CFA SOCIETY OF PHILADELPHIA

2019 RESEARCH CHALLENGE KICKOFF MEETING

October 3, 2018

AGENDA• Opening Remarks Rob Norton, CFA• Research Challenge Overview Mike Neely, CFA• Ethics & Code of Standards Adish Jain• How to Write an Equity Research Report Steve Lyons, CFA• Subject Company Overview• Q&A

2

CFA Research Challenge OverviewMike Neely, CFACFAP Research Challenge Chair

WHAT IS THE CFA INSTITUTE RESEARCH CHALLENGE?

4

“An investment in knowledge pays the best interest”

Benjamin Franklin

2019 TOURNAMENT DIAGRAM

5

95+ LOCAL LEVEL CHALLENGES

Asia PacRegional

EMEARegional

AmericasRegional

Global Final

Top 10%

1,100 Universities

Top 0.45%

6

Bloomsburg University of PA Delaware State UniversityElizabethtown CollegeHaverford / Bryn Mawr CollegeKutztown University of PA La Salle UniversityLehigh UniversityPenn State – HarrisburgPenn State – BerksPenn State – University ParkPhiladelphia UniversityRutgers University – Camden

2018-2019 LOCAL TEAMS*St. Joseph's UniversitySusquehanna UniversitySwarthmore CollegeTemple UniversityUniversity of DelawareUniversity of PennsylvaniaUniversity of ScrantonUrsinus CollegeVillanova UniversityWest Chester UniversityWidener University

* Teams are not final until 19 October 2018 deadline

BENEFITS FOR STUDENTS• Best practices in research and report

writing• Real-life learning experience as an

Equity Analyst• Access and exposure to leading

industry professionals• Professional report and experience to

use on resume/CV and job interviews• Experience presenting to top financial

professionals• Individual and team prizes• Opportunity for travel• Potential for media exposure• Network of over 10,000 students and

2,200 volunteers worldwide

7

CFA Society Philadelphia Research Challenge Trophy

Search:“CFA Institute Research Challenge: The Student Perspective”

YouTube link:https://www.youtube.com/watch?v=6POIAHu8flo&list=UUHwkW7lTTzf19xg5R4gfwVw

2018 RESEARCH CHAMPIONS

University of Delaware

8

University of Lausanne, Switzerland

Philadelphia Local Challenge Global Final – Kuala Lumpur, Malaysia

RULES OVERVIEW• Each team consists of 3-5 students

(undergraduate or graduate)• Up to two team may represent each

University• Students must be enrolled in the

university they represent and registered for at least a part-time course load at the time of the kickoff meeting

• Reports and presentations must be the students’ original work

• Students may not have contact with the subject company outside of organized events

• Students may not enlist the help of any professionals other than the mentor or faculty advisor

• Mentors and faculty may NOT contact the company

• Mentors, faculty, and subject company may NOT provide material non-public information

• Written reports must conform to the guidelines set forth by CFA Institute and include the cover and back pages provided by CFA Institute

• Teams may not use props in their oral presentations

• Students, mentors, and faculty must all agree to abide by the CFA Institute Code of Ethics and Standards of Professional Conduct

9

ADVISOR AND MENTOR INVOLVEMENTFaculty Advisor• Insight and guidance on research

methods and tools as taught in academia

• 10 hours maximum of productive time

• Access to faculty for other projects unrelated to the Research Challenge is permitted

• All work must be the original work of the students

Industry Mentor• Insight and guidance on industry

practice• 6 hours maximum of productive time• Face to face or virtual• Company management question

development• Review first draft of research report• Presentation development

assistance

10

11

Date Milestone

October 3 Kick-Off Luncheon

October 19 Universities registration deadline

October 22 (4pm) and November 14 (10 am)

Company Conference Calls

December 7 Final Draft Due to Mentor

January 18 Final Report Due to CFAP

January 19-25 Report Grading

January 25 Four Finalist Teams Announced

February 14 Local Final Presentations - Union League, Philadelphia

April 23 - 24 Regional Final – New York, NY

April 25 Global Final – New York, NY

2018-2019 COMPETITION TIMELINE

Students MUST register on the CFA Institute website

Ethics & Code of StandardsAdish JainCFAP Research Challenge Co-Chair

CFA INSTITUTE RESEARCH CHALLENGE

Promoting best practices in equity research among the next generation of analysts

13

CODE OF ETHICS & STANDARDS OF PROFESSIONAL CONDUCT

14

REASONABLE CARE

INTERESTSCOMPETENCE

INTEGRITY

CONFLICTSPROFESSIONALISM

DUTIES

CONFLICTS OF INTEREST

University ABC enters the local CFA Research Challenge and are eager to compete. Peter Finch is University ABC’s industry mentor and also manages a long only portfolio for Faithful Inc. Coincidentally, Peter owns a sizable position of the Research Challenge subject company in his Faithful Inc. portfolio.

