How to Pitch a Stock (1)

7/31/2019 How to Pitch a Stock (1)

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How To Pitch A Stock


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Agenda

Types of Analysis / Efficient Market Theories

How to Approach the Analysis

Resources

Details of a Fundamental Analysis

Six Steps to a 5 Minute Stock Pitch

Q&A

Example of a Pitch Informational Purposes Only


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Types of Analysis / Efficient Market

Technical Analysis No Efficiency

Excess returns can beearned by usinginvestment strategiesbased on historical shareprices

Past events or patternscan influence the stockprice

Study of past financial data, primarily through charts to forecast price trends


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Market Timing Weak-form efficiency

Share prices exhibit no serial

dependencies, meaning that

there are no "patterns" to

asset prices.

Future price movements are

determined entirely by

unexpected information and

therefore are random

Example Buying a retail stock ahead of the holiday season


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Fundamental Analysis Semi-strong efficiency

Semi-strong-form efficiency

implies that share prices adjust to

publicly available new information

very rapidly and in an unbiasedfashion, such that no excess

returns can be earned by trading

on that information

Technically fundamental analysis

will not be able to provide excess

returns

Idea behind fundamental analysis is to pull out information others cant.

Analyzing all public information and

getting your feet wet!


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Insider Information Strong efficiency

Share prices reflect all

information, public and

private, and no one canearn excess returns

Based on this theory even

insiders cannot earn higher

returns

Illegal way to trade securities! Just think Martha Stewart.


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How to Approach the Analysis

Start with the big picture

Macro EconIndustry Info Stock Specific Info.

Ex. Investing in countercyclical companies during

a recession

Top Down

Approach

Bottom Up

Approach

Start with Company specific information

Generally ignores macro & industry level econ.

Ex. Investing in Company X because you believeit is under valued.


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Resources

Newspaper Wall Street Journal, FinancialTimes, Barrons, etc.

TelevisionCNBC, Cramers Mad Money, CNN

Research Reports Thompson Analytics,

Investext

Company Information SEC Filings (10K, 10Q),

Conference Calls, Investor Presentations,Company Website, Company Management


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Steps to a Fundamental Analysis

Fundamental Analysis Industry and Competitive Position

Porters Five Forces - Substitutes, Rivalry, Barriers to Entry, Bargaining

Power of Suppliers, Bargaining Power of Customers

Management

How good are the guys running the business?

Building a financial model

Digging into the 10K, 10Q, and information above

What are the performance drivers for the company

Comparable Company Valuation


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Contents of a Fundamental Analysis

1) Key Financial Information and a Stock Price Graph-Current share price and price target-Revenue growth and margin assumptions-EPS estimates and Price/Earnings Multiples


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2) Brief Company DescriptionBased in San Antonio, TX, Valero Energy Corporation operates as a refining and retailing company inthe United States. Its refining business includes refining operations, wholesale marketing, product supplyand distribution, and transportation operations. The companys products include reformulated gasoline,

diesel fuel, and low-sulfur diesel fuel and oxygenates. It also produces conventional gasoline, distillates,jet fuel, asphalt, petrochemicals, lubricants, and other refined products. As of December 31, 2007, thecompany operated 17 refineries.

3) Investment Merits-Highlight the companys key strengths-Most of the investment merits should be company and not industryor macro economic specific-The investment merits should be unique and not something that

every analyst or other investor knows about


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3) Catalysts-Highlight 2-3 things that will cause the stock price to move in aparticular direction-The catalysts can be both short term and long term changes

4) Investment Risks-Highlight the no more than three risks to your thesis-Know when these risks might materialize-Have a strict exit strategy in case these risks come true. What typeof a loss are you willing to accept on this position

-Have counterpoints to your investment risks where appropriate


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5) Comparable Company Analysis / Relative Valuation

-Value of an assets compared to the values assessed by the market for similarcompanies-Examples include Price to Earning Ratios and Enterprise Value to EBITDA-Metrics will depend on Companies and Industries


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6) Discounted Cash Flow Analysis

-Academic theory states that a stock should be priced at the value of all futurecash distributions-Problem with a DCF is that it can easily be manipulated


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Fundamental Analysis (Examples) Buy and hold investors - Believe that latching onto good businesses allows the

investor's asset to grow with the business. Fundamental analysis lets them find

'good' companies, so they lower their risk and probability of wipe-out.

