Picking a Stock to Analyze

So for a class, I need to basically pick a company and do a DCF/comparables analysis along with a short spiel about some of the qualitative aspects of it (i.e. the strategy, industry trends, etc.). I was wondering what characteristics you recommend and or, if you're feeling generous, if you have some tickers I should look into for researching.

Based on some searching I've done, since I figured I'm not the only one to ask this, I've gathered that I should pick something with a relatively simple business model (i.e. not a JPM or other bank), that isn't that diversified (i.e. not GE/MMM with tons of different departments), and smaller is better. However, I'm wondering if there is anything more that you would add to this (these were the main points people seemed to emphasize), if you have advice for what sectors typically have more info on them, or if you've done something like this for a class and wanted to share some ideas about what you/others have chosen and why you would/wouldn't pick the company to value again.

how to analyze and pick a company for Class?

When picking a company to analyze for a class assignment - you should target stable, easy to understand industries as well as mature companies that are easily modeled.

User @Vancouver Canucks 2011, an investment banking associate, shared the rational for using a mature company:

Vancouver Canucks 2011 - Investment Banking Associate:

For the DCF component, I would also pick a company in a defensive industry with steady and predicable cash flows. This way, you can project out future cash flows with more certainty. I would find a mature business so that you can reasonably estimate / control CAPEX and D&A. You probably know the rest... Nothing too funky like a FIG or TMT company that will require a lot of sensitivities...

Depending on the amount of time you have, it may be wise to choose a company that you are familiar with in order to save time researching what the company actually does.

What Sectors to Focus On?

You want to stick to sectors that are easily understood and modeled:

  • Consumer Discretionary
  • Consumer Staples
  • Industrials
  • Telecom

You will want to avoid complex sectors such as:

  • Energy - Involves models such as NAV different from the DCF
  • Financials - Involves Excess Equity Model
  • Healthcare - Difficult to model drug approvals, insurance claims etc
  • IT - Difficult to predict the model for fast growing companies

In the end, it will be in your best interest to use a company in the consumer space as they are usually stable and easily predictable.

What Qualitative Elements Should I Look For?

When you are doing your qualitative analysis, you want to look for trends that will effect the business over then next 6 months. You want to avoid backward looking events (IE previous strong earnings announcement, previous new product announcement).

Use resources such as The Wall Street Journal and other financial press to read about trends in the industry and contact your library to find out what industry databases your school has access to. If possible, gain access to Thomson Reuters or a similar research platform to learn what Wall Street research analysts think of the industry and the company.

How Do I Pick Comparable?

When looking to find comparable companies for your analysis, you want to look for competitors based on the following elements:

  • Size - Market Cap
  • Industry - Same or Similar Industry
  • Location

If your company does not have many straight forward competitors, look for companies in similar industries that are valued in a similar way. Example - if you are valuing a cruise line you could include amusement parks in the comparables set.

You should target to have at least 5 companies in your peer set.

How to Build a Discounted Cash Flow Model

Once you have your qualitative analysis, you need to turn to the discounted cash flow analysis. For a review of how to build a DCF, please see below. When you are building your assumptions you should build them based upon your analysis of the industry and company. That being said - if you do not have any forward looking insight on the industry you could use historical averages to project out EBIT and the other line items of the DCF.

Read more about building the DCF in our WSO Company Database or check out a video from our partner Wall Street Prep below.

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Comments (25)

Oct 10, 2011

For the DCF component, I would also pick a company in a defensive industry with steady and predicable cash flows. This way, you can project out future cash flows with more certainty. I would find a mature business so that you can reasonably estimate / control CAPEX and D&A. You probably know the rest... Nothing too funky like a FIG or TMT company that will require a lot of sensitivities...

I would honestly find a brand name (American-centric) foods company that is an one-trick pony. Foods because it is a consumer staple and has a simple business model. Brand name is important so that you can pass on the increase in commodity costs to the consumers... American-centric business so you are not dealing with additional competitive strategy dynamics and exchange rate complexities...

I would be curious to see what you come up with. Let us know when you find Mr. Right...

Oct 10, 2011

try a regulated utility....your life will be much easier

Oct 10, 2011

nipsco

Oct 10, 2011

Thanks for the suggestions so far! I've done a bit of screening on utilities since you guys recommended them and came up with either Northwest Natural Gas (NWN), Portland General Electric (POR), or Waste Management (WM). I feel like Waste Management would have the most info and the easiest to find comparable companies for since it's a bit larger (i.e. Republic Services immediately comes to mind), but it's size will also pose other challenges when valuing out divisions. NWN is kind of other end where it's too small and too simple making it hard to find comparables/do in depth analysis of flows. So basically, my question is, is size as big of a concern as I'm making it out to be, or does it really just depend on how complicated the company's structure is (i.e. a 20 billion dollar company with 1 or 2 divisions is easier to value than a 200 million dollar company with lots of divisions)?

