Comparable Companies Analysis - The Boeing Company

The target is Boeng Company (NYSE : BA) and selected trading comps are Lockheed Martin Corporation (NYSE : LMT) and Northrop Grumman Corporation (NYSE : NOC) . Although the target is BA, opinions and price targets are determined for every trading comps' stock.

Thereby, suggestions are made for a 3-month investment and a longer-term 1-year investment.

Data dates back to February 4th, but this will not affect anything about the estimate, because the multiples and price have remained similar.

The 2013-year comparison between The Boeing Company, Lockheed Martin Corporation and Northrop Grumman Corporation on February 4^th.

Trading Multiple	BA	LMT	NOC	Mean(average)
Current share price	122.8	148	111.4	-
% of 52-wk.high	85%	91%	90%	-
Enterprise Value	93 210 mln.	8 453 mln.	28 881 mln.	-
P/E	24	16.4	13.3	17.9
P/S	1.09	1.1	0.98	1.06
P/B	24.8	N/A	N/A	N/A
EV/EBITDA	14.2x	1.88x	5.37x	7.15x
EV/SALES	1.08x	0.18x	1.17x	0.81x
Leverage	1.47x	1.37x	1.42x	1.42x
ROE	43.7%	120%	19.4%	61%
ROA	0.51%	8.0%	7.4%	5.3%
Gross margin	7.6%	9.9%	21.8%	13.1%
EBITDA margin	15.4%	9.2%	12.7%	12.4%
Net profit margin	5.3%	6.6%	7.9%	6.6%
Ex-dividend	N/A	2.10%	1.80%	-
Dividend Yield	12.02.2014	27.02.2014	27.11.2013	-
Opinion	Strong Buy	Sell	Hold	-
Price target	150$	140$	120$	-

• Next 3-month recommend to BA, because it had disappointing 4^th quarter results, but RSI has fallen to 30-40 zone. Although EBITDA has suffered because of operating expenses, its COGS (cost of goods sold) still have not been suffering. It is indicated by the increase of EV/EBITDA and Gross profit margin. Its asset base compared to liabilities is still much stronger than its trading comps' NOC and LMT.

• Next 1-year recommend to NOC, because it shows high margins for a company smaller than Boeing, which are great indicators for future positively surprising results. Although NOW has risen 85% since January 2013 and a correction down to 100pt should be expected, the long-term investment bought from 100pt level is recommended. Equivalently it has lower P/E and P/S than its trading comps. Sure, P/B is negative, because NOC has higher liabilities than assets. That ought not to affect high margins and earnings growth, unless the whole economic starts to stumble as feared. If market is feared to be crashing, the price target should be approximately divided by three, because this is were   

Comparable Companies Analysis - Nokia Corporation

Target is Nokia Corporation (NYSE : NOK) and selected trading comps are Apple Inc. (NASDQW : AAPL) Samsung Electronics Co. (NYSE : SSNFL) and Blackberry Limited. (NASDAQ : BBRY).
Athough the target is NOK, opinions and price targets are determined for every trading comps' stock. Thereby, suggestions are made for a 3-month investment and a longer-term 1-year investment.
Data dates back to February 16th, but this will not affect anything about the estimate, because the multiples and price have remained similar.

Trading Multiple	NOK	AAPL	SSNFL	BBRY	Mean (average)
Current share price	7.14	544	1250	8.98
% of 52-wk.high	87%	94%	84%	53.4%
Enterprise Value (millions)	9 460	126 250	106 689	7448
P/E	159	13.3	44	N/A	72.1
P/S	2.1	2.89	5.75	0.59	2.8325
P/B	8.6	4.19	11.8	1.76	6.5825
EV/EBITDA	8.76	2.58	1.95	N/A	13.29
EV/SALES	0.74	0.74	2.4	0.93	1.293
Leverage	6.18	0.35	0.2	N/A	2.243
ROE	2.08%	30.6%	25.9%	-66.8%	-2.055%
ROA	59.8%	19.3%	17.4%	-92.9%	0.9%
Gross margin	11.3%	37.6%	39.8%	-9.94%	19.7%
EBITDA margin	8.5%	28.7%	24.0%	-110.4%	-12.3%
Net profit margin	1.3%	21.7%	13.1%	-90.0%	13.6%
Ex-dividend	4.05.2012	6.02.2014	27.12.2013	N/A
Dividend Yield	N/A	2.30%	1.02%	N/A
Opinion	Hold	Buy	Buy	Hold
Price target	8 $	600 $	1400 $	10 $

1-year comparison between Nokia, Apple, Samsung and Blackberry on February 16th

• Next 3-months recommendation to Samsung, because April 11 Samsung launches a new smarthphone Galaxy S5, which has a 5.2-inch screen and many other impoved features. The only worrying factor for the reviewers seems to be non-evolutionary design. Nonetheless, stock price has also been decreasing in last two months, so there is room to grow. In addition, their substantial market share in China remains, because Apple has not been doing very well there and trading multiples indicate Samsung has low debt (leverage multiple), P/E is reasonable for a growth stock and margins are only slightly lower compared to Apple.

