Contemporary Investments: Chapter 13 Chapter 13 COMPANY ANALSYSIS: LOOKING FORWARD Is there a...
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Transcript of Contemporary Investments: Chapter 13 Chapter 13 COMPANY ANALSYSIS: LOOKING FORWARD Is there a...
Chapter 13 COMPANY ANALSYSIS:
LOOKING FORWARD• Is there a long-term relationship between
earnings and stock prices?
• How are earnings calculated?
• What are the simple quantitative methods for forecasting earnings?
• How are business models used to forecast earnings?
• What are some of the other financial variables the analyst needs to estimate?
Earnings and stock prices
• Long term relationship between stock prices and earnings
• Relationship between earnings announcements and stock prices
Figure 13.1 – Earnings and Stock Prices for Johnson & Johnson
Earnings and earnings forecasts• Measuring earnings per share
– Number of shares outstanding
– Basic earnings per share
• Definition
• Continuing and discontinued operations
– Diluted measures of earnings per share
Earnings forecasts
• Consensus forecasts
• Earnings surprises
• Management forecasts
Forecasting earnings
• Approaches to forecasting earnings
– Qualitative forecasts
– Quantitative forecasts
– Bottom-up forecasts
– Top-down forecasts
Forecasting earnings- Cont.
• Trend based forecasts
– Assumptions behind trend based forecasts
– Average compound growth rate
– Trend based regression
Figure 13.2 – Earnings per Share for Kohl’s Corporation
Figure 13.3 – Actual vs. Predicted Earnings per Share
Business models
• What is a business model
• Understanding the business
• Total revenues (Sales)
• Operating expenses and operating profit
• Net income and earnings per share
Business models- Cont.
• Sensitivity analysis
–What is the purpose of sensitivity analysis
– How to conduct a sensitivity analysis
Forecasting other financial variables
• Dividends
– Dividend payout ratio
– Stability of dividends versus earnings
• Cash flow
• Required return
Figure 13.6 – Earnings and Dividends for Johnson & Johnson
Cash flow
– Differences between cash flow and earnings
– Free cash flow
– Operating cash flow
Required return
– Required return versus expected return
– Estimating required return