Financial Statement Analysis
Research Project Guidelines
PURPOSE:
Your research task and objective is to analyze a firm’s financial reporting information and formulate, using that analysis, and other information available in the public domain, a quantitative assessment of value.
NOTE: When doing your quantitative work, use the most recent financial reports that were unaffected by COVID, which for most firms, means a fiscal year that ends no later than the end of January, 2020.
COMPANY: Tractor Supply Co. (TSCO)
METHOD:
1. Industry Analysis You should first research the industry your firm competes in, including main competitors, and other significant industry information. Using information from sources such as the company’s 10-k, news services, research outlets, industry databases, etc. You can also use library databases, e.g., Value Line Research, which is available to students on-line. Then analyze the industry using the models we learned in class, with an emphasis on Porter’s framework.
2. Business Strategy Next, identify your firm’s business strategy, using constructs discussed in class and the text, e.g., low cost (or differentiation); geographical diversification.
3. Analysis of Core Earnings Next, identify core, and sustainable, revenue and expense elements. Then support why you chose to include, exclude, modify, or add to, items that were reported in net income.
4. Traditional Time Series Analysis of Profitability Next, complete a time-series analysis of profitability. Using traditional Dupont decomposition (ROE, ROA, capital leverage, etc.) analyze changes in the performance of your firm across time, identifying sources and possible reasons for any change.
5. Cross-Sectional Analysis of Operational Profitability Next, using comparative analysis of operational profitability (NOPAT, NOA, RNOA, etc.), compare the company to one major competitor, again noting any differences and explaining the results you find, to the extent possible.
6. Analysis of Risk Next assess the investment risk of your firm. Components of risk that you should analyze include short term solvency, long term solvency risk, systematic risk, bankruptcy risk, earnings manipulation risk, risk of dilution from shareholder transactions, and risks associated with the representational faithfulness of the reports themselves (e.g., red flags, earnings distortions, etc.) You should conclude this section with an estimate of the cost of equity capital, and an explanation supporting this estimate.
7. Forecasts Next, make and present, a forecast of earnings, free cash flow, residual income, and the balance sheet for the forecast period (at least 5 years forward). Then list and develop an explanation for the key determinants of your forecast (e.g., projected sales, COGS, SG&A, etc.)
8. Valuation Next make a valuation estimate (on a per share basis) using the DCF and residual earnings valuation models we discussed in class. Then compare these estimates to the price of the shares at the close of the fiscal year. If the price differs from your estimates, why do you think they differ? What does the market seem to be pricing instead?
9. Impact of COVID Next consider the impact of Covid on the firm. How much were sales and earnings impacted? How much was the price of the common stock impacted by the end of March, 2020 (when the S&P500 index fell by about 40%, as compared to prices in late January/early February of that same year)? What do you think will likely happen to the company’s performance, the cost of equity capital for the firm, and the price of the shares when the pandemic ends? Explain.
10. Investment Recommendation Given the current price, now, do you think the stock is a buy or sell from here? Why?
REPORT:
Write up the results of your analysis in a succinct report that does not exceed 5 pages of single spaced text, not including tables, figures, references, or graphics. Each of the numbered items should be listed as a separate section, and sub-titled as described above. Each numbered item should be discussed for about ½ a page each m/l. The report should use good form. Do not embed tables, figures or graphs throughout the text. Instead attach them at the end, labeled (e.g., Table 1, Table 2, etc.) and refer to them as such in the text. (e.g., “see Table 1).
To submit, send a WORD file to me, attached to an email, with tables, figures, and graphs attached at the end. Be sure to put your name, the name of the company, and the ticker symbol, on the first page. Attach to the email the most recent primary financial reports (income statement, balance sheet, statement of cash flow) from the 10-K, and include a link in the references to the rest of the 10-K.
Do not copy anything, without citing and giving credit to whoever wrote it, or thought of it, or computed it. Make your own ratios, z-scores, etc., using the formulations we learned. Do not plagiarize or copy large chunks of text from others, including, of course, the 10-k itself!!
For example, copying some ratio we’ve never discussed, or rehashing what management says its doing is not YOUR analysis and what we learned together in the class. Stick primarily to concepts we covered. Don’t believe everything you read. Think critically! Apply the concepts and models we covered effectively.
