Strategic Capital Group
Workshop #1: Stock Pitch
Composition
What does a pitch look like?
Investment Thesis
Company Overview and Advantage
Industry and Market Analysis
Valuation
Risks
The Investment Thesis
Why do you want to invest in this company?
• Reasons to invest in a company:
– Value Investingpicking
investments
Which is
the riskiest?
The safest? that are
trading for less than their intrinsic value.
Who might be interested in each style of investing?
– Growth Investing- picking investments that have
potential to grow more than the market already
believes.
– Fixed-Income Investing- picking stable investments
that can provide returns even when stagnant.
The Investment Thesis
• Does the stock fulfill a strategy in the overall
portfolio?
– Diversification- risk management strategy
Name two stocks that do not correlate
whereby losses in some securities is offset by
gains in non-correlated securities
Company Overview
• What does it do?
• Who’s running it?
• How does it make money? • Why this company and not
• Who are its competitors?
competitors?
Company Overview: Key Statistics
• Serve as a quick financial snapshot of the
business to assess its health
• We want to look at:
–
–
–
–
–
–
Are they in a lot of debt?
Do they have any cash?
How much money have they made in the past years?
What do their margins (profitability) look like?
What is the scope/size of the business?
Where does it operate?
Key Statistics You Saw Last Meeting
Earnings History
$6,000
$5,000
$4,000
4,313
4,946
4,551
Historical Revenue
5,503
30,000
25,000
$3,544
$3,000
Franchised…
Company-…
20,000
15,000
2,395
$2,000
10,000
$1,000
5,000
$-
0
2006
2007
2008
2009
2010
2011
2006
2007
2008
2009
2010
2011
Operating Margin
Total Restaurants
35.0%
34,000
27.4%
30.0%
33,000
25.0%
32,000
20.0%
30.1%
31.0%
31.6%
2009
2010
2011
21.2%
17.0%
15.0%
31,000
10.0%
30,000
5.0%
0.0%
29,000
2006
2007
2008
2009
2010
2011
2006
2007
2008
Other Key Statistics We Can Use
Net Income (Profit)
Profit Margin =
Revenue (Sales)
Current =
Ratio
Current Assets (assets we can turn
into cash in one year or less)
Current Liabilities (debts we have
to pay this year)
Historical
Earnings per Share =
Net Income (Profit)
Shares Outstanding
Competitive Advantage
• Competitive Advantage- a distinct, unique
advantage a company has over its
competitors,
it to generate
What areallowing
some examples
of this wemore
revenue, can
achieve
margins, or hold
see inbetter
real companies?
customers better than others.
Competitive Advantage: Exercise
Sanity Check
• We’ve discussed different investment ideologies
• We’ve covered what to look for in a company
overview and what statistics to look at
• We’ve discussed examples of competitive
advantages
Key Terms: Value Investing, Fixed-Income Investing,
Growth Investing, Diversification, Competitive
Advantage
Industry Analysis- Porter’s 5 Forces
Threat of
New
Entrants
Bargaining
Power of
Suppliers
Intensity
of
Rivalry
Threat of
Substitutes
Bargaining
Power of
Buyers
Market Analysis
• Questions to ask
– Is instability in a region going to hurt its margins?
– Are conditions pushing investors out of one asset
class and into another?
– Are there untapped markets waiting for this
company?
• Focus on global news and ask yourself if this
will influence your company.
Market Analysis: Exercise
• How can a Euro-zone debt crisis and Chinese
growth slowdown influence a company like
Verizon?
• How does instability in the Middle East impact
margins of American Airlines?
Valuation
• The big cheese: what investors really care
about. Is my investment going to make
money?
• Intrinsic vs. Relative Valuation:
– Intrinsic: Valuing a company based on how much
revenue/cash/profit it will generate in the future
– Relative: Valuing a company by comparing it to its
peers
Valuation
Intrinsic Valuation
• Factors in a company’s
future profit potential.
• Both qualitative and
quantitative brought
together
• Concerned about cash
flows, as investors, we
ultimately care about
tangible money that can be
used to pay us
Relative Valuation
• Factors in similar
competitors in the market
• If market averages for a
trading multiple (P/E, P/B,
P/S) are higher than your
company’s, this is a sign
that your company is
undervalued compared to
the rest of the market
Intrinsic Valuation: How do we do it?
1.) Understand the company
– Revenues, profitability, trends, management quality, new
products, market competition, etc.
2.) Build a model
– Common practice is to build a Discounted Cash Flow Model
(DCF) that forecasts how much money the company will
generate in the future, then finds out what that cash is worth
right now.
3.) Put a price tag on the company
– Find out what a company that can generate X amount of cash
over the next 5 years is worth through the model and compare
to the current share price. If your implied share price from the
model is less than the current market price per share, you
should invest.
Example of a DCF
Revenue
Cost of Sales
Gross Profit
Gross Margin
Projected
2011
2012
2013
2014
2015
$27,006.0 $28,356.3 $29,774.1 $30,965.1 $31,894.0
$10,231.6 $10,579.5 $10,928.6 $11,278.3 $11,560.3
$16,774.4 $17,776.8 $18,845.5 $19,686.8 $20,333.8
62.1%
62.7%
63.3%
63.6%
63.8%
Assumptions
2016
$32,531.9
$11,791.5
$20,740.4
63.8%
SG&A Expenses
EBIT
EBIT Margin
$8,342.6 $8,843.16 $9,329.53 $9,702.71 $9,993.79 $10,193.67
$8,431.8 $8,933.7 $9,516.0 $9,984.1 $10,340.0 $10,546.8
31.2%
31.5%
32.0%
32.2%
32.4%
32.4%
NOPAT
D&A
Change in NWC
CapEx
FCF
DCF
$5,649.3
$1,329.6
($550.0)
$2,730.0
$4,798.9
Terminal Value
Enterprise Value
$5,985.6
$1,412.4
$750.0
$2,900.0
$3,748.0
$3,569.5
$6,375.7
$1,468.9
($575.0)
$3,016.0
$5,403.6
$4,901.2
$6,689.3
$1,498.3
$500.0
$3,076.3
$4,611.3
$3,983.4
$6,927.8
$1,513.3
($225.0)
$3,107.1
$5,558.9
$4,573.4
$7,066.3
$1,513.3
$150.0
$3,107.1
$5,322.5
$4,170.3
$
133,625.04
$
125,896.49
WACC
5%
Tax Rate
33%
Exit Multiple
Share Price
11.08
$
98.62
Calculations
Enterprise Value
$ 125,896.49
Less Net Debt
$ 10,164.70
Equity Value
$ 115,731.79
Shares Outstanding
Value Per Share
Implied Discount
1018.6
$
113.62
15.19%
Sanity Check
• We’ve learned Porter’s 5 Forces, a method of
evaluating an industry
• We’ve learned that global market forces
should be considered when evaluating a stock
• We’ve learned what intrinsic valuation is and
received a rough outline of how to use it
Key Terms: Porter’s 5 Forces, Intrinsic Valuation,
Relative Valuation, Discounted Cash F
Relative Valuation: How do we do it?
1.) Determine peers of your company
– Look at industry, size, geography
– What good is comparing Apple to Verizon?
– Competitors are on the 10-K’s most of the time
2.) Assemble company multiples or “comparables”
– Find multiples like P/E, P/B, EV/EBITDA for your company and its
chosen peers
– Resources for this: Yahoo Finance, Bloomberg, CNBC
3.) Compare multiples between companies
– For value investing, you want your stock to be trading at less
than market value (lower multiple than the averages)
– Based on these numbers, we can calculate an implied share
price
Relative Valuation
Target company:
Step 1: Assemble peers of the company
Relative Valuation
Step 2: Assemble company comparables
P/E 2010 = 18
P/E 2011 = 17
Estimated P/E 2012 = 16
P/B 2010 = 1.4
P/B 2011 = 1.3
P/B 2012 = 1.2
P/E 2010 = 22
P/E 2011 = 25
Estimated P/E 2012 = 21
P/B 2010 = 1.6
P/B 2011 = 1.8
P/B 2012 = 1.5
Etc.
Compare the multiples
Company
P/E 2010
P/E 2011
P/E 2012
P/B 2010
P/B 2011
P/B 2012
ATT
22.0x
25.0x
21.0x
1.6x
1.8x
1.5x
T-Mobile
21.0x
22.0x
18.0x
1.9x
2.2x
1.5x
Sprint
25.0x
24.0x
20.0x
2.5x
2.2x
0.6x
Average
22.7x
23.7x
19.7x
2.0x
2.1x
1.2x
Verizon
18.0x
17.0x
16.0x
1.5x
1.4x
1.3x
So we know it’s undervalued…
But how do we know by how much?
BY USING ALGEBRA!
We make a key assumption to determine an implied share price through
multiples:
• In the long run, our multiple will equal the industry average for that
same multiple, so…
Relative Valuation
Verizon Price
=
Verizon Earnings Per Share
Industry Price to Earnings
Multiple
If we want to find what our stock is
worth
comparison
industry,
So based
oninthe
2012 Pricetotothe
Earnings
solve
for Verizon
Price.
multiple, Verizon
should
be worth
$50.93 an
implied discount of 11% to its current price of
$45.90
Industry P/E X
=
Verizon Price
Verizon Price
=
=
23.7x
$ 50.93
X
Verizon EPS
$2.15
Risks
• Every company has something wrong with it or has a
chance for failure
• Found in 10-K, but we want real risks
• Two kind of risks:
– Company-specific
– Industry-wide
– Technically market-wide risks too, but those aren’t relevant
as they are going to be present in nearly every potential
company.
• You’re not helping anyone if you give bullshit risks, it
can only hurt you if you look past serious problems
with the company.
Sanity Check
• We’ve learned how to perform a relative
valuation of a company
• We’ve learned how to extrapolate a share
price from a multiple comparison
• We’ve learned the two kinds of risks and the
value of being honest
Announcements
• PAY DUES
• UIA Stock Pitch Competition coming up on Sept.
29, make a USIT team and go kick ass.
– Need help building your pitch or making it a bit more
in-depth? Talk to any SCG member
• SimComp takes place on October 4th, next
workshop we’ll be working on how to trade on
news and trade quickly  maybe
• Stock Pitch teams will be formed before next
meeting- notifications will be sent by EMAIL