1 1 Ch17, 18, 19 – MBA 566 Security Valuation and Analysis Macroeconomic and Industry...
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Transcript of 1 1 Ch17, 18, 19 – MBA 566 Security Valuation and Analysis Macroeconomic and Industry...
11Ch17, 18, 19 – MBA 566
Security Valuation and Analysis
Macroeconomic and Industry Analysis/Fundamental Analysis
Equity Valuation
Ratio analysis
22Ch17, 18, 19 – MBA 566
Factors affecting firm valuationGlobal economic analysis
Domestic Macro-economy
Government Policies
Industry analysis
Company analysis
Fundamental Analysis
33Ch17, 18, 19 – MBA 566
Performance in countries and regions is highly variable.Political riskExchange rate risk (Figure 17.1, page 554)
SalesProfitsStock returns (Table 17.1, page 554)
Global Economic Considerations
44Ch17, 18, 19 – MBA 566
Gross domestic product
Unemployment rates
Interest rates & inflation
Budget deficit
Consumer sentimentCheck St. Louis Fed for this set of information
Domestic Macroeconomy
55Ch17, 18, 19 – MBA 566
Either affect the demand side (fiscal policy, monetary policy) or the supply side (improving the incentive of production) of goods and serviceDemand shock - an event that affects demand for goods and services in the economy.
Tax rate cutIncreases in government spending
Supply shock - an event that influences production capacity or production costs.
Commodity price changesEducational level of economic participants
The Effect of Government Policy
66Ch17, 18, 19 – MBA 566
Fiscal Policy - government spending and taxing actions.
Monetary Policy - manipulation of the money supply to influence economic activity.
Open market operations
Discount rate
Reserve requirements
Supply Side Policies
Policies on employment
Productivities
Economic growth
Government Policies
77Ch17, 18, 19 – MBA 566
Business Cycle
Peak
Trough
Cyclical industries
Defensive industries
88Ch17, 18, 19 – MBA 566
Economic Indicators
Economic indicators
99Ch17, 18, 19 – MBA 566
Useful Economic Indicators
1010Ch17, 18, 19 – MBA 566
Factors affecting sensitivity of earnings to business cycles:
Sensitivity of sales of the firm’s product to the business cycles
Typically varying across industriesOperating leverageFinancial leverage
Industry life cycles
Industry Analysis
1111Ch17, 18, 19 – MBA 566
Effect of Operating Leverage
See example 17.1 on page 571
Firms with lower operating leverage do better in recessions
1212Ch17, 18, 19 – MBA 566
Effect of Operating Leverage
1313Ch17, 18, 19 – MBA 566
DOL
Degree of operating leverage (DOL)=% change in profit/ % change in sales
=1+Fixed costs / Profit
Computing DOL for firms A and B
1414Ch17, 18, 19 – MBA 566
Effect of Financial Leverage
Financial Leverage
Financial leverage hurts in bad yearsSee example 19.1 on page 639 (Table 19.4)
1515Ch17, 18, 19 – MBA 566
Figure 17.6 Returns on Equity, 2005
1616Ch17, 18, 19 – MBA 566
Figure 17.7 Rate of Return, 2005
1717Ch17, 18, 19 – MBA 566
Slow growers
Stalwarts
Fast growers
Cyclicals
Turnarounds
Asset plays
(page 592)
Industry Life Cycles
1818Ch17, 18, 19 – MBA 566
Industry Life Cycle
1919Ch17, 18, 19 – MBA 566
Sector Rotation
Portfolio is adjusted by selecting companies that should perform well for the stage of the business cycle
Peaks – natural resource extraction firms
Contraction – defensive industries such as pharmaceuticals and food
Trough – capital goods industries
Expansion – cyclical industries such as consumer durables
2020Ch17, 18, 19 – MBA 566
Balance Sheet ModelsBook Value
Dividend Discount Models
Price/Earning Ratios
Equity Valuation Models
2121Ch17, 18, 19 – MBA 566
Limitations of Book Value
Book value is an application of arbitrary accounting rules
Can book value represent a floor value?
Better approachesLiquidation value
Replacement cost
2222Ch17, 18, 19 – MBA 566
Intrinsic Value (page 606)Self assigned ValueVariety of models are used for estimation
Market PriceConsensus value of all potential traders
Trading SignalIV > MP BuyIV < MP Sell or Short SellIV = MP Hold or Fairly Priced
Intrinsic Value and Market Price
2323Ch17, 18, 19 – MBA 566
VD
ko
t
tt
( )11
VD
ko
t
tt
( )11
V0 = Value of Stock
Dt = Dividend
k = required return
Dividend Discount Models: General Model
2424Ch17, 18, 19 – MBA 566
VD
ko
Stocks that have earnings and dividends that are expected to remain constant.
Preferred Stock
No Growth Model
2525Ch17, 18, 19 – MBA 566
E1 = D1 = $5.00
k = .15
V0 =
VD
ko
No Growth Model: Example
2626Ch17, 18, 19 – MBA 566
VoD g
k g
o
( )1Vo
D g
k g
o
( )1
g = constant perpetual growth rate
Constant Growth Model
2727Ch17, 18, 19 – MBA 566
VoD g
k g
o
( )1Vo
D g
k g
o
( )1
E1 = $5.00b = 40% k = 15%
(1-b) = 60% D1 = $3.00 g = 8%
V0 =
Constant Growth Model: Example
2828Ch17, 18, 19 – MBA 566
g ROE b g ROE b
g = growth rate in dividends
ROE = Return on Equity for the firm
b = plowback or retention percentage rate (1- dividend payout percentage rate)
Estimating Dividend Growth Rates
2929Ch17, 18, 19 – MBA 566
)1()1()1(...2
21
10
kPD
kD
kDV N
NN
PN = the expected sales price for the stock at time N
N = the specified number of years the stock is expected to be held
Specified Holding Period Model
3030Ch17, 18, 19 – MBA 566
Example
Go through the example 18.1-18.3 from page 592 to 594
3131Ch17, 18, 19 – MBA 566
)(
1
)(
)1(
1
0
110
ROEbk
b
E
P
ROEbk
bE
gk
DP
)(
1
)(
)1(
1
0
110
ROEbk
b
E
P
ROEbk
bE
gk
DP
b = retention ratio
ROE = Return on Equity
P/E Ratio with Constant Growth
3232Ch17, 18, 19 – MBA 566
Example 18.4 on page 598.
Numerical Example with Growth
3333Ch17, 18, 19 – MBA 566
Summary of Key Financial Ratios
3434Ch17, 18, 19 – MBA 566
Table 19.10 Summary of Key Financial Ratios
3535Ch17, 18, 19 – MBA 566
Table 19.10 Summary of Key Financial Ratios
3636Ch17, 18, 19 – MBA 566
Table 19.10 Summary of Key Financial Ratios
3737Ch17, 18, 19 – MBA 566
Table 19.10 Summary of Key Financial Ratios
3838Ch17, 18, 19 – MBA 566
Figure 19.2 Comparative Accounting Rules