Studies in Applied Finance

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https://jscholarship.library.jhu.edu/handle/1774.2/40419

The Studies in Applied Finance series is under the general direction of Professor Steve H. Hanke, Co-Director of the Institute for Applied Economics, Global Health, and Study of Business Enterprise (hanke@jhu.edu) and Dr. Hesam Motlagh (hnekoor1@jhu.edu), a Fellow at the Institute for Applied Economics, Global Health, and Study of Business Enterprise.

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Investment Thesis for Advanced Metallurgical Group (AEX: AMG)
(Institute for Applied Economics, Global Health, and the Study of Business Enterprise, 2017-07) Subramanya, Anshul
Advanced Metallurgical Group (Euronext: AMG) is a global critical materials company headquartered in the Netherlands. AMG produces specialty metals, alloys, and high performance materials such as ferrovanadium antimony, tantalum, and niobium. They also engineer advanced vacuum furnace systems and operate vacuum heat treatment facilities for the transportation and energy industries. The market currently prices AMG at 26.42 Euros ($29.58 USD, market close 06/16/17, 0.89 Euros / Dollar Exchange Rate, Figure 1) per share. By using a Probabilistic Discounted Cash Flow Model (P-DCF), we estimate a free cash flow (FCF) per share of approximately $33.50, or 29.82 Euros. This estimate is based on expectations of AMG’s current product portfolio as well as their ongoing spodumene project, and suggests that the stock is currently trading at a 13.25% discount. AMG has also provided an EBITDA target of $200M+ by 2021,1 and reaching this target yields the estimated FCF per share mentioned above. Our analysis shows that AMG has the opportunities, leverage, and appropriate compensation metrics attain this target, so we rate AMG a buy.
Investment Thesis for PepsiCo, Inc. (NYSE: PEP)
(Institute for Applied Economics, Global Health, and the Study of Business Enterprise, 2017-06) Wu, María Belén
PepsiCo, Inc. (NYSE: PEP) is a global food and beverages company, most commonly known by its famous brands such as Pepsi-Cola and Frito-Lay. Using historical performance data, we have determined through a Probabilistic Discounted Cash Flow (P-DCF) analysis and Monte Carlo simulations that the company is fundamentally worth $81.25/share. Despite PepsiCo’s cost-cutting efforts and reorientation of business to accommodate the shift of consumer preferences towards healthier and more eco-friendly food, the macroeconomic and political instability in PepsiCo’s emerging market segments, as well as the company’s high debt levels lead us to conclude that PepsiCo does not have the revenue generating potential to justify the current market price. For all the reasons above, we rate PepsiCo a SELL.
Investment Thesis for Polskie Górnictwo Naftowe I Gazownictwo (WSE: PGN)
(Institute for Applied Economics, Global Health, and the Study of Business Enterprise, 2017-03) Hanke, Steve H.; Motlagh, Hesam; Subramanya, Anshul
This working paper is an in-depth financial analysis of Polskie Górnictwo Naftowe i Gazownictwo (PGNiG), a Polish state-controlled oil and natural gas company. Our analysis examines the economic trends and commodity movements that affect PGNiG and how the firm adjusts to these changing factors. This analysis is combined with our proprietary Discounted Cash Flow (PDCF) model and a Monte-Carlo simulation. This results in distributions of probable free cash flows and future earnings. Our goal is to provide the necessary financial and background information along with in-depth analysis to allow the reader to make an informed investment decision.
Investment Thesis for Kite Pharma, Inc. (Nasdaq: KITE)
(Institute for Applied Economics, Global Health, and the Study of Business Enterprise, 2017-03) Semenkow, Samantha
This working paper is an in-depth analysis of Kite Pharma, Inc. The analysis examines the economic factors that impact Kite Pharma’s underlying business fundamentals. This analysis is then combined with a proprietary Discounted Cash Flow (P-DCF) model to determine Kite Pharma's financial position. The model will be presented along-side Monte-Carlo simulations to reveal the distribution of probable free cash flows and the potential for future earnings. In addition to these quantitative factors, we I assess the alignment of Kite Pharma’s executives with shareholders based on the company’s proxy report. At the conclusion of this analysis, I aim to clearly convey Kite Pharma’s business strategy and the company’s financial standing to arrive at a sound investment decision.
Investment Thesis for Chipotle Mexican Grill, Inc. (NYSE:CMG)
(Institute for Applied Economics, Global Health, and the Study of Business Enterprise, 2017-02) Mabie, Alexander
This working paper is an in-depth analysis of Chipotle Mexican Grill Inc. The analysis examines the economic factors that impact Chipotle’s underlying business fundamentals. This analysis is then combined with a proprietary Discounted Cash Flow (P-DCF) model to determine Chipotle’s financial position. The model will be presented along-side Monte-Carlo simulations to reveal the distribution of probable free cash flows and the potential for future earnings. In addition to these quantitative factors, we I assess the alignment of Chipotle’s executives with shareholders based on the company’s proxy report. At the conclusion of this analysis, I aim to clearly convey Chipotle’s business strategy and the company’s financial standing to arrive at a sound investment decision.
Investment Thesis for International Business Machines Corp.
(Institute for Applied Economics, Global Health, and the Study of Business Enterprise, 2016-11) Krishnan, Shiv
The working paper is an in-depth financial analysis of International Business Machines (IBM). Our analysis examines the change in IBM’s business from a traditional hardware and software services provider to a cognitive services and cloud platform company. This analysis is combined with our proprietary Discounted Cash Flow (P-DCF) model and a Monte-Carlo simulation. This results in distributions of probable free cash flows. In addition to these quantitative factors, we also examine compensation plans of IBM executives to assess the degree to which the executives’ compensation incentives are aligned with the objective of creating shareholder value.
