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MODULE BEAM007J: INVESTMENT ANALYSIS DISSERTATION
GUIDANCE ON HOW TO RESEARCH YOUR COMPANY
Students are expected to analyse ONE company in depth & focus on VALUATION:
? Analyse business model, performance & prospects
? Compile 5-year revenue, income & cash flow forecasts
? Translate these into comprehensive valuation of equity value
Students should use this data to compile an 8,000-word dissertation. This comprises a company case study written in the style of an equity research investment analysis report. This should:

? Analyse and understand one company in detail
? Select company from a list of 500 quoted European stocks
? Demonstrate skills in:
o Analysing company websites, investor presentations and the past 6 years financial statements, strategy reports and operating statements
o Identifying key drivers of business model and competitiveness
o Comparing financial ratios – margins, returns, liquidity, efficiency, solvency – of the company with the ratios of three competitor companies
o Drawing conclusions from these ratios about the company’s performance relative to competitors
o Translating this data into forecasts of revenue, costs, income, cash flow, dividends & shareholder value
o Using these forecasts to value the company’s equity and recommend whether investors should buy or sell its shares

STRUCTURE OF REPORT

1. Summary: equity data, company fundamentals, prospects, valuation & recommendation
2. Introduction: Company’s business model – which markets drive its revenue and profit?
3. 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
4. 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
5. Financial analysis: translate trading assumptions into sales, costs, income & cash flow forecasts
6. Valuation: translate forecasts into DCF, RIVM & DDM valuations relative to share price, and Price Multiples relative to peers
7. Recommendation & Conclusion
?
MORE DETAILED GUIDANCE ON EACH OF THE ABOVE SEVEN SECTIONS

1. SUMMARY (10% OF TOTAL MARKS)
COMPANY ANALYSIS
o Recommendation on stock valuation
o Key equity data: share price, market capitalisation, target price, past year’s share price performance, prospective P/E ratio
o Two to three statements which explain your forecasts for the company’s revenue, income and cash flow
o Key economic and market forces driving company’s prospects
o How this translates into valuation, target price & recommendation
o Use hard statistics to support forecasts and valuation
YOU SHOULD NOT START TO COMPOSE THIS SUMMARY UNTIL YOU HAVE COMPLETED ALL THE OTHER SECTIONS IN THE DISSERTATION. THIS SHOULD BE THE LAST SECTION WHICH YOU WRITE SINCE IT NEEDS TO SUMMARISE THE MAIN POINTS WHICH YOU HAVE MADE IN OTHER SECTIONS.
2. INTRODUCTION (6%)
Describe the company’s activities and business model. What does it sell? Where? To whom? With what competitive advantage? What are the main markets served by company – by region, product, customer type. This should be a short, succinct outline of what drives this business. It should NOT be a lengthy history and description (and promotion) of the business downloaded from the company’s website. USE THE SEGMENTAL ANALYSIS IN THE NOTES TO THE COMPANY’S CONSOLIDATED FINANCIAL STATEMENTS TO MEASURE % REVENUE AND PROFITS FROM EACH MAIN PRODUCT AND REGION.
KEEP THIS SECTION SHORT. DESCRIBE BRIEFLY THE MAIN PRODUCTS, SERVICES AND MARKETS WHICH DELIVER MOST OF THE COMPANY’S PROFITS. USE YOUR OWN WORDS TO IDENTIFY THE MAIN MARKET TRENDS AND COMPETITIVE ISSUES WHICH THE COMPANY FACES.

