During the semester, each class member will serve as an analyst responsible for analyzing the performance, estimating the current market value and making an investment recommendation on one company. To help in this process, you will also serve on a “sector team” with other class members who are analyzing similar companies. Each sector team will be composed of five or six team members. The analysis of each company will be done in a series of steps with weekly posts on topics paralleling those we cover in class. Be the end of the semester, you will have completed a detailed analysis and valuation of a real company. Finally, each team will make a presentation and lead a discussion about their firms in a panel discussion attended by a number of Bryant alumni who work in finance.
The purpose of this project is twofold. First, and most importantly, the project will give you an opportunity to apply what you are learning in this course and to develop your skills as a financial analyst. Second, this project will give you the opportunity to develop a professional work product that may be useful to you in your job search. To this end, you should view your weekly additions to the project not just as a step to meeting the course requirements but as a showcase for your abilities as a financial analyst.
Sector and Company Selection
Each sector team will select one of the following three sectors and each team member will select one company from that sector. We will be using BusinessWeek’s sector rosters to make these choices and the links to these sectors are shown below. Shown below are a series of additional criteria to use in selecting your company. Attached is a form that you should use in submitting your company selections for approval.
Requirements (your choice must meet these criteria):
1. Your company must come from one of these three sectors and should be in the same subsector as the rest of you sector team.
· Consumer Discretionary Sector http://investing.businessweek.com/research/sectorandindustry/sectors/sectordetail.asp?code=25
· Consumer Staples Sector http://investing.businessweek.com/research/sectorandindustry/sectors/sectordetail.asp?code=30
· Technology Sector http://investing.businessweek.com/research/sectorandindustry/sectors/sectordetail.asp?code=45
For example, if you click on the Consumer Discretionary Sector link above, you will be taken to a screen that lists 17 subsectors. The first subsector is “Textiles, Apparel and Luxury Goods” and it contains 38 companies. The next subsector, “Specialty Retail” contains 106 companies. Your team should select a sector (one of the three above) and then a subsector with each team member selecting a different company from that subsector. This way, you will reduce your work load by being able to share comparable data with your teammates.
2. You may not choose a company that has been analyzed in FIN 370 during the last two years. A list of these companies is on the course Blackboard site under the “project” link.
3. You may not choose a company that is being analyzed during this semester in this course (e.g., DKS or a company from one of the cases).
4. Your company must have at least five years of available financial statements and 10k reports. You can verify this by looking at the company’s investor relations web site or by searching for the company on the U.S. Securities and Exchange Commission’s EDGAR site at http://www.sec.gov/edgar/searchedgar/companysearch.html (Hint: Search using the ticker symbol, not the company’s name).
5. Your company must have at least three publicly-traded competitors each with five years of available financial statements.
Other Guidelines for Company Selection (carefully checking for these criteria will make your life a lot easier over this semester):
1. Look for companies that are engaged in a single business. Companies that are engaged in multiple businesses will require you to do much more work as you will have to analyze each business individually and then combine the results to measure the overall performance and value of the company.
2. Avoid companies that have had significant acquisitions or divestitures during the last five years. The presence of these transactions will skew your financial results and add to your work load. There are two ways to check for this. First, you should read the first section of your firm’s 10k report for each of the past five years. Major transactions will typically be disclosed there. Second, look at the firm’s total assets in each of the past five years. Firms without major acquisitions or divestures will show a fairly smooth pattern of growth in assets. If you find a unusual increase or decrease in total assets, look for the reason.
3. Coordinate with your sector team and pick companies that operate in the same subsector. For example, your team might choose to pick companies from the 106 specialty retailers listed in the Consumer Discretionary Sector. Picking a group of firms that are competitors in the same subsector will allow you to share information and specialize.
The FIN 370 course syllabus includes a course plan that details both in-class and project activities and due dates. The course is designed so that we will be covering each step of the analysis a few days before you are responsible for updating your project. You are expected to have posted your completed analysis for each segment by the end of the day (i.e., midnight) on the due date. Late or missed additions will result in grade penalties.
While much of the analysis focuses on the individual companies, your sector team is intended to be a resource for you. You should meet regularly with your sector team and you may use team mates for editorial support. That is, while you are expected to analyze your own company, you may review each other’s postings to help correct for errors or omissions. Each analyst’s report should include a summary posting with a listing of all of the companies and a brief overview of the performance of the group of companies. Each sector team will also work together to prepare for the Sector Panel Presentations at the end of the semester. The grade portion of the project related to the sector team will include a peer evaluation at the end of the semester.
Shown below are guidelines for each update that you will post to your company analysis. You should regard these guidelines as minimum requirements. The best analyses will go beyond these guidelines. Feel free to post additional material that would help an investor decide whether to buy or sell this stock. Be creative! Track your company throughout the semester. Update your analysis to include discussions about ongoing news on the firm. Show that you really understand the firm, its businesses, the industry and competitors. Go beyond simple quantitative analysis. What do the numbers tell you? Remember your role; you are an independent analyst following this stock for the purpose of making an investment recommendation on the company. Be objective; don’t get caught up in the company’s marketing hype and management discussion “spin.”
