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Presentation Procedure

Overview. Choosing a CompanyEvaluating a CompanyPresenting a CompanyTypical Mistakes. Choosing a Company. The Student Investment Association is a value fundYour pitch should be focused around why this company is undervaluedLook for companies that are trading with a low price/book ratio (P/B) and a low price/earnings ratio (P/E) relative to their peersChoose a small- to mid-cap companyMarket Capitalizations from $500 MM - $5 BLess analyst coverageThe size effect.

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Presentation Procedure

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    2. Overview Choosing a Company Evaluating a Company Presenting a Company Typical Mistakes

    3. Choosing a Company The Student Investment Association is a value fund Your pitch should be focused around why this company is undervalued Look for companies that are trading with a low price/book ratio (P/B) and a low price/earnings ratio (P/E) relative to their peers Choose a small- to mid-cap company Market Capitalizations from $500 MM - $5 B Less analyst coverage The size effect

    4. Choosing a Company Benjamin Graham Investing with a Margin of Safety Invest in a company whose stock price is trading at a significant discount to its intrinsic value Look for unpopular or out-of-favor companies Mr. Market AAPL 52 wk range: $196.89 - $364.90 Shares Outstanding: 921.28 MM $154.8 B A low P/E and P/B ratio does not ALWAYS mean the company is undervalued Look for companies that have a high Return on Invested Capital

    5. Evaluating a Company

    6. Evaluating a Company Assess the companys strategy What is their competitive advantage Low cost leaders, differentiation What is their plan for the future Is the company sustainable, why What risk and success factors they must manage Analyze the companys profitability and risk Use financial ratios and compare them over time and against competitors and the industry Use any industry specific measures Same store sales, FFO, EBITDAR

    7. Evaluating a Company Analyzing a companys profitability and risk contd Has the companys margins increase, decreased or maintain What is the companys ROA and ROE Is the ROE greater than the cost of equity What does their short-term liquidity look like Current/quick ratios, Days in Inventory, Days A/R outstanding, Days A/P outstanding What does their long-term liquidity look like Debt to Equity ratio, Interest Coverage ratio Compare these factors for the company over the past several year and currently against its competitors

    8. Evaluating a Company Forecasting future performance The information gather in prior steps Management guidance Use analyst reports to get ideas about how others think about the company. Dont use them as your own work Valuation SIA provides a sample Discounted Cash Flow model on the website Use that to input historical data and your forecasted projections to value the company Take a step back and think does this make sense?

    9. Discounted Cash Flow The value of any resource is the present value (PV) of the future payouts discounted at a rate reflective of the risk of the payouts Then to value the company, we project the future free cash flows to equity and discount them to present value. Its hard to project the free cash flows reliably after 5 years Use the terminal value method to capture the present value of the free cash flows into perpetuity Use the cost of equity as the discount rate because we are looking at the FCF to equity The cost of equity is calculated using CAPM

    10. Discounted Cash Flow We project firm growth through revenue and the rest of the components in the DCF model are percentages of revenue. The terminal value is a large part of the companys value be conservative with estimate The long-term growth rate shouldnt grow faster than GDP When using CAPM it is better to use historical averages rather current values. Historical average risk-free rate: 6% Historical average market risk premium: 5.6% Be able to logically back each of your projections

    11. Presenting a Company Build your presentation around selling the 3 main reason, your investment thesis, we should invest in this company Try to boil down the information to relevant facts surrounding your company Present both the 3 main reason and 3 biggest risks to the company Try to anticipate possible questions surround your investment and risks reasons and cover them in the presentation

    12. Presenting a Company Investment overview (1 slide) Have your recommendation and 3 main reasons to invest Company overview Briefly cover how this company makes money Industry overview Cover key industry information relevant to your investment thesis What is the issue surrounding the company Why is the company trading at these low multiples Why is the company undervalued Why is the market wrong

    13. Presenting a Company What is going to make you investment thesis come true Why should we invest in this company What are risks to your investment thesis Why might the company no be undervalued Your valuation Briefly walk us through your projections and your thought process behind choosing these projections

    14. Typical Mistakes Presenting an overview of the company instead of focusing on the relevant facts regarding why we should invest Knowing who a companys management is and what is the revenue break down is important, but shouldnt be presented unless it affects your investment thesis Making a decision about a company before evaluating it Dont base the facts around your decision, base your decision around the facts. As you evaluate the company, if information doesnt look like you expected then change your decision or company.

    15. Typical Mistakes Just because its in the news doesnt mean it is relevant Unless the news story affects your investment thesis, it shouldnt be included Not explaining what key terms are If you werent comfortable using the term before you research the company then it probably should be explained Forgetting about the efficient market hypothesis The reason for buying or selling a stock shouldnt be based on an event The reason should be based on the markets under or over reaction to it

    16. Questions?

    17. Appendix

    18. Ratios Price to Earnings Current stock price / TTM EPS Price to Book Current stock price / (Total Assets Intangible assets Liabilities) Return on Invested Capital How well is the company using its money to generate returns (Net Income Dividends) / Total Capital Total Capital includes long-term debt, common and preferred shares, additional paid-in capital

    19. DCF Formulas Free Cash Flow to Equity FCFE = NI + D/A ?NWC Cap Ex FCFE = CF from Operations Cap Ex Terminal Value Terminal FCFE / (Cost of Equity Growth Rate) CAPM Cost of Equity = Risk-Free + Beta * Market Risk Premium

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