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PERC 2007: Equity Research Overview and Discussion. Karl C. Mergenthaler JPMorgan Chase. A Good Place to Start. On Bloomberg, Type ITW Equity DES {GO}. Financial Situation and Prospects. Trends Are metrics getting better or worse? How do metrics compare with peers?

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perc 2007 equity research overview and discussion

PERC 2007:Equity Research Overview and Discussion

Karl C. Mergenthaler

JPMorgan Chase

a good place to start
A Good Place to Start

On Bloomberg, Type ITW Equity DES {GO}

financial situation and prospects
Financial Situation and Prospects
  • Trends
    • Are metrics getting better or worse?
    • How do metrics compare with peers?
    • Can / will metrics get better in the future?
  • Income Statement
    • Gross, Operating, and Net Margin
  • Balance Sheet
    • Leverage: Net Debt to Total Capital
      • What is the optimal capital structure?
    • ROE = (NI / Sales) X

(Sales/Assets) X

(Assets / Equity)

  • Cash Flow Statement
    • Free Cash Flow / Net Income
  • Bloomberg: ITW equity FA {go}
  • Historical data in tables and graphs.
industry and competitive analysis
Industry and Competitive Analysis

Potential Entrants:

Barriers to Entry

Industry Competitiveness:

Rivalry among existing firms

Buyers

Suppliers

Hint:

Focus on growth and sustainability of sales and earnings.

Substitutes

industry and competitive analysis1
Industry and Competitive Analysis
  • Secret to success: Do some original research!
    • Conduct a survey
    • Interview a customer
    • Go to a factory
    • Visit a store
    • Analyze raw material costs
valuation
Valuation
  • Key Inputs
    • Growth Rate: What is driving growth in sales and earnings?
    • Interest Rate (WACC)
      • CAPM
      • Multi-factor Arbitrage Pricing Theory
      • Add equity risk premium to LT bond yield
  • Discounted Cash Flow Models
    • Free Cash Flow Models
      • Firm lacks stable dividend policy
      • Dividend policy not related to earnings
      • FCF is related to profitability
      • Controlling shareholder perspective
    • Dividend Discount Models
      • Firm has dividend history
      • Dividend policy is related to earnings
      • Minority shareholder perspective
valuation1
Valuation
  • P/E Growth
    • Compare to Historical and Peer Group
    • Meaningless if EPS < 0
    • Earnings can be volatile
    • Accounting issues
  • P/B ROE
    • BV more stable than EPS
    • Accounting issues
  • P/S Op Mgn
    • Sales not as volatile as EPS
    • Sales less influenced by accounting choices
    • High Sales = High Profits
  • TEV / EBITDA
    • TEV = Market Cap + Net Debt
  • Bloomberg: ITW equity RV {go}
  • Customize with the drop downs.
recommendation
Recommendation
  • Investment Recommendation
    • Buy: Target Price implies at least 15% upside.
    • Sell: Target Price implies at least 15% downside.
    • My advice: Take a stand - don’t call it a HOLD.
  • Investment Risks
    • What could go wrong?
    • What could change projections?