Post 1: The Company – Introduce the company and its businesses.
Post 2: Competitors – Determining which companies are most comparable to the subject company is a non-trivial exercise. Look at the companies that operate in the same industry segment as your company. How are they similar and how are they different? Are they comparable in size? How do their strategies compare? Do they serve similar market segments and geographic areas? Do these companies also operate in other businesses that may affect comparisons with your company?
Post 3: Strategic Analysis – What is the company’s strategy and how does it compare to that of its competitors? What is the company’s source of competitive advantage? Do an environmental scan and/or a SWOT analysis. Consider the industry and what it takes to succeed. Consider Porter’s five forces. Look into the future. How is the business and industry changing? Are there any disruptive innovations looming?
Post 4: Profitability Analysis – Examine the firm’s profitability over the past five years in comparison to its overall industry and to your selected competitors. Look at multiple metrics for profitability including gross profit margin, net profit margin, return on assets, return on equity and return on net operating assets. Use the DuPont equation to disaggregate the firms’ ROE and explain changes in the firms’ ROE over the past five years.
Post 5: Revenue Recognition and Operating Income – How does your firm recognize revenue and how does your firm’s revenue recognition policies compare to its competitors? Is there any evidence of aggressive revenue recognition? Consider the firm’s operating income and how it has been affected by “above the line” items including research and development expenses, restructuring costs, income taxes and foreign currency translation. Consider “below the line” components to income including discontinued operations and extraordinary items. Examine earnings per share and the impact of dilution from new shares (and potential new shares) and the anti-dilution effects of share buy-backs. Finally, consider the “quality of earnings” of your firm.
Post 6: Assets and Working Capital – Examine each of the major assets and working capital accounts. How does your firm account for each of these items and does the accounting method differ from the firm’s competitors. Examine the firm’s receivables. Is there any evidence of aggressive revenue recognition or earnings management through manipulation of the allowance for doubtful accounts? Examine the firm’s inventory methods and policies and compare to their competition. If the firm uses a different inventory accounting method (e.g., FIFO versus LIFO) than its competitors, calculate the impact on net earnings. Is there any evidence of excess or obsolete inventory? Examine the firm’s accounts payable. Is the firm paying within a reasonable time? How does this compare to the firm’s competition? Calculate asset management / efficiency ratios for the past five years for your company and its selected competitors including A/R turnover in days, Inventory turnover in days, A/P turnover in days, the cash collection cycle in days. Calculate and interpret liquidity ratios including the current ratio, quick ratio and cash ratio. Examine the firm’s fixed assets and related accounting policies including depreciation period and method. Examine the firm’s intangible assets. Look at the footnotes for evidence of impairments.
Post 7: Liabilities and Off-Balance Sheet Financing – Examine the firm’s use of leverage and compare its use of leverage with its competitors. Compute leverage ratios and coverage ratios. Make a judgment about the firm’s financial risk compared to its competition. Does the firm utilize off-balance sheet financing? If so, estimate the value of this off-balance sheet financing and prepare a revised balance sheet recognizing this debt. Calculate the impact of this off-balance sheet debt on the leverage ratios and on your overall assessment of the firm’s financial risk. Does the firm have any pension obligations? Is any portion of these obligations unfunded?
Post 8: Equity Analysis – Examine the firm’s equity in comparison to its competitors. Does the firm utilize multiple classes of stocks and, if so, what are the differences in the classes. Examine stock transactions by insiders and institutional investors? Are insiders buying or selling stock? Examine the firm’s use of employee stock options and other stock-based compensation. Consider the dilutive effect of these transactions on future earnings per share. Examine the firm’s dividend policy and any stock dividends and splits over the past five years. Compare the firm’s stock performance over the past five years with its competitors and with an appropriate broad market index.
Post 9: Cost of Capital – Calculate the firm’s weighted average cost of capital (WACC). Consider the impact of any off-balance sheet financing in the calculation of the firm’s capital structure weights. Determine the firm’s cost of debt. What is the most reasonable proxy if your firm’s debt is not publicly traded? Estimate the firm’s cost of equity using the DCF, CAPM and Bonds plus risk premium methods.
Post 10: Free-Cash Flow Valuation – Estimate the value of the firm using the McKinsey Free Cash Flow model. Be sure to discuss your key assumptions and sources and justify your growth rates, key inputs (e.g., COGS percent, SG&A percent, CapEx percent, etc.) and your choice of time horizon.
Post 11: Alternate Valuation Models – Estimate the value of your firm using alternate valuation models including the Residual Operating Income (ROPI) model and market multiples approach.
Post 12: Examine your entire project and make a final judgment about the firm as a potential investment. What do you believe is the “true value” of the company and its stock? Make an investment recommendation.
Project evaluation will be based on the following criteria:
1. Demonstrated understanding of accounting and financial concepts,
2. Creativity in the analysis and justification in the recommendations,
3. Thoroughness and completeness,
5. Form (e.g., details such as citing references, grammar, presentation of the project, Professionalism of graphics, typing errors, etc.), and
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