Class notes, week ending 9/25
Class notes, week ending 9/25 FIN 3050
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This 6 page Class Notes was uploaded by Arianna Laurenza on Friday September 25, 2015. The Class Notes belongs to FIN 3050 at Clemson University taught by Kerri McMillan in Summer 2015. Since its upload, it has received 79 views. For similar materials see Investment Analysis in Finance at Clemson University.
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Date Created: 09/25/15
092115 Chapter 7 Finding Undervalued Stocks Book Examples 13 Combined Dividend and Earnings Model ke 1 1 year EPS x 13 Divsha re x failor PXOCS 2012 320 040 128 90 1111 115 2013 360 040 144 81 11112 117 2014 410 040 164 73 11113 120 2015 462 040 185 66 11114 122 2016 520 040 208 59 11115 123 597 PARTI est PE price PV Terminal EPS x ratio 2016 x factor PV Year 2016 520 15 78 059 4602 STEPII VS0 597 4602 5199 2 Beta 8 measures individual company risk market risk SampP 500 stock index 8 10 market 51M 8 07 gt 30 less reisky than the market Class Notes FIN 3050 Investment Analysis 09212015 092315 Chapter 5 Economic Analysis Top down Evaluation based on CFA program Economic Analysis Industry Analysis Copmany Analysis Stock Price Analysis Don t worry about pages 122 amp 123 Don t skip the box on page 121 4 goals Know all 10 leading indicators from the book page 131 Economic Activity and the Business Cycle Federal Government Policy Goals 1 Stable prices 0 low infiltration rate 0 Current 18 historical average 3 2 Business stability at high levels of production 0 low levels of unemployment 0 current 56 3 Sustained real growth GDP 0 Actual economic growth after deducting in ation 4 Balance of imports and exports Primary Tools to Stimulate Economic Activity 0 Fiscal Policy government s taxing and spending policies 0 Monetary Policy Federal Reserve controls the money supply and interest rates that controls in ation and promotes economic growth Gross Domestic Product GDP 0 Measures output and consumption within the US in a given year 0 Does not include products made by US firms in foreign countries 0 Recession 2 or more consecutive quarters of negative real GDP Personal Consumption o Fastest growing sector 0 Driving force behind economic growth 0 Accounts for more than 60 percent of GDP Business Cycles and Cyclical Indicators 0 Trough end of a recession and beginning of an expansion 0 Peak end of an expansion and beginning of a recession Class Notes FIN 3050 Investment Analysis 09232015 Leading Indicators 0 Change direction in advance of general business conditions 0 Help anticipate rising corporate profits and possible stock market price increases 0 A few indicators know all 10 from the book 0 Consumer expectations leading indicator of economic activity measured by GDP I When consumer confidence decreases spending tends to contract 0 Money Supply M2 money supply 0 Stock prices often anticipates the end of a recession and goes up between real GDP leads the economy by 5 months I Most accurate and most reliable Coincidental Indicators 0 Move approximately with the overall economy 0 Example personal economy Lagging Indicators 0 Usually change direction after business conditions have turned around 0 Example consumer price index CPI Stock Prices and Economic Variables 0 Strong relationship between the level of economic activity measured by GDP and longrun movements in the stock market Business Cycles and Industry 0 Each Industry may be affected by the business cycle differently 0 Consumer oriented industries tend to be sensitive to shortterm business cycle swings o Durable goods I Washers and dryers I Refrigerators I Stoves I Automobiles o Necessity oriented companies not deeply dependent on the economy tend to be consistent performers noncyclicals 0 Food 0 Pharmaceuticals 0 Industries with low price elastic products also hardly affected by the business cycle 0 Cigarettes 0 Alcohol Class Notes FIN 3050 Investment Analysis 09232015 Chapter 6 Industry Analysis Top down Valuation Evaluation based on CFA program Economic Analysis Industry Analysis Copmany Analysis Stock Price Analysis Fivestage Industry Life Cycle 092515 Salas Stage IV Stage V M dtl atc P3570th High payout ratio High dividend payout ratio Path and then no dividends Stage III I 395 g N Stock dividends 5 and splits Low payout ratio 1 Expansion Decline Stage II V StDCk dimldcnds I Crossover point 39orn accelerating growth to decelerating growth Stage I No cash 1 Growth dividends Development ratio scale Time Development Growth Expansion Maturity Decline Stage I Stage 11 Stage III Stage IV Stage V d 4 iegtiwgi C A Stage I Development no cash dividends Stage II Growthstock dividends only Stage III Expansion stock dividends and splits Stage IV Maturity high payout ratio Stage V Decline high payout ratio then no dividends Class Notes FIN 3050 Investment Analysis 09252015 Stage 1 Development Companies getting started with new idea product or production technique that makes them unique Usually privately owned and financed with owner s money as well as capital from friends family and or a bank If successful may attract venture capital Pays no dividends because all profits are reinvested into the firm Risky investment with large potential return Stage 11 Growth Industry or company that has achieved market acceptance for its products or services Retains earnings for reinvestment Sales and returns on assets growing at increasing rate Becomes profitable Pays stock dividends to preserve capital May pay low cash dividends as the need for capital declines as new sources of capital declines as new sources of capital appear Risky investment with large potential return Stage III Expansion Sales and earnings continue expanding but at a decreasing rate Crossover point pg 141 change from accelerating growth to decelerating growth More competition enters the market Asset expansion slows Cash dividends increase in dividend payout ratio Stock dividends and splits still common Stock prices may decline as investors realize growth rates will be declining Stage IV Maturity Industry sales grow at rate equal to the economy as measured by long termgdp growth Plant and equipment are in place financing alternatives are available domestically and internationally cash ow from operations usually sufficient to more growth requirements of firms dividend payout may range 4050 often compared to growth rate of SampP 500 Index Smucker39s 45 dividend payout ratio Pepsico 53 Stage V Decline Class Notes Industries suffer declines in sales if product innovation has not increased product base over the years May be specific to a country Industry may undergo consolidation Weakest companies fail Bankruptcy Dividend payout ratios sometimes rise to 100 or more of earnings followed by drastic cuts or elimination of dividends FIN 3050 Investment Analysis 09252015 Growth in NonGrowth Industries 0 Growth in companies may exist in mature industry stage 0 Not all firms within an industry experience same growth path in sales earnings and dividends 0 Some companies may be better managed have better people have more efficient assets or invest more in research and development 0 Some mature firms might be good investments 0 Growth by expansion abroad 0 International demand greater than domestic demand 0 Utilities in areas of rapid population growth Ex Starbucks is mature but expanding abroad in India Industry Analysis Handout 0 Sector a broader definition that can include several different industries Ex Insurance industry in Financial Sector Class Notes FIN 3050 Investment Analysis 09252015