3. SECTOR OVERVIEW (15%)
Review macro-economic, competitive and other market forces in those products/regions which contribute most of the company’s profits. How are these affected by demographics, social trends, consumer behaviour, fashion, changes in global trading patterns, environmental issues – as well as GDP forecast by region? Guidelines to students for this section include:
i. Sector comments must be relevant to company’s operations
ii. Identify two to five key market forces driving demand
iii. Understand how competition works in sector
iv. Reach clear conclusion on likely future directions of sector demand
v. You may use PEST if you wish but this is not encouraged
vi. Avoid PEST lists of factors with no quantitative assessment
vii. Reach evidence-based conclusions about specific market forces
viii. Do NOT simply download economic and sector data without explaining its causal link to prospects of the company
THE BEST SECTOR REVIEWS FOCUS ON THE MARKETS (BY PRODUCT AND REGION) WHICH CONTRIBUTE MOST OF THE COMPANY’S PROFITS. DO NOT WASTE TIME, SPACE AND MARKS ON DATA ABOUT MARKETS WHICH ARE NOT SIGNIFICANT FOR THE COMPANY’S PROFITS. FOCUS ON THE WIDER MARKET FORCES. DO NOT RECYCLE DATA ABOUT THE COMPANY’S ACTIONS AND PRODUCTS. THIS IS A SECTOR REVIEW AND SHOULD FOCUS ON EXTERNAL MARKET FORCES, NOT INTERNAL ACTIONS.

4. COMPANY ASSESSMENT (28%)
Assess the historic performance, current competitive position and future prospects of the company against this sector background. Use this assessment to reach (and explain) conclusions about forecasts for revenue, costs, profits, cash flow and dividends. Guidelines to students for this section include:

A. Analyse 6-year trends in financial ratios:
i. PERFORMANCE – margins, asset turnover, ROA, leverage, ROE, DuPont Analysis
ii. EFFICIENCY – asset & inventory turnover, Cash Conversion Cycle (Inventory Days + Receivables Days – Payables Days)
iii. LIQUIDITY & SOLVENCY – current ratio, debt-equity, interest cover
B. Compare company’s performance with sector peers
i. has it improved or deteriorated in recent years?
ii. Have there been any volatile movements – what may have caused them?
iii. Has it performed better or worse than its peers?
iv. Are its finances stronger or weaker than its peers?
v. Has the company been delivering consistently high margins, ROA and ROE?
vi. Or has it been falling behind hits competitors in margins, ROA and ROE?
vii. If so, is it poised for recovery from a low point? Or unlikely to recover?
C. Highlight and focus on distinctive trends and inter-company differences. Look at the underlying trend over the whole 6-year period. Analyse, interpret and explain reasons for these. Do NOT just describe ratio changes from year to year. Focus on those trends which look important and relevant to the company’s long term performance and prospects. Do NOT spend time and pages on describing ratio trends where there has been little change or difference between the companies.
D. GIVE PRIORITY TO THE PERFORMANCE RATIOS. THESE USUALLY SHOW THE KEY DIFFERENCES BETWEEN THE COMPANIES. SET OUT INDIVIDUAL DUPONT ANALYSIS TABLES FOR YOUR COMPANY AND FOR EACH OF ITS THREE COMPETITORS. CALCULATE THESE RATIOS YOURSELF AND SHOW THE WORKINGS CLEARLY IN THE CELLS OF THE EXCEL SPREADSHEETS WHICH YOU SUBMIT WITH THE DISSERTATION. THE S&P CAPITAL IQ DATABASE MAKES IT EASY FOR YOU TO DOWNLOAD SIX (OR MORE) YEARS OF A COMPANY’S FINANCIAL STATEMENTS IN EXCEL AND CALCULATE THE FINANCIAL RATIOS FROM THEM. USE THE LAYOUT BELOW FOR DUPONT PERFORMANCE RATIO CALCULATIONS.

Key questions to address, in addition to financial ratios:
i. What markets does this company serve?
ii. What are the main drivers of these markets (country GDP, trends in demographics, consumer behaviour, government policy etc)?
iii. What are the best estimates of future trends in these drivers over the next 18 months, five years and in perpetuity?
iv. If the 2020 or 2021 results have been heavily affected by the COVID lockdown, take this into account and try to identify the long trend without the COVID effect
v. What is this company’s “unique selling point” in these markets?
vi. How does this compare with competitors’ offerings?
vii. What is the most likely trend in the company’s sales, costs, net income and cash flow over the next two, five and 50 years?
viii. Can you justify the assumptions for these trends?

