week-7-how-to-pitch-a-stock

8/7/2019 week-7-how-to-pitch-a-stock

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How To Pitch A Stock


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Agenda Types of Analysis / Efficient Market

Theories How to Approach the Analysis Resources Details of a Fundamental Analysis Six Steps to a 5 Minute Stock Pitch Q&A Example of a Pitch Informational

Purposes Only


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Types of Analysis / EfficientMarket

TechnicalAnalysis

No Efficiency Excess returns can be

earned by usinginvestment strategiesbased on historical shareprices

Past events or patterns

can influence the stockprice

Study of past financial data, primarily through charts to forecast price trends


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Market Timing Weak-formefficiency

Share prices exhibit noserial dependencies,meaning that there areno "patterns" to assetprices.

Future price movements

are determined entirelyby unexpectedinformation andtherefore are random

Example Buying a retail stock ahead of theholiday season


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FundamentalAnalysis

Semi-strongefficiency

Semi-strong-form efficiency

implies that share pricesadjust to publicly availablenew information veryrapidly and in an unbiasedfashion, such that noexcess returns can be

earned by trading on thatinformation Technically fundamental

analysis will not be ableto provide excessreturns

Idea behind fundamental analysis is to pull outinformation others cant.

nalyzing all publicinformation and getting your

feet wet!


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Insider Information Strong efficiency Share prices reflect all

information, public

and private, and noone can earn excessreturns

Based on thistheory eveninsiders cannotearn higher returns Illegal way to trade securities! Just think Martha

Stewart.


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How to Approach theAnalysis

Start with the big pictureMacro EconIndustry Info Stock Specific Info.Ex. Investing in countercyclical companies during a recessionTop Down

Approach

Bottom UpApproach

Start with Company specificinformationGenerally ignores macro & industry

level econ.Ex. Investing in Company X because

you believe it is under valued.


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Resources Newspaper Wall Street Journal, Financial Times,

Barrons, etc. Television CNBC, Cramers Mad Money, CNN

Research Reports Thompson Analytics,Investext

Company Information SEC Filings (10K, 10Q),Conference Calls, Investor Presentations,Company Website, Company Management


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Steps to a FundamentalAnalysis

Fundamental Analysis Industry and Competitive Position

Porters Five Forces - Substitutes, Rivalry, Barriers to Entry, Bargaining Power of Suppliers,Bargaining Power of Customers

Management How good are the guys running the business?

Building a financial model

Digging into the 10K, 10Q, and information above What are the performance drivers for the company

Comparable Company Valuation


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Contents of a FundamentalAnalysis

1) Key Financial Information and a Stock Price Graph-Current share price and price target-Revenue growth and margin assumptions-EPS estimates and Price/Earnings Multiples


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2) Brief Company DescriptionBased in San Antonio, TX, Valero Energy Corporation operates as a refining and retailing company in theUnited States. Its refining business includes refining operations, wholesale marketing, product supply and distribution, and transportation operations. The companys products include reformulated gasoline, diesel fuel, and low-sulfur diesel fuel and oxygenates. It also produces conventional gasoline, distillates, jet fuel,asphalt, petrochemicals, lubricants, and other refined products. As of December 31, 2007, the company operated 17 refineries.

3) Investment Merits-Highlight the companys key strengths-Most of the investment merits should be company and not industryor macro economic specific-The investment merits should be unique and not something thatevery analyst or other investor knows about


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3) Catalysts-Highlight 2-3 things that will cause the stock price to move in aparticular direction-The catalysts can be both short term and long term changes

4) Investment Risks-Highlight the no more than three risks to your thesis-Know when these risks might materialize-Have a strict exit strategy in case these risks come true. What typeof a loss are you willing to accept on this position

-Have counterpoints to your investment risks where appropriate


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5) Comparable Company Analysis / Relative Valuation

Value of an assets compared to the values assessed by the market for similar companies

Examples include Price to Earning Ratios and Enterprise Value to EBITDA

Metrics will depend on Companies and Industries


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6) Discounted Cash Flow Analysis

Academic theory states that a stock should be priced at the value of all futurecash distributions

Problem with a DCF is that it can easily be manipulated


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Fundamental Analysis(Examples)

Buy and hold investors - Believe that latching onto good businesses allows theinvestor's asset to grow with the business. Fundamental analysis lets them find'good' companies, so they lower their risk and probability of wipe-out.

