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CHAPTER 9
COMPANY ANALYSIS AND STOCK VALUATION
I. Company Analysis Versus the Stock Valuation
A. Different factors determine the type of company and the type of stock, which means the
two are not the same – e.g., the stock of a growth company is not necessarily a growth
stock.
B. Growth Companies and Growth Stocks
Growth companies are those that consistently experience above-average increases in
D. Cyclical Companies and Cyclical Stocks
Cyclical companies are those whose sales and earnings will be heavily influenced by
aggregate business activity
Cyclical stocks are those that will experience changes in their rates of return greater
than changes in overall market rates of return
II. Economic, Industry, and Structural Links to Company Analysis
The analysis of companies and their stocks is the final step in the top-down approach
to investing
A. Economic and Industry Influences
B. Structural Influences
III. Company Analysis
A. Firm Competitive Strategies
1. Defensive or Offensive Competitive Strategies
a. Defensive strategy involves positioning firm so that it its capabilities provide the
best means to deflect the effect of competitive forces in the industry
b. Differentiation Strategy – firm positions itself as unique in the industry
3. Focusing a Strategy
a. Whichever strategy it selects, a firm must determine where it will focus this
strategy
specific groups
B. SWOT Analysis
1. Strengths – give the firm a comparative advantage in the marketplace
C. Some Lessons from Lynch
Favourable Attributes of Firms
a. Firm’s product should not be faddish
D. Tenets of Warren Buffet
1. Business Tenets
2. Management Tenets
IV. Estimating Intrinsic Value
A. Present Value of Cash Flows
1. Present value of dividends (DDM)
B. Relative Valuation Techniques
1. Price/earnings ratio (P/E)
C. Present Value of Dividends
1. Growth Rate Estimates
2. Required Rate of Return Estimate
D. The Present Value of Dividends Model (DDM)
1. Two or three-stage model
E. Present Value of Free Cash Flow to Equity (FCFE)
1. It attempts to determine the free cash flow that is available to the stockholders after
F. Present Value of Operating Free Cash Flow (FCFF)
1. The objective of this technique is to determine a value for the total firm and subtract
G. Relative Valuation Ratio Techniques (Exhibits 9.3 and 9.4)
1. Price-Earnings Ratio
V. Estimating Company Earnings Per Share
VI. Shoppers Drug Mart Competitive Strategies
A. The Internal Performance
1. Industry Factors
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VII. Estimating Company Earnings Multipliers
A. Macroanalysis of the Earnings Multiplier
B. Microanalysis of the Earnings Multiplier
1. Comparing Dividend-Payout Ratios
2. Estimating the Required Rate of Return
VIII. Additional Measures of Relative Value
A. Price/Book Value Ratio
IX. Analysis of Growth Companies
A. Growth Company Defined
B. Actual Returns Above Required Returns
X. Measures of Value-Added
A. Economic Value Added (EVA)
1. EVA Return on Capital
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XI. Site Visits and the Art of the Interview
A. These visits facilitate dialog between the corporation and the investor community
XII. When To Sell
A. Many times, holding on to a stock too long can lead to lower returns
XIII. Influences on Analysts
A. Efficient Markets
B. Paralysis of Analysis
C. Analyst Conflicts of Interest
XIV. Global Company and Stock Analysis
A. Availability of Data