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http://www.investopedia.com/video/play/un
derstanding-fundamental-analysis/
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Academy #6
Fundamental analysis
“I’ve never bought a stock unless, in my view, it
was on sale.” John Neff
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Cornerstone of investing
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Analyzing fundamentals
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Qualitative and quantitative
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Great for proposals
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Asking the right questions
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Is the company’s revenue growing?
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Is it actually making a profit?
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Is the cash flow positive?
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Is it in a strong-enough position to beat out
its competitors in the future?
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Is it able to repay its debts?
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Is management trying to ”cook the books"?
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Quantitative
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Qualitative
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Applications
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Risks
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Intrinsic Value
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Accounting
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Valuation methods
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Stock screener(s)
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Price on a:
Specific time
Quantity (supply / demand)
Market price is subjective
Opinions differ
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The “real” value of a company
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But what determines the real value?
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Balance sheet
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Income statement
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Cash flow statement
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What a company owns (debit):
◦ Short term assets
◦ Long term assets
◦ Intangible assets
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How a company owns it (credit):
◦ Equity
◦ Short term liabilities
◦ Long term liabilities
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Net profit -> Shareholders’ equity
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Profit/earnings
Accrual accounting
Revenue – cash flow
Costs – expenses
EBITDA
Earnings before interest, taxation,
depreciation and amortization
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Cash is king!
Cash in and outflow
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No influence of bookkeeping tricks
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Earnings Per Share (EPS)
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Dividend yield
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Price/Earnings (P/E)
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EV/EBITDA
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Book to market value
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Gordon’s growth model
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Earnings per share (EPS)
Earnings divided by shares outstanding
Dividend per share
(money now – reinvesting)
Shell - Google
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Value of the company divided by earnings
(profit)
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Price per share divided by EPS
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What determines height of the ratio?
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Enterprise Value/EBITDA
EBITDA – Earnings
- Earnings before I tricked that dumb auditor
Book to market value
Book value firm / market value firm
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D = dividend
g = growth rate
r = discount rate
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Compare P/E ratio with peers
Is it higher, lower?
Why?
Good reason(s)?
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Multiple expansion – contraction
◦ Longitudinal: compare ratio’s with previous years
◦ EPS growth, dividend growth
◦ Cross-sectional: compare ratio’s with each other
◦ EPS growth, dividend per shares growth but P/E
decline -> why?
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Business model
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Markets
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Competitive environment
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Management
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Market opinion
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What does the company do?
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Where does it generate money?
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Look at key drivers/factors
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Don’t invest in a business you don’t
understand!
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Boston Chicken
Fixed fee
MC Donald's
Franchise system
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Strategy
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Value proposition
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Cost structure
Fixed costs – variable costs
Commodities (Air France-KLM)
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Patents (Pharmaceutics)
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What drives success?
How are these factors changing?
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Characteristics of markets:
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◦ Spare car parts example
◦ Smartphones example
◦ Nintendo Wii example
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What can a company do better than it’s
competitors? (Michael Porter)
◦ Cheaper/better/faster
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Google: best search engine
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Apple: strong brand name
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Toyota: efficiency advantage
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Coolblue: fast delivery
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How competitive is the industry?
◦ Airlines
◦ Soft drinks
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Incentives
◦ Shareholder alignment
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Consistency
◦ Skagen funds
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Track record
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Example: Angela Ahrendts – Apple
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Material events
◦ Earnings, public announcements
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World events
◦ Central bank policies, political and war events
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Industry appeal
◦ Social media stocks
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Example: BP oil spill
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Finding an edge & catalysts
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Where to find valuable information?
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Let’s do this!
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Edge: asymmetric information distribution
◦ Interpretation
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Catalyst: why now
◦ Intrinsic value versus market price
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www.google.com/finance
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www.yahoo.com/finance
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www.finviz.com
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Company website
◦ Investor Relations
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Which company?
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Timing
◦ Technical analysis
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Efficient market hypothesis
◦ No free lunch
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Is the market ever going to reflect the
intrinsic value?
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One can be wrong in calculating intrinsic
value
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Information transfer
◦ B&R members
◦ Traders
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Large cap vs small cap
◦ Apple - musclepharm
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Stock reflects all available information
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Weak form:
◦ past prices can’t lead to outperformance
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Semi-strong form:
◦ Public information can’t lead to outperformance
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Strong form:
◦ All information is incorporated in the price of an
asset, even inside information
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