Introduction

Firstly, welcome to LIS! We hope you enjoy the journey in our club and learn as much
about finance as possible having fun with a community of members that share the same
passion for this field! Having that said, it is important to note that although this guide is
more directed to the new members of LIS, it is highly encouraged that every member
reads it. The guide will serve to be consulted by everyone who is having doubts during
the process of analyzing equities.
The purpose of this guide is to provide concise information on how to do financial
analysis and value a stock. This process is called Equity Research, where we find
information about a certain stock, and about its industry and peers (or competitors), to
contrast our point of view with the market´s sentiment. Why? Because the market may
behave irrationally, and a lot of times stocks are valued in an optimistic or pessimistic
way, making it possible to find great investments priced below their true value! This is
how we operate in LIS, doing our research based on the fundamentals of the company,
pricing it, always trying to find cheap companies regardless of the current price and its
previous behavior-it is known as Value Investing. It means that the value of a stock is
completely disassociated with its price, and a lot of times companies that have been
decreasing in price are the best investments. The market might not believe in the
company, but our research might prove otherwise, and we could be correct (or not-
Even Warren Buffet, one of the best investors of all times, made mistakes).
However, it is important to notice that the idea of the market being irrational or rational
is subject to debate, and some people don´t believe in Equity Research and Active
Management because they argue the market can price itself almost perfectly (Efficient
Markers Theory).

So, at this point you might be questioning: How do I value a stock then?
The financial analysis of a company is done quantitatively and qualitatively, which
complement each other. Although it can be argued that, for example, as analyzing a
growth stock it is more important to look at the qualitative part of the company – due
to the lack of fundamentals we invest in the idea; a lot of times that kind of company
isn´t even profitable- the quantitative parameters always play a huge role too.
The analysis of a company is always associated with the quantitative part: How much
does it sell? How good are the margins? Is it too much in debt and how good is the
balance sheet? Is the Free Cash Flow stable and growing? Etc.…
However, we must not neglect the qualitative aspects of an organization. Among other
factors we must have in account the governance of a company (Executive Board and
Supervisory Board, being the last one most known as Board of Directors), fully
understanding the product or service the company provides and how it differs from
peers, etc…

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To analyze both these types of parameters, the Financial Analysis Template we do in LIS
(most known as One-Pager) is subdivided in:
1. Financial Data
2. OP (One-Pager)
3. Peers Analysis
4. Segments of Activity and Geographical range
5. ESG Factors (Environmental, Social, and Governance)
6. DCF (Discounted Cash Flow)

This will also be the structure of this guide.

So, in conclusion, and answering the question, “How do I value a stock?”, we should
gather the quantitative and qualitative aspects of a company (OP, Peers, Segments, and
ESG), and reflect on them, to do a Discounted Cash Flow model, in which based on our
assumptions and forecasts we calculate a stock price. That is the goal of the One Pager:
with prior quantitative and qualitative analysis of a company, we find our subjective
price of the stock. And then, ideally, if the company is good and is priced below the value
it is trading at, it is a buy. Finding great undervalued companies is the goal of every value
investor.

As a final note, the OP is automatized and linked to the Financial Data so that when we
fill the financial data, the One Pager will be completed with more relevant information,
like financial ratios, the evolution of the sales and margins of a company, etc.…,
processing data in a more efficient way and easier to analyze compared with the
“financial data” excel sheet. Not only in the OP but some information throughout Excel
is automatized and linked to financial data.

I would also like to mention that as a financial analyst there are important information
sources that need to be highlighted:
 Financial Statements (Income Statement, Balance Sheet, Cash Flow Statement)
 Statements of Changes in Equity
 Notes (in the annual reports)
 Annual Reports and 10-Ks (and quarterly reports)
 Management Commentary
Other sources include sustainability reports, proxy statements, Interim Reports,
Press Releases (Earnings Announcements and Conference Calls), Presentations
to Analysts, and Information about the economy, industry, and competitors.

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This is the template we will complete for each financial analysis: Click here to see a full
One Pager

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Financial data
What is financial data?
Financial statements are written records that convey the business activities and the
financial data of a company. The pieces of data are later used to analyze business
performance and determine whether the current business strategies are having good
results or not. The investment thesis done has by basis the financial data, without it,
there wouldn’t be enough to conclude whether we should buy or sell a stock.
With the financial data reported people and organizations judge the business’
creditworthiness, decide whether to invest in the business and determine whether the
business is complying with government regulations.
To briefly sum it, financial data represents past performance about the company, and
although it does not give us the value of a business, it helps an analyst when making
predictions performance, so in order words, helps estimate the value of a company.
Financial data can be divided into various categories (assets, liabilities, equity, income,
expenses, and cash flow) and three main financial statements: Income Statement,
Balance Sheet, and Cash Flow Statement.

It is also important to notice that to fully comprehend the information in the financial
statements, there are notes in the companies’ reports, that give us complimentary
information like which method did the company used to calculate inventories? What
does necessarily mean some metric that might be misleading (like If the company
reports something too vaguely like “other expenses”).

Click here to see a full One Pager

You can then see an excel sheet named “Inputs”, the one we are referring to in this part
of the guide. We fill the “Inputs” sheet, and automatically the “Financial Data” sheet will
be filled, with not only the information we completed in the “Inputs” sheet but other
relevant information like the evolution of some parameters, like sales.

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Where to get info?
We can find this information on the specific’s company annual report, 10k form, Yahoo
Finance, threadlabs, and as of last resource Bloomberg, Refinitiv, or Koyfin. It is also
important to highlight that the most important source is the annual report or 10-K, and
some information like “Float” can only be found in yahoo finance.
In the “Inputs” sheet it is referred to where to get every piece of information necessary
to complete the financial data.
A final note would be we do not have access to the Bloomberg terminal, however, if we
find relevant bond information online or in the annual report, it is worth including it in
the One Pager.

What are the elements in the financial data?

Regarding Income Statement:
Net sales

The sum of a company's gross sales minus its returns, allowances, and discounts. Net
sales calculations are not always transparent externally. They can often be factored into
the reporting of top-line revenues reported on the income statement, and companies
usually report Revenues or Sales as Net Sales.

Gross profit

Is the profit a company makes after deducting the costs associated with making and
selling its products, or the costs associated with providing its services. Essentially it is
calculated as Net Sales minus Cost of Sales.

Operating income
Is an accounting figure that measures the amount of profit realized from business
operations, after deducting operating expenses such as wages, depreciation, and cost of
goods sold (COGS).

Net Finance Costs

It’s a subtraction of the financial Income – financial expenses (interest income- interest
expenses). (Can be found in the Income Statement after operating expenses and before
pretax income, some companies don’t report it.)

Other expenses
Are those expenses that do not fit the former categories.

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Taxes
Are mandatory contributions levied on individuals or corporations by a government
entity.

Net Income
Also called net earnings, is calculated as sales minus cost of goods sold, selling, general
and administrative expenses, operating expenses, depreciation, interest, taxes, and
other expenses.

Regarding the Balance Sheet:

Cash & Equivalents

Are the total value of cash on hand that includes items that are similar to cash in terms
of liquidity. Having them on hand speaks to a company’s health, as it reflects the firm’s
ability to pay its short-term obligations or face unexpected adversities. Cash &
Equivalents might be investments securities that are meant for short-term investing and
they have high credit quality and are highly liquid. ( It is found on the top of the balance
sheet(in assets) when analyzing US companies-US GAAP, or at the bottom when
analyzing European companies-IFRS).

