Single company valuation study.

1) Analyse company’s business activities

• Use your own explanation of how company’s business model works

2) Identify key drivers of business model and competitiveness

• Use independent data on company’s markets
• Assess future prospects for these markets

3) Compile financial ratios for performance, efficiency, liquidity and solvency for company and at least three competitors

• Ratio analysis over the past five years
• Comparing these ratios – draw your own conclusions, NOT just descriptions

4) Detailed forecasts of income statement and balance sheet for next five years and in perpetuity

• Justify your forecast and support with statistics

5) Apply valuation techniques, with full spreadsheet support (see tutorials)

• Capital Asset Pricing Model (CAPM),
• Discounted Dividend Model (DDM),
• Discounted Cash Flow (DCF),
• Relative price multiples of earnings and cash flow.

Structure of the Project

• Summary:
  • equity data, company fundamentals, prospects, valuation & recommendation
• Introduction:
  • Company’s business model – which markets drive its revenue and profit?
• Sector review:
  • the market forces driving demand, supply, competition, prices, costs & margins in the sectors which contribute most of the company’s revenue and profits
• Company assessment:
  • company’s competitive position in sector, past performance relative to peers (using financial ratio analysis), key drivers of future trading, conclusion on their likely direction and impact on financial forecasts
• Forecasting
  • translate trading assumptions into sales, costs, income & cash flow forecasts
• Valuation:
  • translate forecasts into DCF & DDM valuations relative to share price, and Price Multiples relative to peers
• Recommendation & conclusion

 

Summary

Show key data on share price & performance, valuation price & ratios and investor recommendation

1) Two to three statements which explain your forecasts for the company’s revenue, income and cash flow

2) Key economic and market forces driving company’s prospects

3) How this translates into valuation, target price & recommendation

Introduction to company

1) Summarise company’s activities and business model

-What does it sell? Where? To whom? With what competitive advantage?

-Main markets served by company (by region, product, customer type)

-Typical features which MIGHT affect your company:

Demographics, social trends, consumer behaviour, fashion, changes in global trading patterns, environmental issues

• Avoid lengthy history and descriptions
• Use short, sharp summary of what drives this business

Sector review

1) Sector comments must be relevant to company’s operations

2) Identify two to four key market forces driving demand

3) Understand how competition works in sector

4) Reach clear conclusion on likely future directions

5) Reach clear conclusions about specific market forces

6) Support those conclusions with statistical evidence

-Do NOT simply download economic and sector data without explaining how it affects sector prospects

Company assessment

1) Assess historic performance and future prospects

2) Analyse 5-year trends in financial ratios:

• Has it improved or deteriorated in recent years?
• Have there been any volatile movements – what may have caused them?
• Is the company reliable in delivering sustained earnings growth?
• Or is it poised for recovery from a low point? Or unlikely to recover?

3) Compare company’s performance with sector peers

• Has it performed better or worse than its peers?
• Are its finances stronger or weaker than its peers?
• Has it been operated more efficient than its peers?