219 lines
7.5 KiB
Org Mode
219 lines
7.5 KiB
Org Mode
#+title: Section 11 | Lesson 59 - read financials and find data patterns
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#+HTML_HEAD: <link rel="stylesheet" type="text/css" href="../_share/media/css/org-media-sass/categories/business.css" />
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#+OPTIONS: H:6
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* Links
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- [[./../mba-main.org][TOC | Business]]
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- [[https://www.udemy.com/course/an-entire-mba-in-1-courseaward-winning-business-school-prof/learn/lecture/4315028#overview][S11:L59 course video]]
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- file:../_data/section_11/microsoft_valuation.numbers
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- file:../_data/section_11/course_notes.pdf
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* Notes
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- MS changed from a growth stock to a value stock
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- growth investors loved it
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- bill gates left and the company became a bureacracy
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- dont ever invest in a tech company where the founder is gone
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- they are buying back shares
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** forecast revenue
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- forecast each year after the next
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- not looking at each
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- add assumptions 'why' something will happen
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- e.g. 2016 Windows 10 is free for the first year, but the second year cost
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- xbox sales slowing
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- good because factories are less profitable
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- the new director was good with clouds and clouds are good for $
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*** how to build the model
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- read the 10k
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- go to investors website and read relations stuff
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- last 15 minutes of conference wall street guys ask questions
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- call investor relations directly and ask them
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- make sure you do your due dilligence
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- the relations guys will bs you if you don't know your stuff
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- you have the same access as analysts do
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- reg fd: regulation federal disclosure
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- government mandatated
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- everyone has the same access
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- publish on website
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- publish on webcasts
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** calculate net income
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1. calculate operating expenses
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\[
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\text{Operating Expenses} = \text{R&D} + \text{Sales & Marketing} + \text{G&A}
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\]
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2. calculate operating income (EBIT)
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\[
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\text{EBIT} = \text{Gross Profit} − \text{Operating Expenses}
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\]
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3. calcuate taxes (assume taxes are 21% of EBIT)
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\[
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\text{Taxes}= \text{EBIT} × \text{21%}
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\]
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4. calculate net income
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\[
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\text{Net Income} = \text{EBIT} − \text{Taxes}
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\]
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** calculate forecasted fields
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*** Operating Expenses
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\[
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\text{Operating Expenses} = \text{R&D} + \text{Sales & Marketing} + \text{G&A}
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\]
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*** Operating Income (EBIT)
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\[
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\text{EBIT} = \text{Gross Profit} - \text{Operating Expenses}
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\]
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*** Taxes
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- Assume taxes are 21% of EBIT
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\[
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\text{Taxes} = \text{EBIT} \times 21\%
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\]
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*** Net Income
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\[
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\text{Net Income} = \text{EBIT} - \text{Taxes}
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\]
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*** Shares
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**** Where We Have the Information
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- When historical data is available, derive share count using net income and diluted EPS:
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\[
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\text{Shares} = \frac{\text{Net Income}}{\text{Diluted EPS}}
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\]
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- For forward projections, we reverse this: project shares first, then derive EPS.
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**** Assumed Share Growth by Company Type
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| Company Type | Assumed Annual Share Growth |
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|---------------------------+----------------------------------|
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| High-growth tech | 5–8% |
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| Mid-sized growth firm | 3–5% |
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| Blue chip or cash-stable | 0–2% or flat/shrinking via buybacks |
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**** Core Financial Projection Assumptions
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| Element | Assumption |
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|-------------+------------------------------------------------------------------|
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| Shares | Project using a realistic dilution rate (e.g., 3–5%) unless buybacks occur |
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| Net Income | Calculate as EBIT × (1 - tax rate), based on revenue projections |
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| EPS | Net Income / Shares |
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*** EPS
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- For projected years, calculate EPS based on projected net income and projected shares.
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- Maintain a YOY column for EPS to support stock price modeling.
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*** Stock Price
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- Stock price should be projected based on fundamentals, not simple historical price growth.
