Joseph York

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Fundamental Analysis of Stock ResearchMentor
Session One

• Joseph York
• Monday, November 16, 2009

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What is Fundamental Analysis?

• Can be split into two categories
• Quantitative
• ?Analyzes key ratios
• ?Provides concrete data for analysis
• Qualitative
• ?Analyzes Intangible Data
• ?Management, patents, innovation, etc.
• ?Difficult to measure numerically

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Quantitative Measures

• The following presentation will give you some
  understanding into what these quantitative
  measures are and how to use them
• It is important to remember, however, that you
  must not focus on only one of these values, but
  rather, use several of them together with other
  research tools (technical analysis, industry
  analysis, annual/quarterly reports) to develop a
  true picture of the companys health

Source http//finance.yahoo.com
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The Ratios
PEG
ROE/ROA
Current Revenues
EPS
Quick Ratio
Alpha
Price to Sales
Beta
PE
Current Ratio
Debt to Equity
Net Profit Margin
Price to Book
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Revenues

• Money that a company collects from customers for
  the sale of a product or service. When you
  subtract out all costs from revenues, you get
  profits or earnings.

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Market Capitalization

• The total dollar value of all outstanding shares,
  calculated by multiplying the price of a single
  share by the total number of shares outstanding.
• Mega Cap Market cap of 200 billion and greater
• Big/Large Cap 10-200 billion
• Mid Cap 2 billion to 10 billion
• Small Cap 300 million to 2 billion
• Micro Cap 50 million to 300 million
• Nano Cap Under 50 million

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Net Profit Margin

• Net income as a percentage of sales. You get this
  by dividing net income by sales. Since it's a
  percentage, it tells you how many cents on each
  dollar of sales is pure profit.
• The higher a companys profit margin compared to
  its competitors, the better

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Net Profit Margin Example

• Suppose True Religion made a profit of 20 on the
  sale of a 200 pair of jeans. Dividing the dollar
  amount of earnings by the product cost, that
  firm's profit margin would be 0.1 or 10 percent,
  meaning that each dollar of sales generated an
  average of ten cents of profit.
• The profit margin is very important as a measure
  of the competitive success of a business, because
  it captures the firm's unit costs.

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Earnings per Share (EPS)

• A very important fundamental, calculated
• Basically, this will tell you if and how
  profitable the company is.
• Whats preferred stock? A class of ownership in a
  corporation with a stated dividend that must be
  paid before dividends to common stock holders.

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P/E Ratio

• One of the favorite ratios, it is simply
• EPS from the last four quarters is called
  trailing P/E
• EPS taken from the estimates of earnings expected
  in the next four quarters is called forward P/E
• P/E is referred to as the "multiple," because it
  shows how much investors are willing to pay per
  dollar of earnings.
• High P/E means high projected earnings in the
  future.
• It's usually only useful to compare the P/E
  ratios of companies in the same industry, or to
  the market in general, or against the company's
  own historical P/E

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Price to Sales

• Price to sales is calculated by dividing a
  stock's current PRICE by its revenue (SALES) per
  share
• A low price to sales ratio (for example, below
  1.0) is usually thought to be a better investment
  since the investor is paying less for each unit
  of sales. However, sales don't reveal the whole
  picture, since the company might be unprofitable.

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Price to Book

• Price to book is calculated by dividing the
  current closing price of the stock by the latest
  quarter's book value.
• What is book value you ask? It is the total value
  of the company's assets that shareholders would
  theoretically receive if a company were
  liquidated today.
• A low P/B ratio could mean the stock is
  undervalued, or something is very wrong with the
  company

For Those Interested A liability is recorded on
the balance sheet and can include accounts
payable, taxes, wages, accrued expenses, and
deferred revenues. Current liabilities are debts
payable within one year, while long-term
liabilities are debts payable over a longer
period.
Book Value equals the total of all, minus all
liabilities, dividing the result by the number of
common shares outstanding.
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Debt to Equity

• A relative measure of how much debt a company
  has
• Essentially long-term funds provided by
  creditors divided by funds provided by
  shareholders.
• A higher debt/equity ratio generally means that a
  company has been aggressive in financing its
  growth with debt. This can result in volatile
  (RISK) earnings

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Current Ratio

• A good measure of liquidity of a company, or how
  easily it can cough up cash.
• AKA - Indicator of company's ability to pay
  short-term obligations calculated by dividing
  current assets by current liabilities.
• The higher the ratio, the more liquid the
  company! (What types of companies might this
  ratio be VERY important?)

