What are the product market, financial, and/or commercial opportunities the company plans to take advantage of in the future? Why is this company in a strong position to take these advantages and generate cash flow from them? Explain the company's strategic plan to generate cash flow in the future and state your thesis about whether or not this strategic plan is viable.
Briefly describe the company. You can get this information from the company’s website or from a research source ,Yahoo Finance, Google Finance, MSN, Kiplinger's, SiliconInvestor, Smartmoney, Market Guide, Quicken, etc.
3a. Markets Targeted --- in which markets does the firm hope to generate cash?
3b. Product Advantage --- what makes the company’s output unique (vis-à-vis possible competitors)?
3c. Barriers to Entry --- how is the firm going to hold off competition and keep competitors from eroding cash flow?
3d. Capital Spending Requirements --- is the firm going to need to raise additional capital in the financial markets to remain competitive or can it finance future investments out of internal cash flow?
3e. Management --- Evaluate the success of current management. Have they clearly laid out (in the annual reports) their business plan and have they executed on past plans? Can they be trusted to achieve the objectives they set forth?
3f. Investment Positives --- why should a shareholder own their stock, a banker lend them money, a bondholder buy their bond issues?
3g. Investment Negatives --- what are the risks to the firm’s cash flows and therefore to shareholders? For example, what are risks related to competition, pricing, customer management, other relationships necessary to the company’s success (at generating cash flow over time).
Lay out the firm’s business plan to the best of your ability.
Discuss the firm’s financial model. How is the firm financed? Is it cash flow positive? How fast is cash flow growing or cash burn rate declining? Is the firm financially viable? Look at the firm’s cost of sales and compare it to competitors. If possible, look to see if the cost of sales has been rising or falling? What about SG&A per unit of sales? [This is an indication of management effectiveness.]
Financial Performance and Projections
Do a sensitivity analysis to determine what is likely to happen to cash flow under different scenarios.
What are the major events that may signal the success or failure of management’s business plan and point toward one of the possible scenarios in your sensitivity analysis.
Use a ten-year discounted cash flow model to determine the intrinsic value of the company’s stock. Determine the discount rate with the weighted average cost of capital method.
Research Reports from Morgan Stanley:
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Copyright
© 2002, Satya Gabriel, Economics Department, Mount Holyoke College.
5. Strategic Relationships and Partnerships
6. Industry Description
7. Competitive Landscape