1-Company valuation vs The valuation of stock

a-Growth companies and growth stocks

Observers have historically defined growth companies as those that consistently experience
above-average increases in sales and earnings.

The proper definition however given by Salomon and Miller define a growth company as a firm
with the management ability and opportunity to make investments returns that yield at rates of
return greater than the firm required rate of return. This required rate of return is the firm’s
weighted average cost of capital (WACC).

In addition, a growth company that has abover average investment opportunities should, and
typically does, retain a large portion of its earnings to fund these superior investment projects.

Growth stocks are not necessarily shares in growth companies. A growth stock is a stock with a
higher rate of return than other stocks in the market with similar risk characteristics. The stock
achieves these higher returns because it had been undervalued or overvalued at some point in
the past.

b-Defensive Companies and Stocks

Defensive companies are those whose future earnings are likely to withstand an economic
downturn.

A defensive stock’s rate of return is not expected to decline during an overall market decline or
decline less than the overall market. A stock with low or negative systematic risk (a small
positive or negative beta) may be considered a defensive stock.

c-Cyclical Companies and Stocks

A cyclical sales and earnings will be heavily influenced by aggregate business activity.

d-Speculative Stocks
Possesses a high probability of low or negative returns and a low probability of normal or high
returns.

f-Growth Vs Value investing

Value stocks are those that appear to be undervalued for reason other than earnings growth
potential ( market wrong call ). Value stocks have usually low price to earning and price book
ratios
Growth stocks is generally specified as a stock of a company that is experiencing rapid growth
of sales and earnings. As a result of this company performance, the stock typically has a high
price-earning and price book ratios.

2- Estimating Company earnings per share

a-​Company Sales Forcast

To estimate sales:
1. Find a data set with a strong correlation with sales over a long period (linear regression)
2. Find the estimate for the new data
3. Plug the estimate in the model to estimate sales

b-Estimating the Company Profit Margin

1. Identification and evaluation of the firm’s competitive strategy, that is either low cost or
differenciation
2. The firm’s internal performance, including general company trend and consideration of
any problems that might affect its future performance
(Compare on a chart the margin trend of the company to its industry’s trend
Analyze common-size income statement to understand the evolution of the statement’s
component over time)
3. The firm’s relationship with its industry, which should indicate whether the company’s
past performance is attributable to its industry of it it is unique to the firm.