Slides on Analysis and Valuation of Equity Securities |, Study notes of Investment Management and Portfolio Theory

Download Slides on Analysis and Valuation of Equity Securities | and more Study notes Investment Management and Portfolio Theory in PDF only on Docsity! 10/24/2010 1 Analysis and Valuation of Equity Securities Chapter 5: Economic Activity Chapter 6: Industry Analysis Chapter 7: Valuation of Individual Firm Chapter 8: Financial Statement Analysis Economic Activity Government Economic Policy – Fiscal Policy – Monetary Policy – Growth & Inflation Business Cycles and Economic Indicators – Business Cycle (Through, peak and recession) – Economic Indicators Money supply and stock prices Business Cycles and Industry Relationships. Chapter 6: Industry Analysis Approaches to choosing stocks for investment Industry Analysis Industry life cycle Industry structure Industry trend Industrial groups and rotational investment The sustainable growth model Approaches to Choosing Stocks for Investment Top-down approach – Analysis of Economic activity Bottom-up approach – Company analysis – Industry analysis – Analysis of the industry – Analysis of the company – Macroeconomic viewpoint – Economic analysis – A stock-picking viewpoint rather than industry analysis. Industry Analysis Industry analysis comprises two broad areas. –The Industry life cycle –The Industry structure. Benefits of Industry Life Cycle Analysis Life cycle movements influence many variables considered in the valuation process. Industry Life Cycle The particular phase in the life cycle determines – the growth of earnings – dividends, capital expenditure, – and market demand for products 10/24/2010 2 Industry Life Cycle Analysis Analysis of industry financial data helps place an industry on the life cycle curve. – This in turn guides the analyst toward decisions on growth, duration of growth, profitability and potential rates of return Industry Life Cycle . The analyst can determine if all companies in the industry are in the same stage of the life cycle and translate company differences into various assumptions that will affect their individual valuations. Stages of the Industry Life Cycle Development Product – Companies get started in business. – new ideas, products, or production techniques that makes the firms unique. Ownership and capital – Generally privately owned – Financed with owner/s’ money, and funds from family, friends, and banks. – As success follows venture capitalists also, participate in funding. – Common need for capital to grow and expand. Sales and business growth – Slow as the product penetrates market – Upon success the market demand will create growth in sales, earnings, and assets move the industry/firm toward the next stage. Distribution of profit – No distribution of profits Growth Product & Sales – some degree of acceptance for its products in the market. Ownership and capital – Additional financing through share offering. Business risk & growth – Still risky in general as investors feel shy to invest due to uncertainty about further growth, profitability, dividend earnings. – Possibilities of large capital gains or losses. Distribution of profit – At early growth, earnings retained for reinvestment. – Firms making profits may distribute stock dividends. –Low cash dividends may be paid •as need for new capital declines and new sources of capital appears. •to attract institutional investors. Expansion Product & Sales – Sales expansion and earnings growth continue but at a decreasing rate, i.e., the growth rate slows down. Ownership and capital – Fully incorporated through share offering – varied sources of capital available Business risk & th – Competition enters and attempts to take away market share away from existing firms. grow – Once investors recognise that past growth will not extrapolate and is in decline, stock prices can fall considerably and P/E can fall because of slower-growth expectation. – Uneven and non-smooth growth makes it difficult to determine the cross-over point Distribution of profit – Cash dividends (5-15% to 25-40%) as expansion opportunities fade away and little retention is needed for reinvestment. – Stock dividends and stock splits are common. Maturity Product & Sales – Industry sales growth rate more or less at par with the national economic growth as measured by the country’s GDP growth rate. Ownership and capital – Financing alternatives are available both domestically and internationally. Business risk & –Market is more or less saturated. growth Distribution of profit –Cash flows from operations are usually more than enough to meet the growth requirements of the firm. –Large cash dividends are very typical of the firms. (45% - 60% payout is common.)