Applied Equity Analysis: Stock Valuation Techniques for Wall Street Professionals [Hardcover]

James English (Author)

Book Description

ISBN-10: 0071360514 | ISBN-13: 978-0071360517 | Publication Date: May 14, 2001 | Edition: 1

Applied Equity Analysis treats stock valuation as a practical, hands-on tool rather than a vague, theoretical exercise—and covers the entire valuation process from financial statement analysis through the final investment recommendation. Its integrated approach to valuation builds viable connections between a firm’s competitive situation and the ultimate behavior of its common stock. Techniques explained include EVA, newer hybrid valuation techniques, and relative multiple analysis.

Editorial Reviews

From the Back Cover

Today's Most Comprehensive Practitioner's Guide to Modern Equity Analysis

Professional equity analysts must contend with a number of strong forces, each pulling in separate but equally relentless directions. Applied Equity Analysis ties these disparate elements into a seamless whole, and presents a clear, complete equity analysis picture.

Written from the working analyst's point of view, in a singularly candid style that is both thought provoking and illuminating, Applied Equity Analysis covers:

• How to think, speak, and develop investment recommendations in the language of Wall Street
• How competitive forces directly impact financial results and, in the process, drive stock valuation
• How to use valuation methodologies designed to quantify the growth and earnings assumptions inherent in speculative stock prices

Applied Equity Analysis emphasizes techniques that work on a day-to-day basis, rather than traditional but often impractical academic approaches. By combining a solid discussion of finance and investment theory with techniques popular among today's buy- and sell-side analysts, it presents a picture of stock investment analysis that is analytically rigorous, aggressively uncompromising, and based on earnings­­the true driving force of Wall Street.

"The equity analyst's job is to present a position, supported by financial and non-financial evidence. Data unnecessary to the argument are, in a word, unnecessary. However, the analyst must understand all the data, relevant or not. The ultimate goal of the equity analyst is the exploitation of any difference between a stock's price and its value."
­­From Chapter 1

Applied Equity Analysis is about understanding all the data. Written by former JP Morgan managing director James English­­an adjunct professor of finance at the Columbia University School of Business, honored by The Wall Street Journal for his stock analysis skills­­this innovative book treats valuation as a practical tool rather than a theoretical exercise. Its integrated approach shows you how to build straight-line connections between a firm's fundamental competitive situation and its stock performance, by combining an understanding of a firm's competitive strengths and weaknesses with accurate financial statement analysis­­to build a more complete model of a firm's future stock market performance

Combining a solid discussion of finance and investment theory with techniques frequently used by working buy- and sell-side analysts, Applied Equity Analysis discusses:

• Specific valuation techniques for identifying stocks that are undervalued relative to their peers
• Quantitative techniques to link a firm's projected future financial performance to its potential future valuation­­based upon the current trading patterns of comparable stocks
• A hybrid valuation technique to mathematically calculate a stock's inherent growth expectations
• A proven strategy for formulating and successfully presenting an investment recommendation
• An entire chapter on the Stern Stewart EVA^TM system as an alternative­­and potentially useful­­way of decoding financial statement information
• Relative and hybrid earnings-based valuation techniques that are more practical than cash-flow methods­­and frequently far superior

On today's Wall Street, equity analysts must focus on a firm's ability to produce returns that exceed capital costs, and then estimate the firm's future power to maintain and increase those returns. Let Applied Equity Analysis supply you with in-depth examples and explanations of Wall Street's most important equity analysis tools­­and give you a hands-on, real-world handbook for equity analysis in today's complex financial marketplace.

About the Author

James English is currently an adjunct assistant professor of finance at Columbia University School of Business. He spent twenty years with JP Morgan serving in many positions, including managing director of JP Morgan Capital, the firm's venture capital unit. In his over quarter-century career in finance, English practiced­­and become proficient in­­virtually every one of the field's subspecialties: commercial banking and credit analysis, corporate treasury and foreign exchange, capital markets, mergers & acquisitions, venture capital, and sell-side equity analysis.

Product Details

• Hardcover: 422 pages
• Publisher: McGraw-Hill; 1 edition (May 14, 2001)
• Language: English
• ISBN-10: 0071360514
• ISBN-13: 978-0071360517
• Product Dimensions: 9.3 x 6.3 x 1.2 inches
• Shipping Weight: 1.7 pounds (View shipping rates and policies)
• Average Customer Review: 3.2 out of 5 stars  See all reviews (9 customer reviews)
• Amazon Best Sellers Rank: #104,528 in Books (See Top 100 in Books)

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Most Helpful Customer Reviews

76 of 79 people found the following review helpful:

5.0 out of 5 stars Very readable, very insightful, and extremely practical, September 22, 2001

By A Customer

This review is from: Applied Equity Analysis: Stock Valuation Techniques for Wall Street Professionals (Hardcover)

James English's "Applied Equity Analysis" is a how-to manual on evaluating stocks based on his 20 years of experience at JP Morgan. The book is very well-written and readable since the author employs plain english (no pun intended) to make his three major points: 1) accounting numbers--while by no means perfect--are excellent tools in evaluating stocks, 2) accounting-based stock valuation is superior to (but does not neccessarily supplant) cash flows, and 3) competition ensures that eye-popping financial performance doesn't last forever.

