COL Fundamental Analysis

7/29/2019 COL Fundamental Analysis

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FundamentalAnalysis

Fundamental analysis is a combination of quantitative

and qualitative analysis that determines a stocks

value by focusing on a company's actual business and

its future prospects.


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FundamentalAnalysis

1. What is being priced in?

2. What is mispriced?

Two Most Important Questions:

Stocks will make money over the long

term provided that earnings are on anuptrend and valuations are cheap.


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FundamentalAnalysis

Process of forecasting corporate earnings

(using a top down approach)

Macro-economic analysis

Industry analysis (industry lifecycle, competitive environment)

Company analysis (strategy, financial statement analysis)


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FundamentalAnalysis

How to identify strong companies (The Five Ps)

ProductPredictability

Potential

People

P/E (Valuation)


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FundamentalAnalysis

1. Alternatives

2. Competitive advantage

Benchmarking


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FundamentalAnalysis

Puregold Savemore Rustans Robinsons

Revenues 1000 1500 500 250

Gross Margins 15% 12% 10% 8%

Operating

Margins 10% 8% 5% 3%


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FundamentalAnalysis

Inputting numbers through commonly used valuation methods

DCF or Discounted Cash Flow Method

NAV or Net Asset Value Method

Relative Valuation Method


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Commonly used methodsfor determining Fair Value

Present value of future free cash flows

FV = CF1/(1+r1) + CF2/(1+r2)2 + CF3/(1+r3)

3 + . . .

Higher earnings will lead to higher fair value

Lower interest rates will lead to higher fair value

Can be used on all stocks

DCF or Discounted Cash Flow


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Required Rate or Return: 10%

Year Cash Flow PV of Cash Flow

0 500.0 500.0

1 600.0 545.5

2 700.0 578.5

3 800.0 601.1

4 900.0 614.7

5 1,000.0 620.9

6 and onward 1,100.0 6,830.1

Total

O/S

10,290.8

1,000.0

FV per share 10.3

Required Rate or Return: 8%

Year Cash Flow PV of Cash Flow

0 500.0 500.0

1 600.0 545.5

2 700.0 578.5

3 800.0 601.1

4 900.0 614.7

5 1,000.0 620.9

6 and onward 1,100.0 8,382.4

Total

O/S

11,843.1

1,000.0

FV per share 11.8

Example: DCF Method


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Sum of the fair value of assets

Commonly used for property companies and holding companies

NAV or Net Asset Value


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Commonly used methodsfor determining Fair ValueExample: NAV Method

Asset PhpMil Php/sh % of Total Valuation Method

BPI (33%) 62,630 126.25 23.4% P/BV multiple

Globe (30%) 33,906 68.35 12.7% DCF

Manila Water (43.3%) 20,832 41.99 7.8% DCF

Ayala Land (53.5%) 136,714 276 51.1% NAV based

IMI (67.7%) 10,626 21 4.0% DCF

Total for listed subs/affil 264,708 534 99.0%

Ayala Automotive 6,844 13.80 2.6% Book value

AG Holdings 4,856 9.79 1.8% Book value

Minus net debt (9,124) (18.39) 3.4%

NAV 267,283 538.78 100.0%

Outstanding sh (Mil) 496.09

Value per shae 538.78

Fair value estimate 443.00 (15% discount to NAV)


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An analyst chooses a target valuation multiple and uses that to value

stock

Ex. 15X P/E, 1.5X P/BV

Target multiples are usually based on industry average, historical

average, adjusted up or down based on EPS growth or ROE

Relative Valuation Method


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Relative ValuationMeasures

P/E = Price/Earnings per share (EPS)

EPS = Net income to common/Outstanding shares

General rule: Companies with higher EPS growth deserve to trade at

higher P/E

P/E & EPS Growth


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Which stock looks cheap?

Which stock looks expensive?

