Running head: PORTFOLIO DEVELOPMENT AND STOCK ANALYSIS
5-1 Final Project Milestone Two: Stock Analysis and Portfolio Development
Kerri A. Gentz
SHNU
September 29, 2019
Running head: PORTFOLIO DEVELOPMENT AND STOCK ANALYSIS
2
Stock analysis
Symbol Estimate Dividend Earnings Sales Free cash 5 year Average Average Free cash d beta s per per share per flows per dividend industry industry flow share share share growth PE ratio P/S ratio growth IBM 0.86 5.6 12.38 83.52 13.36 4.6% 23.7 1.12 2.6% ORCL 1.1 0.6 2.21 9.17 2.86 21.1% 20.5 4.45 10% MMM 0.98 4.505 8.16 50.44 7.78 7.0% 23.8 2.59 7% NFLX 1.57 NONE 0.43 22.14 -3.61 N/A 52.5 6 N/A GE 1.12 0.93 0.89 13.50 -0.82 6.3% 23.8 2.59 N/A
Value of IBM
The valuation model being used is the free cash flow model. We used the model because IBM has an outstanding performance as measured by the free cash flow per share.
Value of IBM = free cash flow per share/current market price per share
Value of IBM = 13.36/153.83 = 8.68
The stock's expected return = 0.75% + (0.86*9%) = 8.49%
Value of ORCL
We shall use the dividend valuation model. The method is appropriate since the firm has reported a commendably high 5-year dividend growth. Therefore, it would be appropriate to value the firm using the dividend since it is what desirable feature of the firm. The firm has a low payout ratio and hence the method is suitable for the firm (Hallahan & McKenzie, 2014).
Value of ORCL = Dividend/1+g = 0.6/1.211 =$49.55
Expected return = 0.75% + (1.1*9%) = 10.65%
Value of MMM
The MMM will be valued using the free cash flow valuation model. The method is appropriate since the firm has an outstanding performance in terms of free cash flow per share.
Value of MMM = Free cash flows per share/current market price per share
Value of MMM = 7.78/208 = 3.74
Expected return = 0.75% + (0.98*9%) = 9.57%
Running head: PORTFOLIO DEVELOPMENT AND STOCK ANALYSIS
3
Value of NFLX
The valuation model used is using price multiples. The company does not pay dividends and therefore using dividend growth model would be impracticable. The free cash flow model cannot be used since the firm has a negative free cash flow per share (Kimball & Shapiro, 2018).
Value of the firm = price/sales per share
Value of NFLX = 149.41/22.14 = 6.74
Expected return = 0.75% + (1.57*9%) = 14.88%
Value of GE
The price multiples will be used as the valuation model. The negative cash flow witnessed by the company makes the method most suitable. The firm would have been undervalued if free cash flow method would have been used (Pham & Steen, 2013). The capital expenditure of the firm is higher than the operating cash flows.
Value of GE = price/earnings per share
Value of GE = 27.01/0.89 = 30.35
Expected return = 0.75% + (1.12*9%) = 10.83%
The calculations assume that all the investment have equal weights of 0.2 or 2