Accounts Receivables
Is the balance of money due to a firm for goods or services delivered or used but not yet
paid for by customers.
Inventory
Is the term for the goods available for sale and raw materials used to produce goods
available for sale. There are three types of inventories: raw materials, work in progress,
and finished goods.
Debt
Is a sum of money that is owed or due. Debt can be considered long-term or short-term,
depending on if the companies’ financial obligations are expected to be paid in less or
more than 1 year (or one business cycle). Debt usually implies paying interest over the
money borrowed.

Bonds
Are units of corporate debt issued by companies and securitized as tradeable assets. It
is referred to as a fixed-income instrument since bonds traditionally paid a fixed interest
rate (coupon) to debtholders. Variable or floating interest rates are also now quite
common. Bond prices are inversely correlated with interest rates: when rates go up,
bond prices fall and vice-versa. Bonds have maturity dates at which point the principal
amount must be paid back in full or risk default. To summarize when issuing a bond
company are issuing their debt.

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Lease
Is a contract by which one party conveys land, property, services, etc. to another for a
specified time, usually in return for a periodic payment? Leasings can be considered
long-term or short-term depending on the company's business cycle and usually, it is
considered long-term leasing if the payment period is above 6 months.
Note:(Although it is not consensual, in LIS we assume Leases as Debt.)
Minority Interest
Shareholders of another company that owns a percentage of this company and its
earning if it’s a small percentage (less than 50%). It usually shows up as a noncurrent
liability in the balance sheet.
Shareholder equity (SE)
Also referred to as stockholders' equity, is the corporation's owners' residual claim on
assets after debts have been paid. Shareholder equity is equal to a firm's total assets
minus its total liabilities.

Regarding the Cash Flow Statement:

Depreciation & Amortization
Are two methods of calculating the value for business assets over time. ... Amortization
is the practice of spreading an intangible asset's cost over that asset's useful life.
Depreciation is the expensing of a fixed asset over its useful life. To conclude, these are
not monetary out-flows of the company (they are not paying any expenses), they just
represent the loss of assets value over time.

(Changes in) Net Working Capital

Is the difference between a company’s current operating assets minus current operating
liabilities from one year to another, for example: [ (current operating assets 2021 –
current operating liabilities 2021) – (current operating assets 2020 – current operating
liabilities 2020)]. It represents the ability to pay back to suppliers, pay the short-term
debt, and overall short-term financial health. It can also be found in a faster way in the
cash flow statement (cash flow from operations), usually called “Changes in operating
assets and liabilities”.

Capex
Or Capital Expenditures is the capital used by a company to acquire, upgrade, and
maintain physical assets such as property, plants, buildings, technology (hardware), or
equipment, so non-current assets, which are also not very liquid. Capex is also referred
to as Property, Plant & Equipment, or similar denominations.

Acquisition
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Is when one company purchases most or all of another company's shares to gain control
of that company. Purchasing more than 50% of a target firm's stock and other assets
allows the acquirer to make decisions about the newly acquired assets without the
approval of the company’s other shareholders.

A Dividend
is the distribution of some of the company's earnings to a class of its shareholders, as
determined by the company's board of directors.
It is expected that a more consolidated company has a higher payout ratio and that a
growth company doesn´t pay dividends, because growth companies are focused on
reinvesting in the business.

Share Buyback (repurchase)

is a transaction whereby a company buys back its shares from the marketplace.
Buybacks can be a good sign since the management believes the shares might be
undervalued and it is also a very common way of giving back to shareholders, instead of
paying dividends. However, a company in the early stages of growth buying back more
shares than issuing might not be the best strategy and is usually a bad sign, since that
money could be reinvested in the business.

Other Relevant Terminology:

Shares Outstanding
refers to a company's stock currently held by all its shareholders, including share blocks
held by institutional investors and restricted shares owned by the company's officers
and insiders.
Float
refers to the regular shares a company had issued to the public that are available for investors
to trade. It is calculated by taking a company’s outstanding shares and subtracting any restricted
stock (insiders’ own and institutional investors) and then dividing it by the outstanding shares.
It’s an indication of how many shares are available to be bought and sold by the general investing
public. However, Float can be found in yahoo finance statistics as well as outstanding shares.

Although the float should be compared with peers Ideally this value should be higher
than 99% (99% of the shares of the company are available to the company and don’t
belong to the board or institutional investors, minimizing the risk of conflicts of interest).

What to fill?

We are supposed to fill the spaces in green and regard the income statement, if financial position
equals zero, then we know some data computed regards the income statement is correct.
(Because financial positionNet Income=Operating Income-NFC-Other Expenses/Income-
Taxes  Net Income=Net Income Net Income-Net Income=0=Financial Position).

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Tips
Since the financial nomenclature sometimes is heavy, we decided to write down some
equivalences to ease the search for financial data.

To understand better this board, let´s take Capex´s example. (-)à(+) means that although Capex is (usually)
“negative” since it is an expense, in the financial data we will fill it as a positive value(exactly because
Capex is already expected to be an expense, so a – behind Capex would also mean Capital “Gains” and
not Capital Expenditures.

Contact:
Pedro Gonçalves Serrano
Phone number: +351 918479154
e-mail: serrano.1908@gmail.com

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One Pager
The goal of the One Pager is to sum the relevant information of the financial analysis in
just one page (hence the name “One Pager”). We can interpretate it as an overview of
the company so that the analyst can grasp the main ideas about a business.
The first part of the One Pager gives general information about the company such as:

1. What the company does

2. Members of the board
3. Financial information
4. SWOT Analysis
5. Stock performance
6. Shareholders
General view of the ESG part, Segments, and Peers.

1
4

5 6
10 7 8

15

12
11

13

14

1. Add the logo of the company that you are analyzing.

2. Write the name of the company as follows:

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To get the name linked, go to Data > Stocks > Write the name of the company in the
search bar > Choose the one in which the company had its IPO.

Example: Monster had its IPO in Nasdaq.

Having the name linked will help you to fill other important cells as the description of
the company, their Stock Price, and the outstanding shares.

3.Description of the company

Now that you have linked the name of the company, you can add the description of it
by selecting the cell where is the name of the company and it will be filled automatically.
=E2.Description

4.Board
Many companies share information about their board in their annual report or on their
website. If you want to look for more information about someone from the board as the
companies where they worked, etc. you can look for that information in Bloomberg
(https://www.bloomberg.com/), MarketWatch (https://www.marketwatch.com/) or
even LinkedIn.

It is important to write:

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  Name
 Role: if it is on the board and has an executive role (ie. CEO) the name must be
marked in green as “not independent”.
 Age
 Start date of the current role
 Other current jobs
 Previous jobs (add the jobs that could help him/her to get to the current position)
 Optional: Other information (i.e. Education, Awards)

5.Stock
Last price: is the most recent selling price of a stock (you can write in the cell =E2.Price
or you can find this information in yahoo finance, investing, trading view, etc.)

Outstanding Shares: company's stock currently held by all its shareholders (you can
write in the cell =E2.OutstandingShares or you can find this information in yahoo
finance, investing, trading view, etc.)

Market Cap: refers to how much a company is worth as determined by the stock market.
It is defined as the total market value of all outstanding shares. (you can write in the cell
=E2.outstanding shares or you can find this information in yahoo finance, investing,
trading view, etc.)

Total Debt: shows much debt a company has on its balance sheet compared to its liquid
assets. (it can be found in the balance sheet , but yahoo finance can be a good source
too).

