The document provides an overview of fundamental analysis. It discusses that fundamental analysis determines a stock's value by focusing on a company's business and prospects. It also outlines some key questions and processes in fundamental analysis including macroeconomic analysis, industry analysis, and company analysis. It then discusses how to identify strong companies and provides examples of benchmarking companies. Finally, it outlines commonly used valuation methods like discounted cash flow analysis and relative valuation.

2. Fundamental
Analysis
Fundamental analysis is a combination of quantitative
and qualitative analysis that determines a stock’s
value by focusing on a company's actual business and
its future prospects.

3. Fundamental
Analysis
Two Most Important Questions:
Stocks will make money over the long
1. What is being priced in? term provided that earnings are on an
2. What is mispriced? uptrend and valuations are cheap.

4. Fundamental
Analysis
Process of forecasting corporate earnings
(using a “top down” approach)
Macro-economic analysis
Industry analysis (industry lifecycle, competitive environment)
Company analysis (strategy, financial statement analysis)

5. Fundamental
Analysis
How to identify strong companies (The Five P’s)
People
Product
Predictability
Potential
P/E (Valuation)

6. Fundamental
Analysis
Benchmarking
1. Alternatives
2. Competitive advantage

7. Fundamental
Analysis
Puregold Savemore Rustans Robinsons
Revenues 1000 1500 500 250
Gross Margins 15% 12% 10% 8%
Operating
10% 8% 5% 3%
Margins

8. Fundamental
Analysis
Inputting numbers through commonly used valuation methods
DCF or Discounted Cash Flow Method
NAV or Net Asset Value Method
Relative Valuation Method

9. Commonly used methods
for determining Fair Value
DCF or Discounted Cash Flow
• Present value of future free cash flows
• FV = CF1/(1+r1) + CF2/(1+r2)2 + CF3/(1+r3)3 + . . .
• Higher earnings will lead to higher fair value
• Lower interest rates will lead to higher fair value
• Can be used on all stocks

10. Commonly used methods
for determining Fair Value
Example: DCF Method
Required Rate or Return: 10% Required Rate or Return: 8%
Year Cash Flow PV of Cash Flow Year Cash Flow PV of Cash Flow
0 500.0 500.0 0 500.0 500.0
1 600.0 545.5 1 600.0 545.5
2 700.0 578.5 2 700.0 578.5
3 800.0 601.1 3 800.0 601.1
4 900.0 614.7 4 900.0 614.7
5 1,000.0 620.9 5 1,000.0 620.9
6 and onward 1,100.0 6,830.1 6 and onward 1,100.0 8,382.4
Total 10,290.8 Total 11,843.1
O/S 1,000.0 O/S 1,000.0
FV per share 10.3 FV per share 11.8

11. Commonly used methods
for determining Fair Value
NAV or Net Asset Value
• Sum of the fair value of assets
• Commonly used for property companies and holding companies

12. Commonly used methods
for determining Fair Value
Example: NAV Method
Asset PhpMil Php/sh % of Total Valuation Method
BPI (33%) 62,630 126.25 23.4% P/BV multiple
Globe (30%) 33,906 68.35 12.7% DCF
Manila Water (43.3%) 20,832 41.99 7.8% DCF
Ayala Land (53.5%) 136,714 276 51.1% NAV based
IMI (67.7%) 10,626 21 4.0% DCF
Total for listed subs/affil 264,708 534 99.0%
Ayala Automotive 6,844 13.80 2.6% Book value
AG Holdings 4,856 9.79 1.8% Book value
Minus net debt (9,124) (18.39) 3.4%
NAV 267,283 538.78 100.0%
Outstanding sh (Mil) 496.09
Value per shae 538.78
Fair value estimate 443.00 (15% discount to NAV)

13. Commonly used methods
for determining Fair Value
Relative Valuation Method
• An analyst chooses a target valuation multiple and uses that to value
stock
• Ex. 15X P/E, 1.5X P/BV
• Target multiples are usually based on industry average, historical
average, adjusted up or down based on EPS growth or ROE

14. Relative Valuation
Measures
P/E & EPS Growth
• P/E = Price/Earnings per share (EPS)
• EPS = Net income to common/Outstanding shares
• General rule: Companies with higher EPS growth deserve to trade at
higher P/E

15. Relative Valuation
Measures
Example
• Which stock looks cheap? Company EPS Growth P/E
• Which stock looks expensive? A 10% 10.0
B 20% 8.0
C 15% 12.0
• Company B looks cheap D 8% 15.0
• Company D looks expensive

