Overview of Process – Required Elements of Project FIN 449 Company Analysis Project

Assignment Objectives 1) To prepare you for large-scale, team-based analytic projects that you may be involved with in the future. 2) To gain an understanding and appreciation for the intricacies of building a valuation model. 3) To polish your skills in communicating the results of analysis. 4) To improve your skills in conducting and interpreting financial analyses.

Process (Required Elements) Overview  Nature of business model  Financial structure  Cost of capital (focus on equity)  Forecasts  Calculate FCFE  Valuation  Interpretation of results

Nature of Business Model  Communicate the competitive environment facing the business and its industry  Products/services sold  Size of market  Capabilities to expand (geography and/or products)  Outlook for industry’s product/services  Significant/recent events  Summarize competitive environment  Source(s) of competitive advantage? (industry level & company level)  Difficulty to replicate, lower cost structure, etc.  Other issues…superior management, better workforce, etc.?  Bottom-line: this is an analysis…incorporate facts about industry and company fundamentals into observations about financial structure & performance.

Financial Structure  Understand and communicate the financial structure & performance of your firm AND industry (or important competitors)  NOT simply stating ratios  Use “enough” history  Goal: helps to build “better” forecast  Benefit: may provide some insight regarding challenges facing the firm

Cost of Capital  Remember: cost of capital reflects RISK  Given this: do your estimates make economic sense?  Goal: cost of equity should be reasonable approximation of rate of return demanded by shareholders of the firm

Forecast  Tell your story regarding your thoughts about the company’s future….this story becomes the foundation for your forecast assumptions.  Assumptions should be justifiable based on business/industry analysis (OK to incorporate history…don’t rely solely on it…remember there were 3 different sources for estimating growth…use appropriately)  State & justify all assumptions in forecast (improving/declining profit margins, changing leverage, reinvestment, etc.)  Define and defend forecast period….remember, the length of forecast is based on competitive advantage.

FCFE Calculation  Based off income statement and balance sheet forecasts  FCFE is highly dependent on evolution of assumptions about payout, cash balances, and debt policy.  Especially relevant for high-growth firms with no history of distributing cash to shareholders  How does your FCFE forecast compare to historically computed FCFE?

Valuation  Find the value of equity based on your forecasted FCFE (forecast horizon & terminal value).  If relevant, compare to a dividend valuation  Incorporate payout from repurchases as well  How does your valuation compare to market price?  Evaluate your assumptions…too optimistic, pessimistic, etc.?  Do you have any “words of wisdom” for company management?

My Advice for Presentation  Relax…it’s a learning opportunity.  Prepare approximately 30 minutes of material.  Budget time allocation appropriately. What do you want to spend the most time discussing…where will feedback be most useful?  Make sure to go through whole process before presentation, regardless of whether you are satisfied with your assumptions.  Listen to the questions and comments made during the presentation.

My Advice for Final Paper  Edit your document as much as possible to ensure readability, flow, and consistency.  Discuss important/relevant figures thoroughly (NEVER refer reader to a table/exhibit without discussing)  There are MANY relevant numbers computed in forecast and valuation analysis.  Valuation should be “transparent” as I read your paper.  Don’t plagiarize!  Document your sources.  If in doubt, see me!  Avoid filler.

Companies – Spring 2012  Monday, 5/21  Molson Coors Brewing  Possibly interesting issue?  Value of brand names  Brown-Forman  Possibly interesting issue?  Dual-class structure (management/board ownership & corporate governance)

Companies – Spring 2012  Wednesday, 5/23  Staples  Possibly interesting issue?  Valuing an oligopoly business?  YUM Brands  Possibly interesting issue?  Difficulties in measuring ROE  Buffalo Wild Wings  Possibly interesting issue?  Role of operating leases in valuation

Companies – Spring 2012  Wednesday, 5/30  Apple  Possibly interesting issue?  Role of profit margin & operating asset assumption in valuation  Amazon.com  Possibly interesting issue?  Defining comparables  Netflix  Possibly interesting issue?  Evolution of distribution system

Companies – Spring 2012  Monday, 6/4  Estee Lauder  Possibly interesting issue?  ?????  Kroger  Possibly interesting issue?  Low profit margin business  Goodyear Tire & Rubber  Possibly interesting issue?  Valuing a turnaround story