Sap nov 12

Stock Analyst Program 2011

Jamie [email protected] in Investment Management

November 12, 2010

Agenda

Program Overview

Presentation Overview

Macroeconomic Analysis

Industry Analysis

Stock Valuation Methodology• DCF Valuation• Multiples Analysis

How To Start…


Program Overview

Program OverviewWe will start each meeting with material and finish with an open discussionAfter all the “basics” are taught, we will have student guest speakers and then stock pitching days


Date Topic

Nov 12 Overview, Ways to Value, Key Resources

Nov 26 Accounting 101

Jan Multiples Analysis

Jan Stock Screening Methods

Presentation Overview

Equity Analysis Techniques

Top Down Analysis Bottom Up Analysis

• Investor starts analysis with global economics by observing economic indicators

- GDP growth, Inflation, Interest Rates, Exchange Rates, Productivity and commodity prices

• Investor narrows search down to industry analysis

- In this case sales, price levels, cyclical patterns, local/foreign competition, rates of return and earning per share

• Company analysis involves the use of valuation techniques

- DCF, Industry Comparables and precedents are used to value the company

• Investors analyze individual companies - Emphasis is on company specific or industry specific ratios- Undervalued stocks can be labelled as a strong buy regardless of general macro-trends

• Essentially putting together “story of company and its numbers”

- The story component is composed of company’s business plan, outlook and other qualitative aspects- The quantitative part involves a thorough look at company financials


Presentation Composition

The key to writing a coherent research report is understanding and articulating an investment thesis


Or, you could build bottom up, and focus solely on in-depth company analysis


Indicators are usually released monthly in the form of index numbers, quantities, or value

Cycle Significance and Composition The Indicators

• Cycles can be captured through four phases -Expansion, peak, recession, trough • These phases all vary in nature and duration

as they are met under dissimilar circumstances- Policy intervention measures and business responses may differ across the same phases

•There are several indicators that can help us detect and measure the current and subsequent cycles - Leading, lagging, coincident

1. Sourced to “Guide to Economic Indicators”, The Economist.2. Interest rates may also appear in many cases as a lagging indicator, if policy measures taken are reactionary rather than anticipatory.3. Time span (either maximum or minimum) by which the economic indicator usually reverses in trend in terms of total output.

Leading Indicators Peak/Trough Value recovery (2)

Interest rates (3)≈ 18 months

Business Confidence ≈ 8-16 monthsStock Market ≈ 8-16 monthsHousing Starts ≈ 8-16 monthsCompany Financial Surpluses ≈ 8-16 monthsConsumer Credit ≈ 6 monthsCar Sales ≈ 6 monthsManufacturing orders ≈ 6 monthsRetail Sales ≈ 2-3 months

Coincident Indicators

GDP ≈ 1-2 months

Lagging Indicators

Manufacturing capacity utilisation ≈ 1 monthJob vacancies ≈ 3 monthsEarnings growth ≈ 4 monthsProductivity & Unemployment ≈ 6 monthsInflation ≈ 6 months


Macroeconomic Analysis cont’d. An alternative approach to using economic indicators is to use them as directional devices in terms of specific industries in light of their broader macro-economic implications

Alternative Measures (1)

1. Sourced to “Guide to Economic Indicators”, the Economist.2. The producer price index may overstate cost pressures when above average discounts are offered during a recession, or understate cost pressures when inflation is

rapid.ly increasing

* *2 Gold Price Oil Prices Baltic Dry Index Producer & Wholesale prices (2)

Measures Market Price of gold Market Price of Crude OilDemand for shipping capacity versus supply of dry bulk carriers

Input prices of goods

SignificanceServes as both an input cost, and as a global store of value

Serves as both an input cost, ouput price, and measure of geo-political risk.

Provides price of shipping materials by sea, seen as both a cost to commodity producers and price for carriers

Serves as a leading indicator for future cost pressures

Measurement $ per ounce $ per barrelPrice weighted of cost across various vessels

Monthly index numbers

Sources Bloomberg, Reuters Bloomberg, Reuters Bloomberg, Baltic Exchange Bloomberg, Reuters

Macro-Economic Implications

Increasing trends may lead to contractions, lowering trends, may point towards recovery

Increasing trends may be caused by supply cuts or demand increases, whereas decreasing trends may indicate demand reduction and stable geopolitical risk

Measures indirectly global demand and supply for commodities

Shows the restraints or expansion in terms of domestic production costs

Industry Specific Implications

Rise/Fall in revenue for gold producers

Rise/Fall in revenue for oil supply chain

Indicator of cost of operating a vesselUsually released in relation to a particular business segment


