Plugin-A Closer Look at the Top Line

8/2/2019 Plugin-A Closer Look at the Top Line

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BetterInvesting Stock Curriculum Class 202

Presented by the BetterInvestingVolunteer Advisory Board

A Closer Look at the TopLine

BetterInvesting VolunteerAdvisory Board



Sales GrowthAGENDA

A. Revenue/Sales Growth

B. Company and Products

C. Industry & Market

D. Future Sales Growth

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What is normal business?

Rate of growth?

Consistent & Predictable?

Product Growth Support?

Competiveness?

Economic resilience?

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PART A.REVENUE/SALES GROWTH

1. Income Statement2. Ideal Sales Growth

3. Consistent Sales Growth

4. Historical Sales GrowthFirst look

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Normal Business?

Rate of growth?

Consistent & Predictable?


Competiveness?


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Sales

- Costs

Pre-tax Profit (PTP)

Net Profit (i.e., Earnings)

Shares Outstanding

Earnings Per Share (EPS)

Dividends Retained Earnings

- Taxes

$10,000

- $7,000

$3,000

- $900

$2,100

1000

$2.10

$0.21

(10%)

(30%)

(say, $7 per item)

(1000 items at $10 each)

(90%)

$1.89

s

p

e

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Ideal Sales Growth

Consistent 5-10years

SalesPre-tax Profit

Earnings

Return on Equity

Debt

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Historical Sales Growth

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10-year = 26.5% 5-year = 31.9% 3-year = 33.7%

Recent history very stable! Normal?


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Historical Results

Trend? Recent trend? Consistent?

Low expectations?

High expectations?

Normal?

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Past

10 years 5 years 3 years 1 year 1 qtr

Sales Growth 26.50% 31.90% 33.70% 47.90% 61.30%

Actual Revenue Growth

Recent Past



Normal Business?

Rate of growth? 25%+

Consistent & Predictable? YES


Competiveness?


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Part A. Sales GrowthSummary

Income Statement

Ideal Sales Growth

Consistent Sales Growth

Historical Sales

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Review

1. What is the differencebetween sales and revenue?

2. How do you recognizeconsistent growth?

3. Identify two resources thatprovide historical salesgrowth.

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POLL 1

(Choose all that apply)

The SSG helps us understand:

1. Historical sales growth

2. Consistency & predictability ofsales growth

3. Product growth strategy

4. Competiveness

5. Economic resilience

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PART B.COMPANY & PRODUCTS

1. Lifecycle of a Company

2. Types of Sales Growth

3. Analysts Research

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Normal Business?




Competiveness?


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BestInvestmentOpportunity

Break Even Point

Speculation

0%


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$12,493 $12,127 $13,222

$14,354 $13,859$17,479

$6,742$13,033

$25,179

$4,958

$-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

2008 2009 2010

$Mio

Fiscal Year

iPAD

iPhone

Macintosh

iPod

Deeper analysis requires a reviewof sales by product line.

Product line

Flagship products? What is the growth rate of each product line?

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BestInvestmentOpportunity

Break Even Point

Speculation

37%

29%

34%

0%



Types of GrowthStrategies

Organic

Acquisition & Merger

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Organic Growth

What?Selling more productsSelling to more buyers (market segment)

Increased innovation Advantages?SustainableBuilds on core competencies

Disadvantages?Time to marketCost of new product research &

development

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Acquisition Growth What?

Buying new products Buying new buyers (market segment)

Buying production efficiency Buying innovation

Disadvantages? Not Sustainable May not build on core competencies/deworsification

Advantages? Time to market Cost of new product research & development Diversification

How to Identify? Analyst's Research Annual Reports (Goodwill)

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Summary of salesgrowth strategies

Organic

Acquisition

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Resources

Value Line

Standard and Poors

Morningstar

Yahoo

CNN

Reuters

Manifest Investing

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Value Line Analysis

Increasingmarket share!

Globalmarketbenefits

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Company Analysiswww.morningstart.com(subscription)

Bulls The iOS ecosystem has likely

escaped the reach of anypotential competitors. Howeverthe smartphone market shakesout, we believe the iPhone willcapture a significant part of it.

At less than 10% shareworldwide, the Mac computercan continue to increase itsshare as a capable Windowsalternative.

Apple's retail stores are exposinga new generation of consumersto the breadth of the company'sexpanding product line.

Bears Apple's sales are concentrated in the U.S.

and must face the headwinds of a secularchange in consumer spending habits.

While an iconic U.S. brand, the companyis less well-positioned in the relativelyfaster-growing international markets.

It may be difficult for the company tosustain innovation across its broadproduct line simultaneously, making itdifficult for Apple to maintain itsprofitability and growth.

Google's Android currently has theadvantage of much wider carrierdistribution than the iPhone. Apple mustreach agreements with additional U.S.carriers to fight off the flood of Androiddevices.