.
Enterprise Value: is a measure of a company's total value, often used as a more
comprehensive alternative to equity market capitalization.(can be found on yahoo
financeStatistics)

% Short: Short selling is an investment or trading strategy that speculates on the decline
in a stock or other security's price. The % of short means the % of investors that are
speculating that the stock could decline. (You can find this information in yahoo finance
> statistics)

6.Liquidity and solvency

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Asset: This are the total assets of the company. An asset is something containing
economic value and/or future benefit.

Liabilities: This are the total liabilities of the company. A liability is an obligation between
one party, and another not yet completed or paid for.

Debt/Ebitda: is a ratio measuring the amount of income generated and available to pay
down debt before covering interest, taxes, depreciation, and amortization expenses.
Debt/Asset is a leverage ratio that defines the total amount of debt relative to assets
owned by a company.

Operating Margin (average): is the average of the last 3 years of the operating margin.
The operating margin is an important measure of a company's overall profitability from
operations(operating income/Sales).

Net Margin (a): Is the average of the last 3 years of Net Income/Sales. The Net Margin
measures how much net income is generated as a percentage of revenues received.

7.Profitability
Is a business's ability to produce a return on an investment based on its resources in
comparison with an alternative investment.
EoY: Fiscal Year-End. A fiscal year is often the period used for calculating annual financial
statements.
EBIT: look in the financial data
Depreciation & amortization: look in the financial data
EBITDA: look in the financial data
Net profit: look in the financial data

EPS (Earnings per share): It indicates how much money a company makes for each share
of its stock and is a widely used metric for estimating corporate value. A higher EPS
indicates greater value because investors will pay more for a company's shares if they
think the company has higher profits relative to its share price.
ROA (Return on Assets): This is an indicator of how profitable a company is relative to
its total assets. It gives a manager, investor, or analyst an idea as to how efficient a

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company's management is at using its assets to generate earnings. Higher ROA indicates
more asset efficiency.
ROIC (Return on Invested Capital): This is a calculation used to assess a company's
efficiency at allocating the capital under its control to profitable investments. The return
on invested capital ratio gives a sense of how well a company is using its capital to
generate profits. A company is thought to be creating value if its ROIC exceeds its
Weighted Average Cost of Capital.
Ebitda (a): is the average of EBITDA from the last 3 years.
Net Income (a): is the average net income from the last 3 years.

NFC(a): is the average of net financial costs from the last 3 years.
8.Multiples
Float: Refers to the regular shares a company has issued to the public that are available
for investors to trade.

Insiders Own: This is the number of shares insiders own (shareholders who own more
than 5% of the corporation or an officer or director of the company). Usually, for big
corporations, it is almost 0% and the less the better.

Beta: is a measure of the volatility of a security or portfolio compared to the market. A

Beta of 1 means the stock is perfectly correlated with the benchmark.

Score (S&P): This is the credit rating of the company’s stock given by Standard & Poors,a
credit rating agency.

Price/Book Value: This ratio compares a company’s market price to its book value,
essentially showing the value given by the market for each dollar of the company’s net
worth. High-growth companies will often show price-to-book ratios well above 1.0
(overvalued), whereas companies facing severe distress will occasionally show ratios
below 1.0 (undervalued)

EV/Ebitda (a): considers a company's debt and cash levels in addition to its stock price
and relates that value to the firm's cash profitability. Higher enterprise multiples are
expected in high-growth industries and lower multiples in industries with slow growth.

Bonds 1, 3, 5 years (USD): go to the part of financial data

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Dividend Yield: is the amount of money a company pays shareholders for owning a
share of its stock divided by its current stock price.

9.Traffic ESG
Color each cell doing an average on how the company in is each one.

10.Segments
Write the regions in which the company operates and the categories where they get
their revenues. Add the growth (%) and the % of sales for each one.

11.Add the revenues, operation margin, dividend + repurchase of stock, net cash flow,
debt/asset, depreciation, and CAPEX + acquisition

12.Cash Flow
You can find this data in the consolidated financial statements

Profit: Net Income.

Cash flow from operations: Net cash provided by operating activities.

Investing Activities: Net cash used in investing activities.

Cash flow from financing: Net cash provided by financing activities.

FX: effect of exchange rate changes.

“t Inversiones” -can be interpreted as an adjusted payback ratio since it represents the

years that make worth the investment (<2 is excellent, <5 years is good, <10 years is
decent).

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12.SWOT Analysis

Is a framework used to evaluate a company's competitive position and to develop

strategic planning. SWOT analysis assesses internal and external factors, as well as
current and future potential. To know more about the SWOT Analysis, click here.

To fill these four cells, read the annual report, you may find information in it, or you can
also look for some news about the company or the sector.

13.Peers graph
Steps to create the graph:
I. Go to trading view (https://www.tradingview.com/) or investing
(https://www.investing.com/). This time we are going to create in trading
view.
II. Look for the company that you are analyzing.
III. Click on “Compare” to add his peers.

IV. Look for the name or ticker of each peer.

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V. If you want to change the line’s color of any company, click on:

When you already added all the peers, take a screenshot, and put it on the OP
page.

Write the peers under the graph and mark each company with different colors,
this will make it easier to look for each one.

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How to present the One Pager
Mention which company you are going to present and describe what does the company
does. If you want to mention more information about the company, you can look for it
in their annual report where you will find its segments, when was it founded, when did
it went public, etc.

Give general information about the board, like if it is diversified in terms of industry and
qualifications, average age, and tenure, among others (the board will later be analyzed
in the “ESG” part).

Now, regarding the rest of the information, the idea is not to present every single bit of
information, just highlight the important parts:

You should mention if you notice something abnormal, for example, if in one year they
had a decrease in revenues, or in one year the operating margin is negative or the ROE
or ROA is very low, etc.…. When highlighting it you should also be able to explain it, so
search in the annual report or on the internet how did it happen. It can be a crucial risk
for the future of the company, or something sporadic.

Tip: Present the SWAT Analysis before the DCF, and especially highlight the risks because
that will be crucial for the assumptions in the DCF, and mainly for the discount rate.

Contact:
Michelle Castillo | Vice Head of Equity Research
Phone number: +525532016753
E-mail:michellecastil@hotmail.com

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Segments
A segment is a defined portion or section of something larger. In the “Segments” section
of the One Pager, we break down the company’s operations into smaller parts, to be
better able to perceive the business. The segments of activity are a crucial component
of the One Pager because everything revolves around what the company sells. We
should also ask ourselves if the products/services of the company are the best of the
industry, or unique? Understanding exactly what the company provides and how does
it differ from the competition is truly a key piece of information.
As an investor, one should only invest in lines of business one understands. As such,
analyzing exactly how the company makes money is instrumental.
WHAT TO FILL

- Regions
o Include all the regions reported by the company on the left side.
o Fill in the values for the last 3 years regarding each region.

Regions (2020)
2020 Growth 2019 Growth 2018 Weight
U.S. and Canada $3 215 7% $2 996 6% $2 830 70%
EMEA $746 11% $675 17% $579 16%
Asia Pacific $424 21% $352 40% $251 9%
Latina America and Caribbean $215 20% $179 21% $147 5%
TOTAL $4 599 9% $4 201 10% $3 807 100%

- Categories
o Include all the categories reported by the company on the left side.
o Fill in the values for the last 3 years regarding each category.

Categories (2020)
2020 Growth 2019 Growth 2018 Weight
Monster Energy Drinks $4 305 10% $3 904 12% $3 498 94%
Strategic Brands $266 -3% $275 -4% $286 6%
Other $27 24% $22 -5% $23 1%
TOTAL $4 598 9% $4 201 10% $3 807 100%

- Description of categories
o Include all categories reported by the company in the annual report as a
title, like in the following example.
o If the description of the segments of activity reported is too extensive,
summarize it in the One Pager. The idea is to keep it clear and simple, but
with all the relevant information.

