Equity Valuation for Analysts and Investors / Edition 1

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Create comprehensive stock valuation models--quickly and efficiently

"This amazingly thorough book takes you through real-world financial modeling, provides concise techniques and methods for determining asset value, and offers a blended valuation approach that is responsive to changes in market dynamics. Peer Derived Value, introduced in the book, represents an original and commonsense approach to valuing a stock within its peer group. This book, in my view, is an invaluable addition to any investor's library." -- William V. Campbell, Chairman, Intuit Corporation

Equity Valuation for Analysts and Investors introduces you to the financial statement analysis and model-building methodology used by leading equity research firm Argus Research. Written by Jim Kelleher, the company's director of research, the book offers the tools for estimating individual equity cash value. These include a completely original and proprietary valuation methodology, Peer Derived Value, which values an equity based on the stock's current variation from its historical relation to a user-specifi ed peer group.

In a conveniently organized format, this in-depth guide covers all the tasks you need to master, including:

• Financial statement modeling • Comparables analysis
• Discounted free cash fl ow • Industry matrix models
• Blending valuation inputs to calculate fair value in any market environment

Valuing and predicting the future value of assets and stocks is a laborious task. Successful analysts and investors don't have time for tedious work that is outdated as soon as it's done.

Equity Valuation for Analysts and Investors is the comprehensive guide to efficient financial statement analysis and model-building from one of the world-leading independent equity research firms, Argus Research.

At the helm of the company's research is author Jim Kelleher, who developed his methodology and model-building techniques during his twenty years covering more than a dozen industries in nearly every sector. A good valuation model is an invaluable tool to help the serious investor:

  • Wring more information from the 10-K and 10-Q
  • Predict unexpected earnings shortfall or positive earnings surprises
  • Master the art of "valuation choreography"

One of the biggest challenges to making accurate predictions with a valuation model today is the rapid and constant fluctuation of data. Equity Valuation for Analysts and Investors provides a tried-and-true process for creating effective, compact models that add new measurement and valuation periods and accommodate a company’s unique data presentation and reporting style.

This versatile guidebook also provides both a rigorous process and a shortcut for each step in modeling financial statement data so analysts can customize their data focus based on their position in the value chain. When implemented in the real world, the valuation model uses the power of Excel to allow investors to quickly and accurately update their valuations and predictions by simply inputting adjusted data.

Take control of your investments now by managing them based on your own research and Equity Valuation for Analysts and Investors.

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Product Details

  • ISBN-13: 9780071639231
  • Publisher: McGraw-Hill Professional Publishing
  • Publication date: 6/16/2010
  • Edition number: 1
  • Pages: 400
  • Product dimensions: 6.30 (w) x 9.10 (h) x 1.30 (d)

Meet the Author

Jim Kelleher, CFA, is director of research and senior analyst at Argus Research, a New York–based equity research firm. He has three times been recognized in the Wall Street Journal's "Best on the Street" awards and has contributed numerous articles to leading financial publications. In addition to his experience managing several of the firm's widely used model portfolios, he

actively participates in high-velocity institutional

trading platforms, has helped design and launch Argus-branded investment products, and participates in other aspects of the firm's growth. Kelleher lives in New York City.

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Read an Excerpt

Equity Valuation for Analysts & Investors

A Unique Stock Valuation Tool for Financial Statement Analysis and Model-Building


The McGraw-Hill Companies, Inc.

Copyright © 2010The McGraw-Hill Companies, Inc.
All rights reserved.
ISBN: 978-0-07-175952-6


