Value Investing UNDERGRADUATE INVESTMENT SOCIETY WEEK 7
History Value investing goes back to a financial analyst
called Benjamin Graham. He created the original concepts in his book The Intelligent Investor, first published in 1949. Warren Buffett later became a disciple of his and through Benjamin’s principles has become one of the wealthiest men alive, with $52 billion in net worth.
What is Value Investing? Value investing is an investing strategy where you
purchase stocks as if you were buying shares of a business. Value investors tend to focus on what a company is worth, the intrinsic value. Buy an outstanding company at a sensible price, not an average company at a cheap price! Can be both qualitative and quantitative
Qualitative Factors VALUE INVESTING
What do Value Investors look for? Companies that have simple business models and are
easy to understand Good management teams Companies that are profitable with solid
fundamentals Companies with good cash flow
Simple Business Plan: Coffee Shop   A storefront coffee shop is a simple business model.
They make money through selling coffee. There are not many components to it.
Complicated Business Plan: Google Google is a lot more complicated. A majority of
Google’s revenue comes from advertisement revenue. However they also make money through their line of Android phones, netbooks, & paid internet services There are so many components to Google that it is difficult to gauge how external factors will affect Google
Management Are there any major future changes in management? How will this effect the companies intrinsic value? Is the current management team in place reliable?
Do they have a proven track record?
Company study for today: Johnson and Johnson   Engages in the research & development,
manufacture, and sale of various products in the healthcare field.
Recent JNJ News that could affect the company’s accurate valuation Johnson & Johnson had more than a dozen recalls
during 2010 Rolaids Softchews on December 9 Tylenol Cold Liquid products on November 24 Children’s Benadryl Allergy Fastmelt Tablets on November 15 Junior Strength Motrin on November 15 Rolaids Extra Strength Softchews on November 15 Tylenol 8 Hour on October 18 and various Tylenol products plus Benadryl Allergy Ultratab Tablets and Motrin IB products on July 8
More JNJ News Boston researchers announced January 3 that they
are partnering with Johnson & Johnson to develop and sell a noninvasive test that can detect tiny traces of cancer cells in a blood sample The partnership — a five-year, $30 million deal — is aimed at refining and commercializing a nextgeneration test that could allow physicians to better target cancer-treatment regimens and monitor patients’ responses to drugs
Quantitative Analysis VALUE INVESTING
Quantitative Analysis Income Statement Does this company have steady revenue streams? What percentage of Net Sales is COGS and SG&A? (Are its costs too high compared to the industry?) Can taxes can reduced by subsidies or tax breaks? Balance Sheet Statement of Cash Flows
Income Statement
Steady Revenue COGS = about 30% Net Sales
R&D is more than 10% of Net Sales?
Ratios Price to Earnings (P/E) Ratio Price / Earnings =Price / Earnings Per Share (EPS) EPS = (Net Income – Dividends on Preferred Shares) / Shares Outstanding COGS, SG&A, R&D as a % of Net Sales Make sure
the company’s numbers are on-line with industry average JNJ’s R&D in 2010 totaled $6.8 billion, 11.1% of sales In January 2011, JNJ aggressively funds new development
Quantitative Analysis Income Statement Balance Sheet How quickly does this company collect its A/R? Does this company have the ability to pay off its current debt? What are its long term liabilities? Statement of Cash Flows
Ratios Debt to equity ratio = debt / equity This ratio usually should not be over 1 JNJ’s debt-to-equity ratio is 0.21; industry average is 0.52 Price to book ratio = Market capitalization / total
book value A higher P/B ratio implies that investors expect management to create more value from a given set of assets, all else equal A low P/B ratio may signify an undervalued company Market capitalization = # shares outstanding * price JNJ’s P/B ratio 6.6x; industry average is 16.4x
Quantitative Analysis Income Statement Balance Sheet Statement of Cash Flows Is cash increasing or decreasing from year-to-year? How much cash is on the books?
Ratios Current dividend yield = (Most recent full-year
dividends/ Current Share Price) A high dividend yield can signify that a stock is under priced & vice versa OR that a company has fallen on hard times Again, must compare to industry
Dividend growth (5 years) – 12.9% for JNJ, 9.1% for
industry
JNJ Charts
Summary
 Buy an outstanding company at a
sensible price, not an average company at a cheap price!
The End ANY COMPANIES YOU’RE INTERESTED IN WITH GOOD VALUE?