Description of the Project:
• As the stock analysts for a Pension Plan, your team has been assigned the task of giving a stock recommendation to the firm’s investment committee.
• In this project your team is asked to choose and value a publicly-traded company and give an investment recommendation about the company from the viewpoint of a stock investor.
• This project is designed to primarily apply the concepts, models, and techniques learned in the course. Deliverables:
1. A written report of no more than ten pages printed in 12-point Times New Roman font with one-inch margins. Supporting calculations, graphs, and other exhibits do not count toward the ten page maximum and may be included as appendices. The format of the written report is as follows:
a. Executive Summary
b. Table of Contents
c. Macro Environment Analysis and Forecast
d. Company and Industry Characteristics and Description
e. Analysis of Past Performance
f. Forecast of Future Performance
g. Valuation
h. Recommendation
i. References
j. Appendices
2. Team Presentation—10 minutes + 5 minutes of Q&A from the audience
Steps in this Valuation Project:
1. Macroeconomic Analysis and Forecast
a. Identify the key macro-environmental factors.
b. Assess the likely impact of macro-environmental factors on capital (stock and bond) markets
c. Based on the analysis above and other economic forecasts (such as the Congressional Budget Office’s The Budget and Economic Outlook: 2014 to 2024 and the Economic Report of the President), discuss the implications of your analysis and economic forecast(s) on the industry that you have chosen.
2. Company and Industry Characteristics and Description
a. Industry Characteristics and Description. Describe the nature of the industry and discuss pertinent facts such as its competitive environment, recent and expected trends, current and anticipated regulation, the impact of technological developments, etc., …
b. Company Characteristics and Description. Discuss the nature of the business including its competitive environment, regulatory environment, technological environment, management and personnel issues, etc., …
3. Analysis of Past Performance (of PepsiCo)
a. Publicly available information on the company is the starting point. Two good sources of financial and other information are Morningstar.com or Finance.Yahoo.com (but there are many others).
b. Historical financial information should be integrated with non-financial information about the company. In other words, provide a relevant narrative describing the key events influencing performance during the past five years.
c. Computation and analysis of key financial ratios, especially in comparison with the industry and/or major competitors.
4. Forecast of Future Performance
a. Based on your macro environmental analysis and forecast, your company and industry analysis, and your analysis of your firm’s past performance, forecast your firm’s sales growth during the next five years. This step should include an evaluation/discussion of your assumptions as well as the company’s strategic position.
b. Prepare Pro Forma financial statements using a forecast horizon of 5 years.
5. Valuation
a. Estimate the Intrinsic Value of your firm’s stock using the Free Cash Flow Valuation Model (FCF).
i. Using a forecast horizon of five years, project future free cash flows (as well as the terminal value at the end of five years if relevant) – be sure to list and discuss assumptions you made in deriving these values.
ii. Estimate an appropriate discount rate/required return (the Weighted Average Cost of Capital if you use the Total Firm FCF or the Cost of Equity is you use the Free Cash Flows to Equity holders) and use these required return measures to estimate the intrinsic value of your stock.
iii. Discuss how sensitive you value estimates are to changes in your assumptions and discuss the key drivers of value for your company.
iv. Given your company’s characteristics, value and competitive position, evaluate the most promising avenues for increasing the firm’s value.
b. Relative Valuation
i. Estimate the market value of your stock using the Earnings Multiplier Model and prepare of a list of “comparable” companies using a set of criteria that your team deems appropriate.
ii. Evaluate the value of your company against your major competitors (you are required to use the P/E valuation, Price/Book Value, and/or other relative valuation metrics of your own choosing).
6. Recommendation
a. Make a final recommendation regarding your company’s stock—would you buy, sell, or hold?
b. Present five reasons for your recommendation. Your reasons should be rank-ordered in terms of importance.