• Next 1-year recommendation to Apple, because as usual they represent their products in autumn and hopefully the high expectations help the stock maintain its bullish trend. Also, Apple has started developing its own wristwatch with a bending screen and new iPhone software integrated into cars. In addition, Apple has the best trading multiples compared to its trading comps (competitors). All in all, Apple has higher margins and other multiples are relatively better.

Comparable Companies Analysis

Though there are many techniques to analyze company's financial results, comparable companies
analysis might be considered the one to begin with. The version presented here is slightly primitive compared to analyses made at financial institutions, because it makes it easier to grasp the subject in the beginning. Before presenting examples, it is useful to be familiar with the formulas and know where it is most simple to find the information necessary in order to conduct an analysis. Googling will provide  the filings, but the most accurate is always the data under investor relations, which is located on every company's personal website.

Joshua Rosenbaum and Joshua Pearl “Investment Banking”

Conducting Comparable Companies Analysis

• Investor picks a company stock of his choosing – target
• Companies from same sectors, possibly similar size (small/medium/large-cap) and operating region to compare the target with – trading comps.
• Choose the most accurate indicators for certain industry in order to decide whether the stock is overvalued or undervalud – trading multiples

Market Valuation

Equity Value = Share Price x Fully Diluted Shares (Basic Shares Outstanding + “In-the-money” Options + “In-the-money Convertible Securities)

Enterprise Value = Equity Value + Total Debt + Preferred Stock + Noncontrolling Interest – Cash and Cash Equivalents

Profitability - the higher the better

Gross Margin = Gross Profit (Sales*-COGS**) / Sales

*Sales = Revenue = Turnover

**COGS – Cost Of Goods Sold

Companies always seek to increase gross profit margin through improving the efficiency of the manufacturing process. Other losses besides COGS are called operating expenses.

EBITDA Margin = EBITDA / Sales

Used to indicate performance among peer companies (same areas of business), reduces the importance of different regions that have different taxes and interest rates.

Net Income Margin = Net Income* / Sales

*Net Income = Earnings = Profit

Essential in order to increase EPS (earnings per share), which is the most common and important indicator for the market's decision towards the stock.

Return on Investment – the higher the better

ROE margin = Net Income / Average Shareholders' Equity

ROE = Return on Equity

Average Shareholders' Equity is calculated by summing up Total Equity of current year and prior year and dividing with 2.

For example : Company named XYZ has Total Equity of 1500 million euros in 2012 and 2500 million euros in 2013.

Average Shareholders' Equity = 1500 + 2500 / 2 = 2000 million euros

Measures the return generated on the equity provided to a company by its shareholders.

ROA margin = Net Income / Average Shareholders' Assets

ROA = Return on Assets

Calculating the Average Shareholders' Assets is the same as Average Shareholders' Equity.

Measures the return generated by a company's asset base.

Dividend Yield = Most Recent Annual Dividend Per Share / Share Price

Annual Dividend = Quarterly Dividend x 4

Credit Profile – the lower the better

Leverage = Debt / EBITDA

Leverage refers to a company's debt level. Reveals a great deal about financial policy, risk profile and capacity for growth. The higher a company's leverage, the higher its risk of financial distress and bankruptcy due to the burden associated with greater expense and principal repayments. This ratio can be viewed as the measurement of how many years of a company's cash flows are needed to repay its debt.

Financial Results to Share Price

P/E = Share Price / EPS (Earnings Per Share)

P/S = Share Price / Sales

P/B = Price Share / Book Value (Total Assets – Total Liabilities – Intangible Assets)

Financial Results to Enterprise Value

EV/EBITDA = Enterprise Value / EBITDA

EV / Sales = Enterprise Value / Sales

Conclusion

Although the next step would be benchmarking the companies, the first aquaintance ought to be made with trading multiples before moving forwards.

Benchmarking means determining the intervals to the trading multiples that include enterprise value while considering other multiples as well. Afterwards based on the benchmarking, the intervals for implied enterprise value and therefore the implied share price shall be calculated.

For now, the price targets and opinions are formed not through benchmarking, but by taking into account all trading multiples of the comparable companies and comparing these to each other in order to reach the conclusion.