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 o Include any extra information you find pertinent to better understand the
business segment.

Monster Energy Drinks

Monster Energy® Drinks – a line of carbonated energy drinks. Our Monster
Energy® drinks contain vitamins, minerals, nutrients, herbs and other
ingredients (collectively, “supplement ingredients”)
Strategic Brands
A line of similar constituted drinks under different brands
Other
AFF sells a limited number of products to independent third-party

- Graphs related to forecasts or evolution of important factors:

o The driver of the industry (e.g., Evolution of Specific Taxation)
o Forecast of the volume of sales of the industry
o Market Share of the company

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WHERE TO GET INFORMATION
Some companies may not report the geographical distribution of their operations or the
difference in revenues of their products. In these cases, they usually report why they
took this option because that tends to be that they are not geographically diversified.
Websites and data sources
- Regions and Categories

o Annual Report – CTRL+F “Segments” or “Disaggregation of Revenues”, or

“Business”. This information usually appears after the consolidated
financial statements. It is also stated on the “Business Overview” of the
10-K of the company, usually found at the beginning, just CTRL+F
“Business”. With this information, you can find what each segment is
denominated and use CTRL+F again to find the quantitative data.
o Threadlabs – Select the company, on the “Overview” tab, click on
Segments.
o For worldwide known companies there might be easy to find the
segments of activity by googling it. For example, if we search “How VISA
makes money”, Investopedia has an article deconstructing the different
sources of revenue and explaining them. Not only for VISA but for several
other businesses.

- Description of the Categories

o Annual Report – CTRL+F the name of the category. When filling,
abbreviate the description provided in the document. Not all the
information provided is necessary, the objective is that the investor
hearing the pitch understands the nature of the product/service.

- Graphs
o Google Search the metric and open at least 3 different websites with
purchasable reports on the industry. Choose the most average of them.
Leave the link to the reports on excel.

- Drivers
o Annual Report
 Industry Overview is usually found at the beginning of the
document.
o Company Earnings Call
 When shareholders pose questions regarding the path of the
company or revenues, see with what factors the CEO supports his
answers.
o Industry reports
 Investopedia sometimes has information on sector-specific
drivers. If not, search in other reputable sources, and make sure
that driver applies to the specific company.
o Articles of reputable sources about the company.

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 - Extra Notes/Strategy
o If a company is restructuring or changing its operations, they may make
available a plan for the next few years, like Harley-Davidson.
o Annual Report
 Some companies also report their view for the foreseeable future
in the document.

Final Note: Understanding the companies’ strategy is crucial when

doing forecasts later in the DCF model, and it is important to
understand dynamics like the following:
 Will the company acquire more companies?
 Will the company invest in a big project in the next few
years and take on more debt?
 Are they planning to focus on growth or margins?
 Will the dividend policy change?

HOW TO ANALYZE INFORMATION

The main goal of analyzing segments is to understand what’s the business model of the
company, as well as their focus. The analyst should let the investor know this is a very
easy and concise manner.
Keep it short, straight to the point, and explain some terms that might be unknown for
the listeners or harder to comprehend.

- Regions
o Check the weight (%) of each region, see how diversified they are. They
might be expanding to new regions which is generally a good strategy.
o See year over year growth, might indicate failing local strategies, or
disinvestment by the company in some regions, or the other way around.
See which case it is.
o The board usually have members with nationalities representative of the
major regions the company is selling in (check ESG Governance);
o Some companies have products and business models that don’t make
sense in other countries, check for potential cultural shocks (e.g. IKEA’s
expansion to China).

- Categories
o Check the weight (%) of each region, see how diversified they are;
o Analyze whether there are any synergies or opportunities in having all
the business segments. It’s best when a company focuses on what they’re
good at. (Example: Navigator trying to expand the business activities
outside of selling paper or pulp to later give dividends might not be the
best strategy for a consolidated dividend stock).

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 o Having multiple business segments makes sense if the company is more
profitable in having them all, than being 2 separate companies.
o See year over year growth, might indicate failing business segments, or
disinvestment by the company in them, or the other way around. See
which case it is.

- Description of Categories
o Read the whole description of the segment in the Annual Report, and
make sure your synopsis conveys the same core information.
o Check for synergies between the segments.

- Drivers
o See in what industry the products/services fit in.
o Research forecasts for the growth of that specific industry.
o Interpret the fundamentals and basis for those forecasts (it may be 5G,
cheaper raw materials, more accessibility, acceptance by society, etc).
o Analyze how the company will make the most of a growing trend, what’s
their position as a player in the market, if their actions are aligned with
the trend, and if they are doing anything to outshine the competition.

HOW TO PRESENT
As always, the goal is to pass the most important information to the investor in the less
time possible. As you gain experience presenting, you will get more comfortable with
the process and will be able to distinguish “Important Information” in the different
companies you analyze. However, the most useful piece of information is explaining the
different segments of activity very clearly, and if the sales decreased in one of them for
example, it is important to present why.
For starters, try to answer the following questions:
- Did the company expand to any new locations, or stop selling somewhere, in the
last 3 years? If so, when, and why?
- Do any regions show patterns of growth that differ from the rest? If so, explain
why.
- Does the company heavily dependent on any specific region? Is there a reason,
are they expecting to expand, and what is the downside of it?
- Have there been any lines of business created/disinvested in, in the last 3 years?
If so, when and why?
- Do any categories show patterns of growth that differ from the rest? If so, explain
why.
- Which category is the main money-maker of the company? Does that category
have a future? Is that category the focus of the company, or are they investing
elsewhere?
- What is the nature of each category? How does it bring money to the company?
- How does the information on the graphs impact the company’s future cash
flows?

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 - What is the strategy of the company? Does it align with the drivers of the
market? Is it a good strategy? Why?
- Why did you choose those drivers? In what way do they relate to and impact the
company’s operations?

CONTACT INFO:
David Tita | President
david.tita@aln.iseg.ulisboa.pt
+351 938 461 799

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Peers
Click in the following link: Peers’ analysis example ER Guide-VISA

What is a peer?
A peer can be defined as a company with similar and comparable characteristics to the
one we are analyzing, in terms of business model and products/ services mainly (so they
must be in the same industry). It is important to note that a peer may not implicitly act
in the same geographical segments or have the same size (in terms of revenues). For
example, it would not make sense to compare Netflix with Walmart, or even Netflix with
Intel (although they are both tech companies, the products they provide are completely
different).

What is the main purpose of the peers' analysis?

The main idea of analyzing peers is to compare the performance of our company to its
comparable group, by comparing its growth, margins, debt, and investment levels, as
well as the Price ratios.
By having an overall industry perspective, we position the company in terms of
competitiveness concerning its peer group and check for possible green or red flags that
should be further exploited.
The best analogy to explain why this comparison is important is imagining I received my
corporate finance exam and scored 15/20. It´s a pretty good grade but if all my
colleagues scored 18 then maybe my 15 isn´t that great. So, if my company is not a “best
of class” type, the assumptions to reach the target price of the company will be different
in the sense that I will not be as “optimistic” in my predictions since the competitors are
performing better.

How to select peers

When selecting peers, we need to have in mind that peer’s analysis is about comparing
“apples with apples”. For that reason, we can define a hierarchy of metrics in terms of
importance when selecting peers:
1. Products and services sold
2. Business model
3. Geographic Region
4. Size (Revenues)
In the best-case scenario, we will have peers comparable in terms of business model
and products sold, but also in terms of geographic segments and size. For example, in
VISA´s case, Mastercard fills all of these “requirements”, therefore they can be
considered “perfectly comparable companies”.