Also, did anyone like my initial finding in Coach? I thought it might be interesting because it's relatively small for a large cap with only around 4 billion in revenue and <1 billion in net income, has a simple model, can find lots of info, and I'd actually be interested in the industry it's in (no homo).

Thanks for the help all!

Pretty women make us BUY beer. Ugly women make us DRINK beer.

Oct 10, 2011

Re; Coach....just took a quick look at their 10-K and it's very straight forward. Stable revenues, EPS and cash flows. The DCF would ve very simple. Your idea is solid IMHO.

Oct 10, 2011

I like SAP as your choice, enterprise software is a business a lot of bigger tech companies are diversifying into, plenty of competitors, been around long enough.

just keep in mind that because they're a german company, their filings will look a bit different.

marriott would be interesting as well. I think your point about disney is accurate, there are few competitors to the company as a whole. many may compete with segments, but as a whole there aren't a lot of comparables.

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Oct 10, 2011

I am aware that SAP is a german company, and the last thing I want to do is just trapped in a tailspin mid-stream because the statements are not in the standards a student would expect/be able to understand quickly. Gonna ding Disney:( and SAP

There's more personal upside to Exelon and Black and Decker. Anyone have any insights into those industries?

Corporate financial/business analyst looking for career/MBA/CFA advice.

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Oct 10, 2011

SWK might be a bit simpler to analyze, and they're not comparable to CAT or DE, more to ITW, SNA, etc

Oct 10, 2011

SAP is an international leading enterprise software provider, their statements are just fine. It's not like it is a paper manufacturer in rural china with revenues of $30m. Wouldn't worry about that too much.

Oct 10, 2011

I analysed Delhaize Group for my assignment. It's a Belgian supermarket group with an interesting past, a narrow portfolio and clear competitors (Carrefour, Ahold, Colruyt a.o.). Although it's not in your list, I recommend adding it.

Oct 10, 2011

well you need to know what company but then a lot of the companies can be 'good', do you want a heavy industriallike Boeing or a retail consumer staple like walmart or what? very different stories and effect from things on all these companies

Oct 10, 2011

McDonald's might be a good idea -- you can wrap your head around that business model and how they make money. Not that you can't with the other ones, but it might help you understanding the ER process if you at least know what in the world you're looking at.

Oct 10, 2011

I'd take Boeing, there is a lot going on in that space with Boeing vs airbus right now

Oct 10, 2011

Mcdonalds would be the easiest it is my opinion an outperform is easier to write about and sell than a MP or UP stock. Staples are boring (WMT) and F and BA are kind of a nightmare.

Oct 10, 2011

Are you more interested in winning or learning? If winning, do you know how it's being judged? Depending on how it's being judged, McDonalds may be a hell of a lot easier than the rest of them but you need to make sure you do a rock solid job.

Oct 10, 2011

Call me crazy but I picked Ford when I did my Equity Research project in my class. I was curious to learn how they survive, so I picked it.

But since this is a competition go with what interests you first. It's easier to sell something you like than something you don't.

By the way, Boeing was going to be my 2nd choice if not for Ford...I think the Airbus v. Boeing competition is pretty cool.

Oct 10, 2011

Thanks for all the input guys!

Not to sound overly prudent here, but I really want to win this because it will be judged in part by a very large bank with possible internship offers at the end. It will also be judged by the prof who has made it clear that she is looking for technical accuracy in the analysis. I want to stay away from WMT because I guess everyone will do it, because it's easy.

I've been looking at BA and I've access to their past three years earnings conference calls, so that should be a plus. I honestly don't know much about Ford to comment either way.

But do you guys think technically BA is a bad choice? Too hard? I'd have to get the comparables and accounting stuff spot on to get my foot through the door.

Oct 10, 2011

There is no bad choice here. Go with what you are most interested in, because then you will be willing to work harder at learning the company.

I would recommend contacting the IR person right away, explain your project, and ask if they have any sell side ER they can share (they get it all and they read it). If they aren't willing to share any of the research, ask which sell side analysts they'd recommend contacting to further discuss their company. By going to the IR person first, you might be able to bypass the headache of contacting 20 different analysts (unless you already have access to sell side research, in which case just start there).

Oct 10, 2011

I feel like Boeing will require a ton of fin stmt adjustments- especially when it comes to dealing with operating/finance leases. Just my 2c.

Oct 10, 2011

With Boeing, just realize that half the company is commercial aerospace and the other half is defense. With that said, it's a company I like a lot and I think they're well-positioned in both markets.

Oct 10, 2011

I picked Boeing - still looks like a good challenge!

Question: If you're intuitively leaning on a buy, do you leave out some of the negative information which may make the buy seem technically shaky?

Oct 10, 2011
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Oct 10, 2011