13 - Fundamental & Technical Analysis - Part II -...

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FUNDAMENTAL & TECHNICAL ANALYSIS (Part II) Open: FACTSET Company/Security tab Yield Exercise in SLATE
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RECAP Theories of market participant & price behaviour Rationality Efficient pricing Asset price changes are random Technical Analysis Support & resistance Continuation patterns Reversal patterns Moving averages Fundamental Analysis DDM
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Today’s Agenda Value Measures: P/E ratio & Earnings Yield Fundamental Analysis Fiscal policy Monetary policy Industry Analysis Global Industry Classification Standard (GICS) Business Cycle Risk Stages of Growth Competitive Forces
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Value measures Investors look at several indicators of how expensive or cheap a stock is. These indicators relate the stock price to what you get in return as part owner of the company. The P/E ratio and the earnings yield are 2 of the key indicators.
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The Earnings Yield Suppose the stock price of Shoppers Drug Mart is $57.00 Over the past 4 quarters its total earnings per share (EPS) was $3.00 If next year’s earnings were the same as last year’s and Shoppers were to pay out 100% of its earnings in dividends, what would be the annual return on investment for an investor who bought the stock today ? $3/ $57 = .053 = 5.3% This is called the “Earning Yield” Earnings Yield* = Trailing 12 month EPS = 3/57 = 5.3% Stock Price * Assumes the next 12 months’ earnings will equal the past 12 months’. Earnings Yield
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Price / Earnings Ratio If you take the inverse of the Earnings Yield you get the Price/Earnings (P/E) ratio : P/E ratio = Stock Price = 57/3 = 19 Trailing 12 month EPS What’s the P/E ratio if the earnings yield is 10%? Or 5% ? NOTE: When the P/E goes up, the Earnings Yield goes down & vice versa.
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The Price-Earnings Ratio P/E ratio = Stock Price Trailing 12 month EPS What does a P/E ratio of 20 mean ? Investors are willing to pay $20 for each $1 of earnings the company currently achieves. Investor’s are willing to pay a price which will give them an annual earnings yield of 1/20 = 5% if future earnings equal past earnings.
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The Forward P/E Ratio Forward P/E ratio = Stock Price estimate of EPS in the NEXT 12 months Based on estimates of future EPS in theory it is better than regular P/E only as good as the EPS estimate
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The Price-Earnings Ratio F actset Go to Company/Security tab: Overviews: Snapshot page Look up the P/E ratio (P/E LTM) and Forward P/E (P/E NTM) of: FB-US (Facebook) AMZN-US (Amazon)
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The Price-Earnings Ratio Why is the Amazon P/E ratio much higher than the Facebook P/E ? (Hint: think of the Dividend Discount Model) Price = Dividends over next 12 months required return – div growth rate
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The Price-Earnings Ratio A company’s P/E ratio will be high if: It has high expected future earnings growth It has a low risk of cutting its dividend or going bankrupt (therefore a low discount rate) A company’s P/E ratio will be low if: It has low future earnings growth prospects It has a high risk of cutting its dividend or going bankrupt (therefore a high discount rate)
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  • Fall '19
  • Dividend yield, P/E ratio

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