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Where to find peers
Although there are more reliable sources than others to find peers, it is important to
check them all, so, we should consider the company’s annual report, threadlabs, koyfin,
and Internet as a last resource. If possible, platforms like Bloomberg Terminal and
Refinitiv can be highly useful and reliable too. In terms of reliability of sources of
information, there can be defined a hierarchy:

1-The company’s financial report

Usually, the annual report is the most reliable source to find peers. It is important to
mention that sometimes even the competitors reported might not be the best
companies to compare so we need to always think twice and have a critical sense.
It is important to note some companies don´t report their peers’ groups.
• CTRL-F: peers, competitors, competition, industry.
And you will usually find the competitors reported.

2-Threadlabs
Threadlabs is a platform where you can find diverse information about a company
and competitors are included. It provides a very accurate peers group in terms of
products sold and business model and of several countries. It is also important to
mention that for threadlabs each team leader should give access to the members
and it is imperative that only LIS members can use it.

3-Koyfin
Koyfin is a free online platform, and it can be very helpful to find information about
peers. It just needs registration, and you can navigate freely.

4-Internet
Seeking for this information on the internet requires extra critical thinking and caution!
If you google it, you may find information in some websites (like the Motley Fool,
Investopedia, Seeking Alpha) however it is imperative to do proper research since they
might not provide a fully accurate peer group.

Also, there should be highlighted some important notes:

 When researching for competitors in these four sources mentioned you will
usually come across lots of peers (usually more than 10). However, it can be
counterproductive to compare all of them so this list should be a filter. How?
Following the hierarchy of importance when choosing peers, in other words,
choosing the companies who sell the same products/services and with the same

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 business model. For example, Harley Davidson should not be compared with any
company that sells motorcycles, but with the ones that sell expensive and quality
motorcycles.
 There is not a “correct” number of peers. Usually, we will be comparing our
company with 2-5 other businesses and that will depend a lot on the industry.
 Sometimes, selling the same products/services might not be enough like we will
explore now with Netflix´s example. It also matters that the core business is the
same.

What if we can´t find peers? A 2 examples explanation

1. Like previously mentioned, VISA is an example of a best-case scenario. We found a
company that can be compared in terms of selling the same service and business model,
very similar in size and where it operates. However, we may find companies with no
“comparable” peers. Let´s take Netflix´s case for example:
Which are the companies arguably threatening Netflix? Disney (Disney +), AT&T (HBO),
Apple (Apple TV+), Amazon (Amazon Prime). Although they all sell streaming, only
Netflix has streaming as its core service/product. The other companies’ revenues don´t
rely upon, not nearly close, as much on revenues as Netflix so that will impact margins,
growth, debt levels, and everything comparable metric about this peer’s group, so they
are not necessarily comparable. What is the solution?
The solution is doing a “2 part” peers’ analysis:
1- Firstly, we should a peers analysis comparing enterprises with the same core
business. In the case of Netflix, we can find companies in threadlabs that sell
streaming services, and although they are way smaller in terms of revenues
and market cap, it is the most efficient way of comparison. So, we do the
“normal” peer comparison, which was displayed previously.

2- In our second part, we should compare Netflix with Apple, Disney, AT&T,
Amazon but in a different way. We can´t have an accurate comparison if we
compare their margins or debt levels for example, because the core business
differs and some even operate in a different industry. So, we must compare
each streaming segment particularly and not these companies as a “whole”.
We can compare the number of people that buy their streaming services, and
how much is this number growing, and its margin to do so. Also factors like
who has the best service and future strategies for this segment of activity
matter.

2. There might be cases where you might not find comparable peers, even in
different sizes. For example, monopolistic companies in some industries
might own the patent for a very exclusive product/service that no one else
sells. Or in any other type of monopoly (even a natural one for example), we
might face the same problem. In these cases, even if we find peers, they
might not be comparable and so we should proceed with our peer’s analysis

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 having in mind that it is not very accurate, so it is harder or even impossible
to conclude.

Final Note: It is also important to say that there are Peers analyses more
accurate than others. Depending on the industry and the core business of the
company some peers are very similar, and so very comparable, but
sometimes there are not similar companies to analyze.

How to interpret data

Let´s take VISA´s example, in the link displayed previously:

Profitability
 Regards profitability the first thing we need to have in account are the sales of a
company because that will highly impact our analysis. For this specific case, the
sales of peers are very similar but if not, a smaller company in revenues is usually
expected to grow more and has lower margins and that should be taken into
account.
 PayPal stands out in terms of revenues growth.
 VISA has the bigger operating margin, which is a very good sign and Paypal has
by far the worst margin. Since the gap is significant, as financial analysts we
should try to understand the difference in the business model that explains this
difference and see if Paypal has the potential to reach those higher margins.
 Regarding ROA and ROIC, VISA is not the most efficient company, Mastercard is,
which is not a good sign. Mastercard makes better usage of its assets and capital
to generate profits.

Capital Structure
 Regarding capital structure and Solvency, VISA has very solid Net Debt ratios, but
we can highlight Paypal´s poor net debt/EBITDA (but good net debt/asset), due
to Paypal´s poor Profitability Margins compared with its peers.
 It is also important to mention that VISA has very low Investment/Revenues
compared with Mastercard and especially PayPal, and it is relevant to
understand why and what is the company's strategy because a lack of
investment might be harmful.
In other cases, R&D/Revenues is a much more accurate ratio due to the nature
of the industry (Ex: semiconductors and tech industry or Pharmaceuticals).

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Multiples
 The three companies have a high Float, above 99%, which minimizes conflicts of
interest between shareholders and other holders like insiders (board of
directors). A Float above 99% is the best-case scenario.
 The three Betas are very similar to 1 which means they are almost perfectly
correlated with the S&P500(benchmark index), and VISA has been the “least
volatile” (lower Beta= lower correlation with the market=lower volatility).
 The valuation ratios (P/E, P/B, P/FCF, EV/Asset, and EV/Ebitda) seem interesting
from the perspective of someone analyzing VISA because it has the lowest P/E,
P/FCF, and EV/Ebitda and a very low P/B and EV/Asset, and this means that the
company might be undervalued, which is what a value investor looks for.
 VISA pays dividends of 0,69%, nothing much but the highest of all three. It is
important to know the payout ratio and evaluate how much is the company
giving back to shareholders, because it might not be sustainable, or it could be a
lower value so that the company can reinvest in the business.

Stock performance
 For a value investor, stock performance is not the most important part of an
analysis, companies whose price has been decreasing even for the last 1, 2, or 5
years might be great opportunities.
 However, it can be interesting to compare stock performance and the sentiment
of the market about these three different companies and compare the price
target the other analysts are estimating.
 In this case, it is interesting to see how Paypal is performing so much better in
terms of stock price, and according to Refinitiv analysts, it is still undervalued.
 The three companies have a target price way above the current price which can
be explained because the market has been volatile and economic uncertainty
affects especially the financial sector(due to its correlation with the economy).
This fear, irrational or not, makes these three companies, especially VISA
(according to relative valuation) or PayPal (according to Refinitiv Price targets),
potential buys.

How to Present
When presenting to peers, the speech must be concise, and putting a color scheme like
the one shown helps guide the listener. So, we do not have to necessarily talk about
each specific ratio, but rather summarize the most important information and give a
conclusion (if the company is the best performer out of the three or not; if it might be
cheap or not).

