Finance
Julia_B
2019SP_FIN_6322projectinstructionsv1.docxFIN -6322, Security Analysis
Spring 2019, Ammerman
VALUATION PROJECT
Points: 300 (30% of final grade)
Due date: Apr 21, 2019 at 11:59pm CT
Overview: This project forms a key experiential learning component of the course. By working on this project, students will gain experience applying the concepts and valuation techniques covered in the course to complete a fundamental analysis of a publicly-traded company of their choice. Additionally, students will gain experience communicating the results and implications of their analysis.
GENERAL DESCRIPTION
The purpose of this project is twofold:
1. To give students experience applying the material and techniques covered in the course to a company of their choosing. (Since students get to choose the company to research and value, this should help keep the material and project interesting.)
2. To evaluate students’ level of mastery with the material at the end of the course.
In order to meet these two objectives, students will complete two (2) deliverables as part of this project. These deliverables are due by the due date/time shown above. The two deliverables are:
1. A completed fundamental analysis: this must be an Excel document.
2. A stock analysis report: this must be a Word document.
INSTRUCTIONS
The following instructions form a general framework for completing the project. These instructions are not exhaustive – there could be other steps and research that students need to do in order to successfully complete their project. This is because every firm is different – so the detailed steps followed by one student may differ slightly from those followed by another student as they deal with the issues and challenges unique to their chosen firm.
As with all things in finance, you will have to exercise critical thinking in order to properly apply the concepts and techniques of fundamental analysis to complete the project.
So, with that in mind, here are the general steps students need to follow in order to successfully complete this project.
1. Pick a publicly-traded firm that interests you. Publicly-traded means that the common stock trades in a stock market (such as the NYSE or NASDAQ).
a. Here are some things to keep in mind:
i. The firm you choose needs to be registered with the SEC in order to guarantee that you can get access to its 10-K filings in order to do your historical analysis of company’s financial statements. You can choose an international firm, so long as the common stock is traded in the US and registered with the SEC (e.g., GSK is a pharmaceutical company headquartered in the UK, but its stock trades in the US, so it files 10-K reports with the SEC).
1. Some international firms do not sell their stock in the US, and so are not required to register with the SEC. That means finding their financial statements could be more challenging, and they may not be stated in US GAAP or IFRS. For your sake, and mine, I want to avoid any such complications. So please stick to firms that are registered with the SEC and have 10-Ks available.
ii. Some students may want to choose the same company to research and value (e.g., two students may both want to do a valuation of DIS). That’s fine – I want you to choose a firm that interests you, even if means everyone ends up doing the same firm. As such, students who choose the same firm may want to collaborate with each other. That is permissible, up to a point. Every student is expected to submit their own unique analysis and report. So, what this means in practical terms is: it’s fine for students to share information about the resources they’ve found, and their general process for completing their analysis and report. But students need to actually do their own work in order to ensure that they have a unique deliverable that demonstrates their learning, and not just an ability to copy a peer. If I see analysis and/or reports that look substantially similar (e.g., nearly identical assumptions, layout, written content, etc.) I will interpret this as cheating – one student having copied from the other – and both students will receive zero (0) points for the assignment. Refer to the policy on cheating in the syllabus. Please do not go down this road – I’m happy to help you and answer your questions if you get stuck on details, so there is absolutely no reason for you to copy someone else’s work.
2. Once you have picked your firm, you will need to do some research.
a. First do some basic research on the firm to get started.
i. Research is one of those things where you could make it go on, and on, and on. You need to put some practical parameters on yourself. I recommend you use these questions to guide your initial research:
1. What does the firm sell? (Do they sell products, services, or both?)
2. Where do they sell their products/services?
3. Where do they manufacture their products?
4. What are the key inputs and outputs for firms in this industry?
5. What other firms operate in this industry? Who are their competitors?
6. Where is the firm headquartered? Any particular reason for having their headquarters there (e.g., is that the historical geographic location, or did the firm re-locate their to take advantage of the tax code)?
ii. You might also consider doing a rough SWOT analysis to organize your research
1. What are the firm’s strengths, weaknesses, opportunities, and threats…
a. …as they relate to the industry/other firms in the industry
b. …as they relate to general economic conditions
b. Your research will be ongoing throughout the project.
i. Check the news for stories on your company at least once a week. Ask yourself the following questions:
1. What was reported?
2. What happened to the stock price on the day the news article came out? Why do you think that was the case? Why do other analysts think that was the case?
ii. Check the news for stories related to general economic conditions (e.g., changes in interest rates, unemployment, taxes/tariffs, etc.)