<h2>CHAPTER 1</h2> <p><b>PHASE 1: INCOME STATEMENT AND MARGIN MODEL, PART 1</p> <br> <p>Modeling in a Workbook</b></p> <p>Modeling requires populating countless cells on a spreadsheet. Some of those cells hold complex formula; others hold numbers. As you build your model, you'll know which is which; but to the uninformed eye, a formula cell and a number cell are indistinguishable.</p> <p>One difficulty with describing a dynamic process in a static medium such as a book is that our spreadsheet examples (designated as <b>Figure 1.1, Figure 1.2</b>, etc.) cannot fully display the formulas residing within; that would make for indecipherable gibberish. We thus ask that you read the text closely, refer carefully to the model when requested, and make the needed abstract connections between written word and illustration on the page.</p> <p>We are going to conduct our analysis of a single equity, as much as possible, on a single workbook with linked worksheets. Later we'll discuss a matrix workbook in which we aggregate data from the individual workbooks. Later still we'll throw data from the matrix workbook back to the individual worksheet to provide a kind of peer group relative ranking that will help inform the valuation calculation. For now, though, we can begin with a focus on the individual equity workbook.</p> <p>Our goal is to build a workbook that, once created, can be replicated for other companies in the coverage universe with the least amount of disruption. We'll spend a great deal of time discussing communications equipment companies, so let's borrow a metaphor from the industry to describe a key element of our task. In an astounding transformation, the legacy communications infrastructure has been torn down and replaced with protocols such as Ethernet borrowed from the data network. Ethernet was chosen partly because it is ubiquitous (there is only one Ethernet jack in use the world over) but mainly because it is easily replicable.</p> <p>When we build a workbook, we'll have a few tasks in mind. We want the individual equity workbook to fully capture value for a single stock. But we also want it to lend itself to relatively straightforward manipulation whereby it can transformed into a second company model, and a third, and so forth.</p> <p>No two companies are alike; equally important, no two companies report their financial data in exactly the same way. Creating a replicable workbook is a key element of our task, given that we are working in a world of jangling phones and deadlines, and we certainly are not within that proverbial ivory tower—which, as metaphors go, must be at least as politically insensitive as skinning cats.</p> <p>Our individual company workbook will have several worksheets. At a minimum, our generic workbook will include income statement (or income statement presentation, as we'll call it); ratios and valuations, where we'll conduct historical comparable valuation and also aggregate annual ratios and annual financial statements; a present value worksheet for discounted free cash flow valuation; a query page for real-time pricing; and a worksheet to calculate "smoothed" historical growth rate and forecast normalized earnings. In practice, any workbook used to model and value an individual equity will over time sprout additional worksheets that will be used to track changes in manufacturing footprint, model the combination of acquired assets, or accommodate other real-world events.</p> <p>We'll discuss formatting of individual worksheets and necessary historical backup data as we go. For the past two years, we have been modeling in .xlsx workbooks. All our techniques work in prior-generation .xls workbooks as well. If you are new to this process, we highly recommend that you begin with the .xlsx workbooks consistent with the latest version of Excel.</p> <p>Given that we need to create a replicable workbook, choose for your first model the most "normal" company in coverage. In other words, for your template use a company with steady and even boring growth, consistent profitability, little to no history of changing segment presentations, and a reasonably stable business model. If no such company exists in your coverage, take the best of the bunch.</p> <p>Every workbook needs to access a source for real-time pricing of the asset. As a first step, we will label worksheet 1 as our "Query" page. Our recommended price-data source, and the one used in all our workbooks, is the Money page from MSN. Guidelines for linking data to this worksheet will vary; the process typically requires that a ticker be placed on the query worksheet for immediate reference, or on an adjacent worksheet for a linked reference. In addition to the ticker for the individual equity, we will need real-time pricing for the market beenchmark—in this case, the Standard & Poor's 500 Index (S&P 500). Given that the pricing function can accommodate dozens of tickers, it is also highly useful to includddde prices for the other major indexes [Dow Jones Industrial Average (DJIA), Nasdaq, and New York Stock Exchange Composite (NYSE Composite)]; you may also want to include industry indexes in which the equity is a member.</p> <p><b>Figure 1.1</b> shows the Query worksheet in the Motorola (MOT) model. In addition to prices for MOT, we have priced the S&P 500; much further down the line, this will come in handy for calculating the relative P/E. Also note what is not there; at this point, we have no need to price the peer group.</p> <br> <p><b>Tracking Down Historical Data Sources</b></p> <p>Having built several hundred income statement models, I can tell you that individual company income statement presentations are like snowflakes or fingerprints: remarkably similar, but if you squint, you can see the differences. Individual income statements aren't issued by cookie cutters; they come from the finance departments of disparate companies, peopled with individuals with their own quirks.</p> <p>The modeled income statement has at its heart a variety of percentage-of-revenue inputs. The trouble is, being married to pure percentage-of-revenue procedure robs your model of nuance and precision. As we'll demonstrate later on, depending on the data, you can build an income statement model not on percentage of sales but on percentage of <i>difference</i> between forecast revenue and forecast operating income.</p> <p>To model future financial statements, you need historical data as issued by the company. This historical data will be most usefully recorded in the company's own filings with the Securities and Exchange Commission (SEC), available on every company Web site (typically, see Home Page>Investor Relations>Financials>SEC filings). A variety of pay-for sites exist that enable download of data into Excel; they may charge a one-time fee or a subscription. Because these come and go, we'll limit our mentions to EDGAR.</p> <p>Prepare for some confusion. EDGAR (electronic data gathering, analysis, and retrieval) is a useful and free service sponsored by the SEC that simplifies the tracking down of SEC filings for every company. News headlines on the Web, however, will frequently steer you to EDGAR Online Pro, which is a pay service

Excerpted from Equity Valuation for Analysts & Investors by JIM KELLEHER. Copyright © 2010 by The McGraw-Hill Companies, Inc.. Excerpted by permission of The McGraw-Hill Companies, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Overview; Chapter One. Assessing the Ground; Chapter Two. Financial Statement Modeling; Chapter Three. Comparables Analysis; Chapter Four. Discounted Free Cash Flow; Chapter Five. Industry Matrix Models; Chapter Six. Peer Calculated Value; Chapter Seven. Calculating Fair Value; Chapter Eight. Constructing and Managing Equity Portfolios; Conclusion

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