Presents

“Fundamental Analysis: Finding the

Right Stock”

Presented by:

April L. Tan

CitisecOnline.com Inc.

What makes a good stock?

Price and Earnings

Earnings – Up or Down?

“If a business does well, the stock eventually follows.”

- Warren Buffett

A tale of two companies

EPS comparison of PX and LC

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

LEPANTO

PHILEX

A tale of two companies

Price comparison of PX and LC

-1000.0%

0.0%

1000.0%

2000.0%

3000.0%

4000.0%

5000.0%

6000.0%

7000.0%

8000.0%

3/1

6/2

000

9/1

6/2

000

3/1

6/2

001

9/1

6/2

001

3/1

6/2

002

9/1

6/2

002

3/1

6/2

003

9/1

6/2

003

3/1

6/2

004

9/1

6/2

004

3/1

6/2

005

9/1

6/2

005

3/1

6/2

006

9/1

6/2

006

3/1

6/2

007

9/1

6/2

007

3/1

6/2

008

9/1

6/2

008

3/1

6/2

009

9/1

6/2

009

3/1

6/2

010

PX LC

Factors that affect earnings

Demographics

Economy

Stage of the industry life cycle

Competitive environment

Management capability

Demographics – A growing or shrinking market?

US Population Ages 40-49

0

10000

20000

30000

40000

50000

1985 1990 1995 2000 2005 2010 2015 2020

Year

In T

ho

usan

ds

Demographics – A growing or shrinking market?

Harley Davidson EPS Trend

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Demographics – A growing or shrinking market?

Harley Davidson Share Price Performance

0

10

20

30

40

50

60

70

80

90

1/3/2000 1/3/2001 1/3/2002 1/3/2003 1/3/2004 1/3/2005 1/3/2006 1/3/2007 1/3/2008 1/3/2009 1/3/2010

Demographics – A growing or shrinking market?

US Population Ages 20-29

34000

36000

38000

40000

42000

44000

46000

48000

1985 1990 1995 2000 2005 2010 2015 2020

Year

In T

ho

usan

ds

Demographics – A growing or shrinking market?

DeVry EPS Trend

0

0.5

1

1.5

2

2.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Demographics – A growing or shrinking market?

DeVry Share Price Performance

0

10

20

30

40

50

60

70

80

1/3/2000 1/3/2001 1/3/2002 1/3/2003 1/3/2004 1/3/2005 1/3/2006 1/3/2007 1/3/2008 1/3/2009 1/3/2010

Economy – A tailwind or a headwind?

Investments

Economy

Monetary policy

Fiscal policyExternal demand

(exports, OFW

deployments)

Economy – A tailwind or a headwind?

How will the following developments

affect the profits of companies?

Falling interest rates

Global economic slowdown

Rising OFW remittances

Rising oil prices

Economy – A tailwind or a headwind?

Business Confidence vs Ad Revenue Growth

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

2005 2006 2007 2008 2009 2010*

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Business Confidence Advertising Revenues Growth

Industry life cycle analysis – measuring growth potential

Developmental

ExpansionMaturity

Declining

Earn

ings

Stage of Industry Life Cycle

Earnings Trend vs Industry Life Cycle Stage

Industry life cycle analysis – measuring growth potential

Industry Life Cycle: Summary of Major Characteristics

Developmental Expansion Maturity Declining

Sales and profit growth

Small, but prospects are high

>30%In line with the

economySlower than the

economy

Market penetration Below 10% 10-90% 90% or more -N/A-

Free cash flow NegativeMay still be

negativePositive, growing faster than profits

Large

Example Mining exploration Broadband Cellular phone Film camera

Industry life cycle analysis – measuring growth potential

Which industries and companies have better

growth prospects?

[ ] C ellular phones [ ] Broad Band[ ] F ilm cameras [ ] Digital cameras[ ] C hina [ ] US A[ ] Amazon.com [ ] National Book S tore

Competitive environment – promotes or hinders profitability

Industry Competitors

Rivalry Among Existing Firms

Bargaining Power of Suppliers Bargaining Power of Buyers

Potential Entrants

Threat of New Entrants

Suppliers Buyers

Substitutes

Threat of Substitute Products or Services

Competitive environment – promotes or hinders profitability

Competitive Environment of Different Industries

F avorable Unfavorable

P ower Distribution L iquor

Malls F ood

Water Distribution C lothing

Management capability – ability to execute

• Size

• Financial Strength

• Experience

• Financial track record

Factors

Management capability – ability to execute

Fort Bonifacio

Before After

Measuring Financial Strength

D/E ratio

Debt / Stock Holder’s Equity

Ability to borrow

Ideally < 1

Measuring Financial Strength

EBITDA

Earnings before interest, tax,

depreciation & amortization

Ability to generate cash flow

Positive & growing

Measuring Financial Strength

Theme: Privatization of power plants

Co. A Co. B

EBITDA (PhpMil) 5,453.00 7,661.00

D/E 2.53 0.54

Measuring Financial Track Record

Business Model

Current business

New business Similar

Measuring Financial Track Record

SMC’s investment in mining – good or bad?

