Applied Equity Analysis: Stock Valuation Techniques for Wall Street Professionals / Edition 1

by James English

Overview

Applied Equity Analysis treats stock valuation as a practical, hands-on tool rather than a vague, theoretical exercise—and covers the entire valuation process from financial statement analysis through the final investment recommendation. Its integrated approach to valuation builds viable connections between a firm’s competitive situation and the ultimate behavior of its common stock. Techniques explained include EVA, newer hybrid valuation techniques, and relative multiple analysis.

Product Details

ISBN-13:	9780071360517
Publisher:	McGraw Hill LLC
Publication date:	05/14/2001
Series:	McGraw-Hill Library of Investment and Finance
Pages:	422
Product dimensions:	6.50(w) x 9.20(h) x 1.42(d)

About the Author

James English is currently an adjunct assistant professor of finance at Columbia University School of Business. He spent twenty years with JP Morgan serving in many positions, including managing director of JP Morgan Capital, the firm's venture capital unit. In his over quarter-century career in finance, English practiced and become proficient in virtually every one of the field's subspecialties: commercial banking and credit analysis, corporate treasury and foreign exchange, capital markets, mergers & acquisitions, venture capital, and sell-side equity analysis.

Table of Contents

	Preface	ix
Part 1	Getting Started
Chapter 1	A Day in the Life	3
	Talking the Talk	4
	Doing the Work	10
	Taking a Position	15
	Equity Analysis and Objectivity	18
	Notes	20
Chapter 2	Fundamentals of Equity Valuation	21
	GAAP-Based Financial Accounting	22
	The Problems with GAPP Accounting	22
	The Primacy of Return on Capital: High Times at Consolidated Imports Ltd.	27
	Competitive Equilibrium: Troubles for Consolidated Imports Ltd.	34
	Growth and Value: Hope Rises from the Ashes at Consolidated Imports Ltd.	37
	Transitory Earnings: An Unexpected 10 Percent Price Increase at Consolidated Imports Ltd.	44
	The Equivalence of Growth and Investment	47
	Growth in Perpetuity	53
	Notes	54
Chapter 3	Strategy and Competition I: The Firm's External Environment	55
	Good Companies = Good Stocks?	56
	Market Efficiency and Competitive Impediments	57
	SWOT, Nature, and Nurture	59
	The Generic Opportunities: Emerging to Mature Industries	69
	Beyond Porter	72
	Notes	81
Chapter 4	Strategy and Competition II: The Firm's Internal Competitive Resources	83
	The Porter Approach: Cost Leadership, Differentiation, and Focus	84
	The Resource View: What about Internal Resources?	89
	Sustaining Resource Heterogeneity	89
	Operational Effectiveness Is Not Strategy	92
	The VRIO System	94
	A Dynamic View: Renewal and Erosion of Advantage	98
	Notes	99
Chapter 5	Fundamentals of Stock Behavior	101
	A Thought Experiment: The Haugen Methodology	103
	The Evidence Suggests Market Bias Is Real, Maybe	108
	Implications for Investment Styles	113
	Efficient and Inefficient Markets	118
	If You're So Smart, Why Aren't You Rich?	120
	Maybe Keynes Was Right	121
	Notes	121
Part 2	The Basic Tools
Chapter 6	Reading a Financial Statement: The Accuracy, Sustainability, and Predictability of Financial Information	127
	Financial Misreporting: The Seven Shenanigans	129
	Facing Reality: Earnings Surprises and Analytic Inertia	135
	Predicting performance: Nonrecurring Items	137
	An NRI Analysis of Gateway	140
	Notes	144
	Financial Statements	146
Appendix 6-1	Gateway Financial Statements	146
Chapter 7	Reading a Financial Statement: The Composition of Returns	149
	The Focus of Ratio Analysis Is ROE	150
	Margins Reveal Operational Decisions	151
	Turnovers Describe Investment Decisions	152
	Leverage Is the Return Amplifier	156
	Some Other Ratio Issues	158
