Lecture 2 - Outline 1. Information Collection Co A....

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Unformatted text preview: Outline 1. Information Collection Co A. Information Sources Business Strategy Analysis Strategy Analysis Company Data SEC filings Company Web Site Analysts Research Reports Financial Press Macroeconomic and Industry Data Economic Analysis Industry Analysis The firm’s Strategy Lecture 2 2. B. 3. Business Strategy Analysis Strategy Analysis Application to SBUX 2 Company Data Common SEC Filings Filing Form 10-K Description This is the annual report filed by most companies. It provides a comprehensive overview of the company’s business. Depending on company size, it must be filed within 60 days of the close of the fiscal year. This is the quarterly financial report filed by most companies. It includes unaudited financial statements and provides a continuing view of the company’s financial position during the year. Depending on company size, it must be filed within 35 days of the close of the quarter. This is the “current report” that is used to report the occurrence of any material events of corporate changes that are of importance to investors and have not been previously reported. The proxy statement provides official notification to designated classes of shareholders of matters to be brought to a vote at a shareholders’ meeting. This filing is required by 5 percent (or more) equity owners within 10 days of the acquisition event. These are filings required by persons engaging in “going private” transactions in the company’s stock or by companies engaging in tender offers for their own securities. This is similar to Schedule 13D but is only available in special cases where control of the issuer is not compromised. These are filings required pursuant to a tender offer. These are statements of ownership filings required by directors, officers, and 10 percent owners. Form 3 is the initial ownership filing, Form 4 is for changes in ownership, and Form 5 is a special annual filing. These are filings that are used to register securities before they are offered to investors. The most common registration filings are Forms S-1 and S-3. This document is made available to investors in a security offering. It comes in varieties 424A, 424B1, 424B2, 424B3, 424B4, 424B6, and 424B7. 4 Public companies issuing securities in the United States are required to file a number of detailed financial reports with the Security and Exchange Commission (SEC), which in turn makes these reports available to the public. These SEC filings represent the most important source of SEC filings represent the most important source of company-specific information and provide the natural starting point for the collection of company data. Edgar is the name of the database containing the official financial statement filings for all the companies that are registered in the United States. The files can be downloaded from the following sources: SEC official website: http://www.sec.gov/edgar.shtml official website: http://www Mergent Online through the Johnson School library website (Top Business Databases). Go to the Edgar tab. Allows you to download the files in Excel format. Form 10-Q Form 8-K Proxy Statement (form DEF 14A) Schedule 13D Schedule 13E Schedule 13G Schedule 14D Form 3, Form 4, and Form 5 Registration Statements(forms S-1 and S-3) Prospectus (Rule 424) 3 Items of Disclosure Contained in Form 10-K Item Cover Page Description Lists company name, fiscal year end, state of incorporation, each class of publically traded securities, and other information. Identifies principal products and services of the company, principal markets and methods of distribution, and other key attributes and risks of the business. Location and character of key properties. Brief description of material pending legal proceedings Brief description of material pending legal proceedings. Company Web Site Item 1 – Business Item 2- Properties Item Item 3 – Legal Legal Proceedings Item 4 – Submission of Matters to Vote Information relating to the convening of a meeting of shareholders, whether annual or special, and the matters voted upon. Principal market in which commons stock is traded: high and Item 5 – Market for low quarterly stock prices for the last two years; number of Common Stock stockholders; dividends paid during the last two years; future dividend plans. Five-year summary of selected financial data, including net Item 6 – Selected sales and operating revenue, income from continuing Financial Data operations, total assets, and long-term obligations. Item 7 – Management’s Discussion of results of operations, liquidity, capital resources, off-balance-sheet arrangements, a nd contra ctual esou co Discussion and and obligations. Discussion should include trends, significant Analysis events and uncertainties, causes of material changes, effects of inflation and changing prices, and critical accounting policies. Provides qualitative and quantitative disclosures about market Item 7A – Disclosures risk (e.g., interest rate, exchange rate, and commodity price about Market Risk risk). Requirements apply to financial instruments and commodity instruments commodity instruments. Two-year audited balance sheets, three-year audited Item 8 – Financial statements of income, three-year audited statements of cash Statements and flows, along with supporting notes and schedules. Supplementar y D ata Description of any changes in and disagreements with Item 9 – Changes in independent auditors on any matter of accounting principles and Disagreements or practices, financial statement disclosure, or auditing scope with Accountants of procedure. Opinion of top management and auditors regarding the Item 9A – Controls effectiveness of the company’s internal controls and and Procedures procedures over financial reporting. 