Philadelphia Investment Research Challenge Agenda Overview Daken Vanderburg CFA Vanderburg

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					2008 Philadelphia Investment Research Challenge

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Agenda
Overview
Daken Vanderburg, CFA Vanderburg
Ethics and Code of Standards
Domenic D’Gi D i D’Ginto, CFA

How to Write a Research Report
Ryan Harkins, CFA

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Participating Schools

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Participating Company

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Timeline
Kick-off: October 23rd, 2008 IR Presentation: P i November 7th, 2008 Research Reports (1st Draft) Due to Mentors: December 12th, 2008 Research Reports ( p (final Draft) Due to Society: ) y January 9th, 2009

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Timeline (continued)
Finalist Teams Announced Mid-February, 2009 Panel P P l Presentations i Early March, 2009 North American Regional Championships May, 2009 (NYC) Global Championships p p May, 2009 (London or Hong Kong)

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Resources
http://www.ircphilly.com http://www.cfainstitute.org/society/challenge/in dex.html http://www.cmcsa.com

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Ethics & Code of Standards - Dominic D’Ginto, CFA

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Ethics
Character i d i the right thing, when Ch is doing h i h hi h nobody is looking…..

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Ethics
Why Wh are the C i l M k b k h Capital Markets broken today…..?

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Ethics
….. b because there i not any trust. h is

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Ethics
The Th CFA has always b h l been about b Ethics…..

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Ethics
Professionalism: Knowledge of the law Independence and Objectivity I d d d Obj i i Misrepresentation Misconduct

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Ethics
Integrity of Capital Markets: Material Nonpublic information Market Manipulation M k M i l i

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Ethics
Duties to Clients: Loyalty, Prudence and Care Fair D li F i Dealing Suitability Performance Presentation Preservation of Confidentiality

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Ethics
Duties to Employers: Loyalty Additional C Addi i l Compensation Arrangements i A Responsibilities of Supervisors

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Ethics
Investment Analysis, Recommendations, Actions: Diligence and Reasonable Basis Communication with Cli C i i i h Clients Record Retention

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Ethics
Conflicts of Interest: Disclosure of Conflicts Priority f T P i i of Transactions i Referral Fees

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Ethics
Responsibilities of CFA Members and Candidates: Conduct of Members and Candidates Reference to the designation R f h d i i

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How to Write an Equity q y Research Report -R Ryan Harkins, CFA H ki

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Key Elements
Business Description Industry Overview and Competitive Positioning Financial Analysis Valuation Investment Risks Investment Summary

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Business Description
Products or services Customers Demand factors Distribution strategy Profit model Current earning power Management’s priorities

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Example: Valassis Communications
Delivers coupons and other promotional ads to consumers via shared mail, newspaper polybags and newspaper inserts Customers are major retailers and consumer packaged goods manufacturers that want to motivate consumers 60-70% of consumers respond to p p promotions

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Example: Valassis Communications
Print and paper are largest variable costs Distribution is largest fixed cost and creates significant operating leverage i ifi i l Current earning power exceeds $1.00 per share, but weakening economy will create significant pressure as advertisers reduce budgets Management is focused on (i) moving newspaper customers to shared mail and (ii) reducing debt

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Industry Overview & Competitive Positioning
Market size Competitors Competitive advantages Competitive disadvantages Market share Pricing power

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Example: Valassis Communications
Several regional competitors but only Valassis has a national platform that can reach every U.S. household Declining newspaper circulation hurts but Valassis can move customers to shared mail The internet is a growing source of competition Pricing power is limited but the company s scale company’s provides a significant cost advantage

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Financial Analysis
Study historical financial statements Income statement, balance sheet, cash flow statement Focus on trends F d Profit margins, asset turns, capital structure, returns on capital, growth etc. capital growth, etc Estimate future results