Contrary to another reviewer, English employs excellent examples to clarify and explain his points. Some examples: Gateway 2000's earnings history was used to explain how to find and interpret non-recurring items (NRI) on financial statements. Ratio analysis was demonstrated by looking at the PC industry in 1998. Emerson Electric was the company chosen to show why mature companies were still good buys. Many other examples abound, and English does a successful job in tying their relevance to his arguements.

But successful use of examples is not just the only strength of the book. The author also tackles a range of topics complete with insightful and clear discussions: the flaws of the Efficient Market Hypothesis (EMH), Economic Value Added (EVA), financial statement analysis, fundamental analysis, etc.

A quick glance at the table of contents below gives you an idea of the scope of English's book. I highly recommend this book to not just Wall Street analysts, anyone who is interested in finding fundamental value in evaluating stocks instead of following the crowd.

Pt. 1 Getting Started
Ch. 1 A Day in the Life
Ch. 2 Fundamentals of Equity Valuation
Ch. 3 Strategy and Competition I: The Firm's External Environment
Ch. 4 Strategy and Competition II: The Firm's Internal Competitive Resources
Ch. 5 Fundamentals of Stock Behavior
Pt. 2 The Basic Tools
Ch. 6 Reading a Financial Statement: The Accuracy, Sustainability, and Predictability of Financial Information
Appendix 6-1 Gateway Financial Statements
Ch. 7 Reading a Financial Statement: the Composition of Returns
Appendix 7-1 Comparative Financial Analysis: Personal Computer Industry
Ch. 8 Reading a Financial Statement: Early-Stage Companies and Investment Capacity
Ch. 9 Reading a Financial Statement: Later-Stage Companies and the Transition to Maturity
Ch. 10 Economic Value Added: An Alternative to Traditional Analysis Techniques
Appendix 10-1 Gateway's Cost of Capital
Pt. 3 Financial Models
Ch. 11 Financial Modeling: Base Case Assumptions and Model Design
Appendix 11-1 Dell Computer Corporation Consolidated Statement of Income
Ch. 12 Financial Modeling: The Income Statement and Balance Sheet
Ch. 13 Financial Modeling: The Statement of Cash Flows
Pt. 4 Equity Valuation
Ch. 14 Valuation: Foundations and Fundamentals
Ch. 15 Combat Finance: Relative Methods and Companion Variable Models
Ch. 16 Hybrid Valuation Techniques
Ch. 17 The Quirky Price/Earnings Ratio
Ch. 18 Valuation of Speculative Stocks
Ch. 19 Equity Analysis and Business Combinations
Pt. 5 Getting It Down on Paper
Ch. 20 Financial Writing: Don't Bury the Lead
Bibliography
Index

12 of 12 people found the following review helpful:

5.0 out of 5 stars One of the Best, November 1, 2005

By 

DJ - See all my reviews

This review is from: Applied Equity Analysis: Stock Valuation Techniques for Wall Street Professionals (Hardcover)

There are reams and reams of investment valuation books on the market -- that is obvious.

In my opinion, the three no one should be without are Applied Equity Analysis, Stephen Penman's monster tome "financial statements and...", and lastly, Aswath Damadoran's book, "investment valuation."

Most hyperventilating MBAs default to Damadoran; I really enjoy the simplicity behind Applied Equity Analysis.

Caution: Neither of the 3 are what you'd call "light reading."

If you have any money left, honorable mention goes to Cooke's "security analysis on wall street."

22 of 26 people found the following review helpful:

2.0 out of 5 stars for SELL-SIDE analysts only, January 13, 2006

By 

catweazle (San Bruno, CA) - See all my reviews

This review is from: Applied Equity Analysis: Stock Valuation Techniques for Wall Street Professionals (Hardcover)

I bought this book based on the strong reviews as a complement to Damodaran's classic on valuation, but felt disappointed.

To qualify my comments: First, I am not a sell-side analyst, and secondly, I haven't finished the book. After about 50 pages, I threw in the towel.

My first stylistic objection to the book is its low content density. There is tremendous repetition and examples are trotted out in excruciating detail, even where the conclusions are fairly obvious. For example, on p. 34: "At competitive equilibrium, the firm can identify no incremental investment opportunities likely to generate returns in excess of capital costs. Competitive equilibrium is often defined as a condition in which investment opportunities generate returns equal to capital costs, but existing investments continue to earn abnormal rates." To me these two sentences are already redundant. But in case you still didn't get it, further DOWN on the SAME PAGE: "...This situation is called economic equilibrium, or economic parity. What does equilibrium mean? When returns are forced down to capital costs, then economic rents and/or abnormal earnings disappear and no further incentive to enter the business exists".

But the most frequently repeated point of the first two chapters, is best summed up on p. 19: "As I say many times in the coming pages [and he's not kidding, there], equity analysis is not prophecy; it's opinion. It was never meant to be objective description, but it is strong advocacy." If you're the sell-side analyst, having to "dress up a pig" to help your firm gain some banking business, this book might offer some ideas. But where does this leave the consumer of such analysis? "It's the investor's job to 'diversify' by considering a variety of analysts' positions." (p.9)

I think better advice for the investor might be to learn how to perform sound analysis themselves. For that, I recommend Damodaran's book. I lost my faith in this book's intent to provide balanced (let alone predictive) analysis.