Portfolio Managers - May use fundamental analysis to correctly value 'good' and

'bad' companies. Even 'bad' company's stock goes up and down, creating

opportunities for profits.

Contrarian investors - Distinguish "in the short run, the market is a voting

machine, not a weighing machine". Fundamental analysis allows you to make

your own decision on value, and ignore the market.

Value investors - Restrict their attention to under-valued companies, believing

that 'it's hard to fall out of a ditch'. The value comes from fundamental analysis.


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Six Step Stock Pitch1) State the name, ticker and price of the company. Then give a company

description. Also know how this stock has traded over the last year.

2) Give your opinion upfront: Buy or Sell. Dont pick a hold stock. State

your price target (buy or sell).

3) State four or five top investment merits in bullet form. When highlighting

these merits be sure to mention how your opinion differs from the street!

4) Discuss the industry - Trends, competition, etc. Use Porters 5 Forces.

5) Give your valuation argument. Use comparable company valuations and

DCFs where appropriate.

6) Acknowledge investment risks to your opinion. Try and provide a counter

point to all your investment risks.


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Thank You!

QUESTIONS?Contact Information:

[email protected]


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TRN Key Statistics

Price: $29.69Market Cap: $2.42B

Recommendation Sell

Price: $21.89Market Cap: $1.77B

TRN 12-Month Stock Price Graph

TRN Industries (TRN) Rail Car Manufacturer


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Our Expectations Street Expectations

Declining rail cardemand

TRIP Holdings ispulling forwardrevenue

Leasing focus iscompeting with GEand GATX

Demand willplateau in 2007-2010 time frame

TRIP Holdingsoffers more stablecash flows

Leasing focusstabilizes income

Investment Thesis


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Backlogs Deliveries

Rail car demand is declining consistent with previous cycles

Fewer cars are required due to larger car capacity and railroad efficiency

Declining Rail Car Demand

Rail Car Demand 88-07

Backlog

-#o

fCars

Delivery-#of

Cars

StreetExpectation

OurExpectation

A decline in demand will have a negative effect on TRNs backlog, revenues, and margins


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Based on projected ethanol demand, the number of tank and covered hopper cars needed totransport ethanol will be:

9.0 10.0 11.0

14x 21,428 cars 23,809 cars 26,190 cars

Billions of Gallons of Ethanol Produced

Average

Turns

10x 30,000 cars 33,333 cars 36,666 cars

12x 25,000 cars 27,777 cars 30,555 cars

Ethanol and Tank Car Demand

Current ethanol production of 6.0 bln gallons, implies only 14,000-16,000 additional cars are

needed GATX notes that 4,000 ethanol tank cars are currently idle

After 12-18 months, tank cars needed for ethanol through 2010 should be in service

Required Tank Cars


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TRIP is an off-balance sheet entity but controlled by TRN Q2 Earnings Call when we put the cars into the TRIPwe get the immediate benefits of the earnings

capability there. So it just gives us an enormous amount of flexibility to control more of our owndestiny.

- Tim Wallace, Chairman, President & CEO

TRIP is adding leasing car capacity despite declining industry fundamentals

Increased railcar shipments to our Leasing Group, partially offset by a decline in external sales. Q310-Q

100%

Formation of TRIP

TRN Rail

Division

ExternalCustomers

TRN Leasing(100% Subsidiary)

TRIP Holdings(20% Subsidiary)

33% Rev46% Backlog


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Competing With Customers

Trinity Lease Fleet Competing w/Major Customers

GE Rail Services

+Greenbrier

Recently GEEquipment Servicesplaced an 11,900 car

order with Greenbrierfor tank and coveredhopper cars

Greenbrier haspreviously notmanufactured these

car models

Trinity Leasing and TRIP are directly competing with TRNs traditional customers

Cars in Lease Fleet


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Excluding FreightCar America, the average competitor P/E and EBITDA multiple are 8.4x and4.8x, respectively.