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Example: Valassis Communications
Valassis Communications (VCI)
Income Statement Sales COGS Gross Profit Operating Expenses Operating Income Interest Expense Other Income Non-recurring Income Pretax Income Taxes Minority Interest Net Income Balance Sheet Cash & Short-term Investments Accounts Receivable Inventories Other Current Assets Fixed Assets Goodwill Other Intangibles Long-term Investments Other Assets Total Assets Short-term Debt Accounts Payable Taxes Payable Other Current Liabilities Long-term Debt Deferred Taxes Minority Interest Other Long-term Liabilities Total Liabilities Stockholders' Equity 1998 739.2 493.2 246.0 71.2 174.8 34.5 2.2 (6.0) 136.5 52.2 (0.0) 84.3 84 3 1998 6.9 96.6 31.9 7.6 46.4 21.4 19.8 1.4 232.0 69.1 89.5 340.5 1.5 500.5 (268.5) 1999 793.9 496.8 297.0 83.1 213.9 26.0 0.7 188.7 67.5 121.1 121 1 1999 11.1 94.6 29.2 7.4 52.8 24.7 15.4 9.6 2.4 247.2 77.7 91.9 291.4 1.9 462.8 (215.6) 2000 835.3 530.6 304.8 81.6 223.2 22.9 (13.7) 15.6 202.1 76.4 125.7 125 7 2000 11.1 114.6 27.9 14.1 60.0 59.0 13.9 18.1 7.0 325.7 85.7 1.0 84.4 325.5 1.7 498.2 (172.5) 2001 847.5 544.8 302.6 89.2 213.5 17.7 (2.0) (6.1) 187.7 68.5 119.1 119 1 2001 10.6 136.1 27.9 9.0 64.1 64.2 13.5 34.0 3.8 363.0 2.6 82.8 87.7 252.4 3.3 428.7 (65.7) 2002 852.3 538.8 313.5 94.7 218.8 13.3 (0.9) (55.3) 149.2 53.9 95.3 95 3 2002 97.2 114.6 21.0 9.2 66.7 49.7 13.0 3.8 10.9 386.1 86.1 75.7 257.3 0.3 419.4 (33.3) 2003 916.5 620.1 296.4 120.2 176.1 13.1 3.7 (3.9) 162.8 59.1 103.7 103 7 2003 207.4 210.1 21.0 18.2 86.9 118.7 12.8 3.6 14.2 692.8 51.8 197.8 99.5 259.8 7.7 616.7 76.1 2004 1,044.1 748.4 295.7 133.2 162.5 11.4 2.7 2.9 156.8 56.1 100.7 100 7 2004 188.1 267.4 27.6 18.1 93.5 121.3 13.5 0.3 8.2 738.0 231.8 83.6 273.7 8.4 597.5 140.5 2005 1,131.0 836.9 294.1 135.8 158.4 10.9 5.7 (6.9) 146.2 50.8 95.4 95 4 2005 136.4 273.9 25.2 15.5 108.1 121.1 12.9 0.6 4.0 697.7 14.3 215.7 93.5 259.9 2.7 8.1 594.2 103.5 2006 1,043.5 790.1 253.3 131.7 121.7 10.9 6.3 (33.5) 83.5 32.3 51.3 51 3 2006 155.2 343.0 25.8 18.5 109.4 121.1 12.3 4.9 11.2 801.4 268.8 93.4 259.9 3.5 8.2 633.9 167.6 2007 2,242.2 1,722.1 520.1 341.9 178.2 84.9 8.0 (12.4) 88.9 30.9 58.0 58 0 2007 125.2 522.0 43.6 19.4 304.6 845.5 300.4 7.2 22.6 2,190.5 30.9 333.7 176.7 1,279.6 120.5 29.0 1,970.6 219.9 2008E 2,448.0 1,878.5 569.5 393.6 175.9 96.1 6.5 (2.4) 83.9 32.9 51.1 51 1 2008E 208.9 502.4 44.2 37.6 244.1 844.2 295.8 6.9 24.3 2,208.3 136.3 325.7 14.9 152.7 1,146.4 122.5 34.7 1,933.2 275.1

