Stock Analysis Assignment (Fin 470)
Follow the below format & instructions for your stock analysis. You grade will be based
on completing the below instructions in a coherent (well written) and convincing (well
argued) way. You must choose a company to analyze for which you can obtain the
below listed information. (Hence, it may be necessary for you to select a mid or large
cap stock as it may be difficult to acquire the requisite information for very small
companies.) Your stock analysis is meant to be similar to a stock report from an
investment brokerage house. Hence, it does not need to recommend a “buy” of the stock
– as many brokerage houses cover stocks on which they may not currently have a “buy”
recommendation. There are numerous websites that you will use to obtain stock
information – make sure to cite them, particularly when a graph, table, or data is/are
taken directly from the website. The vast majority of the links referenced below can be
obtained from the One Approach To Gathering Information About Stocks (heretofore,
“One Approach”) which is linked to from my Econ 475 website:
http://www.cwu.edu/~tenerelt/finance%20475%20-%202.htm.
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1) Company profile
o You should describe the company and its businesses/products.
o See #2 from “One Approach.”
2) Industry competitors
o You should give a list of the company’s competitors. Use your judgment in
including companies from your reference websites.
o See #4 from “One Approach.”
3) Market position, growth opportunities, and risks (This is the heart of your
analysis.)
o From the information you can obtain, you should try to describe as accurately as
possible the company’s approximate market share in each of its major businesses
(if you can find the data), and the company’s approximate market share in its
primary products (if you can find that data). You should also try to explain why
you believe that the company will maintain, increase, or decrease its market share.
You should also explain the key risks for the company – that is, the key factors
which can influence the financial success or lack of success for the company
moving forward. Include a discussion of the firm’s ROE and its ability to
maintain or increase that ROE moving forward.
o See #3, and possibly #5 and #6 from “One Approach.”
4) Valuation (This is the soul of your analysis.)
o 4-a) You should report valuation ratios compared to the industry and S & P
500.
 See #9 (the “Morningstar 2” link) from “One Approach.”
 Report the data in the “Current Valuation” table at the “Morningstar 2” link.
 Comment in particular on the price to earnings and the price to book ratios.
 Calculate the average net income/earnings growth over the last 5 years (links
to income statements are referenced in the discussion of financial statements
below) and construct the PEG ratio.
 Does the company seem overvalued or undervalued based on the PEG ratio?
 Explain.
o 4-b) If the company pays dividends, use the dividend discount model (DDM)
to value the company.
 Note: If the dividends for your company are zero then skip 4-b and go straight
to 4-c.
 Use either the constant growth DDM or a two-stage (or multi-stage) DDM.
(See chapter 13.)
 If you use a constant growth DDM use the following equation to value the
company: D0(1 + g)/(k – g), where D0 is the current dividend level.
o Note: g must be less than k.
o See “Calculating k” which is in bold below to see how to calculate k.
 If you use a two-stage DDM, forecast out dividends for 5 years (or more if
you want). Then assume a fixed growth rate in dividends from the 5th year
forward to calculate a terminal value in the 5th year. Then find the present
value of (i.e., discount) the dividends for each of the five years and the
terminal value for the fifth year. Then take the sum of the discounted values
to determine your final valuation using the DDM model.
 To find the present value of (i.e., to discount) each year’s dividends,
divide each year’s dividends by (1 + k)t, where t is the number of years
forward. Use the below listed equation in red to calculate the discount
rate, k.
 To calculate the terminal value use the equation D0(1 + g)/(k – g), where
D0 is the dividend in year 5. Remember to discount the terminal value by
dividing by (1 + k)t before taking the sum of the discounted values.
o Note: g must be less than k.
 Explain your choice of DDM.
o 4-c) Use “Owner-Earnings,” a variation on FCFE, to value the company.
 Owner-Earnings (OE) = Net Income (excluding any unusual income/charges)
+ Depreciation & Amortization – Capital Expenditures.
 If you want to get a little more sophisticated, you can use “maintenance
capex” in place of Capital Expenditures in the above equation.
Maintenance capex is the amount of capital expenditures necessary for the
firm to maintain the current level of competitiveness/profitability. See the
following link for a discussion of how to calculate maintenance capex:
http://www.oldschoolvalue.com/blog/valuation-methods/calculatingmaintenance-capital-expenditure/.
 Use either a constant growth owner-earnings discount model or a two-stage
(or multi-stage) owner-earnings discount model. (See equation 13.12, and
substitute owner-earnings for FCFE.)
 Note: If you calculate owner-earnings and it is negative then you must use
a two-stage or multi-stage owner-earnings model.
 If you use a constant growth owner-earnings discount model, use the
following equation to value the company: OE0(1 + g)/(k – g), where OE0
is the current level of owner earnings.
o Note: g must be less than k.
o See “Calculating k” below to see how to calculate k.
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You must divide your final number for the value of the company by the
number of shares outstanding to get a per-share value of the company.
