L3_Earnings_Estimation___Earnings

L3_Earnings_Estimation___Earnings - Earnings: Importance...

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1 Earnings: Importance and Estimation B,K & M Chapter 17
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2 Earnings are Important: Growth Earnings related to superior returns over time Some studies suggest companies with large increases in earnings ( earnings growth ) deliver the most consistent superior returns Specifically, differences between predicted and actual earnings increases have the greatest impact on price changes
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3 Earnings are Important: Expectations According to Efficient Market Theory : expectations of future earnings should be incorporated into share prices therefore excess returns should not be achievable using consensus expectations Studies show that if earnings turn out to be higher than forecasts , an excess return can be achieved Excess returns can be achieved if changes in expectations of future earnings can be predicted Therefore, the objective is to make superior earnings forecasts
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4 Economy and Industry Aggregate Earnings (Economy) Industry Earnings Company Earnings Factors Determining Earnings Industry, 21% Others, 58% Economy, 21% According to a study by Brealey et al :
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5 Forecasting Earnings: Basics Top-Down Analysis Analyse and forecast macroeconomic variables Analyse and forecast the industry Within industries with best expected future, select the firms with best future expectations relative to their current prices to invest in Bottom-Up Analysis Analyse and forecast company-specific issues Consider future of industry and macro economy as part of company specific issues Invest in the companies with the best expected future earnings relative to their current price
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6 Top-Down Analysis Global economic forecast. Domestic macroeconomic forecast. Industry analysis. Analysis company positioning within the selected industries. Specific company valuations. Selection and investment decision.
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7 Logic of Top-Down* * (In a balanced fund scenario…) Economic Analysis: Determines asset class allocation bonds, equities, property, cash etc. Industry Analysis: Determines industry sector weightings in equity portfolio financials, industrial, resources etc. Company Analysis: Determines company weightings per sector.
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8 Domestic Macroeconomic Analysis GDP and Manufacturing Output Employment Inflation Interest Rates Budget Deficit Sentiment Exchange Rates
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9 GDP Growing GDP indicates more growth opportunities and will likely result in share price increases. -2 0 2 4 6 8 -4 10 -2 0 2 4 6 8 - 4 10 61 66 71 76 81 86 91 96 01 South Africa: Quarterly y-o-y % change ALSI Quarterly y-o-y change
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10 Unemployment Indication of shrinking / growing market as people find jobs or lose them, and indication of extent to which economy is operating at capacity.
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This note was uploaded on 06/01/2011 for the course FIN 3026W taught by Professor Drtoerien during the Summer '09 term at University of Cape Town.

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L3_Earnings_Estimation___Earnings - Earnings: Importance...

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