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ESG (Environmental, Social, Governance)
ESG (Environmental, Social, and Governance) is a key set of standarts that qualifies a
company's impact on society. Environmental criteria considers how sustainable and
ethical is when it comes to environment, social measures how the company interacts
with suppliers, its employees, and the overall community where it operates.
Today, more than ever, ESG has become important. This is because it is an essential
indicator to understand how the companies position themselves regarding topics like
climate change and communities, the employee´s wellbeing and other relevant aspects.

Photo

Where to get the information

 Annual Reports / Sustainability Reports (main source for the “environmental”
part)
 The proxy statement (main source for the “governance” part)
 International and national media
 Shareholder’s conference
 Shareholder’s plan´s and information of the last years

Note: It is imperative to do, not only a comparison amongst peers but also a comparison
over time,to see how the company has been evolving over time regarding ESG. It is also
important to refer the future goal of the company regarding some matter(E.g. Plan to
use 100% of renewable energy during the company´s production cycle).

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 What to fill
Environmental

Metrics :

 CO2 Direct emissions: How much are the companie´s CO2 emissions. What are
they doing to change that?
 Total Water Usage: How much water does the company waste?What are they
doing to change that?

 Total Energy Consumption: How efficient is the company in terms of energy

consumption?What are they doing to change that?

 Waste Management: How efficient is the company in terms of waste

management?What are they doing to change that?

 Land Degradation: How much land does the company destroy?What are they
doing to change that?

Note: It could be very useful to use comparisons between industry average or major
peers to track the actual performance of the metrics. Tip: Sustaynalitics generates
averages by indicator industry.

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Social

 Employee turnover: Number of Employees leaving per year / Average Number

employed per year. Usually a good employee turnover sits below 5% , but we
can only reach a proper conclusion if we compare with peers.
 Salaries and compensation: relate to the employees’ wages(glassdoor is a good
website to see wages and companie´s rankings), and non monetary
compensations like flexible hours, telework, mental awareness programs,etc…
 Reputation issues: Position of the image of the company in media and the
population. There is no “place” to find the reputation of the company but usually
a company with an ethical business model, good product and few litigations has
a great reputation.
 Prejudice issues: refers to handicapped people, LGBTQ+ community, and
different race people integrating the workforce. Usually companies report
measures to attenuate prejudices in the company(in the sustainability report).
 Health damage: is referring to the sector in which the company is inserted. For
example, a cigarette company, being in a sector that damages health, will be in
red. Health damage can also refer to the employee´s health, what is the company
doing to ensure employees stay healthy physically and mentally?
 Ocupational Safety: Refers to how safe are the employees of a company while
working.Some companies report work accidents and its evolution.
 PXP: refers to pension plans the company provides to its employees.
 Community Involvement: Most important the policies of the company to the
population as a social contribution.The most common example is volunteering.
 Public sector: is about lobbying activities or ties with the government, usually,
this is a bad sign.
 Litigations: Important legal litigations that a company was involved in the last
years. Litigation and Reputations are not always reported, so, you need to look
for information in external sources. Tip: Search for keywords like “Netflix
litigations”, “Netflix being sued”, “Netflix court” and check for news too.

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Governance (Board of Directors , not the Executive Board)

 Diversity: You need to check the board members and analyze if they are mostly
from the same age group, nationality,gender and how diverse are their
qualifications.It is also important to contextualize and have in mind the industry
and country where the company operates.
 % Independent: % of independent members of the board. They should all be
independent.
 Average time as counselors: Board average time working in the company . It
depends on the industry but it should average from 3-7 years ,otherwise there is
too much or too little rotation.
 Transparency: If the information of the board about their public profile is
available and accurately disclosed.
 CEO/Chairman: You need to check if the CEO is the same person as the chairman.
If that´s the case, this can usually lead to conflicts of interest, which is a red flag.
 Audit/Consulting: You need to check if the company has paid the auditors for
extra services since an audit firm should only provide auditing
services.Therefore, it is important to look for the common proxy statement, and
search for “audit fees”. If they provide “other fees”, “non audit fees”, “consulting
fees” or “tax fees”, for example , that is a red flag.

Parameters
These are categorizations concerning the performance of the company's indicator being
analyzed. They are divided into the following four categories.

Impact

 Impact: Indicates the external impact generated by the metric. A lower impact is
considered more positive.

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Ranking

 Ranking: It is a metric associated with the performance of the indicator. Best in

class as a notable indicator in the company.

Mitigation

 Mitigation: Indicates whether there are plans in place to care for the indicator.
You must write a ''yes'' if there is evidence and a ''no'' if there is no evidence.
Traffic

 Traffic: Color coding to measure the company's performance on this precise

indicator. You should put a color sign, green, yellow, or red, depending on how
well the company is at that specific point. (Green indicates the better).

Final Note: Only “Traffic” and “Comments” need to be filled because the ESG excel sheet
has Ranking, Impact, and Mitigation automatized. We just need to select in which sector
is our company in.

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 How to interpret
The interpretation is based on the information available, assessing whether
improvements are being made and whether there are reported strategies concerning
the indicators to be followed.
It is necessary to generate comparisons between sectors, to generate context and
optimize the interpretations otherwise we could hardly conclude anything.
How to present
In the presentation, you need to present the most important results in the next order:
Environmental and Social: Here is important to show them more relevant indicators and
information to bring a general view of the two parts.
Governance: Here, is important to present line by line to explain the status of the
company's leadership
The idea is not to present every single parameter, and usually, it is just relevant to
present the “yellow” or “red” flags.

Tips & Tricks / FAQ

1.- Objective: Try not to write long sentences. Be objective.
2.- Graph: If needed you can add a graph or image to support your analysis.
3.- Numbers Comparison: Compare a little deep in the last year/s. For example, if the
company has improved, not only its numbers, if also implemented new measures.
4.- Company Segment: Pay attention to which kind of company you’re analyzing. For
example, if it is a telecommunications company, it’s normal to not have info about land
degradation or animal suffering, in that case just right a “NA” (non-applicable)
5.- Country factor: You should take into account the country environmental to context
analyses
6.- Confirm news: Be careful. You need to look in trusted media to find reliable
information.
Note: There are a lot of websites that are not that reliable, so be sure to search on 4 or
5 different ones if you are in that case to confirm it.
7.- Annual Report and Sustainability: Most of the info you’ll need is going to be either
on the Annual Report of the company or in a separate document usually called
“Corporate Governance and Sustainability”. Also, you need to go deeper in the research,
because you need to look in sites as trusted media, forecast, and make beach marking
to complete the information that you need to a complete ESG.

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Contact:
Sergio Marcano: +52 5578694683
Email: sergiomarcano58@gmail.com

Page 37 of 46
DISCOUNTED CASH FLOW MODEL(DCF)
The DCF method is used to determine the value of a business. In this final step of the
One Pager, the idea is to eventually reach the fair value of the stock through the
Discounted Cash Flow Model. As the name suggests, the value of a business is defined
by the expected Cash Flows of a company, discounted by a “discount rate”. It is all about
defining how much is the company worth based on the money we think it will make in
the future. So, it´s imperative to define the concepts of Cash Flow and Discount Rate:
1. Cash Flow- Although the model is called the Discounted Cash Flow Model, there
are three types of Cash Flows: Operating Cash Flows, Investing Cash Flows, and
Financing Cash Flows. In the DCF model, we want to discount the Free Cash Flow,
which is calculated by adding these three cash flows.
The Free Cash Flow is the money the company made in a year (which can be used
to captivate investors by paying dividends or buying back shares, used to invest
in the company, or just be kept for liquidity reasons).
So, when we refer to Cash Flow in the DCF model, we are referring to the Free
Cash Flow, so the money a company made. It is not profit, a company may not
be profitable but have a positive cash flow, since profit is just one of the
parameters of the operating cash flow.

