1 ShareScope How investors evaluate company performance Tim Clarke General Manager, ShareScope.

1

ShareScope

How investors How investors evaluate company evaluate company

performanceperformanceTim ClarkeTim Clarke

General Manager, ShareScopeGeneral Manager, ShareScope

2

Stock markets

Initial Public Offering

Ltd v Plc• Share ownership• Control• Accounts / reporting• Money-raising• Cost

3

Investing

• Superior returns• Fund management• Growth, Value, Income, Momentum

• Your share of profits• Yield / interest rate• Dividend reinvestment• Compounding

4

Dividends

• Einstein described compound returns as the “eighth wonder of the world”.

5

Dividends

6

Compounding

Bob’s Grocery Stores Plc

Share price 100p Holding period 30 years

Dividend 4p Share price remains unchanged

Value of shares £1000 1000 x 100p

Income received £1200 4p x 1000 x 30yrs

Investment value £2200 £1000 + £1200

Annual income £40 1000 x 4p

Yield on cost 4% 4p / 100p

7

Compounding

Initial value of shares £1000 1000 x 100p

Income received £0 Dividends reinvested

Final value of shares £3243 3243 x 100p

Annual income in year 30 £130 3243 x 4p

Yield on cost 13% 13p / 100p

Bob’s Grocery Stores Plc

Share price 100p Holding period 30 years

Dividend 4p Share price remains unchanged

8

Compounding

Initial value of shares £3325 1000 x 332.5p

Income received £0 Dividends reinvested

Final value of shares £69,335

Annual income in year 30 £2754

Yield on cost 83% £2754/ £3325

British American Tobacco Plc (BATS)

2nd Jan 2000 Share price = 332.5p Dividend = 22.2p

2nd Jan 2015 Share price = 3522p Dividend = 144.9p

9

Dividend Yield

10

PrivateInvestors

Merchant Banks / Fund

ManagersStockbrokers

SELL SIDE BUY SIDE

Stock Market

Structure of the market

Market capitalisation

Share price x No. Shares

e.g. Tesco Plc

Share price = 219.25pNo. Shares = 8,123,000,000Market cap. = £17,809,677,500

12

Profits/earnings

13

Profits/earnings

EPS = Earnings per Share

14

Profitability

15

Profitability

16

Profitability

17

• Minefield• Continuous operations• GAAP• Exceptional items

Practical considerations

18

Profitability

19

P/E =

Market cap / Value

PriceEPS

20

Price/Earnings Ratio

21

Price/Earnings Ratio

22

Price/Earnings Ratio

23

PEG = PE / Earnings Growth

PEG

24

Cash Flow & Liquidity

25

Dividend cover

26

Dividend cover

OM = Operating Profit / Turnover (Sales)

27

Operating Margin

28

Balance Sheet

29

Debt

Gearing = Debt / Shareholder funds

30

Returns

Return on capital employed (ROCE)

Profit / Shareholder equity & Total borrowing

31

Returns

32

Returns

33

Problems with EPS

• Share buybacks• Debt instead of equity

34

Discount/Premium to NAV

35

Discount/Premium to NAV

36

Discount/Premium to NTAV

37

City Expectations

R R R

14/3/11 14/9/12'12Jul Jul

Sainsbury (J) PLC

Oct Apr

Pence Ord

360

350

340

330

320

310

300

290

280

270

260

ScopeShareChart (c) www.sharescope.co.uk

38

City Expectations

39

City Expectations

40

City Expectations

-16%

41

Was Tesco a good investment?

42

Stock Screening

• Search the stock market• Use understanding of financial metrics to

find attractive investment opportunities• Criteria to use depend on the type of

investor you are

43

Growth - Warren Buffett• Capitalisation above £250m

• Exclude property stocks

• Below average PE in subsector

• EPS has increased in four out of the last five years

• Operating margin is trending upwards

• Net gearing below 100%

• Interest cover of 1.5 or more

• Cash flow higher than EPS

• ROCE of at least 12% for last three years

• ROCE trending upwards over last three years

• Ideally above average in sub-sector for most of PE, ROCE,

Op margin, Net Gearing, Price to cash flow

Stock Screening