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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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Commonly used methodsfor determining Fair Value
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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Commonly used methodsfor determining Fair Value
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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Commonly used methodsfor determining Fair Value
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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Relative ValuationMeasures
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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Relative ValuationMeasures
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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Relative ValuationMeasures
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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COL Rating / Target Price
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)
COL Rating / Target Price
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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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Cheap Stocks withgrowing earnings
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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Cheap Stocks withgrowing earnings
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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Cheap Stocks withgrowing earnings
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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Using the Invest Guide
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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Using the Invest Guide
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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How tofind theCompany
Snapshots
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Example:CompanySnapshot of
SM Prime
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How tofind theCompany
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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Definition of Financial Terms
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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Definition of Financial Terms
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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Definition of Financial Terms
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.
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