1. What was reported?
2. What happened to the stock price on the day of the event/report? Why do you think that was the case? Why do other analysts think that was the case?
iii. Various assumptions used in your financial modeling and valuation will require some research. This will become more apparent as you get into the technical part of the project as outlined in your readings.
3. After doing your basic research, you should have a good sense of what your firm is all about, who the key players are (internal and external), and how they are positioned in their industry and in the economy. You are now ready to begin doing your analysis.
a. Chapters 8 – 15 in your text provide a clear, step-by-step approach for completing a fundamental analysis. Simply follow the steps in these chapters.
b. We will be doing an analysis of a company together during our live sessions, and we will complete one step each week (see syllabus for details). I recommend that you attend the live session, and then complete that same step for your own project later that same week.
c. You should have a reason behind every number in your financial model and valuation. For example, if you assume that inflation will be 2% for the next five years you need to explain or reference where this number came from. Simply assuming a number for any variable in a financial analysis without support is unacceptable.
4. You also need to write a stock analysis report summarizing your work and recommendation to either buy/sell/hold the stock.
a. Decide who your audience is:
i. Are you writing to a large population of individual investors who might subscribe to your investment analysis services (e.g., Motley Fool)?
ii. Are you a buy-side analyst writing to the head asset manager of the fund you work for outlining whether the position in this stock should be increased, held, or liquidated?
iii. Are you a sell-side analyst writing to give the key points for buyers interested in purchasing the stock?
iv. This gives you flexibility in deciding ‘who you want to be’ in the world of investments. I don’t particularly care who you decide to be – just be sure to clearly state what your role is and who your audience is so I know and can evaluate your work accordingly.
b. Length
i. The body of the report should be no more than two (2) pages, single spaced, 12-point font, 1-inch margins.
c. Content
i. Somewhere in the report, you need to specifically state your recommendation to either buy, sell, or hold a current position in the stock.
ii. The vast majority of your report needs to be centered on and organized around supporting your recommendation. For example, you might discuss:
1. How the firm has performed historically in different economic conditions; the expected economic conditions in the future; how those conditions may affect key assumptions that drive the value of the firm
2. Key changes in the industry and how that relates to the key assumptions for value drivers.
3. Key developments for the firm, such as entering a new market, and how that is expected to affect key assumptions that drive value.
4. This is not an exhaustive list – it is meant simply to get you thinking about your research informs your analysis and ultimately your recommendation, and how to communicate that to your audience.
d. Style
i. The style of your report will depend largely on the role you choose to play and the intended audience of your report.
ii. In general: I prefer less financial jargon. My personal view is that it takes a higher level of mastery to translate complicated concepts and techniques into ‘normal-people-speak.’ So, that is generally what I prefer to see.
iii. Additional guidelines
1. If you choose to play the role of a buy-side analyst writing to your boss who is the fund manager, then naturally the expectation is that the audience will be more acquainted with financial concepts and jargon. In such a case, the use of jargon or technical language is more acceptable.
2. If you choose to play the role of an analyst writing to individual investors (e.g., someone’s Grandma who is interested in buying a single share of stock for their grandchild), then technical jargon is going to be much less acceptable. Yes, in the real-world technical jargon gets thrown at individual investors all the time – but I consider this to be a matter of intellectual intimidation and almost unethical. Because I want you to be ethical business leaders and masterful at your craft, I do not want to see lots of jargon and technical language included in a report that is written to individual investors.
e. Format
i. This should be a professional-looking product.
ii. As with the style, the format will also depend on your role and intended audience.