Industry Analysis

Pick a Sector GICS: Global Industry Classification Standard (MSCI Barra)10 sectors > 24 industry groups > 68 industries > 154 sub-industries


Sector # Sector Market Allocation

10 Energy 11.03%

15 Materials 7.42%

20 Industrials 9.98%

25 Consumer Discretionary 8.56%

30 Consumer Staples 10.15%

35 Health Care 9.54%

40 Financials 21.62%

45 Information Technology 12.01%

50 Telecommunication Services 5.08%

55 Utilities 4.66%

Visit http://www.mscibarra.com/products/indices/gics/gics_structure.html

Industry Analysis

• Evaluate competitive position of industry relative to others• Nature of industry? Regulation? Importance of innovation and technological

development? Which economic forces have biggest impact?

• Identify companies within the industry that look promising• Examples: strong market position, low cost player, differentiator, innovator

• Can you understand the dynamics of your chosen industry?• Example: financials versus consumer discretionary

Important Considerations


Stock Valuation Methodology


Valuation methodologies are not mutually exclusive and more effective when used to validate one another

Valuation Methodology

4

Current Share Price: €16.25(1)

____________________Note:(1) Share price at end of trading session of 30 March 2009 as provided by Bloomberg(2) Based on target prices issued by brokers since December 2008(3) Multiples based on historical trading statistics. EBITDA estimates as per broker consensus(4) Transaction multiples based on comparable deals

Strong fundamentals suggest upside potential of current share price

Ferrovial share price has been battered in equity markets

High financial gearing

Market cyclicality in certain parts of company

Exposure to construction industry and global liquidity freeze

Perceived risk of default of BAA

Expectation of damaged traffic scenario in European Airports

Five Year CDS suggests only 40% probability of BAA default

Target range at low end of trading multiples and at 50% discount to SoTP Base Case

Share Price (in EURm)

Last 3 Months (1)

Last 6 Months (1)

2009E EBITDA (3)

2010E EBITDA (3)

Transaction multiples

2008E EBITDA (4)

SOTP Base Case

Concensus Analyst Estimates(2)

Trading multiples

Trading Range

€ 16

€ 100

€ 57

€ 39

€ 43

€ 40

€ 16

€ 115

€ 97

€ 61

€ 64

€ 75

€ 31

€ 20

€ 0 € 25 € 50 € 75 € 100 € 125

Target Range: - €€4343 €€5050

Valuation MethodologyStock Analyst Program 2011

Valuation Methodology

• Determine the stream of revenue being generated• Derive weighted average cost of capital (WACC) for firm or rate of return specific to asset• Risk cash flows according to WACC

• Assumes time value of money • General assumptions on terminal value are used

Discounted Cash Flow (DCF) Precedent Transactions

• Determine from past transactions similarities i.e. industry composition, level of risk, size of the transaction• Filtering through the assumptions being used for the precedent transaction allows transparency in your own valuation• The more transactions the better

• Relevant private transactions may or may not be available for use

• Develop case studies for the most relevant transactions to determine an appropriate range to use

• Put more weight on transactions with similar assumptions

• Determine the relevant industry classification • Use of industry based ratios • If specific industry does not exist, work backwards

• Relative comparisons are key; company vs. company & company vs. industry average • Gives a brief idea of where company lies and who key competitors are

• Allows us to determine best/worst of breed

Comparable Transactions


DCF- Methodology

Discounted Cash Flow Method


DCF- Methodology

• Determine unlevered FCF’s each year using assumptions driven off of revenue

• Determine TV at last year of forecast period (2015 or 2020)• 1) Growing perpetuity

• Assumes constant growth rate (2-3%) – not really used• 2) Terminal multiple

• Assumes an exit multiple of an operating metric like EBITDA or FCF, to determine a value for the enterprise at that point in time

• Bring everything back to present value at WACC, add cash, subtract debt and divide by the number of common shares outstanding to arrive at an appropriate share price as determined by your analysis



DCF- Methodology



Revenue

Attendance 17.40 18.97 20.67 22.53 24.56 26.77 29.18 31.81 34.67 37.79 41.19 44.90 48.94 50.90

Sponsorship 15.70 17.11 18.65 20.33 22.16 24.16 26.33 28.70 31.28 34.10 37.17 40.51 44.16 45.93