Company B looks cheap

Company D looks expensive

Example

Company EPS Growth P/E

A

BC

D

10%

20%15%

8%

10.0

8.012.0

15.0


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P/BV = Price/Book value per share (BV)

BV = Stockholders equity/Outstanding shares

ROE or Return on equity

ROE = Net income/Stockholders equity

General rules: Banks are usually valued using ROE and P/BV; Companies

that deliver higher ROE deserve to trade at higher P/BV

P/BV & ROE


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Which stock looks cheap?

Which stock looks expensive?

Company A looks cheap

Company C looks expensive

Example

Company ROE P/BV

A

BC

D

10%

12%8%

15%

0.8

1.42.0

1.7


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If a company is expected to earn Php5.25 per share next year and its

historical average P/E is 9X, the fair value of the stock is:

P = P/E x EPS

= 9 x 5.25

= 47.25

If a company is expected to have a BV of Php15.00 per share next year and

its historical average P/BV is 1.5X while it is expected to maintain an ROE of

12%, the fair value of the stock is: P = P/BV x BV

= 1.5 x 15.00

= 22.50

Example: Relative Valuation Method

Determining Fair Value usingRelative Valuation Method


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Valuation Measures

Div Yield = Dividend per share/Price

Salary as an investor

Stocks with high dividend yield are usually considered attractive for

conservative investors looking for income, assuming that the companys

earnings outlook is positive

Most high dividend yielding stocks are utility companies with slowerearnings growth

DIV Yield


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High Dividend YieldingStocks

High Dividend Yielding Stocks*

Ticker Company Div Yield

MER Meralco 4.70%

SCC Semirara 4.50%

AEV Aboitiz Equity 3.30%

GLO Globe Telecom 5.50%

TEL PLDT 7.00%

*Regularly check investment guide for updates


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Where to getInformation

Strategy Reports

Investment Guide


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Strategy Reports

Discuss the factors affecting the stock market

Answer the question Should I be bullish or bearish and why?

Provide suggestions on how investors should respond to these factors

Ex. Buy aggressively; wait for pullbacks; sell

Provide an opinion on which sectors and stocks would be most affected by

factors affecting the market

Ex. Focus on growth stocks; avoid mining stocks; list of best picks


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Strategy Reports

Monthly strategy reports

Focused on relevant issues for the month

COLing the Shots

Philippine Market Strategy

Semi-annual strategy reports

Focused on longer term relevant issues (past six months, next six to twelve

months)


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How to findthe StrategyReports


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Investment Guide

The investment guide is appropriate for investors who prefer to use a

bottom up approach

A guide that provides most of the important fundamental information

needed by investors on companies that are part of COLs coverage list

Information included:

Current stock information (Price, Outstanding Shares, Market

Capitalization)

Recommendation (Rating, Fair Vale Estimate)

Earnings (Revenues, Net Income, EPS, Growth)

Financial Ratios (Net Margin, ROE, LTD/E)

Valuation (P/E, P/BV, Dividend Yield, PEG)


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How tofind theInvestment

Guide


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How to useInvestment Guide

Most important pieces of information

Market Cap

COL Rating / Target Price

P/E & EPS Growth

P/BV & ROE

Div Yield


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Market Cap

Price x outstanding shares

Measure of size

Important because larger companies are usually more liquid compared tosmaller companies

Liquid stocks can be easily bought or sold, size of portfolio will not be a

problem

Ex. Ayala Land vs. Vista Land

Market Cap or Market Capitalization


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Analyst recommendation on the stock, either BUY, SELL or HOLD

Determined by estimating the fair value of a company in light of its future

earnings potential (evaluation of earnings growth outlook and valuation)



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Two types of stocks generally earn a BUYrating in our Investment Guide

Earnings

Up DownValuation

Cheap BUY (Type 1) BUY (Type 2)

Expensive HOLD SELL


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Cheap Stocks withgrowing earnings

Type 1: This type of stock usually trades at low relative P/E despite high

EPS growth, or low relative P/BV despite high ROE; upside to the target

price is high

This is the most preferred type of stock to buy

Ex. DMCI (2009), ICTSI (2005), Security Bank (2005)


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Type 2: This type of stock trades at very attractive valuations, but earnings

are usually weak in the short term

Ex. Semirara (SCC), Philippine market (2008)

