EARN $100,000 A
YEAR!
In this exercise, you are going to take a position at a financial firm in which you are going to put your expertise to work. You will have seven opportunities to value a firm correctly making recommendation to either buy or sell each company. If you get it right, you will receive a $10,000 bonus each year, if you get it wrong, you will find a cut in your pay of $5,000.
For each valuation, you need to write up (half page) on how you valued the stock, and what value you came up with. You should also conclude with a buy, strong buy, sell, or strong sell. Holding the stock is not an option. You must also write down your report BEFORE you click your choice to see what happens. Failure to justify your decision will get you fired and a poor grade on this assignment. Making the wrong decision won’t get you fired, not backing up why you made it will. Good luck to you.
This is an example of the information
you will be given.
Your first valuation is of MOX. The details are below:
2004 2003 2002
EPS $3.89 $3.15 $1.68
DPS $1.06 $0.98 $0.92
FCF per share $2.25 $1.32 $0.51
Sales per share $41.1 $32.3 $26.7
Cost of Capital 15% 15% 15%
Expected growth 20% 15% 6%
Average P/E 11.8 11.5 23.10
Average P/Sales 1.24 1.26 1.31
ROE 24.9 23.3 15.4
MOX's current stock price is $51.26 a share as of Jan. 2004. What is your recommendation for the stock price over the next year? Use the P/E method along with a three stage model assuming intrinsic growth rate for next 5 years, and moving over next 5 years to 6% for best shot of correct answer.
Your
Valuation should look something like this:
You need to at least do one of these procedures, two would be better.
Over the last three years Mox has shown a large increase in earnings per share from $1.68 to $3.89 while dividends have grown from $0.92 to $1.06. This is a growth rate of 7.3% [(1.06/.92)^.5-1]. Free cash flow has also risen dramatically along with Sales per share. Growth rate has increased while the average P/E has fallen. All indicators suggest this is a very attractive stock. I will value this company based on two relative valuation measures and an intrinsic valuation model.
First, let’s find the intrinsic growth rate. This is ROE * (1-payout ratio). The payout ratio in 2004 is $1.06/$3.89 = 27.25%. Thus, growth rate is 24.9*(1-.2725) = 18.11%
P/E method:
Expected EPS is $3.89 * 1.1811 = $4.59
The P/E ratio has fallen dramatically from 2002 to 2003 and has now begun to climb. The PEG ratio last year was .77 [ 11.5/15], with the higher expected growth rate this year of 20%, the PE may increase. Holding the PEG ratio at .77, one could guess a PE of .77 * 20 which equals 15.4. I will just use the current average PE of 11.8 for the expected. Thus, projected price is 4.59 * 11.8 = 54.16. This would be a $54.16/51.26 -1 = 5.66%. This does not exceed my cost of capital or required return. Recommend sell.
P/Sales method:
Sales per share has also increase dramatically although average price per sales has remained in the 1.25 range. I will use 1.25 has my P/sales estimate and estimate sales per share of $48.54 from $41.1 sales * 1.1811 growth rate. Estimated price is then 1.25 * 48.54 = $60.68. Return would be 60.18/51.26 = 18% return. This estimate would suggest buy.
Three stage model. I will use FCF $2.15, g = 18.11%, k = 15%, Value attained is $50.80.
Both PE and growth model suggest sell. Thus, I will recommend sell.
You now can click your choice.
Click here, you don't get to choose in this example.
Ready to get started, then click below, remember, write your report first before you click on the buy or sell buttons, otherwise it will be no fun!
My thanks to Lakshma Muchantula for invaluable help with the Flash Progam.