Broadcast 28.70 31.28 34.10 37.17 40.51 44.16 48.13 52.46 57.19 62.33 67.94 74.06 80.72 83.95

Merchandise 5.20 5.67 6.18 6.73 7.34 8.00 8.72 9.51 10.36 11.29 12.31 13.42 14.63 15.21

Other 7.10 7.74 8.44 9.19 10.02 10.92 11.91 12.98 14.15 15.42 16.81 18.32 19.97 20.77

Total 74.1 80.8 88.0 96.0 104.6 114.0 124.3 135.5 147.7 160.9 175.4 191.2 208.4 216.8

Operating Costs

Payroll 50.92 56.01 61.62 67.78 74.56 82.01 90.21 99.23 109.16 120.07 132.08 145.29 159.82 166.21

Stadium Operating Expenses 16.38 17.04 17.72 18.43 19.16 19.93 20.73 21.55 22.42 23.31 24.25 25.22 26.22 27.27

Other 1.80 1.87 1.95 2.02 2.11 2.19 2.28 2.37 2.46 2.56 2.66 2.77 2.88 3.00

Total 69.10 74.92 81.28 88.23 95.82 104.13 113.22 123.16 134.04 145.95 158.99 173.28 188.92 196.48

EBITDA 5.00 5.85 6.76 7.73 8.77 9.88 11.06 12.30 13.61 14.99 16.43 17.93 19.49 20.27

Depreciation 2.20 2.29 2.38 2.47 2.57 2.68 2.78 2.90 3.01 3.13 3.26 3.39 3.52 3.66

EBIT 2.80 3.56 4.38 5.26 6.20 7.21 8.27 9.41 10.60 11.86 13.17 14.55 15.97 16.61

Interest 2.26 2.46 2.69 2.93 3.19 3.48 3.79 4.13 4.50 4.91 5.35 5.83 6.36 6.61

Taxes 0.19 0.38 0.59 0.82 1.05 1.30 1.57 1.85 2.13 2.43 2.74 3.05 3.37 3.50

Net Income 0.35 0.71 1.10 1.52 1.96 2.42 2.91 3.43 3.96 4.52 5.09 5.66 6.25 6.50

Multiples Analysis- Methodology

PE MultiplePE ratio = Share Price/EPSRationale - How many times does the company trade at compared to its Net Profit per share

EV/EBITEV = Enterprise Value = Market Cap. + MV of debt (actuality the BV of debt)Market value of the firm less debt compared to its net income

EV/EBITDAMV of the firm less debt compares with its approximate measure of cash valueDepreciation and Amortization – non-cash items added back to EBIT

EV/BV of AssetsMV of the firm less debt compared to its asset value on the booksNow looking at an asset base value of the firm compared to the market value adjusted for debt

Multiples Analysis


Multiples Analysis- Methodology

Issues with multiples

- Hard to find truly comparable peer firms – subjectivity…- Dependence on accounting policies – GAAP, AASB etc…differ according to jurisdiction- Cyclicality of earnings, timing of year end- Discriminates against firms with negative equity- Hard to conduct sensitivity analysis - ranges

Multiples Analysis


How to Start…

How to Start…

• Macroeconomy• David Rosenberg, Chief Economist & Strategist, Gluskin Sheff

• Go to GluskinSheff.com to sign up for morning newsletters (often bearish)• SeekingAlpha.com > The Macro View (can e-mail subscribe)• Economist.com > Business and Finance

• Industry Analysis [VPN required]• http://www.mcgill.ca/library/library-findinfo/subjects/management/industry/ >

NetAdvantage > Industry Reports• Or, > Mergent Online > Industry Reports

• Bloomberg terminal: RSE <go> > Search by Industry• SeekingAlpha.com > Stocks & Sectors

• Company Analysis• Finviz.com > Screener• Google.com/finance > Screener• http://www.mcgill.ca/library/library-findinfo/subjects/management/industry/ >

ValueLine [old school, but great info in one page]• Bloomberg terminal: ‘ticker’ <go> > Fundamentals & Estimates > ANR

Important Resources


How to Start…

• DCF Starting point• Bloomberg terminal: 3) Fundamentals & Estimates > FA• Company 10-K and 10-Q filings (available at edgar.com)• Analyst reports (Thomson Investext)

• Often have DCF analysis built into reports• http://research.thomsonib.com/gaportal/login.asp [VPN necessary]

• Multiples starting point• Bloomberg terminal: 3) Fundamentals & Estimates > RV• Finviz.com > Screener

Important Resources


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