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Module 7 Fundamental Analysis

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  1. Module 7Fundamental Analysis

  2. Module 7 - Learning Objectives • Define fundamental analysis. • Differentiate between fundamental, technical and speculative analysis. • Define income statement and its major components. • Define balance sheet and its major components. • Define cash flow statement and its major components. • Analyze and evaluate key measures in a company’s income statement, balance sheet, and cash flow statement. • Evaluate a company’s products and market position. • Evaluate a company’s management. • Explain earnings estimates and how they can be used to evaluate a company. • Download financial statements from financial websites and evaluate an investment.

  3. What Is Fundamental Analysis? Fundamental analysis: Looking for hidden value in a company. Technical analysis: Discerning patterns in price charts. Speculative investing: Playing the odds. Some finance types believe that none of these work. The market is “efficient” and stocks are priced at what they’re worth.

  4. How Do You Do Fundamental Analysis? • SEC documents on the company • Company websites • Library (Value Line, Standard and Poor’s, periodical databases) • Business press (Wall Street Journal, New York Times, Forbes, Fortune, and Business Week) • Financial websites

  5. What are you looking for? • Growth in top line • Growth in bottom line • Upcoming products that might grow the company • New markets that may grow the company • Management that is good at growing the company • In short, growth

  6. What can you find at a company website? • Let’s try www.boeing.com

  7. Product and Market • Strong brand franchise in its market • Market leader - largest share of sales • Growth • New products in the pipeline

  8. Product and Market? • AT&T • EMC • Amgen • Time Warner

  9. Management • CEO, CFO, and COO • Good management team • Good track record • Compensation • Buying or selling company stock

  10. Financial Statements • Accounting is the language of business • Companies are required to report their financials according the accounting standards • Publicly-listed companies need to file their financials with the SEC • The main financial statements: • Income Statement • Balance Sheet • Cash Flow Statement

  11. Income Statement Activity for the year - revenues and expenses

  12. What’s your income statement?

  13. Balance SheetSnapshot of financial situation

  14. What’s your net worth?

  15. How does it work for companies?

  16. Evaluating Income Statements • Merck is a major drug company. Here are its revenues, earnings before taxes, and basic earnings per share for the past four years. • Calculate the growth rates in sales • Calculate the operating margin. • Calculate the growth rates in earnings per share. • What does each of these tell you about Merck?

  17. Calculate growth in debt and equity for American Home Products now part of Pfizer. What do your findings show?

  18. Calculate Pfizer’s growth in operating cash flow. What does it tell you about the company?

  19. Earnings Projections • Forecast or prediction of what the company will do in the next two years • Detailed analysis of the company • Create a financial model (income statement, balance sheet and cash flow statement) for the company • Basis of where analysts think stock price will be in the next two years.

  20. Pfizer’s Earnings Estimates