5 Most companies have a dedicated investor relations section of their Web site providing financial information about the company. fi One "must read" in the company Web site is the press release section. Company press releases often provide more timely information than SEC filings. the information in these press releases is not subject to the same standards as the company's SEC filings. Always read these press releases with a grain of salt! Good examples are press releases related to quarterly earnings announcements These press releases are made days or even announcements. These press releases are made days or even weeks ahead of the corresponding Form 10-Q filing. However, companies often make up their own pro-forma measures of earnings in their press releases and typically emphasize good information and downplay bad information. You will often find the annual report to shareholders. Be careful not to confuse the firm's annual report with its official Form 10-K filing. There are fewer required disclosures in the annual report than in the 10-K and, for many companies, the annual report is little more than a marketing document. If you check out the company's Web site shortly after an earnings announcement, you will frequently find an audio file that replays the conference call that management had with analysts to discuss the quarter's results. 6 Analyst Research Reports Analyst Research Reports (Cont.) Sell-side analysts Buy-side analysts Another source for company-specific information is the research distributed by analysts working for the independent research firms and the research departments independent research firms and the research departments of brokerage houses. Buy-side research is used internally by the institutional investor and is not typically made available to other investors. To access analyst research reports, you can use the following sources: Thomson one banker – summary of recommendations recommendations. Yahoo finance Investext, a division of Thomson Research, provides the reports themselves. Historically, the recommendations and price targets contained in sell side analyst reports have been unreliable. Sell-side analysts rarely charge a direct fee for the research they issue to clients. Instead, they generate revenue from two indirect sources. Help their brokerage business to generate brokerage commissions by attracting clients and encouraging commissions by attracting clients and encouraging them to trade. Analysts often work for brokerage houses that are affiliated with investment banks. By issuing positive research on current and potential investment banking clients, sell-side analysts help to generate investmentbanking business. The fact that sell-side analysts generate revenue through fact that sell analysts generate revenue through these indirect sources poses a great conflict of interest. Zero in on the research report of the analyst issuing the least favorable recommendation on a stock. This way, you are more likely to find solid analysis rather than fi superficial hype. 7 8 Financial Press Macroeconomic and Industry Data The company will not rush to write a press release about their own questionable accounting practices, but the financial press will not hesitate to do so. And the company will not generally compare itself to other firms in the same industry, but a good news article frequently does this. y, The only word of warning we offer is that writers for the financial press are paid to write exciting stories that people will be drawn to read; being accurate is desirable but not paramount. Most of the major financial portals on the Web have links to recent news stories, along with the firm's press releases. One way to be sure you haven’t missed something big is way to be sure you haven missed something big is to check out the investment message boards for the company. Yahoo, Motley Fool, and several other sites sponsor boards where investors exchange views about particular stocks along with insults about one another particular stocks along with insults about one another's intelligence. Data on past economic activity FreeLunch.com Economagic FedStats The White House Economic Statistics Briefing Room www.bea.gov - Bureau of Economic Analysis Forecasts of future GDP The Conference Board Congressional Budget Office International GDP forecasts: US Department of Agriculture Agriculture Industry data Market Insight - S&P Industry Survey Investext plus Valuationresources.com provides a nice set of links to available industry resources for different industries, and is classified by sector. Not all links are free. Some are subscription based only. 9 10 Economic Analysis Business Strategy Analysis What is it? Process by which the current state of the economy is evaluated. Why necessary? Defines the bounds/parameters of subsequent analyses analyses Helps generate future forecasts Examples - potentially useful economic indicators Growth in GDP (long run sustainable growth rates) Interest rates / yield curve Key Commodity prices (e.g. oil prices) Foreign Exchange rates What is the objective of business strategy analysis? The objective of business strategy analysis is to: (a) determine the competitive conditions in the industry and (b) assess the firm's plan for dealing with those conditions. Why is this topic important? Business strategy analysis provides the foundation for the remainder of the analyses th th The analyst has no context for assessing historical performance without performing business strategy analysis The analyst cannot make reasonable predictions about a firm's future without performing business strategy analysis 11 12 Business Strategy Analysis Industry Analysis Business strategy analysis contains two steps: In the first step the analyst evaluates the industry’s profit potential. In this step the analyst identifies the industry’s key profit drivers and assesses the industry’s profit th potential at a qualitative level. In the second step the analyst evaluates the firm strategy for competing in the industry firm’s strategy for competing in the industry. The firm’s goal is to create sustainable abnormal profits. The analyst's goal is to determine whether the company has created a sustainable competitive advantage. As noted above, the first step is to assess industry profitability There are number of frameworks the profitability. There are a number of frameworks the analyst can use to accomplish this goal. The important thing is that the analyst should assess industry attractiveness, regardless of which framework is used. We will focus on Porter's Five Forces. This framework is used to assess the degree of actual and potential competition, and bargaining power in the input and output markets. Available mechanism - Porter’s Five Forces 1. Rivalry among existing firms - is there price fi th pressure from existing firms? Over-capacity? 