnings
Price per unit x units sold
Cost of the inputs associated with the product
Literally the cost of the goods you sell
Cost of input per unit x units sold
Costs not associated with producing the good
Ex.) salaries paid to accountants or executives
The final residual profit after all expenses and taxes have been taken out
Also known as net income, net profit
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Stock Price
AAPL
$467.41 per share
LNKD
$243.90 per share
If we want to invest in cheap stocks (buy-low-sell-high), which would you invest in?
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Stock price is arbitrary!
A company wants to sell a bunch of stock onto a stock exchange to raise money (IPO)
The company needs to raise $100 million
The company gets to choose the stock price it wants to issue the stock at
1 million shares @ $100 each10 million shares @ $10 each100 million shares @ $1 each1 billion shares @ $0.10 each
Price is only used to gauge how much you make off a buy-and-sell trade. It is NOT a determinant of value
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Back to multiples
• We want to figure out if an investment is cheap
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Relative Valuation ExampleYour exotic friend asks you to go buy this fruit you’ve never seen for him, but to not spend too much for him.
The fruit is only sold by one vendor and costs $5 each, but you have no idea if that’s a good price. What do you do?
You compare it to other things that are like it, namely, other fruit!
You can refine your search further by comparing to other fruit that look and taste like it.
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Relative Valuation ExampleYou look around and find a vendor who has a similar looking, but slightly larger fruit.
You look around and find a vendor who has a similar looking, but larger fruit, selling for $10 each.
$5 each
$10 each
In order to standardize the price and eliminate the factor of size, we can calculate the price per pound
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Relative Valuation
• Much in the way price is arbitrary for fruit until you standardize it per unit of weight, stock price can be standardized per unit of earnings
Price per share
Earnings per share
Total earnings / total shares
=Tells you how much you pay per dollar of earnings
Investors tend to want to pay less for a dollar of earnings like paying less per pound of fruit
=
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Price to Earnings Example
AAPL
=11.7x
LNKD
$243.90$476.41
$40.82 $.37
=676.6x
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Interpreting a P/E Multiple
• Lower isn’t always better– For better, safer, growing companies,
investors are willing to “pay a higher multiple”– Sometimes a higher multiple indicates
expectation the company will “grow into it”
• Cheap has two meanings– You can get a good price– But that also means you could be getting bad
quality
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Questioning a Multiple
• Low Multiple + Quality Company = Good investment– If it’s so great, why is it cheap?
Exaggerated Bad News
Small Company- not regularly covered by Wall Street Analysts
Quality is being incorrectly perceived
Future of the company is going to
result in multiple expansion
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Multiples Used
Price per share
Earnings per share
Price per share
Book value per share
How much you pay per dollar of earnings
How much you pay per dollar of resources of the business
Price per share
Cash Flow per shareLike P/E, but using cash flow (different from earnings)
Enterprise Value
EBITDALike P/E, but using better measurements of price and a proxy for cash flow/earnings. Most popular multiple
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Derivation of Stock Price
P/E Industry = P/E Target Company
We know:• P/E Industry (average of P/E of similar companies)• Earnings Per Share company (10-K)• We want to solve for price
P/E Industry
As long as the stock is trading below the industry multiple, its implied price will be higher than its
current price.
=
Price
EPS10.2x
10.2x$3
$3Price10.2x * $3
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Portfolio Update
Historical PerformanceInvested Capital Cash Exposure AUM Weekly Portfolio Return Cumulative Return Since 8/30/13 Exp-Adj Weekly Return Exp-Adj Cum. Return
8/30/2013 $4,396.8 $9,716.0 31.2% $14,112.8 - 0.0% 0.0%9/6/2013 $7,739.3 $6,556.9 54.1% $14,296.2 1.3% 1.3% 2.40% 2.4%9/13/2013 $4,328.6 $9,922.9 30.4% $14,251.5 (0.3%) 1.0% (1.03%) 1.3%9/20/2013 $4,381.9 $9,922.9 30.6% $14,304.8 0.4% 1.4% 1.22% 2.6%9/27/2013 $5,911.2 $8,226.2 41.8% $14,137.4 (1.17%) 0.17% (2.80%) (0.3%)