5. FINANCIAL ANALYSIS AND FORECASTS (15%)
Translate the above assessment of macro forces and company’s competitive position into forecasts of the company’s income statement, cash flow and balance sheet for the next five years. Guidance to students includes:
i. Revenue growth forecasts are the main driver of these models and subsequent valuation (see 6 below). Link these revenue growth forecasts clearly to the sector overview and company assessment.
ii. Derive expenses forecasts from assessment of supplier pressures and movement in operating overheads – it is usually most straightforward to set out each line as % of revenue, based on the past five years’ average amended to reflect likely changes in price and cost pressures. Disregard 2020 percentages if its figures have been heavily affected by COVID.
iii. Revenue less Expenses (COGS, operating, interest, taxation) gives Net Income
iv. Estimate Dividend from Net Income and payout ratios
v. Estimate Cash flow from Net Income +/- working capital and depreciation accruals
vi. Estimate Balance sheet from accruals, retained earnings and cash flow
Go to Week 7 (Forecasting) on the ELE website for module BEAM038J (Investment Analysis 2) and click on “Asynchronous Lecture Slides”. Parts A & B provide excellent guidance to forecasting, especially slides 17 to 21. Also note that

6. VALUATION (20%)
Use these forecasts to compile valuations of the company’s equity, based on both benchmarking multiples relative to comparator companies and calculating the intrinsic net present value of future dividends, cash flow and earnings. Guidance to students includes:
RELATIVE MULTIPLES
? First-year forecast of sales, earnings, EBITDA, dividend & opening book value
? Calculate ratios of:
o P/E and PEG
o EV/EBITDA
o P/Sales & P/Book
? Compare with equivalent peer (competitor) company ratios
? First-year forecast (“prospective”) price multiples are the most heavily used by analysts for equity valuation
? This means share price divided by earnings or EBITDA forecast for the year ahead
? S&P Capital IQ provides a useful list of prospective multiples for peer/competitor companies
INTRINSIC VALUE
? Convert dividend forecast into DDM

? Convert free cash flow forecast into DCF

? Convert earnings forecast into Residual Earnings (RE)
? Use CAPM to calculate cost of equity and cost of capital for discount rates
? Compare intrinsic value with share price and reach Buy/Sell recommendation if share price is >10% lower/higher than average intrinsic valuation
? If DDM, DCF and RE valuations differ sizeably (>10%), first check calculations and then try to identify reasons or possible inconsistencies.
? Also if valuations differ very sizeably (>25%) from current share price, first check calculations and then try to identify reasons. It is unusual for valuation estimates to differ by more than 25% from the current share price. This would mean that either you have used much lower (or higher) growth assumptions in your forecasts than are being used by most market analysts or you have made an error. You are permitted to show such large differences but you should also prove that you have tried to identify the reasons for those differences.
? The use of sensitivity analysis and risk assessment is also encouraged. Compile sensitivity tables showing how the valuation estimate under each method will change in response to changes in the discount rate and perpetuity growth rates used. These will show that you understand how sensitive the valuation estimates are to small changes in discount rates and perpetuity growth rate assumptions. If, for example, you have recommended a BUY for the stock because your valuation estimates are 20% higher than the current share price, look closely at the risks that (a) your growth forecasts may be too optimistic, or (b) your cost of equity estimates may be too low.

7. RECOMMENDATION & CONCLUSION (6%)
Deliver a balanced resume of the company’s performance, competitive position and prospects, leading to a summary of the valuation prices, the share price recommendation and the main limitations for each valuation approach.

FOOTNOTE ON S&P CAPITAL IQ DATABASE
This database provides all the financial statement data which you will require to analyse and compare your company with its competitors. Most students should have attended one of the three training sessions organised by S&P Capital IQ for students who are doing this module. Make sure that you are registered to use the S&P Capital IQ database through the link immediately below.
https://pages.marketintelligence.spglobal.com/university-of-exeter.html

If you experience any problems, e-mail the Support address set out below.
support.ciq@spglobal.com