Fundamental Analysis

BizWiz Resources
Absolute Traders Consulting, Inc.

13 October 2012
1
Gavin Cheng Lee, CPA, CIA, MSF, CFA

Assistant Professor
College of Business Administration
University of the Philippines Diliman
Director | Vice-President Academic Relations
Program Director CFA Level 1 Review Class
Chartered Financial Analyst Society of the Philippines (CFAP)
Director | Regional Sector Representative Education
Eastern Metro Manila Chapter (EMMC)
Philippine Institute of Certified Public Accountants (PICPA)
Philippine Institute of Certified

Public Accountants
EASTERN METRO MANILA CHAPTER
What does valuation

questioned refer to?
2012 www.thefundamentalinvestor.com
Where did these values

come from?
Fundamental analysis attempts to determine

the intrinsic value of a stock by
understanding the factors that affect the
companys actual business today, as well as
the future prospects
What is
intrinsic value?
What is the purpose of

determining intrinsic value?
What are these

factors?
NOSEBLEED!!
The process of Fundamental Analysis enables

you to assess:
What are the companys growth prospects?
Are revenues and profits increasing? Or has the
company reached a mature stage?

Can the company pay its liabilities?
Can the company remain competitive?
Where could the company be in five years time?
Intrinsic value is the fair market value (FMV)

of a stock todayi.e. the theoretically
correct price of the stock.
Why is it theoretical?
Why should you want to know the FMV of a stock?
What is the purpose in life of knowing a supposed
correct price if it is only theoretical?
FMV is a universal concept

If you know the FMV of any object, you will
have a basis for making an informed decision:
buy, sell, or do nothing
You will know if you have a good deal or not
Will you buy:

The latest Apple iPhone for Php 3,000?
A freshly cooked Big Mac sandwich for Php 500?
A Samsung Galaxy tablet for Php 125,000?
Why do people spend Php 150 to buy what is

claimed to be coffee at Starbucks when a
perfectly good 3-in-1 Nescafe (that also
claims to be coffee) sells for only Php 10?
Why do you ask for discount when shopping

in tianggethen walk away if you dont get
the price that you want?
How do you determine the price and discount
that you want?
Question:
Why will you decide to
buy or not to buy?
Answer:
Because you have an idea in your head of what the FMV of
these items arebut how did you come up with this FMV?
10
Why did you shell out Php 985.00 to spend a

perfectly beautiful Saturday afternoon
listening to three geeks talk nonsense about
therapies for your wallet?
Do you really believe that the FMV of the
three geeks in one afternoon is Php 985.00?
Are you 100% convinced that we are worth
your Php 985.00? Why?
What factors influenced your decision that Php 985.00

is a fair price for this seminar? Would you still have
attended if you had to pay Php 5,000?
11
Informally, FMV is a result of the interaction

of many forces, including:
Historical experience with a similar product
Expectations about the future benefit to be
derived from using the product

External factors that are beyond your control
Personal bias
12
More formally, the FMV of an asset is the

value today of the expected cash flows in the
future
The value today is known as present value
The benefit expected to be obtained in the future
is captured by the notion of expected cash flows

Cash is KING
No cash = No business
13
You will need to forecast the Income

Statement
Revenues
Less
Expenses
Equal
Profit or Loss
Many forms of revenues: sales,

interest income, etc.
Many forms of expenses: salaries,

rent, office supplies, meals, etc.
The Income Statement captures the essence of why the

business entity exists in the first place:
Are profits being generated?
Lets illustrate this in Excel
14
You can see why intrinsic value is theoretical:

Because of the assumptions made regarding the
future when forecasting the future cash flows

The actual outcome may or may not be the same
as your forecast
So why bother making a forecast?

Because the forecast serves as a useful point-of-
reference to monitor your investments

performancei.e. is it time to buy or sell?
15
Cost vs. benefit trade-off

Include as much detail as possible
There are many ways to project cash flows:

Revenues:
Project the volume and selling price per segment, per
product, per customer group, etc.
Expenses:
Project as a % of sales
Project individually using specific cost drivers
16
Statistical models to project cash flows:

Regression analysis
Be careful with the assumptions

Never pluck a number out of thin air with no
supporting basis
Use logic and common sense to assess whether an
assumption is realistic or not
Lets return to Excel

17
Many qualitative and quantitative factors

affect the intrinsic value of an asset,
including, but not limited to:
Macroeconomics
Geopolitical factors
Industry-specific issues
Company-specific issues
18
What will drive the future profits?

Whats the business model?
First mover advantage
Monopoly structure
Brand image of products or services
Product distribution mechanism / logistics
Competitive advantage
Customer loyalty
Quality and quantity of competitors
19
20
What will drive the future profits?

Who are the directors and top management?
Who is leading the company?
What is the reputation?
Do they have the expertise?
What is the track record?
What is the compensation scheme?
21
What are the corporate governance policies?

