Company Selection and Analysis

Before there is a model, a deck, or a vote, there is a blank screen and a question: which company, and why this one? This Spring 2023 session is the club's answer — the ground floor of the analyst curriculum. It walks the full arc of a pitch in embryo: how to choose a firm, how to understand its business and the macro forces acting on it, how to actually read the three financial statements, how to weigh risks against their mitigants, and how the valuation, the investment thesis, and the recommendation come together at the end. It closes with the club's field guide to the Bloomberg terminal — nine pages of codes indexed by task.

Everything downstream in the curriculum — the valuation model, the reassessment discipline — assumes the reflexes this session installs. It is deliberately built on real companies: KB Home for the business and macro reads, Air Products for the balance sheet, Walt Disney for the income statement, Leidos for capital structure, Metro do Porto for the cash flow statement, and Public Storage for relative valuation.

Where it all starts

Choosing a firm is not a stock screen. The session frames it as three questions asked in sequence, each one a filter the company must survive before the next.

Understanding the business

The business read is a checklist of questions, and the session answers each one for KB Home, the US homebuilder, to show what a complete answer looks like:

Answering these before opening the accounts pays off twice: you capture a sense of how the firm works, and you know what you should expect to find in the financial statements before you find it.

Understanding the macro

Macro matters because the economic environment affects how the firm performs, because macro also carries events like geopolitics and pandemics that move the whole market, and because the firm's geography and industry shape its outlook. The watch list: the Macro Department's overview, central bank decisions (the local central bank, the ECB, and the Fed), the key data flow — consumer confidence, spending, government data, unemployment, inflation prints, PMIs — and the key prices for the industry at hand.

Fundamental, not technical

There are two families of company analysis. Technical analysis evaluates investments through price trends and chart patterns, on the assumption that past trading activity predicts future price moves. Fundamental analysis seeks a stock's real or fair market value from the business and its financial statements. PMC does fundamental analysis — and within it, both branches: absolute valuation, building a DCF from the firm's own estimated revenues and costs, and relative valuation, comparing the firm with key industry peers on ratios like EV/EBITDA, P/E, and P/B.

Reading the statements

The balance sheet

The balance sheet is an overview of the firm's assets and commitments in the short and long term — informative of its financial position. Assets are ordered from most liquid (cash, short-term investments, receivables, inventories) to least (plant and equipment, intangibles like copyrights and patents); liabilities split at the 12-month line into current and non-current; equity is the residual balance, dominated by share capital and retained earnings.

The first pass over it is liquidity analysis — can the firm meet its short-term obligations? Run on Air Products' 2022 accounts:

Net working capital — current assets minus current liabilities — came to roughly 2,817 million dollars: the capital left after meeting every short-term obligation and turning all current assets into cash.

The second pass is cash-flow management — a liquid firm can still struggle to generate cash. Three periods measure the operating rhythm:

Chained together they give the cash conversion cycle — how long the firm takes to generate cash from its operations: ACP + AHP − APP = 52 + 20 − 108 = −36 days. A negative cycle means the suppliers are financing the firm's operations: Air Products collects from customers and turns its inventory long before its own bills come due.

The third pass is capital and debt structure — what financing supports the operations:

Alongside the ratios, always pull the debt schedule — Leidos' maturities run 2022 through 2026-and-beyond, and a wall of near-term maturities reads very differently from a long tail.

The income statement

The income statement compiles all revenues and costs — it is mostly an indicator of profitability. Reading Walt Disney's 2021 accounts: revenue presentation can break down by product and service as well as by geography; the cost structure depends on the industry and on how the company is organised (SG&A), with some costs there purely for accounting purposes (D&A); and additional items can matter depending on amount and frequency — Disney's statement carried restructuring charges and income from investee companies. Whenever possible, get a view of the evolution and segmentation of revenues and costs: Disney's 67.4 billion of 2021 revenue splits six ways by segment (affiliate fees, advertising, subscriptions, parks, licensing, other) and three by geography, with the Americas contributing over 80%.

The ratio pass here is profitability analysis:

The cash flow statement

Three sections, one balance. Operating cash flows are everything that results directly from the firm's operations. Investing cash flows relate to investments or sales of assets — financial products, property, plant, equipment. Financing cash flows capture the raising and repayment of debt and equity. The balance of the statement is the variation in the firm's cash position.

The session's example is deliberately uncomfortable: Metro do Porto, the Porto subway operator, generates negative operating cash flow and positive investing cash flow — it is selling assets to finance its operations. The statement that looks healthiest at the bottom line can be telling a survival story in the sections.

Risks and mitigants

The session drives the point home with seven real cases, each pairing a factual red flag with what actually happened:

The pattern to internalise: JCPenney and Apple show a near-identical liquidity flag with opposite outcomes. The fact was never the analysis — the mitigant, or its absence, was.

Putting it all together: the valuation

Absolute valuation determines intrinsic value with a DCF built from the captions studied above. The session structures it in four blocks:

Relative valuation uses industry median or average ratios of key metrics to assess the company against its peers. The session runs it on Public Storage, the self-storage REIT, against National Storage Affiliates, Extra Space Storage, CubeSmart, and Life Storage — comparing FFO per share, P/FFO, EV/EBITDA, P/B, P/E, and P/S, then reading the implied prices by quartile into a football field next to the DCF. The applied example takes one ratio end to end: the industry median P/S of 15.23, multiplied by Public Storage's 21.69 billion of sales, implies a price near 330 against a market price near 289 — undervalued under this scenario.

The thesis and the recommendation

The investment thesis explains why a certain security is a good investment opportunity. The questions to work through: why should we invest in this security, and why does it stand out from the crowd? What are the firm's key strengths? What role can the security play in PMC's portfolio, and how does it fit the club's goals? Which macro conditions particularly favour the company right now? What value can the stock add compared with the securities already in the portfolio? What particular events — political, economic, social — are shaping the outlook? And is the valuation the heart of this pitch, or is the macro context doing the work?

The recommendation turns the thesis into a specific course of action: what should we buy, and how much as a percentage of the overall portfolio? What are the funding sources — selling other securities, cash, or a mix? What price range do we see fit, with stop-losses and take-profits? What is the potential upside and downside? When should the transaction be enacted if approved, and what information should we monitor that might force us to act quickly?

Collecting the information: the Bloomberg index

The session closes with the club's index of Bloomberg terminal codes — nine pages organised by task: economic indicators, company data, absolute and relative valuation tools, technical analysis, directories, currencies, bonds, portfolio management, commodities, and ETFs and options. The mechanics come first: load the security, then any function code applies to it. The full tables live in the deck; the appendix below carries the ones a new analyst reaches for first.