presentation procedure
DESCRIPTION
Presentation Procedure. By: Phil Garrett. Overview. Choosing a Company Evaluating a Company Presenting a Company Typical Mistakes. Choosing a Company. The Student Investment Association is a value fund Your pitch should be focused around why this company is undervalued - PowerPoint PPT PresentationTRANSCRIPT
![Page 1: Presentation Procedure](https://reader036.vdocument.in/reader036/viewer/2022062519/568153cf550346895dc1c347/html5/thumbnails/1.jpg)
Presentation Procedure
By: Phil Garrett
![Page 2: Presentation Procedure](https://reader036.vdocument.in/reader036/viewer/2022062519/568153cf550346895dc1c347/html5/thumbnails/2.jpg)
Overview
• Choosing a Company
• Evaluating a Company
• Presenting a Company
• Typical Mistakes
![Page 3: Presentation Procedure](https://reader036.vdocument.in/reader036/viewer/2022062519/568153cf550346895dc1c347/html5/thumbnails/3.jpg)
Choosing a Company• The Student Investment Association is a value fund
– Your pitch should be focused around why this company is undervalued• Look for companies that are trading with a low price/book ratio (P/B) and a low
price/earnings ratio (P/E) relative to their peers
• Choose a small- to mid-cap company– Market Capitalizations from $500 MM - $5 B
– Less analyst coverage
– The size effect
![Page 4: Presentation Procedure](https://reader036.vdocument.in/reader036/viewer/2022062519/568153cf550346895dc1c347/html5/thumbnails/4.jpg)
Choosing a Company• Benjamin Graham
– Investing with a Margin of Safety• Invest in a company whose stock price is trading at a significant discount to its
intrinsic value
• Look for unpopular or out-of-favor companies
– Mr. Market• AAPL 52 wk range: $196.89 - $364.90 Shares Outstanding: 921.28 MM
• $154.8 B
• A low P/E and P/B ratio does not ALWAYS mean the company is undervalued– Look for companies that have a high Return on Invested Capital
![Page 5: Presentation Procedure](https://reader036.vdocument.in/reader036/viewer/2022062519/568153cf550346895dc1c347/html5/thumbnails/5.jpg)
Evaluating a Company• Read through a company’s financial statements (10-K,10-Q)
and transcript from the earnings call
• Analyze the company’s industry− Porter’s 5 Forces
• Competition: who are their competitor, how competitive is the industry
• New Entrants: what are the barriers to entry, is it easy to enter the industry
• Substitutes: What are the substitutes, is it for consumers to substitute their product
• Power of Suppliers: Who are their suppliers, can they control the pricing
• Power of Buyers: Who are their buyers, can they control the pricing
− What are other factors that affect the industry• Government regulation
• Commodity prices
• Seasonality
![Page 6: Presentation Procedure](https://reader036.vdocument.in/reader036/viewer/2022062519/568153cf550346895dc1c347/html5/thumbnails/6.jpg)
Evaluating a Company• Assess the company’s strategy
– What is their competitive advantage• Low cost leaders, differentiation
– What is their plan for the future
– Is the company sustainable, why• What risk and success factors they must manage
• Analyze the company’s profitability and risk– Use financial ratios and compare them over time and against
competitors and the industry
– Use any industry specific measures • Same store sales, FFO, EBITDAR
![Page 7: Presentation Procedure](https://reader036.vdocument.in/reader036/viewer/2022062519/568153cf550346895dc1c347/html5/thumbnails/7.jpg)
Evaluating a Company• Analyzing a company’s profitability and risk cont’d
– Has the company’s margins increase, decreased or maintain
– What is the company’s ROA and ROE• Is the ROE greater than the cost of equity
– What does their short-term liquidity look like• Current/quick ratios, Days in Inventory, Days A/R outstanding, Days A/P
outstanding
– What does their long-term liquidity look like• Debt to Equity ratio, Interest Coverage ratio
– Compare these factors for the company over the past several year and currently against its competitors
![Page 8: Presentation Procedure](https://reader036.vdocument.in/reader036/viewer/2022062519/568153cf550346895dc1c347/html5/thumbnails/8.jpg)
Evaluating a Company• Forecasting future performance
– The information gather in prior steps
– Management guidance
– Use analyst reports to get ideas about how others think about the company.
• Don’t use them as your own work
• Valuation– SIA provides a sample Discounted Cash Flow model on the website
– Use that to input historical data and your forecasted projections to value the company
• Take a step back and think “does this make sense?”
![Page 9: Presentation Procedure](https://reader036.vdocument.in/reader036/viewer/2022062519/568153cf550346895dc1c347/html5/thumbnails/9.jpg)
Discounted Cash Flow• The value of any resource is the present value (PV) of the
future payouts discounted at a rate reflective of the risk of the payouts
• Then to value the company, we project the future free cash flows to equity and discount them to present value.