Number of independent directors
Compensation scheme
Stakeholder rights: voting mechanism, number of
votes per share, etc.

These factors DO affect
the markets perception of
the company.
Example:
SMC (Ramon Ang)
AC (Ayala family)
22
Geopolitical issues
Stability and character of the government
Who is leading the country?
What are the key policies? Are certain industries
at a disadvantage?
Are laws and regulations steady?
Regional bloc considerations
Euro zone, ASEAN, etc.
23
Macroeconomics
What are the historical and projected GDP growth
rates?
What are the key drivers and risks of GDP growth?
Can the growth be sustained?
Which sectors are projected to grow? Which ones
might slow down? Are you in the sector that is
projected to grow or slow down?
24
25
Macroeconomics
Is inflation expected to go up? Or down? Or
remain steady?
This will affect BSP monetary policy
BSP monetary policy affects interest rates, which
will affect the cost of borrowing from banks

What is the relationship between inflation and the
stock market?
26
Macroeconomics
Is the Peso expected to get stronger, weaker, or
remain the same?

What will make it stronger or weaker?
Is your business affected by the movement of the
Peso? Do you have imports or exports?
27
Macroeconomics
You cannot discuss PHL macroeconomics without
discussing OFW remittances

Will the remittances increase, decrease, or stay
the same?
From which part of the world and which
employment sectors are the remittances coming
from? What are the risks?
Does your business depend on OFW remittances?
28
Macroeconomics
What is the state of the countrys financial health?
What is the fiscal policy stance?
Is there a budget deficit or surplus? Is it increasing
or decreasing?
How is the level of government debt? What are
the tenors and interest rates?
What are the countrys ratings from Moodys,
S&P, and Fitch Ratings?
29
30
31
Macroeconomics
Are there other global events that could affect
your business?
Are you highly exposed to the prices commodities
such as oil, gold, copper, etc.?
Are you exposed to the economic health of other
countries that are major trading partners?
32
33
Specific industry issues

Is it heavily regulated?
Ex: Banks, insurance companies
Are there unique features?
Ex: Concession Agreements for utility firms such as
Meralco, Manila Water, Maynilad, etc.
What are the future prospects for the industry?
What are the barriers to entry and level of
competition?
34
35
36
Specific industry issues

What is your current and projected market share?
Are there tax benefits? Are these permanent or
temporary?
Ex: Renewable energy companies are subject to 0nly
10% corporate income tax
What are the risk factors?

Are there any unique trends?
37
Specific company issues

Do a structured analysis:
SWOT (Strengths, Weaknesses, Opportunities, and
Threats) Analysis
Porters 5 Forces
38
39
Specific company issues

Use ratio analysis to assess the companys
historical performance
Read the news and disclosures to assess the
companys future plans and growth prospects
Assess and understand the key risk factors
Identify possible unusual circumstances

40
Environmentally sensitive business

Law suits
Monopoly power
41
Project the Financial Statements:

Income Statement
Balance Sheet
Statement of Cash Flows
42
Presents a summary of a firms financial position at a given

point in time
Assets = what the firm owns
Liabilities = what the firm has borrowed
Equity = the investments of the owners (i.e. stockholders)
Snapshot at a specific
point in time
Ordinary
photograph
Assets = Liabilities + Equity
43
LIABILITIES
ASSETS
Computers
Vehicles
Inventory
Office Supplies
Land
Building
Furniture
Payable to supplier
Short-term bank loan
Long-term bank loan
Bonds Payable
Capital
Structure:
% Debt
% Equity
EQUITY
Owners investments
Accumulated earnings
All the assets MUST have been funded in some way or another:
borrow money from a lender OR equity investments by owner
44
Provides a summary of the cash flows over the period of

concern, typically the year just ended
Types of cash flows:
Operating Activities
Investing Activities
Financing Activities
Links the income statement and (previous and current)

balance sheets
The Cash item in the Balance Sheet comes from the Statement of
Cash Flows
Income Statement profits Cash flow

45
Calculate the Present Values:

Determine the WACC (Weighted Average Cost of
Capital)
Use Discounted Cash Flow (DCF) models
Do scenario analysis:
Pessimistic case
Normal case
Optimistic case
46
Value investing
Look for stocks with market prices below the
intrinsic value
Implication: you should know the intrinsic value
Typical stock screens: Relative Valuation metrics

Lower-than-average Price / Book Ratio
Lower-than-average Price / Earnings Ratio
High Dividend Yield
The most famous value investor:
Warren Buffett
(Berkshire Hathaway Inc.)
47
Price / Earnings ratio

=

=

High P/E = Expensive stock
Low P/E = Cheap stock
48
Price / Book ratio

=

=

High P/B = Expensive stock
Low P/B = Cheap stock
49
Dividend Yield
A return on investment ratio