16. Relative Valuation
Measures
P/BV & ROE
• P/BV = Price/Book value per share (BV)
• BV = Stockholders equity/Outstanding shares
• ROE or Return on equity
• ROE = Net income/Stockholders equity
• General rules: Banks are usually valued using ROE and P/BV; Companies
that deliver higher ROE deserve to trade at higher P/BV

17. Relative Valuation
Measures
Example
• Which stock looks cheap? Company ROE P/BV
• Which stock looks expensive? A 10% 0.8
B 12% 1.4
• Company A looks cheap C 8% 2.0
• Company C looks expensive D 15% 1.7

18. Determining Fair Value using
Relative Valuation Method
Example: Relative Valuation Method
• If a company is expected to earn Php5.25 per share next year and its
historical average P/E is 9X, the fair value of the stock is:
• P = P/E x EPS
• = 9 x 5.25
• = 47.25
• If a company is expected to have a BV of Php15.00 per share next year and
its historical average P/BV is 1.5X while it is expected to maintain an ROE of
12%, the fair value of the stock is:
• P = P/BV x BV
• = 1.5 x 15.00
• = 22.50

19. Valuation Measures
DIV Yield
• Div Yield = Dividend per share/Price
• Salary as an investor
• Stocks with high dividend yield are usually considered attractive for
conservative investors looking for income, assuming that the company’s
earnings outlook is positive
• Most high dividend yielding stocks are utility companies with slower
earnings growth

20. High Dividend Yielding
Stocks
High Dividend Yielding Stocks*
Ticker Company Div Yield
MER Meralco 4.70%
SCC Semirara 4.50%
AEV Aboitiz Equity 3.30%
GLO Globe Telecom 5.50%
TEL PLDT 7.00%
*Regularly check investment guide for updates

21. Where to get
Information
Strategy Reports
Investment Guide

22. Strategy Reports
Discuss the factors affecting the stock market
Answer the question “Should I be bullish or bearish and why? ”
Provide suggestions on how investors should respond to these factors
Ex. Buy aggressively; wait for pullbacks; sell
Provide an opinion on which sectors and stocks would be most affected by
factors affecting the market
Ex. Focus on growth stocks; avoid mining stocks; list of best picks

23. Strategy Reports
COLing the Shots
• Monthly strategy reports
• Focused on relevant issues for the month
Philippine Market Strategy
• Semi-annual strategy reports
• Focused on longer term relevant issues (past six months, next six to twelve
months)

24. How to find
the Strategy
Reports

25. Investment Guide
The investment guide is appropriate for investors who prefer to use a
“bottom up” approach
A guide that provides most of the important fundamental information
needed by investors on companies that are part of COL’s coverage list
Information included:
• Current stock information (Price, Outstanding Shares, Market
Capitalization)
• Recommendation (Rating, Fair Vale Estimate)
• Earnings (Revenues, Net Income, EPS, Growth)
• Financial Ratios (Net Margin, ROE, LTD/E)
• Valuation (P/E, P/BV, Dividend Yield, PEG)

26. How to
find the
Investment
Guide

27. How to use
Investment Guide
Most important pieces of information
Market Cap
COL Rating / Target Price
P/E & EPS Growth
P/BV & ROE
Div Yield

28. Market Cap
Market Cap or Market Capitalization
• Price x outstanding shares
• Measure of size
• Important because larger companies are usually more liquid compared to
smaller companies
• Liquid stocks can be easily bought or sold, size of portfolio will not be a
problem
• Ex. Ayala Land vs. Vista Land

29. COL Rating / Target Price
COL Rating / Target Price
• Analyst recommendation on the stock, either BUY, SELL or HOLD
• Determined by estimating the fair value of a company in light of its future
earnings potential (evaluation of earnings growth outlook and valuation)

30. Two types of stocks generally earn a “BUY”
rating in our Investment Guide
Earnings
Valuation Up Down
Cheap BUY (Type 1) BUY (Type 2)
Expensive HOLD SELL

31. Cheap Stocks with
growing earnings
Type 1: This type of stock usually trades at low relative P/E despite high
EPS growth, or low relative P/BV despite high ROE; upside to the target
price is high
This is the most preferred type of stock to buy
Ex. DMCI (2009), ICTSI (2005), Security Bank (2005)

32. Cheap Stocks with
growing earnings
Type 2: This type of stock trades at very attractive valuations, but earnings
are usually weak in the short term
Ex. Semirara (SCC), Philippine market (2008)
There are pros and cons in buying this type of stocks

