Meeting Agenda

Announcements Market Overview: Economics Update Lecture: Multiples Analysis Portfolio Update Pitch: INTC Important Dates

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The Suggestion Box

Economics Update

3 Main Metrics

• Adjusted Civilian Unemployment Rate• Inflation• GDP

26.5%

Lecture: Multiples Analysis

ObjectivesWhat is a multiple?How is a multiple calculated?How is a multiple used?How do you evaluate a multiple?

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

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?

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

Back to multiples

• We want to figure out if an investment is cheap

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.

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

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

=

Price to Earnings Example

AAPL

=11.7x

LNKD

$243.90$476.41

$40.82 $.37

=676.6x

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

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

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

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

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

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

Andrew SmithNoah Pentecost

Jenny LaiEdward Zhao

Bethany Mandrell

OverviewInvestment Thesis

Valuation

Company Overview

Risks/Mitigations

• Strong company with healthy dividends• Undervalued relative to competitors• Trading at discount when you consider their

market position and innovation

Investment Thesis

PC/Tablet

Servers Mobile

Company Overview

• 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

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

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

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%

Questions

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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

Announcements

WorkshopsEvery Thursday 7-8PMSAC2.120

Topic this week:• Comps Analysis