=

High Dividend Yield = Cheap stock (due to low market price)

Low Dividend Yield = Expensive stock (due to high market price)
50
Growth investing
Look for stocks that have a recent history of
earnings growth momentum

Determine the key drivers of the earnings growth
and assess if its possible to ride the momentum
Ex: three straight years of earnings growth
You would look for companies with earnings
expected to grow faster than the industry or

economy
51
Annual reports
Bond prospectus
IPO prospectus
SEC 17-A
PSE disclosures
Company websites
News articles
Research reports
As an analyst, youll have to digest

the information in order to come up
with your own opinion...much like
what a doctor does
52
53
ED C - D aily 10/4/ 2012 Open 6.32, H i 6.4, Lo 6.31, C lose 6.35 (0. 6%) Vo l 29,947 ,700 MA(Close, 15) = 6.12, Mid MA(Close, 45) = 5.97, Long MA(Close, 100) = 5.97, BBTop(C lose,1 5,2) = 6.31, BBB
6. 40
6. 2475
6. 22
6. 20
6. 03
6. 00
5. 91644
5.
5. 8125
80
5. 8013
5. 60
5. 40
5. 20
5. 00
N ov em ber
D ecember
2012
Created
AmiBroker
- advanced
analysis
http://www.amibroker.com
ED Cwith
- AD
MAC
X(14)
D (12,
= 26)
35.93,
=charting
0.08,
+Dand
I Signal(12,26,9)
=technical
37.26,
-D I software.
= 8.51
= 0.05
Fe bruary
March
Ap ril
May
Jun
4. 80
0. 0793008
28.
4247
Jul 21.
0. 0499716
017
12. 2776
54
55
GMA7 - D aily 10/4/ 2012 Open 8.8, H i 8.8, Lo 8.16, C lose 8.27 (-8 .3%) Vo l 3,960, 700 MA(Close, 15) = 9.59, Mid MA(Close, 45) = 9.88, Long MA(Close, 100) = 10.03, BBTop(C lose,1 5,2) = 10.42, B
10. 4202
10.
10. 0252
0
9. 88444
9. 59467
9 .0
8. 76915
8. 27
8 .0
7 .0
6 .0
D ecember
2012
Fe bruary
March
Created
with-AmiBroker
advanced
charting
and
analysis
GMA7
MAC
AD
X(14)
D-(12,
= 26)
30.09,
= -0.+D
24,
I technical
=Signal(12,26,9)
4.27,
-D Isoftware.
= 41.31
=http://www.amibroker.com
-0. 13
Ap ril
May
Jun
Jul
Au gust
Se ptember
October
41..127482
-0
3062
-0 .244193
30.
0906
4. 27106
56

Fundamental Analysis

Caricato da

Informazioni sul documento

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Fundamental Analysis

Caricato da

Copyright:

Formati disponibili

BizWiz Resources

Absolute Traders Consulting, Inc.

Gavin Cheng Lee, CPA, CIA, MSF, CFA

Philippine Institute of Certified

What does valuation

Where did these values

Fundamental analysis attempts to determine

What is the purpose of

What are these

The process of Fundamental Analysis enables

company reached a mature stage?

Intrinsic value is the fair market value (FMV)

FMV is a universal concept

Will you buy:

Why do people spend Php 150 to buy what is

Why do you ask for discount when shopping

Why did you shell out Php 985.00 to spend a

What factors influenced your decision that Php 985.00

Informally, FMV is a result of the interaction

derived from using the product

More formally, the FMV of an asset is the

is captured by the notion of expected cash flows

You will need to forecast the Income

Many forms of revenues: sales,

Many forms of expenses: salaries,

The Income Statement captures the essence of why the

Lets illustrate this in Excel

You can see why intrinsic value is theoretical:

future when forecasting the future cash flows

So why bother making a forecast?

reference to monitor your investments

Cost vs. benefit trade-off

There are many ways to project cash flows:

Statistical models to project cash flows:

Be careful with the assumptions

Lets return to Excel

Many qualitative and quantitative factors

What will drive the future profits?

What will drive the future profits?

What are the corporate governance policies?

votes per share, etc.

BSP monetary policy affects interest rates, which

will affect the cost of borrowing from banks

remain the same?

discussing OFW remittances

Lets return to Excel

Specific industry issues

Specific industry issues

What are the risk factors?

Specific company issues

Specific company issues

Lets return to Excel

Environmentally sensitive business

Project the Financial Statements:

Presents a summary of a firms financial position at a given

Assets = Liabilities + Equity

Provides a summary of the cash flows over the period of

Links the income statement and (previous and current)

Income Statement profits Cash flow

Calculate the Present Values:

Typical stock screens: Relative Valuation metrics

Price / Earnings ratio

Price / Book ratio

High Dividend Yield = Cheap stock (due to low market price)