With a 8.4x P/E multiple and expectations of declining revenue and contracting margins,

Trinity will have a valuation of

Comparable Company Analysis

Comparable Company Valuation Table

($ in millions, except per share values)

Share 2008E

Price as of % of 52-wk Enterprise P/E EBITDA

Company 11/7/07 Low High Value 2007E 2008E 2007E 2008E Margin

Trinity $29.69 100.0% 59.7% $3,602 5.9x 6.1x 8.3x 8.8x 15.7%

American Railcar $19.23 100.0% 44.2% $384 4.5x 3.5x 9.7x 8.3x 11.4%

Greenbrier 23.49 109.6% 59.4% 872 7.0x 6.1x 18.6x 8.4x 11.5%

FreightCar America 38.50 102.4% 64.5% 293 4.1x 9.8x 9.5x 20.4x 6.4%

Mean 8.2x 8.5x 12.5x 12.3x 8.8%

Source: Investext equity research and Company filings.

EV / EBITDA


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Comparable Company Multiple

A decline in railcar demand will lead to an EPS of $2.46 and a share price of $20.63

Projected Income Statement

($ in millions expcept per share value)

Projected

2005 2006 2007 2008 2009

Rail Cars Shipped 22,930 25,240 27,493 24,000 14,850

Rail Group 1,816$ 2,143$ 2,434$ 2,231$ 1,449$Other Segments 893 1076 1319 1649 2308

Revenue 2,710$ 3,219$ 3,753$ 3,880$ 3,758$Revenue Growth -- 18.8% 16.6% 3.4% -3.1%

EBITDA 204$ 383$ 600$ 603$ 537$EBITDA Margin 7.5% 11.9% 16.0% 15.5% 14.3%

EPS 3.28$ 3.24$ 2.46$

P/E Multiple 8.4x

Implied Share Price 20.63$

Historical Year


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DCF Valuation

The DCF valuation of $21.89 implies a 26% downside to the current stock price of $29.69

(in millions except per share data)

2005 2006 2007E 2008E 2009E 2010E 2011E 2012E

Normalized

Residual Yr.

Revenue 2,710$ 3,219$ 3,753$ 3,880$ 3,758$ 3,758$ 3,946$ 4,143$ 4,277$Revenue Growth 38.0% 18.8% 16.6% 3.4% -3.1% 0.0% 5.0% 5.0% 3.25%

EBIT 204$ 383$ 503$ 497$ 395$ 406$ 434$ 487$ 577$EBIT Margin 7.5% 11.9% 13.4% 12.8% 10.5% 10.8% 11.0% 11.8% 13.5%

Income Taxes @ 38% 191 189 150 154 165 185 219

Net Operating Profit after Taxes 312$ 308$ 245$ 252$ 269$ 302$ 358$

Cash Flow

Net Operating Profit after Taxes 312$ 308$ 245$ 252$ 269$ 302$ 358$

Plus: D&A 97 106 142 178 216 256 351Less: Capex (751) (466) (451) (451) (473) (497) (433)Less: Increase in Working Capital 24 17 (16) 0 25 26 18

Free Cash Flow (317)$ (34)$ (80)$ (21)$ 37$ 87$ 295$

Company Valuation WACC Calculation Residual Calculation

PV of Cash Flows ('07- '12) (347) D/V 46.0% Residual Cash Flow 295$

Plus: PV of Residual Value 3,303 Weighted average 6.20% Divided by Cap Rate (r-g) 5.79%

Fair Mkt Value 2,956 Marginal Tax rate 38% Residual Value 5,091$

Less: Net Debt (1,180) E/V 54.0% Mult. by PV Factor 0.65

Implied Equity Value 1,776 Ke 13.46% PV of Residual Value 3,303$

Shares Outstanding 81.1 WACC 9.04%Implied Share Price 21.89

Historical Year Projected Year

5-year DCF analysis


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.....

Risks

Most of TRNs other businessare operating at capacity

Current tank car supply can offsetincreasing industry demand

TRN is not the market leaderin every type of rail car

TRNs other businessesstablize company earnings

Ethanol cars are easily andcheaply converted to other uses

New rail car types will offset thedeclining demand for ethanol cars

Risks To Thesis

Counterpoint

Documents

How to Pitch a Stock (1)