Educational: How to perform a DCF analysis? The Italian Sea Group & Sanlorenzo full models
Furthermore, The Week in the Markets (Zoom on liquidity) & Portfolio Management
Hi there!
Week in the Markets Summary of the key events of the week that are influencing the markets with Zoom in FED Liquidity
Education: How to perform a DCF Valuation step by step Including The Italian Sea Group and Sanlorenzo full models. We've been preparing this publication for a long time on two companies we know like the back of our hand, and we believe it can be very useful to share the valuation process with all of you.
Portfolio Management: Tremendous end of the year. New companies added to the watchlist and many interesting trends for the beginning of 2024!
The Week in the Markets
Week in which Daily Expiration Options (ODTE) have been quite active, taking advantage of the lower trading volume around these quasi-holiday dates, causing some scares, such as the one on Wednesday when indices plunged in the last two hours of the market. However, the main American indices have ended another week in positive territory, with the Russell 2000 leading the way. The S&P 500 marks its eighth consecutive week of increases. Over the past five decades, there have been only three longer winning streaks, with the most recent one taking place two decades ago.
Several positive pieces of news this week, as detailed in the macro section, have aided indices in sustaining their upward momentum. Notably, consumer prices saw a decline, marking the first decrease since April 2020. There was also a surprising surge in new home construction, with housing starts jumping by 14.8% in November. Additionally, comments from San Francisco Federal Reserve Bank President Mary Daly expressed her view that rates would remain quite restrictive even if the Fed were to cut rates three times in 2024.
Once again, small caps topped the week's performance, and since early November, this has ceased to become news. We provide detailed commentary on the companies in the Portfolio Management section, but we are tremendously pleased with the results of the analysis published two months ago on the Restaurant Industry - which has likely become the most profitable analysis ever published on this website - and we believe there is still a significant potential ahead.
Additionally, noteworthy is the considerable appreciation of the FTSE 100 due to the loss of value in the Sterling stemming from the sharp drop in the inflation figure, hinting at potential rate cuts by the BOE sooner rather than later. The Dollar followed a similar path due to the recent decline in the PCE and the same expectations that the FED might start lowering rates as soon as March (although this remains to be seen).
By sectors, Communication services stocks, particularly propelled by increases in Google parent Alphabet and Facebook parent Meta Platforms, spearheaded the gains within the S&P 500. Energy shares also exhibited strong performance, driven by a rise in oil prices attributed to concerns about attacks on shipping in the Red Sea. Additionally, Harbour Energy, one of the companies with its thesis freely available on the website, agreed this week to acquire non-Russian oil and gas assets from Wintershall Dea in a deal valued at $11.2 billion in cash and stock with BASF and LetterOne. The stock has surged almost 40% this week. The worst performers of the week were Utilities and Real Estate, which had been the top performers in recent weeks but saw profit-taking.
In terms of countries, once again, China bore the brunt of the week. This was due to the government's announcement of new restrictions in the gaming sector that wiped off nearly USD 80 billion in market value from some of China’s largest gaming companies.
Zoom of the week : Liquidity in the markets
Related to the article we published a few months ago explaining how Asset Flows work (i.e., how to measure and understand where money is flowing into and out of assets and sectors – tremendously useful from our perspective to comprehend market movements and avoid blind investments), today we want to briefly highlight the importance of liquidity in the market and the current situation.
To provide some context, after the significant monetary expansion (QE) during the pandemic, the Fed began Quantitative Tightening (QT) in late 2021 – the purpose of QT is typically to normalize monetary policy after a period of extraordinary accommodation, such as during a financial crisis. It is a tool used by central banks to control inflation, manage interest rates, and adjust the overall level of monetary stimulus in the economy.
QT lasted throughout 2022, and in March of this year, it began to ease due to the episode of regional bank bankruptcies. If we look more closely, in recent weeks (since late October), it seems that not only is QT easing, but the Fed is once again injecting liquidity into the system. This partly explains the recent rise in stock markets. The explanation is more complicated, and indeed, bonds play a fundamental role (the Fed does not directly inject money into the equities market, but operates through bonds, reducing yields and making equity investments more attractive). That's why it's so important and interesting to understand how different assets are interconnected.
In a very simplified manner, we have calculated current liquidity based on three major factors: the total assets on the Federal Reserve's balance sheet, the volume of reverse repos, and the TGA.
The Treasury General Account serves as the primary operating account for the U.S. government and is managed by designated depositaries, mainly Federal Reserve Banks and their branches. Its purpose is to facilitate the daily financial transactions of the government involving public funds.
A Repo inverse occurs when interest rates in the repo market are higher than yields on comparable Treasury securities. This can impact market liquidity by attracting participants to higher-yielding repos, potentially reducing trading activity in the Treasury market, disrupting money markets, and influencing central bank policies. An increase in the reverse repo rate will decrease the money supply and vice-versa, other things remaining constant. An increase in reverse repo rate means that commercial banks will get more incentives to park their funds with the RBI, thereby decreasing the supply of money in the market.
