Lafayette Investment
Club
Oct 14, 2011
Agenda
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Club News
Education – Valuation Ratios
Renewable Energy – overview
How to invest in renewable energy?
Club News
• Morgan Stanley – Fri, Oct 28th
Sebastian Crapanzano, MD, Risk Management
• Barclays – Wed, Nov 2nd
Jim Glascott, MD, Investment Banking
• Rabobank – November
Andrew Cooper
Ratios and Stock
Valuation
Understanding How Stocks Are Compared And Valued
Types of Valuation
• Fundamental Analysis – “A method of evaluating a
security that entails attempting to measure its intrinsic
value by examining related economic, financial and
other qualitative and quantitative factors.” –
Investopedia
• In other words you have to look at the big picture
when fundamentally looking at a company.
• You have to consider things like; Industry (Competitors,
Market), Earnings, Income, Cash Flow etc.
• Essentially you need to find out the Companies DNA.
How do we do this?
• 1) Balance Sheet - A statement of the assets,
liabilities, and capital of a business or other
organization at a particular point in time. (Loans/
Short term/long term Debt)
• 2) Income Statement - a financial statement that
gives operating results for a specific period.
(expenses/ COG’s)
• 3) Cash Flow - The total amount of money being
transferred into and out of a business, esp. as
affecting liquidity. (solvency, the cash health)
• All three things can publically be viewed online,
these statements are released Quarterly, and
Annually.
What's Next?
• Once you have considered “The Big Picture”, you
have an understanding of the companies fiscal
figures, the next question I always ask myself, is
where the hell is this stock going and how does it
compare to its market and competitors?
• A great tool to use are ratios that you can use to
valuate these companies and see how they match
up.
• Most of these ratios point out if the stock is
“cheap” or “expensive” or “undervalued” or
overvalued”.
• Once you understand where the company stands
in comparison to the market, you can see if these
are the right “levels” to get in.
Ratio’s
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Here are some of the Ratio’s used to valuate companies.
P/E – Price Earnings
PEG – Price Earnings Growth
EBITDA - Earnings before interest, taxes, depreciation, and
amorization
• EV/EBITDA – Enterprise Value to EBITDA
Price/Earnings
• This valuation ratio compares the company's current
share price to its per-share earnings.
• This can be a valuable tool in valuating companies
within the same industry.
• P/E is often used as a multiple when noting how much
an investor/trader is willing to pay per dollar of
earnings.
• You will often hear analysts or traders say, “Its trading
10 times earnings” or “At a multiple of 14 the stock
seems cheap”.
• Formula: Market Value per Share / Earnings per Share
(EPS)
PEG (Price Earnings Growth)
Ratio
• A huge valuation tool for estimating potential earnings
growth.
• A company with a low PEG ratio closer to 0 is most
likely undervalued.
• However, just like P/E it has its limits.
• These are projected numbers, so of course are subject
to change.
• This is still a great tool to see how it compares to
industry leaders, also a huge tool used by Growth
Investors.
• Formula: Price/Earnings / Annual EPS growth
EBITDA
• A measurement of a company's operating profitability. It is
equal to earnings before interest, tax, depreciation and
amortization (EBITDA) divided by total revenue.
• In essence you have a look at the company’s total profitability
outlook.
Enterprise Value/ EBITDA
• First Enterprise Value is not to be mistaken with
market cap.
• Market Cap only deals with is limited to common
equity.
• Enterprise Value sums up everything and gives you the
market value of the whole business.
• EV/EBITDA is important because it can compare any
company to another.
• It ignores tax structures of other countries, and it also
can be a great tool for potential takeover targets.
• A company with a low ev/ebitda multiple is considered
by some as undervauled.
DCF – Discounted Cash Flow
• This valuation tool,
seemingly
complicated, but if
your good at math.
• This a great method
for valuating what your
investment may be
down the road.
• In essence, THE DCF is
= the money you
would receive from an
investment and adjusts
for the time value of
money.
Done
More Renewable
Energy
Greg Allis
Solar (PV) Panels
Radiation Hotspots
Wind Turbines
Global Wind Energy
Production
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Source: GWEC, Global Wind Report Annual Market Update 2010
Geothermal
Other forms
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Biofuels
Biomass
Hydroelectric
Tidal
“I’m Going to Work on Wall Street,
Why Do I Care?”
• New and developing technologies
• Huge political, social, and economic impacts
• Money to be made
Success Indicators
• Government/financial support
• Energy potential
• Social attitude towards green energy
Where/How to Invest in Clean Energy
&Risks of Clean Energy
Renewable Energy Companies
Alternate Energy Stocks
• First Solar Inc. (NASDAQ: FSLR)
-solar
• Tesla Motors Inc. (NASDAQ: TSLA)
-electrical(vehicles)
• FuelCell Energy Inc. (NASDAQ: FCEL)
-electrical
Renixx –Renewable Energy Industrial Index
Green ETF’s
• A green ETF is ultimately a basket of alternative energy stocks
or stocks of green companies
• Bought and sold on the stock market
• Not subject to the same fees as an alternate investment
fund(lower expense ratio)
• Buying ETF’s is less risky than individual stocks
Alternate Energy ETF’s
• Market Vectors Global Alternative Energy ETF (NYSE: GEX)
• PowerShares Clean Energy ETF (NYSE:PBW)
• Market Vectors Solar Energy ETF (NYSE: KWT).
Funds
• iShares S&P Global Clean Energy Index Fund (ICLN)
• New Alternatives Fund(NALFX)
Risks of Clean Energy
• Rapidly developing technologies
• Industries prospects rely on Government help(subsidies)
• Alternative-energy stocks tend to fall in and out of favor
depending on the price of crude
• So many clean energy companies emerging its hard to pick
which one will stand the test of time
• (Investor emotional Involvement for the wrong reasons)