Many employers want LMU FNCE students to present a stock pitch in job interviews. To help prepare you, you will build a stock pitch over the course of the semester. At the beginning of the semester, you will be assigned one teammate and a firm to study over the course of the semester. You will produce a stock pitch for the firm through six deliverables, as described below. You must conclude your pitch with a recommendation to either buy or sell the stock.
Deliverables:
- Describe the company and its risks: Go to the SEC’s EDGAR and find the firm’s most recent 10-k. Study the Business Description and Risk Factors. Describe the firm’s business model. How do they generate revenue, and what are their primary costs? Which of the risk factors are the most serious threats to investors and why? Identify an injustice perpetuated by the firm that is not described in the 10-k and demonstrate the risks it poses to investors. (You may find current injustices in the news and on Reddit, Glassdoor, or Violation Tracker.) Present all of this information in no more than three detailed PowerPoint slides, including a cover page. Be sure to cite your sources. Each group member must separately submit a PDF copy of the group’s slides on the “Deliverable #1” discussion board.
- Describe the structure of the industry & competition: Using Bloomberg, identify & describe at least three of your firm’s closest competitors. Detail the advantages that the competitors have over your firm that could affect returns to shareholders. Using news sources (i.e. Fin. Times, WSJ, NYT, etc.) or any of the databases provided through the LMU library (See Appendix 1), provide readers with an understanding of the state of the industry. Combined with your first deliverable, your entire project should be no more than five slides at this point. Each group member must separately submit a PDF copy of the group’s slides on the “Deliverable #2” discussion board.
- What key opportunities does the company face? Using competitors’ 10-Ks, news sources, blogs, podcasts, or other analysis, develop a vision for how competition in this industry will evolve in both the short term and the long term. Explain the key strengths and opportunities you see for your firm, as well as the weaknesses and looming threats that they need to work around. Cite your sources. Combined with your first two deliverables, your project should be no more than seven slides at this point. Each group member must separately submit a PDF copy of the group’s slides on the “Deliverable #3” discussion board.
- Beta calculation: Use spreadsheet software to calculate the common stock’s beta. You must use the β=cov/var formula for this calculation. Historical stock price data can be found on Yahoo! Finance. Use your beta to estimate the cost of the common stock. You must make a number of assumptions to calculate your answer, including the risk-free rate, the market risk premium, and the time period over which beta is measured. (See Appendix 2) In paragraph-format, describe and support your assumptions (in other words, tell the reader why you chose the inputs that you used). Combined with your first three deliverables, your project should be no more than eight slides at this point. Each group member must separately submit a PDF copy of the group’s slides on the “Deliverable #4” discussion board.
- Cash flows & Growth: Beginning with the Statement of Cash Flows in the 10-k, predict at least three items that will change in the future due to your analysis in deliverables 1-4. Explain how much you expect them to change and why. Estimate the free cash flow for the next fiscal year and the growth rate in free cash flow into the future. (See Appendices 3 & 4) You must explain your estimates for growth to the reader. Combined with your first three deliverables, your project should be no more than eleven slides at this point. Each group member must separately submit a PDF copy of the group’s slides on the “Deliverable #5” discussion board.
- Valuation & Recommendation: Estimate what the stock price of your firm should be using their competitors’ P/E and Price/Sales multiples. Then use a DCF model to estimate the value of the firm and the stock price. Assume that the weighted-average pretax cost of debt is 5%*β less than the cost of equity. (For example, for a firm with RE = 15% and β = 1.3, the RD would be 15% – (5%*1.3) = 8.5%.) Finally, make a recommendation, based on your estimates of the stock price, whether to buy or sell the stock. Be sure to include the current stock price on your recommendation slide. Also include your recommendation on your cover slide. Your final pitch should not be more than thirteen slides. Each group member must separately submit a PDF copy of the group’s slides on the “Deliverable #6” discussion board.
Final Deliverable: Your first six deliverables and their critiques should serve as the basis for your final draft, but you may revise the final draft as you see fit to improve your pitch, readability, and flow. In total, the pitch still must not exceed 13 slides (excluding calculations). You must turn in your final pitch slides (in a PDF file) and your calculations (in one Excel file) to Brightspace.