Ticker Shares Cost Per Share Total Cost Basis Purchase Date PX_LAST Total Market Value Gain/Loss Gain/Loss % SectorAAPL US Equity 3 $486.11 $1,458.32 8/13/2013 $482.75 $1,448.25 ($10.07) -0.7% Information TechnologyADNC US Equity 50 $10.51 $525.50 8/13/2013 $11.27 $563.50 $38.00 7.2% Information TechnologyCBRX US Equity 125 $6.82 $852.13 8/14/2013 $7.38 $922.50 $70.38 8.3% Health CareENZN US Equity 200 $1.96 $391.00 8/13/2013 $1.73 $346.00 ($45.00) -11.5% Health CareIDT US Equity 55 $17.91 $984.85 8/14/2013 $18.28 $1,005.40 $20.55 2.1% Telecommunication ServicesSWKH US Equity 400 $1.13 $450.00 8/13/2013 $1.18 $472.00 $22.00 4.9% FinancialsU CN Equity 125 $4.64 $579.68 8/28/2013 $4.86 $608.01 $28.33 4.9% Basic MaterialsAGX US Equity 25 $21.67 $541.75 9/26/2013 $21.82 $545.50 375.0% 0.7% Industrials
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Portfolio Update
Sector Exposures Dollar Amount % AllocationInformation Technology $2,011.75 34%Energy $0.00 0%Consumer Services $0.00 0%Consumer Goods $0.00 0%Financials $472.00 8%Industrials $545.50 9%Health Care $1,268.50 21%Utilities $0.00 0%Telecommunication Services $1,005.40 17%Basic Materials $608.01 10%
Sector Exposures + CashInformation Technology $2,011.8 14%Energy $0.0 0%Consumer Services $0.0 0%Consumer Goods $0.0 0%Financials $472.0 3%Industrials $545.5 4%Health Care $1,268.5 9%Utilities $0.0 0%Telecommunication Services $1,005.4 7%Basic Materials $608.0 4%Cash $8,226.2 58%
14% 0% 0%
0%
3%
4%
9%
0%
7%
4%
58%
Information Technology
Energy
Consumer Services
Consumer Goods
Financials
Industrials
Health Care
Utilities
Telecommunication Services
Basic Materials
Cash
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Andrew SmithNoah Pentecost
Jenny LaiEdward Zhao
Bethany Mandrell
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OverviewInvestment Thesis
Valuation
Company Overview
Risks/Mitigations
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• Strong company with healthy dividends• Undervalued relative to competitors• Trading at discount when you consider their
market position and innovation
Investment Thesis
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PC/Tablet
Servers Mobile
Company Overview
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• Price to earnings below competitors and industry average
Comparables
AMD BRCM IBM QCOM NVDA INTC Average-10.00-5.000.005.0010.0015.0020.0025.0030.0035.0040.00
P/E
BRCM QCOM NVDA INTC Average0
0.51
1.52
2.53
3.54
4.55
Price/BV
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Vertical Integration
• High growth in tablet market share
• Over 90% market share in server chips
Risks/Mitigations
PC Revenue Declines
• Vertical integration is capital intensive
• Competition between Apple and Samsung
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Tech/Market Developments
• Shifts to Tablets • Strong Company Brand• Intel Core
Risks/Mitigations
Changes in Market Mix
• Consistent since 1970s • Leader in microprocessor
technology • Tomorrow Project
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Financials2011 2012 2013E 2014E 2015E 2016E 2017E 2018E
Revenue $53,999.00 $53,341.00 $52,949.18 $54,895.62 $58,189.36 $61,680.72 $65,381.56 $69,304.46Growth rate -1% -1% 4% 6% 6% 6% 6%Cost of Sales $20,242.00 $20,190.00 $20,138.13 $21,079.80 $22,555.39 $24,134.27 $25,823.67 $27,631.32Growth rate 0% 5% 7% 7% 7% 7%Gross Profit $33,757.00 $33,151.00 $32,811.05 $33,815.82 $35,633.97 $37,546.45 $39,557.90 $41,673.13Gross Margin 63% 62% 62% 62% 61% 61% 61% 60%
SG&A Expenses $7,670.00 $8,057.00 $8,463.53 $8,890.57 $9,339.15 $9,810.37 $10,305.36 $10,825.34Growth Rate 5% 5% 5% 5% 5% 5% 5%R&D Expenses $8,350.00 $10,148.00 $10,655.40 $11,188.17 $11,747.58 $12,334.96 $12,951.71 $13,599.29Growth Rate 22% 5% 5% 5% 5% 5% 5%EBIT $17,737.00 $14,946.00 $13,692.12 $13,737.08 $14,547.24 $15,401.12 $16,300.83 $17,248.51EBIT Margin 33% 28% 26% 25% 25% 25% 25% 25%
NOPAT $17,737.00 $14,946.00 $13,692.12 $10,165.44 $10,764.96 $11,396.83 $12,062.61 $12,763.90D&A $6,064.00 $7,522.00 $7,953.00 $9,136.94 $10,078.80 $11,348.48 $12,648.20 $14,169.17Change in NWC -$8,007.00 $1,203.00 $1,263.15 $1,326.31 $1,392.62 $1,462.25 $1,535.37 $1,612.14CapEx $10,764.00 $11,027.00 $10,288.00 $10,068.95 $9,624.36 $9,309.42 $8,951.57 $8,633.06FCF $16,432.38 $6,352.04 $6,534.02 $7,907.12 $9,826.78 $11,973.64 $14,223.88 $16,687.87
Total Enterprise Value Equity Value Value per Share Current Price Implied discount$141,951.25 $131,444.25 $26.58 $22.98 16%
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Questions
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Pitch Team Sign-Ups
www.usiteam.org/membership
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Important Dates
• Thursday, Sept. 26, 6-8PM- Investment Banking Workshop -UTC3.102
• Saturday, October 12: Last day to register for TXSPwww.usiteam.org/events
• Saturday, October 19: Texas Stock Pitch Competition
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Announcements
WorkshopsEvery Thursday 7-8PMSAC2.120
Topic this week:• Comps Analysis