Read the annual report (or alternatively the 10K) of a company from cover to cover. Pay particular attention to the financial statements, managements’ discussion of financial results, and the footnotes to the financial statements. Also look at finance.yahoo.com to see future earnings expectations of analysts and recent developments for the company. The company cannot currently be covered by Morningstar.
Finally, follow the outline below to complete the assignment:
Give a brief description of the company.
Determine for the company if there exists an “economic moat” and if so whether that moat is wide or narrow. In making this decision look at the profitability ratios (see part IV) and the five ways of building a sustainable competitive advantage as discussed in class and on page 25 of the book. Justify your conclusion.
Evaluate the company’s historical growth rate in revenue, earnings and operating cash flows.
Determine the profitability ratios for the last three years along with the free cash flow to sales ratios. Also determine the Return on Invested Capital for the last three years and evaluate the profitability of the company.
Determine the debt and liquidity ratios for the most recent year and evaluate the financial health of the company.
Determine the bear case for the company.
Assign a grade for management stewardship based on competency (financial ratios and strategic decisions by management can aid in this), character (look particularly at related party transactions), and compensation (determine the average annual % increase in the number of shares outstanding over the past few years to aid in this and don’t forget about share buybacks). Explain your reasoning for the grade you assign.
Determine whether the uncertainty of a fair value assessment of the company is low, moderate, high, or very high. Useful indicators of this are the risk factors covered in class and on pages 145-147 of the book. (If it is extreme do not use that company for this assignment.)
Determine a value for the company and its respective stock based on a discounted cash flow analysis. Also compute a value based on a reasonable PE ratio and on a reasonable Enterprise Value/EBITDA ratio. Decide on one figure for the value of the company. Explain any and all assumptions and show all calculations. Compare this valuation to the current market price and decide if the stock is undervalued enough to provide an adequate margin of safety for investment.