 If you use a two-stage owner-earnings model, forecast out earnings for 5 years
(or more if you want). Then assume a fixed growth rate in owner-earnings
from the 5th year forward to calculate a terminal value in the 5th year. Then
take the present value of (i.e., discount) the owner-earnings for each of the
five years and the terminal value for the fifth year. Then take the sum of the
discounted values to determine your final valuation of the company using the
owner-earnings discount model. To get a per-share value of the company, you
must then divide by the number of shares outstanding. This information is
typically found in the income statement of a company.
 Note: If you calculate owner-earnings and it is negative, you must forecast
out owner earnings until it is positive. You cannot calculate a terminal
value unless the owner-earnings for the period in which you are
calculating a terminal value is positive. Therefore, if you are forecasting
out earnings for 5 years, make sure that your forecasted owner-earnings
for the 5th year is positive.
 To find the present value of (i.e., to discount) each year’s owner-earnings,
divide each year’s owner-earnings by (1 + k)t, where t is the number of
years forward.
o See “Calculating k” below to see how to calculate k.
 To calculate the terminal value use the equation OE0(1 + g)/(k – g), where
OE0 is the owner-earnings in year 5. Remember to discount the terminal
value by dividing by (1 + k)t before taking the sum of the discounted
values.
o Note: g must be less than k.
o See “Calculating k” below to see how to calculate k.
o See the immediately above underlined note if owner-earnings in your
last year is negative.
 You must divide your final number for the value of the firm by the number
of shares outstanding to get a per-share value of the company.
 Explain your choice of owner-earnings model (e.g., why you used the constant
growth model as opposed to the two stage model).
o Calculating k
 Use the following equation to calculate k: rf + β[E(rM) – rf]
 rf is the risk-free rate of return. Use the return on the 10-year treasury note –
approximately 2.75%.
 β (beta) can be found on Yahoo! Finance. Enter the ticker, select “key
statistics,” and you will see beta on the right side of the page under “Trading
Information.”
 E(rM) is the expected return on the market portfolio. Use the historical S&P
500 return – approximately 8.5%.
5) Ratio analysis
o You should report profitability and financial health ratios.
 See #9 (the “Morningstar 1” link).
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For profitability ratios, click on “Profitability” below “Key Ratios” and then
report the ratios under “Profitability” for the past 10 years.
 For financial health ratios, click on “financial Health” below “Key Ratios”
and then report the ratios under “Liquidity/Financial Health” for the past 10
years.
o Briefly describe the trends in these ratios and what you feel the importance is.
6) Institutional ownership and changes
o You should report the level of institutional ownership and changes in institutional
ownership over the last quarter.
 See #12 (Institutional Ownership – Total) from “One Approach.”
o You should also describe what you feel is the importance of the numbers.
7) Insider transactions
o You should report the purchases of stock by executives in the corporation.
 See #13 (the “Morningstar” link) from “One Approach.”
 Under “Weekly Insider Transactions” select “2 Year,” “Buy,” and “All
Transactions.”
o Briefly describe what you feel is the importance of the numbers.
8) Analyst recommendations and changes
o You should report analyst ratings and changes in analyst ratings.
 See the second and third link under #11 from “One Approach.”
 Report current recommendations and recommendations in each of the last 3
months.
 Also report a graph of broker recommendations and price against time. Make
sure to cite your source.
o Briefly describe what you feel is the importance of the numbers.
9) 5 year chart
o Present an approximate 5 year chart (or weekly chart) from your favorite charting
website. One possible source is StockCharts.com. Make sure to cite your source.
10) Recommendation (This is your conclusion.)
o Bring together all of the preceding parts of the analysis to make a conclusion.
Discuss the pros and cons of the company (stock). Make a final recommendation
on the stock (Buy, Sell, Neutral) based on your analysis.
11) Appendix: Financial Statements
o Report the following financial statements for your company for the last 5 years.
 You can export the financial statements (income statement, balance sheet,
cash flow statement) from the “Financial Statements” link under #9 from
“One Approach.”
 When you export the data, save it rather than just trying to open it. After
you have saved the file, then go to the folder where the file is saved and
double click on it to open it.
 Enter the symbol in the box next to where it says "Quote" at the top and press
enter. Click on "Income Statement," "Balance Sheet," or "Cash Flow" under
the company name.
BONUS: Quick Summary (Put this at the front of your assignment.)
o This is optional, and will receive 5% extra points on the assignment.
o You should probably do this last since many of the numbers will be included in
the below steps of your stock analysis.
o State you Investment Recommendation: Buy, Sell, or Hold.
o Create a small table with Earnings Per Share (EPS) for the past 5 years and the
analyst estimates for earnings in the current year and following year.
 Use either basic or diluted EPS, but state which one you are using if it is given
from your source.
 See #10 from “One Approach” for the analyst estimates.
 EPS data will be included in the income statement.
o Create a small table with Profitability Metrics: ROA, ROE, Net Profit Margin
(Net Income / Sales), and Operating Margin (Operating Income / Sales) for the
last complete fiscal year (i.e., the last year where annual figures are reported).
 Margins can be calculated from the income statement.
o Create a small table with Valuation Metrics: Total Assets, Market Cap, Price /
Book Value Per Share, P/E ratio (ttm, i.e., trailing/past twelve months of
earnings), PEG Ratio.
 Assets will be reported on the balance sheet.