	Connecting Strategy to Value	160
	The Composition of Returns	160
	Gateway Time Series Analysis	161
	Dell Computer in Its Industry Context	165
	Direct Sellers Have the Edge	167
	Notes	168
Appendix 7-1	Comparative Financial Analysis: Personal Computer Industry	169
Chapter 8	Reading a Financial Statement: Early-Stage Companies and Investment Capacity	171
	Stages of Company Development	173
	Startup: The Company Defines Itself	173
	Emerging Growth: The Battle Is Joined	177
	Notes	183
Chapter 9	Reading a Financial Statement: Later-Stage Companies and the Transition to Maturity	185
	Established Growth: Past the Shakeout	186
	The Transition to Maturity: Maximum Analytic Risk	187
	Mature Companies: The Old--But Good--Economy	191
	Declining Companies: Demand Shrinks	192
	Notes	197
Chapter 10	Economic Value Added: An Alternative to Traditional Analysis Techniques	199
	The Foundations of EVA	200
	The Firm As a Savings Account	201
	NOPAT Is the Pool of Profits	209
	Gateway: EVA in Practice	215
	Notes	225
Appendix 10-1	Gateway's Cost of Capital	227
	Cost of Equity	227
	Weighted-Average Cost of Capital	228
Part 3	Financial Models
Chapter 11	Financial Modeling: Base Case Assumptions and Model Design	231
	Consistency and Continuity in Financial Models	233
	Those Pesky Quarterly Earnings Forecasts	234
	The Laws of Economics and Other Disappointments	236
	Financial Model Design: Tricks and Traps	240
	Starting a Financial Model: Dell Computer	245
	A Partial Reality Check	249
	Notes	250
Appendix 11-1	Dell Computer Corporation Consolidated Statement of Income	251
Chapter 12	Financial Modeling: The Income Statement and Balance Sheet	259
	The Income Statement: The Equity Analyst's Lodestone	260
	The Balance Sheet: Overcoming Circularity	263
	Closing the Balance Sheet: Avoiding Circularity	267
	Alternative Balance Sheet Closers	270
	Other Financial Model Features	272
	Notes	272
Chapter 13	Financial Modeling: The Statement of Cash Flows	273
	The Origins of the SOCF	274
	The Direct SOCF Format	279
	Total Cash Flow Format	283
	Notes	286
Part 4	Equity Valuation
Chapter 14	Valuation: Foundations and Fundamentals	289
	Combat Finance	290
	Accounting Is Sometimes Annoying, But It Is Not Fatally Flawed	292
	Discounted-Cash-Flow Valuation	293
	Terminal Values Are a Big Deal	296
	Dell Computer	300
	Notes	304
Chapter 15	Combat Finance: Relative Methods and Companion Variable Models	305
	The Theory, As Usual	306
	The Computer Industry	315
	Other Industry Valuation Models	318
	Cheap Stocks	324
	Companion Variables and Target Prices	326
	Times Series Models	330
	Notes	332
Chapter 16	Hybrid Valuation Techniques	333
	An Equity Reformation	334
	Self-Correcting Valuations	337
	The Growth Content of Stock Prices	338
	The Complete Specification of Valuation Multiples	345
	Valuation Multiples and Company Performance	347
	Notes	348
Chapter 17	The Quirky Price/Earnings Ratio	349
	The Drivers of the P/E Multiple	350
	Gordon Growth and the P/E Ratio	353
	The P/E-to-Growth Ratio: Another Casualty	355
	P/E and the Franchise Factor	358
	Notes	359
Chapter 18	Valuation of Speculative Stocks	361
	Reverse Engineering Speculative Stocks	363
	Amazon.com	364
	The Calculation	366
	Dell Computer	368
	Relative Valuation Techniques Falter	369
	Another Rule of Thumb: Hope Springs Eternal	369
	High Growth Stocks: The Siegel Calculator	371
	Notes	373
Chapter 19	Equity Analysis and Business Combinations	375
	The Unfortunate Value Story	376
	Deals Happen Anyway	382
	Earnings Accretion and Value Addition	384
	Notes	390
Part 5	Getting It Down on Paper
Chapter 20	Financial Writing: Don't Bury the Lead	393
	The Structure of an Analytic Report	394
	Giving the Reader a Break	404
	Style and Its Abuse	406
	The Chained-Logic Trap	407
	Notes	408
	Bibliography	409
	Index	415