33. Cheap Stocks with
growing earnings
Pros:
• Earnings weakness usually only short term in nature
• Ex. Demand drops due to cyclical reasons such as bear market, high raw
material prices, negative impact of weather disturbances, temporary
delays in operations
• Valuations are usually very attractive (significant upside to fair value
estimate)
• Can be accumulated over a long period of time

34. Cheap Stocks with
growing earnings
Cons:
• Prices might take a while to recover
• Negative news flow might lead to further drop in share prices in the short term
• Actual developments could be much worse than expected (ex. Cebu Pacific)

35. Using the Invest Guide
Step 1: Create a shortlist of stocks to buy
• Ex. List down all the stocks that have a BUY rating and still have an upside
potential of >20%
Step 2: Diversify
• Choose companies that belong to different sectors
• Ex. One property stock, one bank, one power, etc.

36. Using the Invest Guide
Step 3: Determine your preferences
• Growth, value or income
• Growth – high EPS growth
• Value – high capital appreciation potential, low P/E, low P/BV
• Income - high dividend yield
• Liquidity
• Active traders with large portfolio – go for larger market cap stocks
• Long term investors – can invest in smaller market cap stocks
• Names
• Major shareholders (Ayala, Aboitiz, Sy, Gokongwei, MVP, etc.)
• Brands (Jollibee, SM, Meralco, etc.)

37. Using the Invest Guide
Step 4: Validate your preferences
• Questions that you need to answer:
• What does the company do?
• How does it generate profits? If it has numerous lines of business, how
are revenues/operating profits broken down?
• Who are its major shareholders?
• What is its earnings track record?
• What are the drivers of future earnings growth?
• Does the company have the resources to execute its growth plans?
• By how much will earnings grow in the next few years?
• Is there anything that I should be worried about?

38. How to
find the
Company
Snapshots

39. How to
find the
Company
Snapshots

40. Example:
Company
Snapshot of
SM Prime

41. How to
find the
Company
Reports

42. Analyzing stocks that are not part of
COL’s average list
• Questions that you need to answer:
• What does the company do?
• How does it generate profits? If it has numerous lines of business, how
are revenues/operating profits broken down?
• Who are its major shareholders? What is their reputation?
• What is its earnings track record?
• What are the drivers of earnings growth?
• Does the company have the resources to execute its growth plans?
• By how much will earnings grow in the next few years?
• Is there anything that I should be worried about?
• Is the company’s valuation cheap or expensive relative to the market and
its peers?

43. Sources of Information
PSE Website
• Focus on company disclosure, especially 17A (annual report) and 17Q
(quarterly report)
Company Website
• Learn more about what the company does
• Sometimes, the company would have press releases, presentations available
Newspaper Reports

44. How to Stay Updated
Continuously read COL research products
Morning notes
• Summary of important news that could affect the market or certain
stocks updated on a daily basis
• Also include new reports on stocks that we cover (updates, or
analysis of the impact of new developments on profitability and
valuation, change in recommendation)
• New buy or sell ideas are shared
Weekly
Strategy reports

45. Appendix

46. Definition of Financial Terms
Market Cap or Market Capitalization
• Market Cap = Price x Outstanding shares
• Measure of size
• Usually, larger companies are more liquid (easier to buy and sell)
EPS or Earnings Per Share
• EPS = Net income/Outstanding shares
P/E = Price/ EPS
• The lower the better, although companies with higher EPS growth can justify
trading at higher P/E

47. Definition of Financial Terms
PEG = P/E ÷ EPS Growth
• Although technically flawed, it is commonly used as a short cut way to make
P/E comparable to growth
• The lower the better
Div Yield or Dividend Yield
• Div Yield = Dividend per share/Price
• Similar to interest on deposits, the higher the better

48. Definition of Financial Terms
P/BV or Price to Book Value
• BV = Stockholders equity/Outstanding shares
• P/BV = Price/BV
• Commonly used in valuing banks
• The lower the better, although companies with higher ROEs can justify higher
P/BV
ROE or Return on Equity
• ROE = Net income/Stockholders equity
• The higher the better

49. Definition of Financial Terms
Net Profit Margin = Net income/Revenues
• The higher the better
CFO or Cash Flow from Operations
• CFO = Net income + Depreciation and other non cash expenses (income) –
Change in working capital
• Has to be positive
LTD/E or Long Term Debt to Equity Ratio
• LTD/E = Long term debt/Stockholders equity
• The lower, the more conservative; Should be compared to other peers in the
industry

50. Keeping You Ahead.