Workshopping: The first six tasks will not be graded. On their due dates, you will post them to the corresponding discussion board on Brightspace. Another student will claim your pitch by replying to your post in the discussion board to critique it. That student will have until the deadline to indicate parts of the pitch that could be improved and return it to the original author. Criticisms may cover formatting of the document; clarity of the writing; deviations from the instructions; or any other information that you feel is valuable to the authors. You will write your comments in your classmates’ PDF file using Adobe Acrobat Pro or any other software that lets you write digitally on a PDF file. Your critique will be returned to the author through the same discussion thread.
Grading: Your grade will be based on your final draft and calculations, your timely submission of each deliverable, and your critiques. Note that if you do not turn in a deliverable, you will also not be able to critique an assignment, so your grade will be affected twice. You will also receive points if your presentation is voted by the class as one of the top two, and if you vote for one of the top two presentations.
Presentations: All groups will present their pitch in class on the assigned date. Each group will only have six minutes to present. Be warned that six minutes is not enough time to say everything that you want to say, so you need to practice a lot to figure out how to elegantly squeeze in everything in the limited time. Usually, only half of the groups finish in six minutes.
Appendix 1:
Data sources: LMU subscribes to a number of excellent databases besides Bloomberg that you should use for this project. See the LMU library Business Libguide (for full features, make sure to go through the library website on campus first). Some good resources include:
- Business Insights: Global
- IBISWorld
- Morningstar
- Nexis Uni
Appendix 2:
Estimating CAPM Inputs in Your Stock Pitch
The instructions for the current deliverable ask you to make assumptions about the risk-free rate, the market risk premium, and the time period over which β is measured. Use this guidance to help you in those assumptions.
Risk-free rate:
The investor is making the choice today about whether to invest in your stock, the risk-free asset, or the market portfolio. There are two important implications of this choice. First, today’s rates are more appropriate than historical rates. Therefore, use current risk-free rates as inputs to your CAPM model. Second, the expectation is that the investor will hold the asset they choose for the same amount of time. As a result, you must estimate how long a typical investor holds the stock, and then use the risk-free rate that is closest to that holding period. For example, if a typical investor holds the stock for one year, your risk free rate should be today’s one year treasury rate.
Market risk premium:
In theory, the market portfolio contains all risky assets (stocks, bonds, real estate, commodities, collectibles, Pokemon cards. etc). There is no good way to measure the expected return on all risky assets, so you need a close approximation. To reasonably estimate Rm, you will need to use historical data that measures how the market has performed over time. The more data, the better, because the standard deviation of returns is so high. Wall St. analysts typically use the S&P 500 because it is readily available, but not because it is correct. For our purposes, you may use the historical averages in the lecture slides.
Time period over which β is measured:
β is supposed to measure the risk of the stock going forward. We don’t have data on the future, so you will need to use recent historical returns. The important thing is that the risks to the company in the historical period should match the risks you expect the company to face going forward. It is your job to find a date in the recent past when the risks to the company fundamentally changed, and all prior data could be considered irrelevant. The β should be measured from that date until today.
Appendix 3:
Estimating Free Cash Flow
The instructions ask you to identify three items on the statement of cash flows that you expect to change, and then use them to reestimate free cash flow for the coming year. The items that you choose must come from the operating activities or investing activities, not financing activities. The free cash flow is the sum of the cash flows from operating activities and cash flows from investing activities. The example below shows the type of math that is expected of you. The exact three items that you choose will be up to you, based on the specifics of your firm.
Appendix 4:
Estimating the growth rate, g
The instructions ask you to estimate the growth rate in future free cash flows. The visual below from Salter (2020, Figure 21)[1] shows that a perpetual growth rate, g, can be solved if you know the price today (P0), the free cash flow today (EI0), and the cost of equity from CAPM (k). It is your job as the financial analyst to decide if the P/EI ratio is for the company being analyzed or its peers.
[1] Salter, Roy A., 2020, “Reconciling Going-Concern Business Valuation Indications Derived from Multiple Business Valuation Methods.” Working paper, Grenoble Ecole de Management.