• It’s hard to project the free cash flows reliably after 5 years– Use the terminal value method to capture the present value of the free
cash flows into perpetuity
• Use the cost of equity as the discount rate because we are looking at the FCF to equity– The cost of equity is calculated using CAPM
![Page 10: Presentation Procedure](https://reader036.vdocument.in/reader036/viewer/2022062519/568153cf550346895dc1c347/html5/thumbnails/10.jpg)
Discounted Cash Flow• We project firm growth through revenue and the rest of the
components in the DCF model are percentages of revenue.
• The terminal value is a large part of the company’s value – be conservative with estimate– The long-term growth rate shouldn’t grow faster than GDP
• When using CAPM it is better to use historical averages rather current values.– Historical average risk-free rate: 6%
– Historical average market risk premium: 5.6%
• Be able to logically back each of your projections
![Page 11: Presentation Procedure](https://reader036.vdocument.in/reader036/viewer/2022062519/568153cf550346895dc1c347/html5/thumbnails/11.jpg)
Presenting a Company• Build your presentation around selling the 3 main reason, your
investment thesis, we should invest in this company
• Try to boil down the information to relevant facts surrounding your company
• Present both the 3 main reason and 3 biggest risks to the company
• Try to anticipate possible questions surround your investment and risks reasons and cover them in the presentation
![Page 12: Presentation Procedure](https://reader036.vdocument.in/reader036/viewer/2022062519/568153cf550346895dc1c347/html5/thumbnails/12.jpg)
Presenting a Company• Investment overview (1 slide)
– Have your recommendation and 3 main reasons to invest
• Company overview– Briefly cover how this company makes money
• Industry overview– Cover key industry information relevant to your investment thesis
• What is the issue surrounding the company– Why is the company trading at these low multiples
• Why is the company undervalued– Why is the market wrong
![Page 13: Presentation Procedure](https://reader036.vdocument.in/reader036/viewer/2022062519/568153cf550346895dc1c347/html5/thumbnails/13.jpg)
Presenting a Company• What is going to make you investment thesis come true
– Why should we invest in this company
• What are risks to your investment thesis– Why might the company no be undervalued
• Your valuation– Briefly walk us through your projections and your thought process
behind choosing these projections
![Page 14: Presentation Procedure](https://reader036.vdocument.in/reader036/viewer/2022062519/568153cf550346895dc1c347/html5/thumbnails/14.jpg)
Typical Mistakes• Presenting an overview of the company instead of focusing on
the relevant facts regarding why we should invest– Knowing who a company’s management is and what is the revenue
break down is important, but shouldn’t be presented unless it affects your investment thesis
• Making a decision about a company before evaluating it– Don’t base the facts around your decision, base your decision around
the facts.
– As you evaluate the company, if information doesn’t look like you expected then change your decision or company.
![Page 15: Presentation Procedure](https://reader036.vdocument.in/reader036/viewer/2022062519/568153cf550346895dc1c347/html5/thumbnails/15.jpg)
Typical Mistakes• Just because it’s in the news doesn’t mean it is relevant
– Unless the news story affects your investment thesis, it shouldn’t be included
• Not explaining what key terms are– If you weren’t comfortable using the term before you research the
company then it probably should be explained
• Forgetting about the efficient market hypothesis– The reason for buying or selling a stock shouldn’t be based on an event
– The reason should be based on the market’s under or over reaction to it
![Page 16: Presentation Procedure](https://reader036.vdocument.in/reader036/viewer/2022062519/568153cf550346895dc1c347/html5/thumbnails/16.jpg)
Questions?
![Page 17: Presentation Procedure](https://reader036.vdocument.in/reader036/viewer/2022062519/568153cf550346895dc1c347/html5/thumbnails/17.jpg)
Appendix
![Page 18: Presentation Procedure](https://reader036.vdocument.in/reader036/viewer/2022062519/568153cf550346895dc1c347/html5/thumbnails/18.jpg)
Ratios• Price to Earnings
– Current stock price / TTM EPS
• Price to Book– Current stock price / (Total Assets – Intangible assets – Liabilities)
• Return on Invested Capital– How well is the company using its money to generate returns
– (Net Income – Dividends) / Total Capital• Total Capital includes long-term debt, common and preferred shares,
additional paid-in capital
![Page 19: Presentation Procedure](https://reader036.vdocument.in/reader036/viewer/2022062519/568153cf550346895dc1c347/html5/thumbnails/19.jpg)
DCF Formulas
• Free Cash Flow to Equity– FCFE = NI + D/A – ΔNWC – Cap Ex
• FCFE = CF from Operations – Cap Ex
• Terminal Value– Terminal FCFE / (Cost of Equity – Growth Rate)
• CAPM– Cost of Equity = Risk-Free + Beta * Market Risk Premium