October 8, 2008
2009E 2,448.0 1,885.0 563.0 386.8 176.3 92.2 84.0 32.8 51.3 51 3 2009E 179.9 522.0 43.9 37.6 209.1 844.2 295.8 6.9 24.3 2,163.7 136.3 336.0 14.9 152.7 1,040.2 122.5 34.7 1,837.3 326.4 2010E 2,570.4 1,979.2 591.2 411.3 179.9 86.4 93.6 36.5 57.1 57 1 2010E 208.5 553.6 48.6 37.6 174.1 844.2 295.8 6.9 24.3 2,193.5 136.3 358.8 14.9 152.7 990.2 122.5 34.7 1,810.1 383.5

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Example: Valassis Communications
Valassis Communications (VCI)
Cash Flow Statement Net Income D&A Deferred Taxes Other Losses (Gains) on Sale, etc. Change in Working Capital Cash from Operations Capital Expenditures Acquisitions & Investments Sale of Assets Other Cash from Investing Dividends Paid Change in Short-term Debt Change in Long-term Debt Change in Capital Stock Other Cash from Financing Exchange Rate Effect Change in Cash Per Sh P Share Shares Outstanding Book Value Per Share Tangible Book Value Per Share Earnings Per Share Analysis & Assumptions Sales Growth Days Sales Outstanding Inventory Turns Days Payable Outstanding Gross Margin Operating Margin Tax Rate Effective Rate on Debt ROA Debt/Capital Debt/EBITDA ROE EPS Growth 1998 84.3 15.8 (0.6) 3.6 (13.6) (1.6) 87.9 (13.4) 0.1 (0.6) (13.9) (26.7) (75.8) (102.5) (28.5) 1998 59.3 (4.53) (4.86) 1.42 1998 NA NA NA NA 33.3% 23.6% 38.3% NA NA 473.3% 1.7x NA NA 1999 121.1 12.9 0.7 4.1 (7.0) 15.0 146.7 (14.3) 0.2 (10.9) (24.9) (49.1) (68.6) (117.7) 4.2 1999 58.1 (3.71) (3.98) 2.09 1999 7.4% 44.0 16.3 53.9 37.4% 26.9% 35.8% 8.2% 50.6% 384.5% 1.2x -50.0% 46.7% 2000 125.7 11.3 (7.7) 30.9 0.3 (46.4) 114.2 (14.0) (29.9) 0.3 (13.0) (56.7) 33.3 (90.8) (57.5) 0.1 2000 55.5 (3.11) (3.36) 2.27 2000 5.2% 45.7 18.6 56.2 36.5% 26.7% 37.8% 7.4% 43.9% 212.8% 1.3x -64.8% 8.6% 2001 119.1 13.8 9.1 24.0 (2.1) (32.4) 131.5 (15.7) 2.2 (24.3) (37.8) (70.5) (23.7) (94.2) (0.5) 2001 54.4 (1.21) (1.46) 2.19 2001 1.5% 54.0 19.5 56.4 35.7% 25.2% 36.5% 6.1% 34.6% 134.7% 1.1x -100.0% -3.3% 2002 95.3 12.7 (12.1) 64.5 0.7 33.2 194.3 (15.5) (20.5) 1.0 0.1 (35.0) (2.6) (70.2) (72.8) 86.5 2002 53.8 (0.62) (0.86) 1.77 2002 0.6% 53.7 22.0 57.2 36.8% 25.7% 36.2% 5.2% 25.4% 114.9% 0.7x -192.5% -19.1% 2003 103.7 14.9 2.3 3.8 (1.9) 122.7 (18.3) (48.4) 0.7 (2.1) (68.1) 51.6 1.7 53.2 2.3 110.2 2003 52.3 1.46 1.21 1.98 2003 7.5% 64.6 29.5 83.6 32.3% 19.2% 36.3% 4.6% 19.2% 80.4% 0.5x 484.9% 12.0% 2004 100.7 15.5 6.0 7.0 (0.4) (52.0) 76.8 (18.9) (274.5) 311.2 (3.0) 14.8 (38.7) (32.4) (71.2) 2.0 22.3 2004 52.2 2.69 2.43 1.93 2004 13.9% 83.5 30.8 104.8 28.3% 15.6% 35.8% 3.9% 14.1% 66.1% 0.5x 93.0% -2.8% 2005 95.4 16.0 4.2 2.2 0.0 (1.6) 116.2 (24.7) 30.9 (6.1) 0.1 (135.5) (135.5) (1.8) (20.9) 2005 50.2 2.06 1.81 1.90 2005 8.3% 87.3 31.7 97.6 26.0% 14.0% 34.8% 4.0% 13.3% 72.6% 0.8x 78.2% -1.5% 2006 51.3 14.9 1.6 10.2 (28.1) 49.8 (16.3) (4.0) (30.5) 0.2 (50.6) (14.4) 1.8 (12.6) 1.7 (11.7) 2006 47.8 3.51 3.25 1.07 2006 -7.7% 107.9 30.9 111.9 24.3% 11.7% 38.6% 4.1% 6.8% 60.8% 0.8x 37.8% -43.5% 2007 58.0 62.5 3.6 17.1 0.2 15.4 156.8 (30.5) (1,188.9) 102.5 (0.6) (1,117.5) 1,050.6 (19.2) 1,031.4 1.9 72.6 2007 47.9 4.59 (1.68) 1.21 2007 114.9% 70.4 49.6 63.9 23.2% 7.9% 34.7% 10.8% 3.9% 85.6% 4.9x 29.9% 12.9% 2008E 51.1 69.8 (12.7) 8.3 0.3 (4.7) 112.1 (29.7) 28.9 (0.8) (27.9) 0.0 (27.9) 0.2 83.6 2008E 47.9 5.75 (0.43) 1.07 2008E 9.2% 76.4 42.8 64.1 23.3% 7.2% 39.2% 7.4% 2.3% 82.3% 4.4x 20.6% -12.0%

October 8, 2008
2009E 51.3 70.0 (9.0) 112.2 (35.0) (35.0) (106.2) (106.2) (29.0) 2009E 47.9 6.82 0.64 1.07 2009E 0.0% 76.4 42.8 64.1 23.0% 7.2% 39.0% 7.5% 2.3% 78.3% 4.0x 17.0% 0.4% 2010E 57.1 70.0 (13.5) 113.6 (35.0) (35.0) (50.0) (50.0) 28.6 2010E 47.9 8.01 1.83 1.19 2010E 5.0% 76.4 42.8 64.1 23.0% 7.0% 39.0% 7.5% 2.6% 74.6% 3.7x 16.1% 11.3%

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Valuation
Intrinsic value estimates based on discounted future cash flows are ideal but “garbage in – garbage out” Other techniques can indicate opportunity:

Valuation relative to history Valuation relative to peers Valuation relative to the market

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Example: Valassis Communications

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Example: Valassis Communications

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Example: Valassis Communications

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Investment Risks
Demand destruction Cost pressures Competitive threats Financial leverage

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Example: Valassis Communications
Deteriorating economic activity in the U.S. may reduce demand for the company’s services and impair earnings Significant financial leverage limits the company’s flexibility and may create liquidity problems if the economy weakens materially and credit markets remain frozen

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Investment Summary
In a handful of bullets, describe:

the company’s business; the k i k t h h ld th key risks to shareholders; its value; and the expected return f buyers at the current p for y market price

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Example: Valassis Communications
Company with competitively advantaged business in a healthy but cyclical industry Significant d b b d i Si ifi debt burden increases risk b i i k but is manageable At 5x EBITDA, 4x earnings and less than 1x EBITDA book value, the stock is significantly undervalued Worth at least $10 00 per share, more than 100% $10.00 share higher than current price

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