Company analysis and stock valuation ch14 Company
Description: Company analysis and stock valuation ch14 Company Analysis vs. Stock Valuation Good companies are not necessarily good investments. Why? Compare the intrinsic value of a stock to its market value Stock of a great company may be overpriced
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slide1. Company analysis and stock valuation ch14<br>
slide2. Company Analysis vs. Stock Valuation Good companies are not necessarily good investments. Why?
Compare the intrinsic value of a stock to its market value
Stock of a great company may be overpriced (market value is higher than intrinsic value)
Which means its not a good stock to invest in although the company’s performance is extremely well.<br>
slide3. Growth companies and growth stocks Growth company is a:
company that has a rate of return that is higher than the required rate of return (WACC).
Has the potential for future earning growth.
The firm’s sales and earnings grow faster than those of a similar risk firms and the overall economy.
Younger companies that has above average investment opportunities.
These companies retain a large portion of its earning to fund these investment projects.
Low dividend payout ratio. Or no dividend sometimes.<br>
slide4. Growth companies and growth stocks Growth stock is :
Stock with higher expected rate of return than other stocks in the market with similar risk characteristics
Achieves this superior risk-adjusted rate of return because the market has undervalued it compared to other stocks.<br>
slide5. Growth companies and growth stocks Although stock market adjusts stock prices relatively quickly and accurately to reflect new information, available information are not always perfect or complete.
Therefore, incomplete information may cause a stock to be undervalued or overvalued at a point in time.
If the stock is undervalued, its price should eventually reflect the true fundamental value when the correct information becomes available.
During this period of price adjustment, it will be a growth stock.<br>
slide6. Growth companies and growth stocks Growth stock are not necessarily limited to growth companies.
It can be the stock of any type of company as long as this stock is undervalued by the market.<br>
slide7. Growth companies and growth stocks Example,
if an overeager investor tend to overestimate the expected growth rate of earnings and cash flows for a growth company and inflate the price of a growth company stock.
Then investors who paid the inflated stock price will earn a rate of return below the risk adjusted required rate of return.<br>
slide8. Defensive companies vs defensive stock Defensive Company:
Whose future earnings are likely to resist an economic downturn
Normally have low business risk and not excessive financial risk
Supply basic consumer necessities such as Public utilities or grocery stores.<br>
slide9. Defensive companies vs defensive stock Defensive stock:
Rate of return is not expected to decline during an overall market decline or decline less than the overall market.
Stock with low or negative systematic risk
Or in other words, a stock that has a low positive or negative beta (the expected return of an asset based on its expected market returns is low)<br>
slide10. Cyclical companies and cyclical stocks Cyclical companies:
Sales and earnings will be heavily influenced by aggregate business activity
Outperform other firms during economic expansion
Underperform during economic contractions
High volatility in sales (high business risk and financial risk)
Example steel, auto or heavy machinery industries<br>
slide11. Cyclical companies and cyclical stocks Cyclical stock:
Experiences changes in rates of return greater than changes in overall market rates of return
Stocks with high betas<br>
slide12. Speculative companies vs speculative stocks Speculative companies
Whose assets involve greater risk but that also has a possibility of greater gain
Speculative stock
Possesses a high probability of low or negative rates of return<br>
slide13. Speculative stocks One that is overpriced, leading to a high probability that during the future period when the market adjusts the stock price to its true value,
Will experience either low or possibly negative rates of return
Might be the case for an excellent growth stock that is substantially overvalued<br>
slide14. Firm’s Overall Strategic Approach Porter suggests two major strategies:
Low-Cost Strategy
The firm seeks to be the low-cost producer, and hence the cost leader in its industry
Cost advantages vary by industry and might include economies of scale, proprietary technology,
Differentiation Strategy
Firm positions itself as unique in the industry in an area that is important to buyers
A company can attempt to differentiate itself based
on its distribution system or some unique marketing approach<br>
slide15. Company Analysis SWOT analysis
Strengths
Weaknesses
Opportunities
Threats<br>
slide16. SWOT Analysis Internal Analysis
Strengths
Give the firm a comparative advantage in the marketplace
Perceived strengths can include good customer service, high-quality products, strong brand
image, customer loyalty, innovative R&D, market leadership, or strong financial resources
Weaknesses
Weaknesses result when competitors have potentially advantages over the firm<br>
slide17. SWOT Analysis External Analysis
Opportunities
These are environmental factors that favor the firm
They may include a growing market for the firm’s products (domestic and international), shrinking competition, favorable exchange rate shifts
Threats
They are environmental factors that can hinder the firm in achieving its goals
Examples would include a slowing domestic economy, additional government regulation, an increase in industry competition, threats of entry,<br>
slide18. Some Lessons from Peter Lynch Favorable Attributes of Firms may result in favorable stock market performance
Firm’s product should not be faddish
Firm should have some long-run comparative advantage over its rivals
Firm’s industry or product has market stability
Firm can benefit from cost reductions
Firms that buy back shares show there are putting money into the firm<br>
slide2. Company Analysis vs. Stock Valuation Good companies are not necessarily good investments. Why?