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Analysts Sales Grow Expectationshttp://www.stockcentral.com/Administration/StockCentralResearch/tabid/155/Default.aspx?ticker=AAPL

Source CurrentQuarter NextQuarter CurrentYear NextYear 3-5 Years

Value Line(10/8/2010)

$18.4B $21.3B $63.3B $78B23%

$110B21.5%

Yahoo $18.86B91%

$22.22B41.7%

$63.76B74.5%

$81.03B27.1%

S&P (10/9/2010) 47% 13%

CNN $18.9B $22.3B20.5%

$63.7B $81.7B74.48%

Reuters $22.3B $18.4B $63.7B $81.1B27%

Manifest Investing 14.8%

Morningstar(9/9/2010)

16%

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Historical + ACE +Product

Trend? Recent trend? Consistent?

Low expectations?

High expectations?

Normal?

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Past Present Future

10 years 5 years 3 years 1 year 1 qtrCurrent

QtrNext Qtr

Current

Year

Next

Year3-5 years

Sales Growth 26.50% 31.90% 33.70% 47.90% 61.30% 61.30% 20-42% 47-75% 13-27% 15-22%P rod uct i Pod i Pod i Ph one i Phon e i Phone i Pho ne i Pad i Pad i Pad i Pad

Actual Revenue Growth Analyst 's Concensus Est imates

Recent Past Near Future



Normal Business?



Product Growth Support? YES

Competiveness?


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http://www.morningstart.com/http://www.stockcentral.com/Administration/StockCentralResearch/tabid/155/Default.aspx?ticker=AAPLhttp://finance.yahoo.com/q/is?s=AAPL&annualhttp://money.cnn.com/quote/forecast/forecast.html?symb=AAPLhttp://www.reuters.com/finance/stocks/analyst?symbol=AAPL.Ohttp://www.manifestinvesting.com/http://www.manifestinvesting.com/http://www.manifestinvesting.com/http://www.manifestinvesting.com/http://www.reuters.com/finance/stocks/analyst?symbol=AAPL.Ohttp://money.cnn.com/quote/forecast/forecast.html?symb=AAPLhttp://finance.yahoo.com/q/is?s=AAPL&annualhttp://www.stockcentral.com/Administration/StockCentralResearch/tabid/155/Default.aspx?ticker=AAPLhttp://www.stockcentral.com/Administration/StockCentralResearch/tabid/155/Default.aspx?ticker=AAPLhttp://www.morningstart.com/


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PART B. Company & ProductsSummary

Lifecycle of a Company

Types of Sales Growth

Research Resources

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Review1. Explain the lifecycle of a product and its

importance to sales growth.2. Where would you find the

product lines of a company? the growth rate for each of those product lines? the geographic growth rate for each product

line?

3. Where would you look to determine if acompany is growing organically or byacquisition?

4. Where would you find analysts sales growthhistory and future estimates?

5. Where would you find analysts commentsabout a companys growth and futureprospects?

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POLL 2


Product lifecycle helps us

understand1. Historical sales growth2. Consistency & predictability of sales

growth


4. Competiveness


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PART C.INDUSTRY & MARKET

1. Competitors & Peers2. Leaders & Laggards

3. Economic Moat

4. Economic Recession Resilience

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Normal Business?




Competiveness?


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Industry & Marketwww.morningstar.com (Quote/Industry Peers)

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Industry leader!

All industries



Industry & Marketwww.standardandpoors.com(subscription)

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Flat unitgrowth

Increasingportablegrowth

Lots ofdetail!



Economic Moat?www.morningstar.com/quote(subscription)

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http://www.morningstar.com/http://www.standardandpoors.com/http://www.morningstar.com/quotehttp://www.morningstar.com/quotehttp://www.standardandpoors.com/http://www.morningstar.com/


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Leader or Laggard

Peer Group

$43B vs. $48B

26.5% vs. 8.1%

Industry

$43B vs. $48B

26.5% vs. 8.1%

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Competitors & Peers

Competitorselling similar

products to the same customersegment vying for market share

Peersimilar size and industry

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Recession Analysis

2000-2001

-32% revenue drop

2007-2008-2009

+35% and +32%

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History + ACE + Product + Market

Trend? Recent trend? Consistent? Low expectations? High expectations? Normal?

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Past Present Future

10 years 5 years 3 years 1 year 1 qtrCurrent

QtrNext Qtr

Current

Year

Next

Year3-5 years

Sales Growth 26.50% 31.90% 33.70% 47.90% 61.30% 61.30% 20-42% 47-75% 13-27% 15-22%

P ro duct i Po d i Po d i Pho ne iP hone iP hone iP hon e i Pad i Pa d i Pa d i Pa d

Competitors Leader Leader Laggard Laggard Laggard Laggard Leader Leader Laggard Laggard

Ge og ra ph ic US /E U US /E U US /E U US /E U U S/ EU U S/ EU U S/ EU U S/ EU US /E U US /E UOrganic? Organic Organic Organic Organic Organic Organic Organic Organic Organic Organic

Industry 8.1% 1.0% (0. 0) -5.3% 10% 12% 10%

Recession -32% 25.30%

Moat? Narrow Narrow Narrow Narrow Narrow Narrow Narrow Narrow Narrow Narrow

Actual Revenue Growth Analyst's Concensus Est imates

Recent Past Near Future


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Normal Business?