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Quick Ratio

• Like current ratio, this gives a measure of a
  companys financial strength
• It is a measure of how quickly a company's assets
  can be turned in cash
• You subtract inventories so you can check and see
  if a company has sufficient liquid assets to meet
  short-term operating needs. (NOTE THAT CURRENT
  RATIO DID NOT SUBTRACT INVENTORIES)

• A ratio that is really hard to calculate because
  its quick

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Return on Assets (ROA)

• Also sometimes called Return on Investment or
  ROI, this is a measure what earnings were
  generated from capital investment back into the
  company
• Always given as a percentage
• Think of it as How much money (income) was
  generated from a companys investment into itself
  (capital investment or company assets)

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Return on Equity

• It is a measure of how much in earnings a company
  generates in four quarters compared to its
  shareholders' equity and is a good measure of
  profitability
• It is also measured as a percentage.
• For instance, if XYZ Corp. made 1 million in the
  past year and has shareholders' equity of 10
  million, then the ROE is 10. Some use ROE as a
  screen to find companies that can generate large
  profits with little shareholder investment in the
  company.

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Beta

• A measure of a security's or portfolio's
  volatility, or systematic risk, in comparison to
  the market as a whole. (usually calculated with
  SP 500 Index)
• Think of beta as the tendency of a security's
  returns to respond to swings in the market. A
  beta of 1 indicates that the security's price
  will move EXACTLY with the market. A beta less
  than 1 means that the security will be LESS
  volatile than the market. A beta greater than 1
  indicates that the security's price will be MORE
  volatile than the market.

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Price/Earnings to Growth (PEG)

• It is
• Can give you an idea of a stock potential growth,
  since it divides be Earnings Per Share (EPS)
  annual growth rate but is based on analysts
  ESTIMATES!
• If a company has a P/E of 20 and analysts expect
  its earnings will grow 15 annually over the next
  few years, you'd say it has a PEG of 1.33.
  Anything above 1 is suspect since that means the
  company is trading at a premium to its growth
  rate.

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Many Others

• There are many other ratios out there to help you
  get an idea of what the financial health of a
  company is
• What do you do if you dont know what they mean?
  Panic and run around the room? No, use

Many of the formulas and definitions from this
presentation were borrowed from Investopedia
without their consent please dont turn me in.
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Our Example Company

• SFBC International Inc. (SFCC)
• A drug development services company, Provides
  clinical drug development services to branded
  pharmaceutical, biotechnology, generic drug, and
  medical device companies. SFBC specializes
  primarily in the areas of Phase I and early Phase
  II clinical trials and bio-analytical laboratory
  services. The company also provides late stage
  clinical development services that focus on Phase
  II through Phase IV clinical trials.

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Analyzing SFCC Fundamentally

• Valuation Price/Earnings, Price/Sales,
  Price/Book
• Growth Rates
• Debt and Liquidity Debt to Equity, Quick Ratio
• Returns ROA, ROE

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Valuation

• PE Always compare to industry and sector!
• 16.55 vs. and industry of 40.54 and sector of
  30.89
• Is this due to low price or high earnings?
• PS Due to higher sales growth, PS is much lower
  than industry or sector!

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Growth Rates

• For a small market cap (457.09M), it is
  imperative that the company is growing its
  earnings while backing up these earnings with
  increasing SALES.
• Important to look at both quarterly and annual
  growth rates.

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Debt and Liquidity
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Returns
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Questions?