There are pros and cons in buying this type of stocks


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Earnings weakness usually only short term in nature

Ex. Demand drops due to cyclical reasons such as bear market, high raw

material prices, negative impact of weather disturbances, temporary

delays in operations

Valuations are usually very attractive (significant upside to fair value

estimate)

Can be accumulated over a long period of time

Pros:


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Prices might take a while to recover

Negative news flow might lead to further drop in share prices in the short term

Actual developments could be much worse than expected (ex. Cebu Pacific)

Cons:


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Using the Invest Guide

Ex. List down all the stocks that have a BUY rating and still have an upside

potential of >20%

Step 1: Create a shortlist of stocks to buy

Choose companies that belong to different sectors

Ex. One property stock, one bank, one power, etc.

Step 2: Diversify


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Growth, value or income

Growth high EPS growth

Value high capital appreciation potential, low P/E, low P/BV

Income - high dividend yield

Liquidity

Active traders with large portfolio go for larger market cap stocks

Long term investors can invest in smaller market cap stocks

Names

Major shareholders (Ayala, Aboitiz, Sy, Gokongwei, MVP, etc.)

Brands (Jollibee, SM, Meralco, etc.)

Step 3: Determine your preferences


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Questions that you need to answer:

What does the company do?

How does it generate profits? If it has numerous lines of business, how

are revenues/operating profits broken down?

Who are its major shareholders?

What is its earnings track record?

What are the drivers of future earnings growth?

Does the company have the resources to execute its growth plans?

By how much will earnings grow in the next few years?

Is there anything that I should be worried about?

Step 4: Validate your preferences


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How tofind theCompany

Snapshots


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Snapshots


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Example:CompanySnapshot of

SM Prime


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Reports


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Analyzing stocks that are not part ofCOLs average list

Questions that you need to answer:

What does the company do?

How does it generate profits? If it has numerous lines of business, how

are revenues/operating profits broken down?

Who are its major shareholders? What is their reputation?

What is its earnings track record?

What are the drivers of earnings growth?

Does the company have the resources to execute its growth plans?

By how much will earnings grow in the next few years?

Is there anything that I should be worried about? Is the companys valuation cheap or expensive relative to the market and

its peers?


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Sources of Information

Focus on company disclosure, especially 17A (annual report) and 17Q

(quarterly report)

PSE Website

Learn more about what the company does

Sometimes, the company would have press releases, presentations available

Company Website

Newspaper Reports


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How to Stay Updated

Continuously read COL research productsMorning notes

Summary of important news that could affect the market or certain

stocks updated on a daily basis

Also include new reports on stocks that we cover (updates, or

analysis of the impact of new developments on profitability and

valuation, change in recommendation)

New buy or sell ideas are sharedWeekly

Strategy reports


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Appendix


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Definition of Financial Terms

Market Cap = Price x Outstanding shares

Measure of size

Usually, larger companies are more liquid (easier to buy and sell)

Market Cap or Market Capitalization

EPS = Net income/Outstanding shares

EPS or Earnings Per Share

The lower the better, although companies with higher EPS growth can justify

trading at higher P/E

P/E = Price/ EPS


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Although technically flawed, it is commonly used as a short cut way to make

P/E comparable to growth

The lower the better

PEG = P/E EPS Growth

Div Yield = Dividend per share/Price

Similar to interest on deposits, the higher the better

Div Yield or Dividend Yield


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BV = Stockholders equity/Outstanding shares

P/BV = Price/BV

Commonly used in valuing banks

The lower the better, although companies with higher ROEs can justify higherP/BV

P/BV or Price to Book Value

ROE = Net income/Stockholders equity

The higher the better

ROE or Return on Equity


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The higher the better

Net Profit Margin = Net income/Revenues

CFO = Net income + Depreciation and other non cash expenses (income) Change in working capital

Has to be positive

CFO or Cash Flow from Operations

LTD/E = Long term debt/Stockholders equity

The lower, the more conservative; Should be compared to other peers in the

industry

LTD/E or Long Term Debt to Equity Ratio


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Keeping You Ahead.

COL Fundamental Analysis

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