Today’s Goal Equip and inspire you to participate more fully in the Investment Club Evaluate companies for Stock Reports –Post reports on the website Valuation practice for you Something tangible to show for your work Good exposure for the club

Tulane’s Model BurkenRoad reportsBurkenRoad –Short Report, Long ReportShort ReportLong Report –Mutual Fund: HYBUXHYBUX Make stock recommendations –If you pick interesting stocks, recommendations are less important (market perform)

Interesting Stocks 3D Systems Corp: 3D printers –TDSC

Interesting Stocks American Technology Corporation: Laser Sound –ATCO

Interesting Stocks TurboChef Technologies: Superfast Toasters –OVEN

Small Firms Have Little Coverage

Stock Reports The club should build a template that everyone should follow –Looks professional Discussion of business, effects of current events, lists accounting information and forecasts Valuation and maybe a price target Recommendation

Sources of Information Company’s website:MD&A in 10K Goizueta Resources –Business Insights:Industry level information –Thomson One: good charts –Hoovers: List of competitors –Investext: Actual analyst reports –Bloomberg:Beta –S&P’s NetAdvantage:IDK

Valuing Firms Simple method based on similar firms –Easy to understand Can learn quickly –Not emphasized much in class Based on rule of thumb rather than theory

Valuing Firms Using Comps A group of similar companies are identified for the basis of comparison with the company being valued. Key financial multiples are calculated for these companies and then used for valuing the company in question. Motivation –Similar companies should have similar value. Benefit: –Ease of use Drawback –Values obtained are crude measures

P/E Price divided by earnings per share –How much are investors willing to pay for each dollar of earnings? Measure of growth

How much is Google Worth Yahoo –Price$27.36 –EPS0.79 –P/E34.68 P = (P/E) * E Google –EPS7.88 P = (P/E) * E P = (34.68) * 7.88 = $ P = $479P/E = 60.86

Key Valuation Multiples Price / Earnings Price / EBIT or EBITDA EV / EBITDA –EBIT = Earnings Before Interest and Taxes, Income from operations before the effects of the financing and taxes –income independent of capital structure –EBIT is measure of Operating Income –EBITDA = Also before Depreciation and Amortization Measure of Operating Cash Flow –Enterprise Value= Stock Value + Net Debt + Pref. + Minority Interest Includes all forms of capital

What’s a Minority Interest Search “minority interest” in yahoo:

Steps for Comparable Analysis Determine the peer group (your comps universe) Gather the appropriate financial information Enter the financial information into your spreadsheet –normalize for non-recurring items Calculate relevant historical or forward multiples (P/E; EV/EBITDA) Forecast your company’s future financial performance (EBITDA, EPS, Cash Flow, etc.) Apply appropriate multiples to your company’s financial stats and derive implied valuation range

Finding Comps “Comparable” or “similar” in terms of: –Operations Products / services; distribution; costs structure; geography; interest exposure; customers, etc. Financial Aspects –Size (sales, mkt cap); capital structure; margins / profitability; management experience, etc. You are probably better off to not exclude the comps that are different but use them to explain different relative valuation –Use the average (or median) multiples as the benchmark

Issues Subjective nature and process –How do you asses differences in the operations and financial aspects? –Do you assess intangible differences such as brand equity, reputation or management expertise? What is the appropriate number of comps? Selection may be more art than science –Use judgment –Or Hoovers

Alternative Multiples Multiples will vary by industry –Retail: EPS, PEG –Industrials: EBITDA, EPS –Internet: Revenues, Subscribers, Page views –Banks/Financial institutions: EPS, Book Value –REITS: Funds from operations, Net asset value Use forward multiples if possible –Projected EBITDA, EPS

Spreadsheet