Required Valuation Chartcurrent Next Investment A
The term project involves selecting a company and writing at least a six-page fundamental research report on it. This project is due at the time of the final exam. The requirements are as follows:
Company Selected
The company selected should be in Value Line’s edition of the 1700 largest companies, and should have a strong single industry component. For example, General Motors is influenced by what the automobile industry does while General Electric is a conglomerate with no strong industry component. General Motors qualifies while General Electric does not.
Summary
The summary should consist of approximately seven sentences. The first sentence should indicate the fundamental outlook for the company. The final sentence or two should give the relative valuation for the company. The last sentence should give your conclusion – recommendation of buy, sell, or hold. A hypothetical example follows:
“General Motors, long the leading U.S. automobile manufacturer, is awakening from a ten-year slumber. Management is focused on building more attractive cars at a more efficient price. Earnings for this year and next are likely to climb 15% each based on continued gains in market share.
Over the longer term, I expect sales and earnings to grow 10% a year. The shares are currently selling at a 10 P/E which is only about 50% of the average company. I believe that a relative P/E of 75% is more appropriate and the upgrading in multiple plus the earnings gain point to an IRR of 25% per year over the target period. Consequently, I find the stock to be highly attractive and rate it a strong buy.”
Consensus
Indicate here how, if appropriate, you have deviated from established thinking on a company. Examples of differences can include unit growth for industry or company, market share, growth in earnings, per share, relative stock valuation, etc. Be sure to indicate why you feel the way you do.
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Industry
This section should provide industry background and outlook. It should deal with such questions as:
1. What has been its past growth rate?
2. What are the competitive threats to the industry?
3. What is the future growth rate projected to be? Why?
4. Is it an attractive industry to invest in?
High return on equity, etc.
It is understood that you may not be able to provide exact industry figures. If not, you should at least be able to project whether the growth rate will be slower than, equal to, or greater than that for the overall economy. Make sure you place a projected revenue growth figure that is relative to projected U.S. economic growth of 6% (3% real, 3% inflation).
Company
This section should provide the background and outlook for the company. In addition to providing a description of the company and what it does, it should answer, among others, the following questions.
1. What key products does the company make?
2. What has been the past growth rate in revenues and profits?
3. How has the past growth compared with that for the industry? Why?
4. What are revenues and profits projected to grow at over the next year and the next five years? Justify your projections.
5. Is this a high quality company, a speculative one, etc.? Indicate and justify.
Finance
This section should deal with the financial situation for the company. It needn’t be described extensively. It should answer the following questions.
1. Does this company have a strong balance sheet?
2. Does this company have a strong cash flow?
Valuation
This is a key section. It integrates growth rate with the price you pay for that growth. It determines whether a stock is attractive or unattractive. You must use the chart listed on the next sheet to help you arrive at your decision. For example, you shouldn’t have a chart figure of 2% IRR and recommend purchase. To support your decision you should answer the following questions:
1. How does your projected relative P/E compare with the current and past one for the company? Why?
2. How does your projected P/E compare to the market? Justify above or below market relative P/E’s.
3. Is the stock attractive? Why? Obviously a stock will be attractive if it is projected to provide better than average stock market returns.
4. How risky is this stock? Has that been factored into your recommendation and into the calculation of relative P/E? Use volatility of earnings, balance sheet strength, and beta coefficient to support your feelings about risk.
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Your paper will be judged on the following criteria:
1. Your understanding of the subject matter.
2. The quality of your research. Please put in a bibliography and attach the company’s Value Line sheet
3. The clarity of your opinion. A strong opinion when justified is preferred.
4. The logic of your opinions based on the facts.
5. Your ability to justify your projections and opinions. You should constantly be answering the question why you feel the way you do?
6. Your ability to think independently of the research you are given and of prevailing opinion on a stock. For example, thinking contrary to public opinion on a glamour growth company and justifying your approach can count favorably.
7. The appearance of your work in terms of organization, color, charts, tables, etc. can help.
Required Valuation Chart
Current Next Year Target Growth
Year Year 2 Year 3 Rate
Sales
EPS
DPS
BVPS X
ROE X
Mkt P/E (3) X X (3) X
Rel P/E X X X
Co P/E X X X
Target Price (1) X X (2) X
IRR X X X X
The X means don’t fill in. Fill in only those items that don’t have an X. Notes:
(1) – Put in current price per share
(2) – Put in calculated price per share
(3) – Professor Altfest will provide the market P/E
Note – Use these statistics for the overall market.
Return on Equity – 17%
Growth rate in earnings per share – 6%
Overall annual total stock market return – 8