1. If you are writing to external clients (e.g., individual investors who subscribe to your service, or the service you notionally work for) then I expect to see something that looks like a professional newsletter that I would actually pay to receive. For this project: you need to think of me as the editor for the newsletter or service you work for – so you’re trying to convince me that I should keep you on the staff.
2. If you are writing to an internal client (e.g., your boss, the fund manager) then I would expect to see something that doesn’t necessarily have a lot of graphics and formatting, but is still clean and professional in appearance. For this project: you need to think of me as the fund manager – so you’re trying to convince me that I should keep you on the staff.
TIMELINE AND RECOMMENDATIONS
As noted in the syllabus: starting in Module 5, weekly discussion assignments will generally revolve around doing research and analysis for this project and sharing findings with the class, and providing thoughts and feedback to other students.
I recommend that you work on this project a little bit each week in order to stay on schedule with the project and with the discussion posts. Embrace the use of the weekly discussions to provide and receive constructive feedback from your peers. But you also need to critically evaluate the feedback and comments your peers provide to you – assume nothing, question everything, and do the research to reach your own conclusions. Most importantly, you need to be able to support and justify every number in your analysis and every statement you make in your final product.
GRADING EXPECTATIONS
Projects will be graded holistically – that is, based on the “whole package.” There are not specific weights given to different parts of the project, so it is not possible to “make-up” points lost from a flawed analysis by having a pretty report. I expect a professional product, which means both a good analysis and a pretty report.
In general, the grade expectations for this project follow the grade expectations for the entire course as outlined in the syllabus.
Considerations for grading the project fall into the following general categories:
1. Professional appearance, format and design, and organization
2. Writing style and organization
3. Financial analysis
4. Critical thinking, research, and recommendation
In general, a “C” project will have the following characteristics:
· Report length and format does not conform to instructions.
· Report is somewhat organized, but writing does not demonstrate good flow of thought. Report includes grammatical and spelling mistakes.
· Basic steps of the financial analysis are correct, but there are significant problems with the analysis, which could include any of the following: unreasonable assumptions used, some financial factors overlooked which should have been considered, incorrect use of formulas or mathematical operations.
· Demonstrates only superficial research and analysis. Recommendation do not demonstrate critical thinking and do no refer back to the research or analysis. Recommendation based on anecdotal evidence or recommendations of other analysts rather than student’s independent research and analysis.
In general, a “B” project will have the following characteristics:
· Report length and format follows instructions (i.e., is single-spaced, 12-point font, etc.).
· Report is generally well organized. Writing is generally good and flows well, although there may be some grammatical errors and other mistakes. Writing demonstrates awareness of relevant business/finance issues, but does not demonstrate mastery (e.g., excessive use of jargon and technical language, especially if not accompanied by non-technical explanations or definitions).
· Financial analysis is generally correct, but includes some mistakes which could include: assumptions that reveal more research should have been done, one or two small errors in mathematical operations.
· Research and analysis are above the superficial level, but does not demonstrate deep knowledge of the chosen firm and mastery of concepts and analytical techniques covered in the course. Recommendation demonstrates general understanding of the issues facing the company, and generally relate back to the completed analysis.
In general, an “A” project will have the following characteristics:
· Report looks like it could be a professional product ready to be delivered to a paying client/professional fund manager. This includes the use of graphics on a cover page, use of infographics in the report, etc., as appropriate for the role/audience.
· Report is logically organized. Writing demonstrates good flow of thought – one section leads into next if/when appropriate. Writing is easy to read – very little technical jargon (and when used, it is accompanied with an explanation or definition, possibly as a footnote), no grammatical mistakes, no spelling errors, no run-on sentences.
· Financial analysis is done correctly, including having references/explanations for all assumptions. Assumptions are reasonable and based on good research and analysis.
· Research, analysis, critical thinking. Recommendation well supported by research and analysis. No editorializing based on anecdotal or author’s personal experience.