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- Use a mix of valuation models (outlined below) to estimate target price.
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- These models are based on earnings, revenue, and comparable multiples.
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** valuation of stock price
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- create a forecast
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- got earnings per share
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- listed assumptions
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*** how to make a target price
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- 3 methodologies
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- do all of them and take an average
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- keep it simple
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**** methodology 1: price vs earnings per share
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***** NOTE: we are calculating STOCK PRICE based on EARNINGS PER SHARE multiplied by YOY GROWTH RATE
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***** Understanding "Valuation" - Price/Earnings (P/E) Ratio Methodology
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This section of your financial course explains how to estimate the target price of a stock five years into the future using the Price-to-Earnings (P/E) ratio.
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***** 1. The Price-to-Earnings (P/E) Ratio
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- The **P/E ratio** is a way to value a stock based on its **earnings per share (EPS)**.
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- It is defined as:
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#+BEGIN_SRC
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P/E = Stock Price / Earnings Per Share (EPS)
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#+END_SRC
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- Stocks typically trade at a P/E ratio that is close to their **earnings growth rate**:
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- If a company's **earnings grow at 20% per year**, it will likely have a **P/E ratio of ~20x**.
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- If earnings **grow at 8% per year**, the stock might trade at **8x EPS**.
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***** 2. Forecasting the Target Price (5-Year Estimate)
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- The **target price** in **5 years** is based on the company’s **forecasted EPS** multiplied by a reasonable P/E ratio.
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- In this example:
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- **MSFT’s EPS is growing at 12% per year**.
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- The stock should trade at a **P/E of 12x** in 5 years.
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***** 3. Using the Provided Table (EPS Forecasts)
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| Metric | FY19e | FY20e |
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|---------------------------------|--------|--------|
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| Diluted Earnings Per Share (EPS) | $3.93 | $4.90 |
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| Year-over-Year EPS Growth | 12% | - |
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- **FY19e EPS = $3.93**
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- **FY20e EPS = $4.90**
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- **EPS is growing at 12% per year**.
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***** 4. Calculating the Target Price
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- Since the company is growing at **12% per year**, we assume it will trade at **12x earnings** in 5 years.
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- Using the **FY20e EPS of $4.90**:
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#+BEGIN_SRC
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Target Price = 12 × 4.90 = 59
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#+END_SRC
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***** 5. Comparing Today’s Price to the Target Price
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- **Assume MSFT is trading at $47 today** (when the course was written).
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- **Expected appreciation in 5 years**:
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#+BEGIN_SRC
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(59 - 47) / 47 = 25% increase
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#+END_SRC
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- Since **MSFT is a mature company**, a **25% increase in 5 years seems reasonable**.
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***** Final Takeaways
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✔ The P/E ratio method values stocks based on **earnings growth**.
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✔ Stocks usually trade at a **P/E close to their earnings growth rate**.
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✔ Target price is found by **multiplying the estimated EPS by the assumed P/E ratio**.
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✔ **MSFT, trading at $47 today, could reach $59 in 5 years with 12% EPS growth.**
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🚀 Now you understand how the course uses P/E ratios for stock valuation!
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**** methodology 2: price vs revenue/sales
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- assume the avg software company trades at 5x revenue in 5 years
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- MSFT, being a big company that grows slowly, grows at 70% of avg
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- so instead of trading 5x in 5 years, it will trade at 3x in 5 years
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- therefore the [[file:finance_terms.org::*Market Capitalization (Market Cap)][market cap]] should be $504bn in 5 years
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- market cap is $372 today, so this means 35% upside
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| | FY19e | FY20e |
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|---------+----------+-------------|
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| revenue | $128,530 | $143,953 |
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|---------+----------+-------------|
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| | | $503,835.69 |
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| | | 36% |
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ok, first thing is first. he claims the following
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1. market cap is 372b today
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2a. a company would normally be trading at 5x in 5 years
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2b. in this case it will be 3x in 5 years bc it is a large company
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3a.
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|-|FY12|FY13|FY14|FY15e|FYo
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