You are all Equity Researchers for a financial services company in which I am a Portfolio Manager. Our firm is currently evaluating possible equity investments in a selected number of industries and I have organized you into teams to evaluate firms in each of these industries.
Group 1: Beverage Group 6: Beverage Group 11: Apparel
Group 2: Apparel Group 7: Apparel Group 12: Restaurant
Group 3: Restaurant Group 8: Restaurant Group 13: Technology
Group 4: Technology Group 9: Technology Group 14: Apparel
Group 5: Beverage Group 10: Beverage
For the industry your team is assigned, select both a base company and one similarly-sized competitor (peer). You must send both the name and the ticker symbol for both companies to me for my approval.[footnoteRef:1] Once approved, you must obtain the three most recent annual reports (Form 10-K) for both companies. [1: While I must approve all company selections, I will generally provide broad latitude with them so long as financial statements for the companies are publicly available and no two Groups have selected the same base company.]
Each team is required to perform analysis and provide a recommendation to me. You must make one of five recommendations: a strong buy for your base firm, a weak buy for your base firm, a strong buy for your peer firm, a weak buy for your peer form, or no buy (i.e., we should not invest in either firm). The analysis and recommendation must be written in the form of a business memorandum from the Equity Research team (you) to the Portfolio Manager (me) and must include each of the following components. In writing the memo, use section headers to clearly delineate each of the following five sections.
1. Analyze three items on the income statement (or income statement-based financial ratios; see the list on p. 3) for your base company for the last three years and discuss whether the company’s performance related to these items appear to be improving, deteriorating, or remaining stable. Justify your answer.
2. Analyze three items on the balance sheet (or balance sheet-based financial ratios; see the list on p. 3) for your base company for the last three years and discuss whether the company’s performance related to these items appear to be improving, deteriorating, or remaining stable. Justify your answer.
3. Identify the single largest adjustment (in absolute value) to reconcile net income to operating cash flow in the most recent year of your base company’s statement of cash flows (contact me if they did not use the indirect method; also contact me if the identified item reflects something we haven’t discussed in class before). Describe how and why the item arises – that is, broadly describe how it creates a disconnect between income and cash flows for your company. Then, assess the risk (low/medium/high) that this item adversely affects your base company’s earnings quality in the most recent year. Justify your answer.
4. Identify two items not included in (or derived from) the financial statements that you think would be important to someone considering whether to invest in your base company. Discuss your reasons for believing that these items would be important in making an investment decision. (Note: you will need to do some investigation to find these items for your company, and you will need to incorporate knowledge gained from other business classes.)
5. Compare your base company’s financial statements with those of its competitor and provide an official recommendation. Justify and provide support for your recommendation. (Note: your answer in this section must include some financial issues, but your answer need not be limited to a discussion of financial issues.)
1. Your memorandum can have no more than six pages of text and must be formatted as follows: double-spaced with one-inch margins (top/bottom/left/right), using Times New Roman 12-point font. The text of your memo should comprise the first six pages of your document (i.e., do not include a cover page).
2. All data used in the income statement, balance sheet, and cash flow analysis MUST be taken directly from the financial statements. That is, for these sections you may not use data obtained from external (e.g. internet) sources – the data must be sourced directly from the company’s annual financial statements.
3. Immediately after the six pages of text – on the 7th page of your document – you must include a worksheet in which you provide detail supporting all ratio calculations referenced in the text. Every financial value used must include a reference to the page of the annual report from which the number was extracted, and the relevant portions of the annual reports must be highlighted (see item 4 below).
4. Any referenced pages of the annual report (for both companies) must be appended at the end of the document (starting on page 8). Do not attach the entire annual reports – only the referenced pages. (Adobe Acrobat has a tool which can extract pages from one PDF and insert them into another PDF file.)
5. Your memorandum must also contain appropriate quotation marks for quoted material and appropriate citations for material taken from sources outside the financial statements. Financial or other values used in the Other items and Investment decision sections that are not sourced from the financial statements must include appropriate citations.
6. Each group must upload their memorandum to Canvas in PDF form by 11:59 PM on April 19th, 2021.
The written project will be graded on a 100-point scale, in two phases. First, my GTA will review the projects for compliance with the basic requirements (15 points). Second, I will review the projects for content and for composition (85 points). They will be graded as follows:
|Income Statement Items: Choices||8|
|Income Statement Items: Analysis||8|
|Balance Sheet Items: Choices||8|
|Balance Sheet Items: Analysis||8|
|Cash Flow Item: Analysis||8|
|Other Items: Choices and Analysis||10|
|Investment Decision: Analysis||20|
|Compliance with Instructions||15|
The ideal memorandum is well written, free of grammatical and other writing errors, and well organized. The memo addresses each of the issues specified in the requirements, uses appropriate examples to illustrate concepts discussed, and integrates the annual report data with the text. The memorandum focuses on important items, demonstrates a thorough understanding of the relationships among financial statement data, and is cohesive.
Additionally, each individual must submit an evaluation form in which you evaluate each member of your team, excluding yourself , using the following scale:
5: The teammate did much more than their share
4: The teammate did somewhat more than their share
3: The teammate did approximately their share
2: The teammate did somewhat less than their share
1: The teammate did much less than their share
The default rating should be a “3.” Giving every member of the team a “5” will be functionally equivalent to giving every member a “3” – and will make me do extra work to adjust the figures. For every group member who either rates themselves or assigns an average rating of 4 or above, I will reduce the group’s “Compliance with Instructions” grade component by one point.
Teammates whose ratings average 1 point above that of the team will have their scores raised by 5%. Teammates whose ratings are less than 1 point above the team average and at least 2.41 will receive the grade on the paper that is determined by the grading rubric. Teammates whose scores average between 1.5 and 2.4 will have their project grade lowered by 10%. Teammates whose scores average between 0.5 and 1.49 will have their project grade lowered by 20%. Please note that I have utilized this evaluation process in the past, and on average approximately 90% of students’ grades do not change.
You will submit the evaluation form via a link made available on our Canvas page; the form is available at that link.
ALTERNATE INDIVIDUAL PROJECT (if necessary)
I want to ensure that by the time each project is submitted, there are no students who did not contribute at all to their team’s project. In the event you have a teammate that is not contributing at all to the project, please communicate this to me as soon as possible. I will deal with the student directly and, depending on the circumstances, I may remove them from your group.
In order to allow each group enough time to finish the project, I will make the decision to remove a student from their group at least three days before the due date of the project. At that time, the removed student will receive instructions to complete an alternate individual project. The alternate individual project will be due on 4/26/2021.
INCOME STATEMENT AND BALANCE SHEET RATIOS
While you are not limited to the financial statement ratios we covered in class for your I/S and B/S analysis, if you choose to use them, please use the following classifications.
With Terra McGhee
Group Project – Instructions
Spring 2021 | Page 3
Income Statement-based ratios:
· PM, GPM
· Interest coverage
· Change in revenue
Balance Sheet-based ratios:
· Asset turnover
· ART, INVT, PPET
· D/E ratio, Net working
capital, Current ratio,