PPT COMPANY ANALYSIS AND STOCK VALUATION PowerPoint presentation
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COMPANY ANALYSIS AND STOCK VALUATION
Applying the Valuation Models to Walgreens. Walgreens experienced a larger increase than its industry in all ratios, while. PowerPoint PPT presentation
Title: COMPANY ANALYSIS AND STOCK VALUATION
Chapter 15
- COMPANY ANALYSIS AND STOCK VALUATION
Chapter 15 Questions
- Why is it important to differentiate between
company analysis and stock analysis?
and a growth stock?
valuation of common stock?
valuation approach?
techniques?
Chapter 15 Questions
- How do we apply the relative valuation approach?
- What are the major relative valuation techniques
(ratios)?
links that should be considered in company
analysis?
from analyzing its competitive strategy and from
a SWOT analysis?
Chapter 15 Questions
- How do we apply the two valuation approaches and
several valuation techniques?
inputs to alternative valuation models?
earnings per share for a company?
Chapter 15 Questions
- What factors do we consider when estimating the
earnings multiplier for a firm?
firm use to cope with the competitive environment
in its industry?
Company Analysis and Stock Selection
- Good companies are not necessarily good
investments
value of a stock to its market value
one with management and opportunities that yield
rates of return greater than the firms required
Growth Companies and Growth Stocks
growth companies
other stocks with similar risk
because of market under-valuation compared to
other stocks
generally not been growth stocks
Defensive Companies and Stocks
- Defensive companies future earnings are more
likely to withstand an economic downturn
to changes in the market
Cyclical Companies and Stocks
- Sales and earnings heavily influenced by
aggregate business activity
markets, low returns in down markets
Speculative Companies and Stocks
- Speculative companies invest in sssets involving
great risk, but with the possibility of great
gain
surprises and above-average risk adjusted rates
of return because the stocks are undervalued
besides earnings growth potential
ratios of price to book value
The Search for True Growth Stocks
- To find undervalued stocks, we must understand
the theory of valuation itself
Theory of Valuation
- The value of a financial asset is the present
value of its expected future cash flows
flows
Stream of Expected Returns (Cash Flows)
- From of returns
- Depending on the investment, returns can be in
the form of
investment?
Required Rate of Return
- Determined by the risk of an investment and
available returns in the market
of returns
premiums, vary by the type of investment
Investment Decision Process
- Once expected (intrinsic) value is calculated,
the investment decision is rather straightforward
Economic and Industry Influences
- If trends are favorable for an industry, the
company analysis should focus on firms in that
industry that are positioned to benefit from the
economic trends
sensitive to macroeconomic variables should also
Structural Influences
regulatory influences can have significant
influence on firms
changes in technology which followers may imitate
and benefit from
opportunities even when economic influences are
weak
Company Analysis
- Competitive forces necessitate competitive
strategies.
Firm Competitive Strategies
- Defensive or offensive
- Defensive strategy deflects competitive forces in
the industry
competitive force in the industry to improve the
firms relative position
leadership and differentiation
Low-Cost Strategy
- Seeks to be the low cost leader in its industry
- Must still command prices near industry average,
so still must differentiate
return
Differentiation Strategy
- Seeks to be identified as unique in its industry
in an area that is important to buyers
price premium exceeds the extra cost of being
unique
Focusing a Strategy
- Firms with focused strategies
- Select segments in the industry
- Tailor the strategy to serve those specific
groups
its success
SWOT Analysis
- Examination of a firms
- Strengths
- Competitive advantages in the marketplace
- Weaknesses
- Competitors have exploitable advantages of some
kind
time
Favorable Attributes of Firms
- Peter Lynchs list of favorable attributes
- Firms product is not faddish
- Company has competitive advantage over rivals
- Industry or product has potential for market
stability
(insiders) are buying
Applying the Valuation Models (From Chapter 11)
- Discounted Cash Flow Techniques
- Based on the basic valuation model the value of
a financial asset is the present value of its
expected future cash flows
consider different cash flows and also different
appropriate discount rates
Applying the Valuation Models to Walgreens
- DDM Valuation with Temporary Supernormal Growth
- Value Estimate 27.05 (See page 491)
- Implied P/E of 21 times expected earnings
- Market Price 35.65 (mid 2004)
- Prevailing Market P/E of about 18 times current
earnings
Applying the Valuation Models to Walgreens
- Present Value of Free Cash Flow to Equity
- Value Estimate 35.99 (see page 493)
- Implied P/E of about 25 times expected earnings
- Market Price 35.65 (mid 2004)
- Prevailing Market P/E of about 17 times expected
earnings
lower beta
Applying the Valuation Models to Walgreens
- Present Value of Operating Free Cash Flows
- Value Estimate 33.13 (see page 496)
- Implied P/E of 26 times current earnings
- Market Price 35.65 (mid 2004)
- Prevailing Market P/E of about 18 times
Applying the Valuation Models (From Chapter 11)
- Relative Valuation Techniques
- These techniques assume that prices should have
stable and consistent relationships to various
firm variables across groups of firms
Applying the Valuation Models to Walgreens
- All four relative valuation ratios increasing
over time for Walgreens, its industry, and the
market
economic variables
industry in all ratios, while lagging the market
in terms of the P/E ratio in several years
Specific Valuation with the P/E Ratio
- Using the P/E approach to valuation
- Estimate earnings for next year
- Estimate the P/E ratio (Earnings Multiplier)
- Multiply expected earnings by the expected P/E
ratio to get expected price
Specific Valuation with the P/E Ratio
- Earnings per share estimates
- Time series use statistical analysis
- Sales — profit margin approach
- EPS (Sales Forecast x Profit Margin)/ Number of
Shares Outstanding
estimates
estimates and interpret announcements accordingly
Site Visits, Interviews, and Fair Disclosure
- Fair Disclosure (FD) requires that all disclosure
of material information be made public to all
interested parties at the same time
individuals, only provide information during
large public presentations
managers
Making the Investment Decision
- If the estimate of the stocks intrinsic value is
greater than or equal to the current market
price, buy the stock
value would yield a return greater than your
required rate of return (based on current
investment price), then buy the stock
its return would be less than your required rate
of return, do not buy the stock
Ranking Undervalued Stocks
- How do we rank if we have a budget constraint?
- Best to rank on the basis of the excess return
ratio
Influences on Analysts
- Several factors make it difficult for analysts to
outperform the market
opportunities are rare