2. Discount Rate- After we try to predict and make assumptions about the
future Cash Flows of the company, they need to be discounted through a
rate, to determine the present value of the future cash flows.
A higher discount rate means I am less sure about my assumptions and/or
the company is not consolidated and/or presented volatile cash flows in the
past. A company like Microsoft will have a lower discount rate since it is
consolidated and more stable.
The discount rate can also be interpreted as the then subjective rate of return
an investor “demands” from a company: if I invest in a growth stock, since it
is generally more uncertain I will “demand” a higher return (discount rate),
and vice-versa.
Mathematically speaking, the DCF formula is equal to the sum of the cash flow in each
period divided by one plus the discount rate raised to the power of the period number.
This period number will be equal to the number of periods that are being projected into
the future in terms of earnings, in this case, it will be years.

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 Note: The DCF displayed is incomplete since the assumptions range from
the year 2021-2046(the whole DCF could not fit in this A4 sheet).

Another side note is that the Discounted Cash Flow Model displayed is the
one used by Vitalis Pension Fund, and although the model is done in this
manner for this case, a DCF can be modeled in different ways. For example,
the discount rate can be calculated using the weighted average cost of
capital-WACC (however, the DCF method used in this case is Free Cash Flow
to Equity and not Free Cash Flow to the Firm, so we won´t use the WACC as
the discount rate), and the time frame can be from just 5-10 years instead of
25 in this case (assumptions from 2020 to 2045), etc.…
The goal remains the samecalculate the stock price of a company.

So, in conclusion, and with all this in mind, with this model, what we are trying to assess
is whether a company is overvalued or undervalued, based on the underlying
assumptions that were used. To put it in simple terms, if a company is undervalued, then
it would be considered a good investment opportunity, ceteris paribus. However, a
multitude of other factors must also be considered in the fundamental analysis, and this
model cannot be taken and interpreted as is, it must always be put into context and
analyzed along with other pieces of relevant information. To put that more simply, a
company undervalued might not necessarily be a good investment since a lot of
Page 39 of 46
companies are cheap for “rational reasons” like the business model is not sustainable
for the long term, being in a decaying industry, losing competitive advantage, and other
reasons. In those cases, even if a company is undervalued it might not be a solid buy
simply because the company is not competitive anymore or lacks fundamentals (basic
qualitative and quantitative information that contributes to the financial well-being of
the company).
Now, in the previous figure, it shows Intel was overvalued by 4% and the current price
was 234,33$ assuming a discount rate of 8,7%. And to reach a price target we can define
three steps:
1) Predict growth and margins
2) Predict the “factors” (Factor D&A, Factor Net Interest, Factor Tax, Factor Inv-
Investment)
3) Define a discount rate

Notice that the keyword is “predict” since, as previously explained, we are estimating
how much cash a company will be generating in the future, and then discounting it at a
certain rate to arrive at a present value figure. For that we should have in mind the
qualitative and quantitative data in the OP, Segments, Peers, and ESG, as well as the
strategy of the company to ask ourselves the following questions:

 How well is the company going to do into the future based on what I know today?
• Is the demand for their product/service going to increase, decrease or stagnate?
• Is the industry currently under expansion or retraction?

• How long will they be able to grow above the economy's long-term growth rate
(+/- 2%)?

 How has the growth been in the last 10 years? What would be a good and fair
estimate of future sustainable growth?
• Does the company still have a lot of room to grow or is it stagnating?

1)Predict growth and margins

The key part of the DCF model is to predict how much will the company grow each year,
its margins, investment, debt levels, and net working capital. However, it is important
to emphasize the importance of the growth of the company and the operating margin,
since these two are what most influence the value of a company.

Now, you might be wondering, where do I find the values of growth of a company, or
margins, working capital, or any other relevant factor? You don´t!
Unlike what has been discussed previously in this guide, now we will work with future
data, so there is no “website” to give accurate data. Or to be even more specific, it exists,

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but it would be the opposite of the goal of an analyst. If we follow other analysts'
predictions, we aren´t doing our analysis and predictions for the company, just
replicating the view of the company of other analysts.
So, what is the solution?

If we go to yahoo finance, in “analysis” we can usually find estimates for the next two
years. That gives us an idea for the short-term predictions of growth and margins,
however, although it helps a lot, they cannot be blindly followed. We can use those
estimates for 2021 and 2022 to guide us, not as a definitive answer, because some
estimates might not make sense. But usually, those figures will be very accurate since
they provide an average of dozens of financial analysts.

Now, there are some ways to minimize the error in the predictions of a Discounted Cash
Flow Model because that is the whole point of it! No analyst gets every single year's
prediction right, so we should be realistic when it comes to analyzing a company. This
means no optimist or pessimist predictions, to be as objective as possible and minimize
the error by leaving “emotions” out of it. There are some tricks to make assumptions
more “objective” and minimize the error:

 Be conservative when predicting growth- if a company has an average annual

growth of 10% in the last 10 years, then it is unlikely the company will keep this
pace (so we should decrease the growth of the company moderately-it is very
unlikely that a company grows 10% for 35 years).
 When it comes to operating margins we should consider two scenarios-a
consolidated company and a growth company (it depends on the industry which
means a “growing company” and a consolidated company but usually a company
growing above 10% has lower and more unpredictable margins). If a company is
already consolidated it is easy to predict the margins since they are usually more
stable, and because the company is likely to mature it reaches a saturation point in
which they can hardly increase the operating margin, so we should assume the
same margin until the end. If we are talking about a growth company, then it is
even more important to understand the strategy of the company due to its
volatility. So, it is important to gather information about the strategy and future of
the company: Are they going to invest in new projects and contract more debt?
Will their strategy rely on acquiring new companies? Etc.… Those are the kind of
questions we should try to answer.
Plus, we can look at a more consolidated peer´s Operating Margin to use as a benchmark
for the long-term margin of the company we are analyzing. If I am comparing two similar
businesses in different maturity stages, in the long term the “non-consolidated
company” will likely converge to a similar margin.

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Tip: No value in 2021 should be very different compared with 2020 unless there is
specific data on it, a well-defined strategy, or predictions from yahoo finance.
(Example: if the investment for 2020 is 1000, it could be wrong to assume investment
as 9000 in 2021, even if that value is automatized due to the factor investment).

2)Predict the “factors” (Factor D&A, Factor Net Interest, Factor Tax, Factor Inv-
Investment)
At the bottom of the DCF, there is a table with several “factors”, more specifically Factor
Depreciation & Amortization, Factor Net Interest, Factor Tax, and Factor Investment.
A factor is not defined as a “characteristic” in this case, but as a number that will
represent the growth of a certain parameter (like the growth of D&A). For example, a
Factor D&A of 1(or 100%), means that we are assuming Depreciation & Amortization
will behave in the same manner as the Sales of the company (both will grow at the same
pace). (Doubt: Factor of 2-200%?). (Doubt: What range for ST and LT factor?)

So, how do we find these numbers?

Predicting factors, or sales or the operating margin starts by looking at the past behavior
of the company. So, we check the financial data to see how are D&A and Investments
behave and find a pattern for the future according to the company’s strategy? Will the
company invest more or less? How much? Since Investments is accounted as CAPEX+
Acquisitions of Businesses, Factor Investments and Factor D&A should be similarly
aligned since the more we invest in Capex more machinery there is to depreciate and
vice versa.

