What is Fundamental Analysis?

2. What is Fundamental Analysis? • http://www.investopedia.com/video/play/understanding-fundamental-analysis/

3. Academy #6 Fundamental analysis

4. “I’ve never bought a stock unless, in my view, it was on sale.”  John Neff

5. What is fundamental analysis? • Cornerstone of investing • Analyzing fundamentals • Qualitative and quantitative • Great for proposals • Asking the right questions

6. Fundamental questions • Is the company’s revenue growing? • Is it actually making a profit? • Is the cash flow positive? • Is it in a strong-enough position to beat out its competitors in the future? • Is it able to repay its debts? • Is management trying to ”cook the books"?

7. Investment Proposal • Quantitative • Qualitative • Applications • Risks

8. Quantitative • Intrinsic Value • Accounting • Valuation methods • Stock screener(s)

9. What is a stock price? • Price on a: • Specific time • Quantity (supply / demand) • Market price is subjective • Opinions differ

10. Intrinsic value • The “real” value of a company • But what determines the real value?

11. Intrinsic value

12. Financial statements • Balance sheet • Income statement • Cash flow statement

13. Balance sheet

14. Balance sheet • What a company owns (debit): • Short term assets • Long term assets • Intangible assets • How a company owns it (credit): • Equity • Short term liabilities • Long term liabilities

15. Balance sheet

16. Income statement

17. Income statement • Net profit -> Shareholders’ equity

18. Income statement • Profit/earnings • Accrual accounting • Revenue – cash flow • Costs – expenses • EBITDA • Earnings before interest, taxation, depreciation and amortization

19. Cash flow statement

20. Cash flow statement • Cash is king! • Cash in and outflow • No influence of bookkeeping tricks

21. Valuation methods • Earnings Per Share (EPS) • Dividend yield • Price/Earnings (P/E) • EV/EBITDA • Book to market value • Gordon’s growth model

22. Metrics per share • Earnings per share (EPS) • Earnings divided by shares outstanding • Dividend per share • (money now – reinvesting) • Shell - Google

23. P/E ratio • Value of the company divided by earnings (profit) • Price per share divided by EPS • What determines height of the ratio?

24. Other multiples • Enterprise Value/EBITDA • EBITDA – Earnings • - Earnings before I tricked that dumb auditor • Book to market value • Book value firm / market value firm

25. Gordon’s growth model • D = dividend • g = growth rate • r = discount rate

26. Practical implications • Compare P/E ratio with peers • Is it higher, lower? • Why? • Good reason(s)?

27. Practical implications • Multiple expansion – contraction • Longitudinal: compareratio’s with previous years • EPS growth, dividend growth • Cross-sectional: compare ratio’s with each other • EPS growth, dividend per shares growth but P/E decline -> why?

29. Break

30. Qualitative • Business model • Markets • Competitive environment • Management • Market opinion

31. Business model • What does the company do? • Where does it generate money? • Look at key drivers/factors • Don’t invest in a business you don’t understand!

32. Example • Boston Chicken • Fixed fee • MC Donald's • Franchise system

33. Business model • Strategy • Value proposition • Cost structure • Fixed costs – variable costs • Commodities (Air France-KLM) • Patents (Pharmaceutics)

34. Market • What drives success? • How are these factors changing? • Characteristics of markets: • Spare car parts example • Smartphones example • Nintendo Wii example

35. Competitive environment • What can a company do better than it’s competitors? (Michael Porter) • Cheaper/better/faster • Google: best search engine • Apple: strong brand name • Toyota: efficiency advantage • Coolblue: fast delivery

36. Competitive environment • How competitive is the industry? • Airlines • Soft drinks

37. Management • Incentives • Shareholder alignment • Consistency • Skagen funds • Track record • Example: Angela Ahrendts – Apple

38. Market opinion • Material events • Earnings, public announcements • World events • Central bank policies, political and war events • Industry appeal • Social media stocks • Example: BP oil spill

39. Applications • Finding an edge & catalysts • Where to find valuable information? • Let’sdo this!

40. Edges & Catalysts • Edge: asymmetric information distribution • Interpretation • Catalyst: why now • Intrinsic value versus market price

41. Valuable information sources • www.google.com/finance • www.yahoo.com/finance • www.finviz.com • Company website • Investor Relations

42. Let’s do this! • Which company?

43. Risks • Timing • Technical analysis • Efficient market hypothesis • No free lunch • Is the market ever going to reflect the intrinsic value? • One can be wrong in calculating intrinsic value

44. Efficient market hypothesis • Information transfer • B&R members • Traders • Large cap vs small cap • Apple - musclepharm • Stock reflects all available information

45. Efficient market hypothesis • Weak form: • past prices can’t lead to outperformance • Semi-strong form: • Public information can’t lead to outperformance • Strong form: • All information is incorporated in the price of an asset, even inside information

46. Questions?