15

PLAGIARISM

16

University ABC is getting a strong start to the competition by performing research on the subject company and drafting the research report. Richard Smith is a competitor on University ABC’s team and comes across an industry report written by Benjamin Ham on the subject company. The report includes analysis that John includes in his team’s report and makes reference to “leading analysts” to be sure the source is named.

THIRD PARTYINTELLECTUAL PROPERTY RIGHTS

17

University ABC is finally ready to issue a rating on the subject company and accompanies the Buy-rating with images of bags of money. The team believes this demonstrates the conviction they have in the company prospects.

USE OF REPORTS

18

After winning the Research Challenge, Richard Smith has the opportunity to interview with a variety of investment firms. Richard is eventually hired into a competitive investment firm and is responsible for coverage of a particular sector, which coincidentally includes his subject company. Richard leverages the work he produced for the Challenge because he was responsible for drafting the report. He is sure to include all of the report references when drafting a recommendation.

DILIGENCE AND REASONABLE BASIS

Richard Smith forms a conclusion in the research report that the Subject Company will have a difficult time achieving sales targets and justifying current valuations because of their poor social media presence. The subject company has a low number of followers on Twitter and Instagram.

19

How to Write an EquityResearch ReportSteve Lyons, CFAPartner, Cooke & Bieler

PURPOSE OF A RESEARCH REPORT• What is the purpose of a research report?

- Provide...- Relevant content

- Unique insight and perspective

... that will enable the reader to make an improved decision

• What is it not?- Data dump

- Value the reader’s time; use your space thoughtfully

- More is not better... better is better. Data should be useful and easy to read

- Inaccurate- You want conviction... but where possible let facts do the heavy lifting.

- Don’t publish misleading information; seek economic truth!

21

KEY ELEMENTS OF A REPORT• Investment Summary

• Business Description• Industry Overview• Competitive Positioning• Financial Analysis & Trends• Valuation

- Methods and Model Assumptions

• Investment Merits and Risks

• Other Relevant Topics

22

INVESTMENT SUMMARY• In a handful of bullets, describe:

- the company’s business model;- the key tenets of the investment thesis;- the key risks to shareholders;- its fair value;- and the expected return for buyers at the current market price

23

BUSINESS DESCRIPTION• Reader should get a brief intro

- What do they do?- How do they make money (manufacturer, brand franchise, professional service, distributor, risk transfer,

innovation, etc.)- Changes in business mix/profile?

- Who are their customers?- Business, consumer, government, etc.

- How do they reach their customers?- Brick and mortar, direct sales, internet, catalog, etc.

- Where do they operate?- Domestic, international (developed countries, emerging markets), etc.

• Other - Major segments- Financial profile (growth rates, margins, leverage, cash flow)- Major recent developments worth mentioning

24

INDUSTRY OVERVIEW• Target addressable market(s)

- Current and future growth rates- Industry life cycle

• Market characteristics- Monopoly, Duopoly, Oligopoly- Global, regional, or local marketplace

• Key industry demand drivers- End markets- Secular vs. cyclical trends

• Industry trends- Globalization- Consolidation- Regulatory oversight

25

COMPETITIVE POSITIONING• What differentiates competitors?

- Cost structure, scale, product/service quality, technology, intellectual capital (human, patents), customer relationship, geography, etc.

• Porter’s Five Forces... he was onto something!- Rivalry – industry structure, S/D dynamics, fixed vs variable costs, exit barriers- New entrants – barriers to entry (scale, capex, patents, product differentiation, etc)

- Substitutes – switching cost, relative price and quality- Buyer power – concentration, product differentiation, integration threat, switching

cost, co-dependence- Supplier power – similar to buyer power...

• Market share- Market participants’ market share- Historical and projected gains/losses

26

FINANCIAL ANALYSIS & TRENDS• Historical and Projected IS / BS / CFS

- Margins (gross, EBITDA, EBIT, net, etc.) and growth rates- ROA / ROE / ROIC- Cash flow (OCF, FCF; per share and margin)

- Sources (OCF, divestitures, share/debt issuance, etc) and Uses (Divvy, share/debt repo, acquisitions, capex) of cash

- Working Capital (cash conversion cycle; % of sales)

- Leverage (D/EBITDA, DTC, etc.)

- Capital requirements & Liquidity- Current/quick/cash ratio; covenants and debt maturity schedule - Appreciate the difference between liquidity and leverage!

- Other industry specific metrics

• Compare relevant metrics to competitors

27

FINANCIAL ANALYSIS & TRENDS - TIPS• Projected IS / BS / CFS should tie together

• Make sure you don’t have runaway metrics- Projections should make economic sense

• Don’t be mechanical; customize your analysis to the specific company and industry

• Don’t take this section lightly!- Easy to mess up- Should be consistent with your qualitative assessment- Ultimately drives your valuation and recommendation

28

VALUATION• Valuation is an art, not a science... • Discounted cash flow

- Growth and margin assumptions- Terminal value and discount rate

• Multiples (P/E, P/FCFE, EV/FCFF, EV/EBITDA, EV/EBIT, EV/S) - User beware

- When using multiples you implicitly accept historical multiples as an accurate assessment of value

- Underlying a multiple is math... make sure it works and understand the logic- Peers (make sure similar attributes)

- Transactions (make sure similar attributes)

- Historical (make sure the company hasn’t changed)

- Market

29

MODEL ASSUMPTIONS & RISKS• Garbage-in, garbage-out• DCF model assumptions

- Margin assumptions- Revenue drivers, bottom-up where possible- Cost drivers, bottom-up where possible

- Discount rate - Long-term growth rate; forever is a long time... be conservative- WACC/FCFF or Ke/FCFE

- Terminal value- Be careful- “Similar to the Hubble telescope... move an inch and you’re in a new galaxy”

• Risks to estimates- Micro misses – fundamental economics of business change, industry landscape

changes, balance sheet impairs equity owners - Macro misses – recession, interest rates, inflation, etc.

30

INVESTMENT MERITS• What attributes make this a good investment?*

- Favorable fundamental attributes- Strong market position, pricing power, strong brand, favorable outlook

- Attractive industry landscape- Barriers to entry, rational competitors, secular tailwinds

- Balance sheet flexibility

- Attractive valuation

- Good capital allocators

- Favorable ST/LT outlook

* Assumes a buy recommendation

31

INVESTMENT CONCERNS• There are literally pages of risks listed in the 10-k

• Ask yourself... what could go wrong?- Company specific

- Customer/supplier concentration, cost inflation, loss of key product, substitution, balance sheet deterioration, headline risks

- Industry specific- Increasing competitive landscape, unfavorable regulatory changes

- Macro environment- Recession, interest rates, inflation, currency

32

OTHER RELEVANT POTENTIAL HEADINGS• Management summary

- Executive profiles, recent changes, proxy statement

• Ownership summary- Top shareholders, institutional ownership, insider ownership

• Recent business initiatives / developments- New business segment, marketing and/or product strategy- Acquisitions or divestitures- Not always good... headline risk, manufacturing problems, regulatory

changes, etc.

• Recent balance sheet changes- Changes in capital structure, changes in debt or equity

33

TIPS• Start early• Asking why, why, why during due diligence will lead to a

happy place• Utilize publically available resources of co. and peers

- SEC filings: 10-K, 8-K, 10-Q- Company website(s) and presentations- Industry associations

• Double check your facts• List your data source• Edit multiple times• Get it reviewed and incorporate the feedback

34

SAMPLE REPORT

35

36

And the CFA Society Philadelphia 2018 – 2019 Research Challenge Subject Company is…

37

NASDAQ: FIVEFive Below is a leading high-growth value retailer offering trend-right, high-quality products loved by tweens, teens and beyond. We know life is way better when you're free to "let go & have fun" in an amazing experience filled with unlimited possibilities. We make it easy to say YES! to the newest, coolest stuff because everything is just $5 and below across awesome Five Below worlds: Style, Room, Sports, Tech, Create, Party, Candy and Now. Founded in 2002 and headquartered in Philadelphia, Pennsylvania, Five Below today has over 700 stores in 33 states.

SUBJECT COMPANY

INTERACTING WITH FIVE BELOW

• Organized communications ONLY• Two conference calls will be held for students to interact with FIVE BELOW

• Industry mentor or faculty advisor must be present for call with subject company

• Students may contact and survey company suppliers, customers, vendors, etc.

• More information on the conference calls will be available in the coming weeks

38

SUBJECT COMPANY OVERVIEW

Christiane PelzVP, Investor RelationsFive Below

QUESTIONS?

40