Module 7
Fundamental Analysis
1
Module 7 - Learning Objectives
• Define fundamental analysis.
• Differentiate between fundamental, technical and speculative
analysis.
• Define income statement and its major components.
• Define balance sheet and its major components.
• Define cash flow statement and its major components.
• Analyze and evaluate key measures in a company’s income
statement, balance sheet, and cash flow statement.
• Evaluate a company’s products and market position.
• Evaluate a company’s management.
• Explain earnings estimates and how they can be used to evaluate a
company.
• Download financial statements from financial websites and
evaluate an investment.
2
What Is Fundamental Analysis?
Fundamental analysis:
Looking for hidden value in a
company.
Technical analysis:
Discerning patterns in price
charts.
Speculative investing:
Playing the odds.
Some finance types believe
that none of these work. The
market is “efficient” and
stocks are priced at what
they’re worth.
3
How Do You Do Fundamental Analysis?
• SEC documents on the company
• Company websites
• Library (Value Line, Standard and Poor’s,
periodical databases)
• Business press (Wall Street Journal, New York
Times, Forbes, Fortune, and Business Week)
• Financial websites
4
What are you looking for?
• Growth in top line
• Growth in bottom line
• Upcoming products that might grow the
company
• New markets that may grow the company
• Management that is good at growing the
company
• In short, growth
5
What can you find at a company website?
• Let’s try www.boeing.com
6
Product and Market
•
•
•
•
Strong brand franchise in its market
Market leader - largest share of sales
Growth
New products in the pipeline
7
Product and Market?
•
•
•
•
AT&T
EMC
Amgen
Time Warner
8
Management
•
•
•
•
•
CEO, CFO, and COO
Good management team
Good track record
Compensation
Buying or selling company stock
9
Financial Statements
• Accounting is the language of business
• Companies are required to report their
financials according the accounting standards
• Publicly-listed companies need to file their
financials with the SEC
• The main financial statements:
– Income Statement
– Balance Sheet
– Cash Flow Statement
10
Income Statement
Activity for the year - revenues and expenses
11
What’s your income statement?
Median Income (Revenues)
Total Spending (Expenses)
Food at home
Food Away from Home
Alcoholic beverages
Housing
Clothing
Transportation
Health care
Tobacco
Pensions and Insurance
Entertainment
Reading
Education
Donations
Other
Income Before Taxes
Taxes
Net Income After Taxes
Average
Household
Under 25 Years
1998
$23,564
$19,436
1,518
1,557
311
6,151
1,134
4,149
445
186
1,040
974
64
1,139
206
562
$4,128
866
$3,262
Average
Household
35-44 Years
1998
$48,451
$42,154
3,314
2,439
328
14,181
2,193
7,873
1,688
344
4,415
2,215
162
597
997
1,407
$6,297
4,132
$2,165
You
12
Balance Sheet
Snapshot of financial situation
13
What’s your net worth?
Age
Under 35
35-44
45-54
55-64
Average Net Worth
1998
65,900
196,200
362,700
530,200
Median Net Worth
1998
9,000
63,400
105,500
127,500
Source: Federal Reserve
14
How does it work for companies?
15
Evaluating Income Statements
• Merck is a major drug company. Here are its revenues, earnings
before taxes, and basic earnings per share for the past four years.
 Calculate the growth rates in sales
 Calculate the operating margin.
 Calculate the growth rates in earnings per share.
• What does each of these tell you about Merck?
$ Millions
Revenues or Sales
Pre-Tax Income
Basic EPS
2000
40,363.10
1999
32,714.00
1998
26,898.10
1997
23,636.90
9,824.00
8,619.50
8,133.10
6,462.20
2.96
2.51
2.21
1.92
16
17
Calculate growth in debt and equity for
American Home Products now part of
Pfizer. What do your findings show?
$ Millions
Short-Term Debt
Long-Term Debt
$ Millions
Total Equity
2000
58.7
1999
1,912.50
1998
79.6
1997
89
2,394.80
3,668.60
3,859.10
5,031.80
2000
1999
1998
1997
2,818.10
6,214.70
9,614.70
8,175.30
18
19
Calculate Pfizer’s growth in operating cash
flow. What does it tell you about the
company?
$ Millions
Operating Cash Flow
2000
6,195.00
1999
3,056.00
1998
2,929.00
1997
1,629.00
20
Earnings Projections
• Forecast or prediction of
what the company will do in
the next two years
• Detailed analysis of the
company
• Create a financial model
(income statement, balance
sheet and cash flow
statement) for the company
• Basis of where analysts
think stock price will be in
the next two years.
21
Pfizer’s Earnings Estimates
Pfizer Earnings Estimates
Quarter
March-01
0.31
19
0.31
0.32
0.31
0.31
Apr 16, 2001
Current Mean
Number of Brokers
Median
Current High
Current Low
30 Day Ago Mean
Next Report Date
Year
Dec-01
1.30
25
1.30
1.34
1.27
1.30
Dec-02
1.59
22
1.60
1.65
1.56
Reported Actuals
Quarter
0.25
24%
Year Ago Actual EPS
Current vs. Year Ago
Consensus Recommendations
Current Mean
1.8
High
3.0
Low
1.0
Previous Mean
Number of Brokers
1.8
24
Year
1.02
27%
Long-Term Growth Rates
Next 5 Years 23.0%
Median
Number of Brokers 14
Industry Growth
16.2%
Rate
22