Compare the intrinsic value of a stock to its market value
Stock of a great company may be overpriced (market value is higher than intrinsic value)
Which means its not a good stock to invest in although the company’s performance is extremely well.<br>
slide3. Growth companies and growth stocks Growth company is a:
company that has a rate of return that is higher than the required rate of return (WACC).
Has the potential for future earning growth.
The firm’s sales and earnings grow faster than those of a similar risk firms and the overall economy.
Younger companies that has above average investment opportunities.
These companies retain a large portion of its earning to fund these investment projects.
Low dividend payout ratio. Or no dividend sometimes.<br>
slide4. Growth companies and growth stocks Growth stock is :
Stock with higher expected rate of return than other stocks in the market with similar risk characteristics
Achieves this superior risk-adjusted rate of return because the market has undervalued it compared to other stocks.<br>
slide5. Growth companies and growth stocks Although stock market adjusts stock prices relatively quickly and accurately to reflect new information, available information are not always perfect or complete.
Therefore, incomplete information may cause a stock to be undervalued or overvalued at a point in time.
If the stock is undervalued, its price should eventually reflect the true fundamental value when the correct information becomes available.
During this period of price adjustment, it will be a growth stock.<br>
slide6. Growth companies and growth stocks Growth stock are not necessarily limited to growth companies.
It can be the stock of any type of company as long as this stock is undervalued by the market.<br>
slide7. Growth companies and growth stocks Example,
if an overeager investor tend to overestimate the expected growth rate of earnings and cash flows for a growth company and inflate the price of a growth company stock.
Then investors who paid the inflated stock price will earn a rate of return below the risk adjusted required rate of return.<br>
slide8. Defensive companies vs defensive stock Defensive Company:
Whose future earnings are likely to resist an economic downturn
Normally have low business risk and not excessive financial risk
Supply basic consumer necessities such as Public utilities or grocery stores.<br>
slide9. Defensive companies vs defensive stock Defensive stock:
Rate of return is not expected to decline during an overall market decline or decline less than the overall market.
Stock with low or negative systematic risk
Or in other words, a stock that has a low positive or negative beta (the expected return of an asset based on its expected market returns is low)<br>
slide10. Cyclical companies and cyclical stocks Cyclical companies:
Sales and earnings will be heavily influenced by aggregate business activity
Outperform other firms during economic expansion
Underperform during economic contractions
High volatility in sales (high business risk and financial risk)
Example steel, auto or heavy machinery industries<br>
slide11. Cyclical companies and cyclical stocks Cyclical stock:
Experiences changes in rates of return greater than changes in overall market rates of return
Stocks with high betas<br>
slide12. Speculative companies vs speculative stocks Speculative companies
Whose assets involve greater risk but that also has a possibility of greater gain
Speculative stock
Possesses a high probability of low or negative rates of return<br>
slide13. Speculative stocks One that is overpriced, leading to a high probability that during the future period when the market adjusts the stock price to its true value,
Will experience either low or possibly negative rates of return
Might be the case for an excellent growth stock that is substantially overvalued<br>
slide14. Firm’s Overall Strategic Approach Porter suggests two major strategies:
Low-Cost Strategy
The firm seeks to be the low-cost producer, and hence the cost leader in its industry
Cost advantages vary by industry and might include economies of scale, proprietary technology,
Differentiation Strategy
Firm positions itself as unique in the industry in an area that is important to buyers
A company can attempt to differentiate itself based
on its distribution system or some unique marketing approach<br>
slide15. Company Analysis SWOT analysis
Strengths
Weaknesses
Opportunities
Threats<br>
slide16. SWOT Analysis Internal Analysis
Strengths
Give the firm a comparative advantage in the marketplace
Perceived strengths can include good customer service, high-quality products, strong brand
image, customer loyalty, innovative R&D, market leadership, or strong financial resources
Weaknesses
Weaknesses result when competitors have potentially advantages over the firm<br>
slide17. SWOT Analysis External Analysis
Opportunities
These are environmental factors that favor the firm
They may include a growing market for the firm’s products (domestic and international), shrinking competition, favorable exchange rate shifts
Threats
They are environmental factors that can hinder the firm in achieving its goals
Examples would include a slowing domestic economy, additional government regulation, an increase in industry competition, threats of entry,<br>
slide18. Some Lessons from Peter Lynch Favorable Attributes of Firms may result in favorable stock market performance
Firm’s product should not be faddish
Firm should have some long-run comparative advantage over its rivals
Firm’s industry or product has market stability
Firm can benefit from cost reductions
Firms that buy back shares show there are putting money into the firm<br>