Measuring Financial Track Record

ROEReturn on equity

Ability to generate profits on investments

Net income / stock holder’s equity

> 10%

Stable or growing

Measuring Financial Track Record

ROE driversAsset turnover

Sales / Assets

Efficient use of assets

Margin expansionCost management

Increasing leverage Supplier credit

Bank credit

ROE Driver – Asset Turnover

1,000 1,100 1,200

1,0001,0001,000

Pepe

Pilar

vs

Equity 9,000

Sales 3,300

Equity 9,000

Sales 3,000

ROE Driver – Margin

1,000 1,100 1,200

1,0001,0001,000

Pepe

Pilar

vs

Equity 9,000

Sales 3,300

NI 1,485

ROE 16.5%

Equity 9,000

Sales 3,000

NI 1,500

ROE 16.7%

Net Margin: 45%

Net Margin: 50%

ROE Driver – Leverage

1,000 1,100 1,200

1,0001,0001,000

Pepe

Pilar

vs

Equity 9,000

Sales 3,300

NI 1,485

ROE 16.5%

Equity 9,000

Sales 4,000

EBI 2,000

Int (10%) 300

NI 1,700

ROE 18.9%

Net Margin: 45%

Net Margin: 50%

1,000

Measuring Financial Track Record

Google vs. TencentGOOG 2005 2006 2007 2008 2009

EBIT Margin 34.33 33.48 30.64 30.43 31.50

Asset T/O 0.90 0.74 0.76 0.76 0.65

Leverage 1.10 1.09 1.10 1.12 1.12

ROE 23.7% 23.3% 21.2% 16.6% 20.3%

EPS Growth 243.8% 98.0% 33.7% 0.2% 53.2%

Tencent 2005 2006 2007 2008 2009

EBIT Margin 29.57 40.08 41.85 44.44 68.73

Asset T/O 0.45 0.69 0.66 0.85 0.91

Leverage 1.13 1.22 1.30 1.38 1.42

ROE 17.4% 32.0% 35.2% 45.7% 53.7%

EPS Growth -6.0% 119.1% 45.8% 77.5% 84.4%

Measuring Financial Track Record

Price comparison of Google and Tencent

-1000.0%

0.0%

1000.0%

2000.0%

3000.0%

4000.0%

5000.0%8/1

8/2

004

12/1

8/2

004

4/1

8/2

005

8/1

8/2

005

12/1

8/2

005

4/1

8/2

006

8/1

8/2

006

12/1

8/2

006

4/1

8/2

007

8/1

8/2

007

12/1

8/2

007

4/1

8/2

008

8/1

8/2

008

12/1

8/2

008

4/1

8/2

009

8/1

8/2

009

12/1

8/2

009

Google Tencent

Price - Cheap or Expensive?

“I don't look to jump over 7-foot bars: I look around for 1-foot bars

that I can step over.”-Warren Buffett

Price - Cheap or Expensive?

A Good Company…

Price - Cheap or Expensive?

… is not always a good stock

Price – Reason why good companies become bad stocks

Fair Value – Present value of future free cash flows

If Market Price > Fair Value, then bad stock If Market Price < Fair Value, then good stock

Is it a 7-foot bar or a 1-foot bar?

*Determine market expectation reflected in the price

High Expectations Low Expectations

AP at Php18.50 FPH at Php56.00

LT ave. WESM price at Php5.00

(vs. historical ave. of Php4.00+)

Combined market value of its

26% effective stake in EDC and

6.7% stake in MER is higher than

the market value of the company

Company also has a net cash of

Php5.5 Bil

Valuations: Commonly used

P/E

Price / EPS

P/BV

Price / Book value per share (BVPS)

BVPS = Stockholder’s Equity / OS

Commonly used for banks and financials

Valuations: Commonly used

DCF Present value of future free cash flows FV = CF1/(1+r1) + CF2/(1+r2)2 + CF3/(1+r3)3 + . . .

Can be used on all stocks

NAV

Sum of the fair value of assets

Commonly used for property companies and holding companies

Valuations: High or Low Expectations

P/E

Higher growth, higher P/E

P/E < 7X is cheap

Valuations: High or Low Expectations

Which has high expectation?

11E P/E EPS Growth

Banks 13.1 13%

Commercial & Industrial 10.9 8%

Consumer 15.0 3%

Telecoms 10.1 3%

Valuations: High or Low Expectations

Which has low expectation?

11E P/E EPS Growth

AC 17.2 9%

AGI 8.5 20%

SM 16.5 10%

Valuations: High or Low Expectations

P/BV

Higher ROE, higher P/BV

P/BV < 1X is cheap if ROE > 15%

Valuations: High or Low Expectations

Which has high expectation?

Which has low expectation?

11E ROE 11E P/BV

BDO 9.6% 1.4

BPI 14.1% 2.1

MBT 10.7% 1.3

SECB 16.1% 1.2

Valuations: High or Low Expectations

NAV

Market value < 50% of NAV is cheap

Valuations: High or Low Expectations

ALI

FLI-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

Mar

-92

Jun-

93

Sep

-94

Dec

-95

Mar

-97

Jun-

98

Sep

-99

Dec

-00

Mar

-02

Jun-

03

Sep

-04

Dec

-05

Mar

-07

Jun-

08

Sep

-09

+2 stdev

+1 stdev

Mean

-1 stdev

-2 stdev

Valuations: High or Low Expectations

RLC

MEG-80%

-70%

-60%

-50%

-40%

-30%

-20%

Sep

-06

Dec

-06

Mar

-07

Jun-

07

Sep

-07

Dec

-07

Mar

-08

Jun-

08

Sep

-08

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

+2 stdev

+1 stdev

Mean

-1 stdev

-2 stdev

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Mean

+2 stdev

+1 stdev

-1 stdev

-2 stdev

Summary

Price and earnings determine a stock’s direction

Demographics, economic conditions, stage of the industry life cycle, the competitive environment, and management capability drive earnings

Good companies become bad stocks when prices reflect unrealistically bullish expectations

Thank you and have

great day!

To learn more about CitisecOnline and our services and seminars please visit our website at www.citiseconline.com or call our

customer hotline at 6-333-777 or email our customer service group at helpdesk@citiseconline.com