Fundamental Analysis Seminar
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Transcript of Fundamental Analysis Seminar
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 [email protected]