Portfolio Managers - May use fundamental analysis to correctly value 'good' and'bad' companies. Even 'bad' company's stock goes up and down, creatingopportunities for profits.

Contrarian investors - Distinguish "in the short run, the market is a votingmachine, not a weighing machine". Fundamental analysis allows you to makeyour own decision on value, and ignore the market.

Value investors - Restrict their attention to under-valued companies, believingthat 'it's hard to fall out of a ditch'. The value comes from fundamental analysis.


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Six Step Stock Pitch1) State the name, ticker and price of the company. Then give a

company description. Also know how this stock has tradedover the last year.

2) Give your opinion upfront: Buy or Sell. Dont pick a holdstock. State your price target (buy or sell).

3) State four or five top investment merits in bullet form. Whenhighlighting these merits be sure to mention how youropinion differs from the street!

4) Discuss the industry - Trends, competition, etc. Use Porters 5Forces.

5) Give your valuation argument. Use comparable companyvaluations and DCFs where appropriate.

6) Acknowledge investment risks to your opinion. Try andprovide a counter point to all your investment risks.


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Thank You!

QUESTIONS?Contact Information:

[email protected]


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TRN Key Statistics

Price: $29.69Market Cap: $2.42B

Recommendation Sell

Price: $21.89Market Cap: $1.77B

TRN 12-Month Stock Price Graph

TRN Industries (TRN) Rail Car Manufacturer


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Our Expectations Street Expectations

Investment Thesis


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Rail car demand is declining consistent with previous cycles

Fewer cars are required due to larger car capacity and railroad efficiency

Declining Rail Car Demand

Rail Car Demand 88-07

Backlog - # of Cars

Delivery - # of Cars

StreetExpectation

Our Expectation

A decline in demand will have a negative effect on TRNs backlog, revenues, and margins


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Ethanol and Tank Car Demand

Current ethanol production of 6.0 bln gallons, implies only 14,000-16,000

additional cars are needed GATX notes that 4,000 ethanol tank cars are currently idle

After 12-18 months, tank cars needed for ethanol through 2010 should be in service

Required Tank Cars


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TRIP is an off-balance sheet entity but controlled by TRN Q2 Earnings Call when we put the cars into the TRIPwe get the immediate benefits of

the earnings capability there. So it just gives us an enormous amount of flexibility tocontrol more of our own destiny.

- Tim Wallace, Chairman, President & CEO

TRIP is adding leasing car capacity despite declining industry fundamentals

Increased railcar shipments to our Leasing Group, partially offset by a decline in externalsales. Q3 10-Q

1 7 % R e v 2 2 % B a c k l o g

100%

Formation of TRIP

TRN Rail

Division

TRN Rail

Division

ExternalCustomers

ExternalCustomers

TRN Leasing(100% Subsidiary)

TRN Leasing(100% Subsidiary)

TRIP Holdings(20% Subsidiary)

TRIP Holdings(20% Subsidiary)

50% Re v

32% Back

log33% Rev

46% Backlog


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Excluding FreightCar America, the average competitor P/E and EBITDA multipleare 8.4x and 4.8x, respectively. With a 8.4x P/E multiple and expectations of declining revenue and contracting

margins, Trinity will have a valuation of

Comparable Company Analysis

Comparable Company Valuation Table

($ in millions, except per sh

Company


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Comparable Company Multiple

A decline in railcar demand will lead to an EPS of $2.46 and a share price of $20.63

Projected Income Statement

($ in millions expcept p

R il C rs Shi e


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DCF Valuation

The DCF valuation of $21.89 implies a 26% downside to the current stock price of $29.69

(in millions except per share data)

RevenueRevenue Growth

5-year DCF analysis


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..........

Risks

Most of TRNs other businessare operating at capacityMost of TRNs other businessare operating at capacity

Current tank car supply can offsetincreasing industry demand

Current tank car supply can offsetincreasing industry demand

TRN is not the market leader in every type of rail car TRN is not the market leader in every type of rail car

TRNs other businessesstablize company earnings

TRNs other businessesstablize company earnings

Ethanol cars are easily andcheaply converted to other usesEthanol cars are easily andcheaply converted to other uses

New rail car types will offset thedeclining demand for ethanol carsNew rail car types will offset thedeclining demand for ethanol cars

Risks To Thesis

Counterpoint

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