Tips:

-SUM Investments and SUM D&A should be similar

-Usually, these factors range from 0,75 to 2 (D&A and Inv.)
-Factor D&A ST is usually higher than long term
Factor Net Interest and Factor Tax are computed differently:
Firstly, by Factor Net Interest we mean the average rate at which the company pays its
debt. As the interest rates are at all-time lows usually Factor Net Interest ranges from
2% to 5%, and some information can be found in the annual reports most of the time,
or on Damodaran´s website. Also, Net Financial Cost/Average Net Debt can be used as
a proxy.

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As for Factor Tax, the benchmark values for short term and long term are, respectively,
21% and 27%. However, by looking at the previous amounts the company paid in income
tax we can see if they fall in a non-average category. We might find a company that did
not pay taxes in the last 10 years, or very few. In that case, it might not make sense to
assume the company will pay, on average, 21% in taxes in the short term and 27% in the
long term. Because of that, it is always important to see how much the company
previously paid in income taxes.

3)Define a discount rate

Although a discount rate is commonly calculated through the Weighted Average Cost of
Capital (WACC), in this case, it is computed differently:
Discount rate=(1+TELP) * (1+CER) * (1+ %analyst)
We can conclude the discount rate revolves around three factors:
1. Rf- Risk-free rate (or TELP, as displayed)
2. CER- Country Equity Risk
3. % Of the analyst
 TELP
The “TELP”, or Taxa de Endividamento de Longo Plazo, refers to the long-run
equilibrium of a 10 Year Treasury Yield. Please note that this is a long-run
estimate and not the spot rate. To find this figure you should check directly with
Vitalis’ or with your colleagues at LIS, since it may vary in the future. It is also
important to note that the Bond we use is dependent on the company we are
analyzing. If we are analyzing a European company, we should not use the US
10Y Treasury Yield, we should use a bond from the country of the company being
discussed.
 CER-Country Equity Risk
The CER (Country Equity Risk) is more commonly known as the Country Risk
Premium, which is the additional return demanded by investors to compensate
them for the higher risk associated with investing in a certain country. In other
words, it is the risk related to the country/countries where the company
operates. So, it makes sense that the CER is higher for developing countries and
lower for developed nations. Although it is not an easy metric to compute, it can
be found in Professor Aswath Damodaran´s website:
Home Page of Aswath DamodaranDataRisk Premium for Other Markets (in
Topic: Discount Rate Estimation)Total Equity Risk Premium.
For example, in the case of the United States, the CER should be around 4,75%
(it is 4,72%, as for the day the guide was written).
If the company sells in more than one country, it makes sense to compute a
weighted average of the countries risk premiums, because if a company has
revenues of 10% in the United States for example, and then 40% in Asian

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 countries and 50% on European countries, it wouldn't make sense to use the
county equity risk of the US, even if the company is based in that area.

 % Of the analyst (percentage of the analyst)

Although the risk-free rate and the country equity risk are already incorporated
in the discount rate, other risks should be noted too. The % of the analyst is the
more subjective parameter and for that reason harder to define. However, the
easiest way to do it is to use our SWAT analysis in the OP as a guideline, more
specifically, “Risks”. More consolidated companies with solid MOATs like Coca-
Cola have very few risks when compared with a growth stock in a volatile
industry, but let´s jump into a practical example, using VISA, one of the most
consolidated companies in the financial sector. Although VISA can arguably be
considered to act in a duopoly market (with Mastercard), there are still risks
involved:

1. Very correlated with the economy

2. Operating margins might plunge again due to litigations
3. CEO is the Chairman (there could be conflicts of interest)
4. Strong competitor (Mastercard mainly, but PayPal and many other
companies can be potential threats) (% of the analyst: + 0,25%)
5. Financial sector converging to a zero-fee industry (% of the analyst: + 0,5%)

We are entering a very subjective field because you might disagree with those risks, or
you might consider others, or even give different importance to each one of them. For
this case, personally, the % of the analyst was 0,75% (0,25%+ 0,5%), since it was assumed
the last two risks were the most impactful because VISA earns money mainly due to fees
on volume of transactions. A very stable company can have a % of the analyst as low as
0,5% and a very volatile company can have a % of the analyst of 2,5% or even 3%.
It is also important to note that it was a very specific example, regarding VISA, and other
common risks might include:

 Prices of commodities crucial for the business activity

 Prices of raw materials crucial for the business activity
 Supply chain disruption
 Cyber incidents
 Competitive and fast-paced industry
 Etc…
There are also industry-specific risks that are important to have in account for the % of
the analyst(for example, risks of the patent system, regulations, and rise of generics in
the Pharmaceuticals sector).

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There is also another way of looking at the % of the analyst, which is related to how
certain we think our assumptions for growth and the margins may be. So, if for instance,
I adopt a conservative approach for the growth and the margins (because they might be
volatile for example), then I don´t need to compensate in the % of the analyst, there is
no need to increase that number. But, if I take a more optimistic approach, for example
in this case of VISA, the % of the analyst should be 1% instead of 0,75%, or even 1,5%. It
depends on the company, but we should always be as conservative as possible in the
growth and margins predictions. Just have in mind this trade-off between the % of the
analyst (and discount rate), and the assumptions we do. More conservative means a
lower discount rate and more optimistic means we should increase the discount rate
(through the % of the analyst, which also represents how “certain” we think our
predictions are). That’s why a volatile company has a higher interest rate.

How to present
To present the Discounted Cash Flow model, we should justify our assumptions. So, we can start
by justifying the predictions for growth and operating margin, then we explain how we
computed the factors. To see if they make sense and align with the strategy of the company,
because, for instance, even if they have not been investing very much if the strategy of the
business will now be based on acquiring new enterprises, there is no sense in assuming a low
factor investment, just because in the past the company had a different strategy. After “walking”
the listener through the factors, the last thing left to explain is the % of the analyst. The TELP
and CER can be found online but not the % of the analyst, a very important component in the
DCF.

Summary
1. Be conservative for growth assumptions (if the average growth rate in the
last 10 years was 15%, we should usually assume that in the next 10 years
the company will grow at a lower rate and assume growth as being
progressively decreasing.
2. The terminal rate (last growth rate, in 2046) should be around 2%, and in the
years before 2046, the growth should be almost as low, if not also 2%.
3. Usually, the Operating Margins will increase over time as the company
consolidates, however, if the company is already stable and fully
consolidated, the operating margin will likely not increase.
4. We should base all our assumptions (for growth, margins, and factors) on
historical financial data of the company (like the average annual growth rate
and the evolution of margins, investment, etc.… in the last 10 years), but the
future strategy of the company plays a huge role in those predictions too.
Extra conclusion: For volatile companies, the DCF Model is more prone to fail
since it is harder to predict future Cash Flows, although this model is arguably
the most versatile in the range of companies to value and is the most used.

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Final Notes:
1. On the row that reads, “Average EPS”, these are the average estimated
EPS according to various analysts. These figures are worth noting because
they allow for a comparison between the analysis and projection we are
doing and what the other analysts covering the same company think. You
can find these figures on Yahoo Finance or any other website that
provides financial information for that matter.
2. Usually, the Free Cash Flow (FNP) should be positive, so if it is negative,
there might be something in our assumptions that do not make sense (Ex:
assume debt, investment, or Net Working Capital to be too high).

Contacts:
Pedro Santos | Head of Equity Research
+351 929102424
Emai: pedroAires1957@hotmail.com

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