I hope you either have read or will read the “Learn the Lingo‐
Basic Ratios” section of Morningstar. We will be talking about all of the ratios in this section from time to time throughout our time together but I would prefer to take the time we have to start with just a couple to get you going. “108 Learn the Lingo‐Basic Ratios”
Morningstar Investment Curriculum
Paul Madison
Stock Decision Making ‐
Basic Building Blocks
Paul Madison
Sales Growth (SG)
SG = (Future Sales – Base Sales)/Base Sales
Good base to start with! Sales Growth is more consistent over time Easier to project This answers the question is the company growing Next we need Net Profit Margin which is Net profits /Sales This answers the question how profitable is the company. Net Profit Margin (NPM)
NPM = Net Profits / Sales
Finally we have PE , stock price / EPS and this helps understand at what a good value for the company is. Price to Earnings (PE)
PE = Stock Price/Earnings per share
How do we buy Meat?
• Hamburger .... look at Price per lb.
– Hamburger at $2 per lb. we buy
– Hamburger for $5 per lb. we pass
• PE is to Investing as Price per lb. is to Hamburger
• PE – Cost for $1 of earnings
• Different cuts of meat – Different prices
3/28/2012
Investing Fundamentals Part 1 ‐ OSU ChemEs
6
While we are on PE I want to go to my favorite analogy. When we go into the grocery store to buy hamburger we look at the price per pound. If the grocery has a sale and it $2/lb we load up the cart but if there has been a shortage and price is $5/lb then we move on to turkey. PE is Investing’s price per lb. PE tells us what it is going to cost us to buy $1 of earnings. Just as in meat we have fixed in our heads that we are willing to pay more per lb for steak than hamburger so is it true that some companies command a higher PE and can still be good value. We have our building blocks now lets look at the model. Mathematical Model
Future EPS = (Current Sales x SG x NPM) /Shares
Future Stock Price = Future EPS x PE
Stock Appreciation = Future Stock Price/Current Stock Price
BUILDING BLOCKS
EXAMPLE: MCDONALD’S
Morningstar.com for data
What do I need to have?
Actual
Estimated
• Current Sales (TTM)
•
•
•
•
• Shares Outstanding (diluted)
Sales Growth
Future Net Profit Margin
Future PE Future Shares (or use today’s)
SALES GROWTH ‐ SG
McDonald’s ‐ History
5 Yr. Average Range: Sales 3.3% ‐ 8.1%
McDonald’s – Analysts’ Estimates
NET PROFIT MARGIN ‐ NPM
Big Fortune 500 – Fast Food
Looks like they have been consistently 20+% Net profit Margin for the last 3 years
PRICE TO EARNINGS ‐ PE
McDonald’s ‐ PE
Average of last four years about 17
CURRENT SALES & SHARES
McDonald’s
MATH
What do I need to have?
Actual
Estimated
• Current Sales (TTM)
• Sales Growth
– $27,500 million
– 5.3%
• Future Net Profit Margin
– 20.5%
• Shares Outstanding (diluted)
• Future PE
– 17
– 1,033 million
• Future Shares (or use today’s)
Mathematical Model
Future EPS = (Current Sales x SG x NPM) /Shares
= $27,500 x 1.053% x 20.5% / 1,033
= $5.75
Future Stock Price = Future EPS x PE
= $5.75 x 17
= $97.7/share
Stock Appreciation = Future Stock Price/Current Stock Price
= $97.7 / $93.70
= 1.04 or 4% Appreciation
Different Judgments will give very different result:
Sales growth 6%, Net Profit Margin 21%, PE 18 ....a 14% return QUESTIONS
September 24, 2012
107 Introduction to Financial Statements
23
This Month’s Picks ‐ Good Ships
Name
Qualcomm
Ticker
Industry
QCOM
Communications Equipment
FactSet Research Systems
FDS
Information Services
McDonald’s
MCD
Restaurant (Fast)
Coach
COH
Retail Special
Fastenal
FAST
Industrial Wholesale
International Business Machines
IBM
Computer Systems
Walt Disney
DIS
Entertainment
Stock Picks
• Clubs may invest in one or two companies
– Selections due to Josh before our October 1st CEOs Roundtable Discussion
– Selections must include % to be invested if two companies otherwise I will assume 50/50
– Stocks will be bought on open October 2nd
QUESTIONS
September 24, 2012
107 Introduction to Financial Statements
26
DEMO OF MORNINGSTAR & BIVIO