How long can financial markets continue rising before the decline ?

The next chapter of this blog will present analysis for companies of different sectors. Though it is going to be a bulk of the material, some of the necessary formulas used in analysis will be brought forward as well. Considering that all target companies are public and traded at NYSE, it is important to take a view at the state of current economy. The purpose for this blog remains – to increase interest, knowledge and confidence of a younger generation towards the world of investment banking.

What is quantitive easing ?

A year ago economy of the US was struggling with external debt. It has not yet been resolved, but a temporary solution has been found through tapering. Firstly, past two years the Fed has been conducting a programme called quantitive easing. To begin with, banks have been making money not by lending money to businesses and individuals, but rather from buying 10-year treasuries, because it has lower risk compared to the borrowing to business/individual. That takes money off the market, which is bad for the country's (in that case United States) economy. Following that, the government has found a solution. This is, to put mildly, central bank or Federal Reserve in that case, buying toxic assets* from banks for 85 billion a month. 

*toxic assets -

• CDO - Collateralized Debt Obligations
• Bad loans to bankrupt companies etc.
• Mortgage-Backed Securities

How QE has an impact on the banks ?

Firstly, through buying assets from banks and by that lending money to financial institutions the Fed hopes that banks would be more eager to lend that money on to the clients. Secondly, the Fed (government) buys the treasuries in the market. The yield of the treasuries decrease, because demand grows. That creates less incentive for the banks to buy those bonds and increases the likelihood them starting to look for other investments. Therefore, banks start lending money to individuals/businesses in order to make money. All in all, QE stimulates economy by increasing the cash flow without directly accelerating money printing in the meantime.

http://www.globalresearch.ca/the-global-systemic-crisis-quantitative-easing-and-the-feds-tapering-will-trigger-a-boomerang-effect/5369650

How QE has an impact on the economy ?

As a result, due to QE national debt has been surging. Fed has discovered that QE has had more impact on the economy than anticipated. With the growing money flow, more risks have been taken by investors, allowing them to invest into emerging markets. In order to continue these investments, Fed would have to gently grow QE of 85 billion dollars a month. They have decided to act otherwise and start 'tapering', because the first time in the history of the US is not capable of meeting their obligations. 

What is 'tapering' ?

Tapering is a term, which was used first on May 22^nd and it means to reduce QE by 10 billion every month. Tapering begun in December. Consequently the economies of emerging markets have been falling since May. That is because investors, who are familiar with the situation and with a bit lower risk-tolerance, are selling stocks and investing into bonds.

http://bonds.about.com/od/Issues-in-the-News/a/An-Explanation-Of-Fed-Tapering-And-Its-Impact-On-The-Markets.htm

2-year period

EWZ – Brazil Stock Market index

GDAXI – Germany Stock Market index

N225 – Japan Stock Market index

EEM - Emerging Markets index

GSPC – S&P 500 US. Market index

Why start tapering ?

It is simple to see a pattern here. Indexes such as Nikkei 225, Emerging Markets and Brazil took a huge setback from 22^nd May. Fed anticipates that the global economy has become strong and self-sustainable. It enables them to start tapering, because the stimulus from QE in order to keep interest rates low had its effect and it is time to cut back from the bond-buying program in order to focus on lowering national debt.

How tapering has an impact on the economy ?

Tapering remains dependant on the US economy, so the pace of reducing 10 million a month could always be modified. Assuming it remains the same, tapering will be finished by September and there will be no more significant support from the Fed. Assuming the Fed will not come up with another programme. Impacts such as weakening of emerging markets' currencies will start to affect the western economies. The purchase power of emerging markets decreases, therefore the incomes for global companies fall. Thereby, stock prices decrease resulting in a snowball effect. By then, the so called taxi drivers will have their money invested in stocks, because if there are sellers familiar to the overvalued situation of the economy, there have to be buyers too.

Triple bottom support and resistance chart.

S&P 500 index from 1995 to current

Rise of the S&P 500 and finding a new resistance

Considering that in September Fed will have stopped considerably supporting economy and the currencies of emerging markets have slumped, there is a chance for a correction. Since the S&P 500 broke the 1600pt resistance 9-months ago, it has risen to 1850pt level, which indicates 15.7% raise. Currently, huge masses are just entering the US market, implying the S&P 500 is estimated to rise to 2100pt level by September. The new resistance and the support at 1600pt level ought to form approximately at that level and a new decline on the markets might be expected. That statement is supported by the fact that some experts estimate the S&P 500 index to be at a 50 000pt level by the year  2050.

Market Cap to GDP, also known as Warren Buffett indicator