Module 7 Fundamental Analysis

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Module 7Fundamental Analysis
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Module 7 - Learning Objectives

• Define fundamental analysis.
• Differentiate between fundamental, technical and
  speculative analysis.
• Define income statement and its major components.
• Define balance sheet and its major components.
• Define cash flow statement and its major
  components.
• Analyze and evaluate key measures in a companys
  income statement, balance sheet, and cash flow
  statement.
• Evaluate a companys products and market
  position.
• Evaluate a companys management.
• Explain earnings estimates and how they can be
  used to evaluate a company.
• Download financial statements from financial
  websites and evaluate an investment.

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What Is Fundamental Analysis?
Fundamental analysis Looking for hidden value in
a company. Technical analysis Discerning
patterns in price charts. Speculative investing
Playing the odds. Some finance types believe that
none of these work. The market is efficient and
stocks are priced at what theyre worth.
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How Do You Do Fundamental Analysis?

• SEC documents on the company
• Company websites
• Library (Value Line, Standard and Poors,
  periodical databases)
• Business press (Wall Street Journal, New York
  Times, Forbes, Fortune, and Business Week)
• Financial websites

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What are you looking for?

• Growth in top line
• Growth in bottom line
• Upcoming products that might grow the company
• New markets that may grow the company
• Management that is good at growing the company
• In short, growth

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What can you find at a company website?

• Lets try www.boeing.com

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Product and Market

• Strong brand franchise in its market
• Market leader - largest share of sales
• Growth
• New products in the pipeline

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Product and Market?

• ATT
• EMC
• Amgen
• Time Warner

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Management

• CEO, CFO, and COO
• Good management team
• Good track record
• Compensation
• Buying or selling company stock

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Financial Statements

• Accounting is the language of business
• Companies are required to report their financials
  according the accounting standards
• Publicly-listed companies need to file their
  financials with the SEC
• The main financial statements
• Income Statement
• Balance Sheet
• Cash Flow Statement

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Income Statement Activity for the year -
revenues and expenses
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Whats your income statement?
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Balance SheetSnapshot of financial situation
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Whats your net worth?
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How does it work for companies?
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Evaluating Income Statements

• Merck is a major drug company. Here are its
  revenues, earnings before taxes, and basic
  earnings per share for the past four years.
• Calculate the growth rates in sales
• Calculate the operating margin.
• Calculate the growth rates in earnings per share.
• What does each of these tell you about Merck?

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Calculate growth in debt and equity for American
Home Products now part of Pfizer. What do your
findings show?
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Calculate Pfizers growth in operating cash flow.
What does it tell you about the company?
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Earnings Projections

• Forecast or prediction of what the company will
  do in the next two years
• Detailed analysis of the company
• Create a financial model (income statement,
  balance sheet and cash flow statement) for the
  company
• Basis of where analysts think stock price will be
  in the next two years.

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Pfizers Earnings Estimates