In fact, over the past few months, there has been a significant decline in the volume of repos, leading to an increase in liquidity in the system. While Treasury General Account (TGA) balances have risen, the increase has been comparatively modest.
Meanwhile, the world's second-largest economy stands out among global central banks by maintaining a more accommodative monetary policy to stimulate growth. In fact, many analysts anticipate that the People's Bank of China (PBOC) will further ease policy in 2024, considering ongoing deflationary pressures that impact the country's economic prospects.
In 2024, we will be consistently monitoring the strategies and balance sheets (liquidity) of the world's major central banks. This is because, at a macro level, it is already providing significant insights into where and how to position ourselves in various assets.
Macro data
Europe
UK: Inflation collapses. CPI November 3.9% (expected 4.3%, previous Oct 4.6%)
UK GDP QoQ (expected 0.0%, previous 0.2%)
Eurozona: CPI 2.4& (expected 2.4%, previous 2.9%)
US
CB Consumer Confidence 110 (Dec) : 110.7 (expected 103.8, previous 101)
Crude Oil inventories: 2.909MM (expected -2.283, previous week -4.259MM)
GDP QoQ ( forecast 5.2%, previous 2.1%)
Core PCE Price Index YoY ( Expected 3.4%, Previous 3.5%)
Before we begin, we'd like to remind you that our December promotion (which is the only one we offer each year) is about to end. If you'd like to take advantage of it, you can use the code MORAM2024sale on our website to receive a 15% discount (€14.75/month + VAT). This offer will be valid via our website (we also use Stripe as the payment gateway).
Many thanks for the trust to all those who have signed up in the last few days, and Merry Christmas to everyone!
Of course, if you have any questions, you can write to us at info@moram.eu, where we will assist you as much as we can.
Best,
MORAM team
Educational: How to perform a DCF analysis + The Italian Sea Group & Sanlorenzo full models
Today, we are going to carry out an educational exercise to assess, using the Discounted Cash Flows method (which we typically use almost always and is probably the most common in the industry) for two companies whose theses we have shared this year. We will go through the exercise step by step so that anyone, regardless of their level, can follow it. However, the exercise is not at a basic level, and we delve into quite a bit of detail in some points. In fact, to make it useful for all our subscribers, our goal today is twofold:
From an educational standpoint, we aim to go through the valuation process of a company (in this case, two) step by step so that anyone can replicate it on their own in the future.
Publish our analysis model of both companies and our target valuations
It is important to remember that, like any model, the accuracy of the final result depends on the quality of the assumptions made. Therefore, it is essential to dedicate a considerable amount of time to understand the company, the industry, and the economic environment before starting the company analysis.
To achieve this, we will follow the following steps:
Enter the financial statements from the last fiscal years and formulate assumptions based on the notes and the knowledge acquired about the company and the industry
Conduct future projections of the financial statements over a period that makes sense based on the characteristics of the company/industry.
Calculation of Free Cash Flow.
Calculation of the Weighted Average Cost of Capital (WACC), detailing the equity and debt components.
Calculation of the Terminal Value and present value
Target Price (Sensitivity analysis, adjustment, considerations..)
1) Projection of financial statements and assumptions for the exercise
The initial step, assuming we are starting from scratch to analyze a company, is to seek information from its financial statements. This data is frequently available on the company's website. In the case of U.S.-based companies, SEC filings usually offer the option to download the .xls file, facilitating the process. Simultaneously, we read the annual and quarterly reports and listen to the latest conference calls to comprehend the company's situation, its business, and other relevant aspects.
We usually organise our Spreadsheet into several tabs:
Last years and quarters of the Profit and Loss
Last years and quarters of the Balance Sheet
Detail of the company's debt (maturities, collaterals, interest rates, ...)
Notes from previous Conference Calls or meetings with the company
Q&A: All the questions that arise during the process, to be sent to the company if we cannot answer them later ourselves
Misc: All "varied" information about the company that may be interesting but does not fit into any of the previous sections
In the case of TISG, which is the focus today (along with Sanlorenzo that will follow), it is crucial to understand the characteristics of its different models, its competition and their margins, expansion and growth options, which types of boats in their pipeline have higher or lower margins (in the case of TISG, contrary to what may initially seem, this is not so much related to their brands or the length of the boats). Their actual manufacturing capacity...
Similarly, in the case of TISG, since we have matched their pipeline of boats with their respective values and when revenue recognition is expected (our estimate published a few weeks ago and revisited for this exercise), we have used it to calculate the evolution of EBITDA margin in the coming years and the revenue for each brand (as well as the replacement rate based on the forecasted industry situation). This has allowed us to make the assumptions more realistic for the model, both in terms of EBITDA margin and revenues coming from each brand.
Before projecting the P&L & BS for the upcoming years, it is necessary to make a series of assumptions: