Global Investment Research Challenge Where opportunity favors the prepared mind… Kickoff Meeting – Academic Year 2010-2011 The purpose Teach best and ethical practices in equity research through a real-world experience to the next generation of investment professionals Agenda • Challenge Overview and Update • Peter Maher, CFA • Ethics and Code of Standards • Domenic D’Ginto, CFA • How to Write a Research Report • Sanjay Shetty, CFA • Company Presentation • Oona McCullough, Director of Investor Relations, Urban Outfitters Participating Schools Past Champions • 2009 – St. Joseph’s University • 2010 – University of Pennsylvania Global IRC Americas: • 30 Challenges • 200 Universities Asia Pacific: • 16 Challenges • 140 Universities EMEA: • 14 Challenges • 90 Universities Key Components Perform Interview Mentoring by corporate company an industry analysis management professional Write a sell Present to a side equity panel of expert research report judges Timeline Date Event October 21, 2010 Kick-Off Event December 10, 2010 Research Reports (1st Draft) Due to Mentors January 14, 2011 Research Reports (Final Report) Due to Society February 4, 2011 Finalists Announced February 24, 2011 Finalist Presentations April 6-7, 2011 Americas Regional Final (Omaha) April 8, 2011 GIRC Final (Omaha) www.cfaphil.org Participating Company Urban Outfitters, Inc. is specialty retailer offering lifestyle merchandise with annual sales of $1.9 billion. The company was founded in 1970 and is based in Philadelphia. Interacting with Urban Outfitters • One follow up-email per team as the ONLY company contact • Students may contact company suppliers, customers, vendors, etc. • Mentors and faculty may NOT contact the company • Mentors and faculty may NOT provide inside information or company reports Faculty and Mentor Involvement Faculty Advisor Charterholder Mentor • Insight and guidance on • Insight and guidance on research methods and tools industry practice as taught in academia • 6 hours of productive time • 10 hours of productive time maximum maximum • Face to face or virtual • Access to faculty for other • Company management projects unrelated to IRC is question development permitted • Review first draft of research • All work must be the original Report work of the students • Presentation development assistance Report Scoring Section Maximum Business Description 5 Industry Overview & 15 Competitive Positioning Investment Summary 20 Valuation 20 Financial Analysis 20 Other Headings 5 Investment Risks 15 Total 100 Teams School Team Name Philadelphia University Alpha St. Joseph’s University Beta Drexel University Gamma Scranton University Delta Villanova University Epsilon University of Pennsylvania Zeta Millersville University Eta Presentation Scoring Criteria Maximum Argument 35 Questions 35 Team Involvement 15 Poise 10 Materials 5 Total 100 To Do List • By October 29th… • All students, faculty advisors, and mentors must sign and return the Participant Agreement • Students must read the Code of Ethics and Standards of Professional Conduct and complete the online Ethics review • Students must complete the registration form www.girc.membersocieties.org Questions P Ethics & Code of Standards - Domenic D’Ginto, CFA Ethics • Character is doing the right thing, when nobody is looking….. Ethics • Why are the Capital Markets broken today…..? Ethics • ….. because there is not any trust. Ethics • The CFA has always been about Ethics….. Ethics • Professionalism: • Knowledge of the law • Independence and Objectivity • Misrepresentation • Misconduct Ethics • Integrity of Capital Markets: • Material Nonpublic information • Market Manipulation Ethics • Duties to Clients: • Loyalty, Prudence and Care • Fair Dealing • Suitability • Performance Presentation • Preservation of Confidentiality Ethics • Duties to Employers: • Loyalty • Additional Compensation Arrangements • Responsibilities of Supervisors Ethics • Investment Analysis, Recommendations, Actions: • Diligence and Reasonable Basis • Communication with Clients • Record Retention Ethics • Conflicts of Interest: • Disclosure of Conflicts • Priority of Transactions • Referral Fees Ethics • Responsibilities of CFA Members and Candidates: • Conduct of Members and Candidates • Reference to the designation How to Write an Equity Research Report - Sanjay V. Shetty, CFA Key Elements of a Report • Business Description • Industry Overview • Competitive Positioning • Financial Analysis & Trends • Recent Highlights & Key Events • Investment Merits • Investment Concerns • Model Assumptions & Risks • Valuation • Investment Summary Business Description • Brief business description • What do they sell? • Products or Services (Brands and Categories) • Analysis (Contribution, Growth and Margins) • Customers • Whom do they sell to? (Business, Individuals or Government) • Analysis (Contribution, Growth and Margins) • Distribution strategy • What channels they sell through? (Web, Catalog, Retailers, etc.) • Analysis (Contribution, Growth and Margins) Industry Overview • Market size of the industry (USD) • What is the market Growth rate? (CAGR -5 yr) • Market characteristics • Fragmented vs Concentrated • Monopoly/Duopoly/ Oligopoly • Key market players and market share distribution • List top 5 or 10 players • Key industry demand drivers • Recent highlights and current concerns Competitive Positioning • What basis do companies compete on? • Price, product or service quality, customer relationship, scale, etc. • Competitive advantages (Moat) • Cost structure, market leading position, superior technology, etc. • Competitive disadvantages • Market share • Gaining or losing market share • Pricing power Financial Analysis & Trends • Growth (revenue, earnings, EBITDA and operating cash flow) • Margin (gross, EBITDA, EBIT/ operating and net profit) • Returns (assets, equity and invested capital) • Cash flow (operating and free) • Working Capital (cash turnover cycle) • Leverage (credit rating and interest coverage) • Capital requirements & Liquidity (current/quick/cash ratio and capital structure) Recent Highlights & Key Events • Leadership change • New business segment, marketing and product strategy • Business restructuring • Recapitalization • Acquisition or divestiture • Discontinued markets or products • Recent quarter performance Investment Merits • Gaining market share • Market leading position • Pricing power • Superior product/service quality • Established brand • Attractive valuation • Balance sheet characteristics • Near term catalyst Investment Concerns • Client concentration • Lack of pricing power • Lose of market share • High cost structure • Balance sheet leverage • Stiff competition • Unfavorable currency fluctuation Model Assumptions & Risks • Model assumptions • Revenue drivers • Cost drivers • Discount rate • Residual value • Risks to estimates • Unfavorable pricing environment • Unfavorable change in economic scenario • Extreme balance sheet leverage • Demand decline Valuation • Intrinsic value estimates based on discounted future cash flows are ideal but “garbage in – garbage out” • Risks (discount rate, residual value, growth & margin assumptions) • Other techniques can indicate opportunity: • Valuation relative to history (5 years) • Risks (history does not fully reflect future) • Valuation relative to its peers • Risks (no pure play peers) • Valuation relative to the market • Risks (market could be overvalued or undervalued) Investment Summary • In a handful of bullets, describe: • the company’s business; • the key risks to shareholders; • its value; • and the expected return for buyers at the current market price Tips • Start early • Double check your facts • List your data-source • Edit multiple times • Get it reviewed • Incorporate the feedback Questions? Good Luck ! & Thank You !