Competiveness? LAGGARD

Economic resilience? YES

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PART C. Industry & MarketSummary

Competitors & Peers

Leaders & Laggards

Economic Moat

Economic Recession Resilience

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Review

1. How do you determine who thecompetitors are?

2. How do you determine who isleading and who is challenging tolead?

3. What is an economic moat? How doyou find if your companys moat iswide or narrow?

4. How do you evaluate recessionresilience?

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POLL 3


Industry and market knowledge

helps us most understand1. Historical sales growth

2. Consistency & predictability ofsales growth


4. Competiveness


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PART D.FUTURE SALES GROWTH

1. Central Tendency Effect

2. Rule of 5

3. BetterInvesting Guidance

4. Selecting Future Sales Growth

5. Where to Start Growth Projections

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Normal Business?




Competiveness? LAGGARD

Economic resilience? YES

Time to predict the future!

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Predicting the Future

Central Tendency EffectTend to over-estimate low performance

Tendency to under-estimate high

performance Rule of 5

1 of 5 (20%) under-perform (missexpectations)

3 of 5 (60%) perform as expected (meetexpectations)

1 of 5 (20%) over-perform (exceedexpectations)

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Selecting Your 5-yearBetterInvesting Guidance

Emphasize recent history and trends

Should not exceed the norm

Should not exceed analystsexpectations

Should not exceed 20%

GUIDANCE is NOT RULES

JUDGMENT and COMMON SENSEALWAYS APPLY!

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Selecting your 5-yr sales growth

Historical & Future Growth High risk choice = 25%?

Normal = 26-32%?

Low risk choice = 15%?

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Sales Growth History Future(Analysts)10-year 26.5% n/a

5-year 31.9% 15-21%

3-year 33.7% 15-21%

1-year (TTM) 47.9% 23-27%

Current Quarter 61.3% 90%

Recession 25.3%

High risk choice

Normal

Low risk choice




Dont exceed the norm High risk choice = 25%?

Normal = 26-32%? Low risk choice = 15%?

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5-year 31.9% 15-21%

3-year 33.7% 15-21%

1-year (TTM) 47.9% 23-27%


Recession 25.3%




Dont exceed analysts High risk choice = 25%?

Normal = 26-32%?


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5-year 31.9% 15-21%

3-year 33.7% 15-21%

1-year (TTM) 47.9% 23-27%


Recession 25.3%




Maximum of 20% High risk choice = 25% 20%?

Normal = 26-32%?


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5-year 31.9% 15-21%

3-year 33.7% 15-21%

1-year (TTM) 47.9% 23-27%


Recession 25.3%

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POLL 4 What will you choose as your estimated 5-

year SALES growth rate?

Aggressive 20%+

Conservative 15% or less Between 15% to 20%

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5-year 31.9% 15-21%

3-year 33.7% 15-21%

1-year (TTM) 47.9% 23-27%


Recession 25.3%



DecisionSelecting your 5-yr sales growth

Emphasize recent history and trends

Should not exceed the norm Should not exceed analysts

expectations

Should not exceed 20%

Selection = 15%-20%based on personal risk

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Where to start your projection

End of last yearTo ignore recent quarterly results

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End of last quarter

To adjust for current quarterly results

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End of trend line

To project the norm

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Normal Business?

Rate of growth?

Consistent & Predictable? Product growth support?

Competiveness?


Estimate Future Sales Growth?

CONFIDENCE IN SELECTION?

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Part D. Future Sales GrowthSummary

Central Tendency Effect

Rule of 5 BetterInvesting Guidance

Selecting Future Sales Growth

Where to Start GrowthProjections

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Review

1. Explain what increases yourconfidence in your future sales

growth estimate?2. How do the following impact yourfuture sales growth estimate?

Historic Predictability?Product Line growth rates?Competition?Economic Moat?

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POLL 5


BI guidance helps us

1. Make an aggressive prediction

2. Make a conservative prediction

3. Make an informed decision

4. Avoid emotional decisions

5. Learn from the past

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COURSE SUMMARY64



Course Summary

A. Revenue/Sales Growth

B. Company and Products

C. Industry & Market

D. Future Sales Growth

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POLL 6


Do you feel this material will

1. Help you make BETTER revenuepredictions?

2. Help you make more CONFIDENTrevenue predictions?

3. Help you make moreJUSTIFIABLE predications?

4. ELIMINATE emotional decisions?

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Plugin-A Closer Look at the Top Line