2. 3. 4. Threat of New Entrants - Cost of entry barriers; abnormal profitability? Threat of substitutes - based on existence and relative price/performance of competing products. Buyer Power (relative to the firm) - price y; sensitivity; relative cost of not doing business with the other party. Supplier Power (relative to the firm) - mirror image of buyer power. Includes relative cost of not doing business with the other party. 5. 13 14 Porter’s Five Forces Application to SBUX Would you describe the overall performance of the economy over the fiscal years 2005, 2006, and 2007 as strong or weak? What does this imply about profitability for the restaurant industry over this time? How will the economy likely evolve over the next 5 to 10 years, and what does this mean for firms in the industry? What are the key ratios and statistics that capture financial health of firms in the industry? 15 16 Application to SBUX Application to SBUX Is the level of rivalry high or low in the restaurant industry? Why? Who are suppliers to the industry? Is supplier bargaining power high or low? Why? Is the threat of new entrants high or low? Why? Who are buyers from the industry? Is buyer bargaining power high or low? Why? What are some potential substitute products? Is the threat are some potential substitute products? Is the threat of substitute products high or low? Why? Is this an attractive industry? Why or why not? 17 18 The firm’s Strategy The firm’s Strategy (Cont.) According to Porter there are two strategies for earning abnormal profits; cost leadership and differentiation abnormal profits; cost leadership and differentiation. Cost Leadership strategy A cost leader produces the same product or service at a lower cost than its peers Cost leadership is determined by lower cost than its peers. Cost leadership is determined by the company's cost structure and not by the prices it charges. Characteristics Risks Differentiation strategy Differentiators produce a unique product or service at a cost lower than the price premium customers will pay. Characteristics Risks 19 20 Competitive Advantage and Corporate Strategy Analysis The firm’s Strategy Competitive Advantage As noted above, the analyst's goal is to determine whether the company noted above the analyst goal is to determine whether the company has created a sustainable competitive advantage. To achieve competitive advantage, firm must have capabilities needed to implement and sustain strategy. The analyst should ask himself: What are the critical success factors? Does firm have resources to implement/sustain critical success factors? Are there barriers that make imitation of the firm's strategy difficult? Are there changes in industry structure that the firm should worry about? Corporate Strategy Analysis When analyzing a multi-business organization, an analyst has to not only evaluate the industries and strategies of the individual business units, but also the economic consequences of combining different businesses under one corporate umbrella. This process is known as corporate strategy Thi analysis. Some questions the analyst should ask include: Are there significant imperfections in the product, labor, or financial markets in the industries in which a company is operating? operating? Does the company have special resources that have the potential to create economies of scope? Is there a good fit between the company's specialized resources and the portfolio of businesses the company is operating? Important note: Empirical evidence suggests that broad economies of note: Empirical evidence suggests that broad economies of scope are associated with low stock returns. Does SBUX follow a product differentiation strategy or are they a cost leader? What does this imply about profit margin and inventory turnovers for SBUX, relative to its competitors? Does the company have a sustainable competitive advantage? 21 22 Information Sources for Industry and Firm Level Analyses Note this material represents very broad-scope analyses. thi When analyzing a firm, you should be intimately familiar with its industry and operating environment. This includes product lines, key value drivers, growth/expansion opportunities, key risk factors, and potential indicators that the company is executing its strategy competently. ti it Sources of Industry Information: Mergent Online Investext plus Valuationresources.com provides a nice set of links to available industry resources for different industries, and is classified by sector. Not all links are free. Some are subscription based only. Sources of Firm Specific Information: The annual report! In particular, read management’s discussion and analysis of results (MDNA). Tangible plans are useful, while vacuous platitudes are not (e.g.” we plan to expand into the Northeast with 50 new stores by 2007” versus, “our goal is to be the leading supplier of HVAC circulators and pumps”). Available from the SEC through EDGAR. Investext plus Mergent Online Yahoo! Finance 23 ...
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