Single-name Credit Default Swaps: A Review of the Empirical Academic Literature
(Institute for Applied Economics, Global Health, and the Study of Business Enterprise, 2016-09) Culp, Christopher L.; Van der Merwe, Andria; Stärkle, Bettina J.
Single-name credit default swaps (“CDSs”) are derivatives based on the credit risk of a single borrower such as a corporation or sovereign. Although the single-name CDS market expanded rapidly during the period of loose monetary policy and expanding credit from 2002 through 2007, its growth began to slow after the global credit crisis and during the Eurozone sovereign debt crisis in 2010 and 2011, after which the single-name CDS market began to contract. In recent years and despite deliberate efforts by the International Swaps and Derivatives Association (“ISDA”) and market participants on both the buy and sell sides, the single-name CDS market shifted from stagnating growth to an actual contraction and has shrunk substantially. At its high-water mark in June 2011, the total notional amount outstanding on single-name CDSs based on corporate and sovereign borrowers was $15.4 trillion. By June 2015, notional outstanding had collapsed to $6 trillion – i.e., a contraction of 61 percent over four years. Several possible reasons may explain the recent decline in single-name CDS activity. One possibility is that the current environment of relatively low interest rates and default rates has reduced the demand for hedging and synthetic bond investments (a.k.a. taking a position on the credit risk of a borrower) using CDSs. Another oft-cited potential explanation for the post-2011 contraction in the single-name CDS market is the panoply of changes to the global financial regulatory framework, such as margin and capital requirements on cleared and noncleared swaps and the ban in the E.U. on short selling using sovereign CDSs. Such regulatory changes have already reportedly raised costs and decreased demand for single-name CDSs (or for hedging entity-specific credit risk altogether) even though many regulatory initiatives have still not been implemented in final form. Some skeptics of single-name CDSs believe that the products themselves may have been defective prior to some of the reforms undertaken following the credit crisis and Eurozone sovereign debt crisis. Indeed, despite any significant evidence, a few commentators maintain that CDSs were either a cause or significant source of amplification for the credit crisis that migrated from U.S. subprime and leveraged finance markets to the global credit system beginning in August 2007. To provide a more widespread and better understanding of the benefits and costs of single-name CDSs, we were commissioned by ISDA to prepare a review of the empirical academic literature on these products. Specifically, we restricted our review to single-name CDSs based on corporate and sovereign borrowers and did not consider the research on multiname and/or index CDSs, loan CDSs, or CDSs based on asset-backed securities. The scope of our review included empirical research published in peer-reviewed academic journals, quasiacademic/trade journals with largely academic editorial boards, and working papers distributed through the Social Science Research Network (“SSRN”), universities, and the research divisions of financial regulators (e.g., the Bank for International Settlements, European Central Bank, and Federal Reserve). Our review did not include a survey of industry research, articles in industry and trade magazines or journals, and mainstream media publications. Although we have made every effort to be comprehensive and reviewed more than 260 empirical studies, comprehensive is not synonymous with exhaustive, and we offer our apologies for any research we might have missed.
Investment Thesis for Aldeyra Therapeutics, Inc. (NASDAQ: ALDX)
(Institute for Applied Economics, Global Health, and the Study of Business Enterprise, 2016-07) Hua, William
This working paper is an in-depth analysis Aldeyra Therapeutics, Inc. Our analysis examines the factors that impact ALDX’s underlying business. This economic analysis is then combined with our unique net present value (NPV) model to determine ALDX’s financial position. The NPV model will be presented along-side Monte-Carlo simulations to reveal the distribution of probable free cash flows and the likelihood of future earnings. We also studied the proxy report to examine the compensation practices of ALDX and determine whether they are well-aligned with shareholder interests. Our objective is for readers to understand ALDX’s business plan and financial standing to construct a sound investment decision.
Investment Thesis for Gilead Sciences, Inc. (NYSE: GILD)
(Institute for Applied Economics, Global Health, and the Study of Business Enterprise, 2016-07) Johannesson, Stephen
This working paper is an in-depth analysis of Gilead Sciences, Inc. Our analysis examines the economic factors that impact Gilead’s underlying business and how the firm has adapted to these ever-changing factors. This economic analysis is then combined with our proprietary, Hanke-Guttridge Discounted Cash Flow (HG-DCF) model to determine Gilead’s financial position. The HG-DCF model will be presented along-side Monte-Carlo simulations to reveal the distribution of probable free cash flows, the likelihood of future earnings, and the degree to which the firm’s drug pipeline is being considered by the current market valuation. In addition to these quantitative factors, we also examine the compensation plans of Gilead’s executives to assess alignment with shareholders. At the conclusion of this analysis, it is our intention for readers to understand Gilead’s business plan and the company’s financial standing to arrive at a sound investment decision.
Investment Thesis for Whirlpool Corp. (NYSE:WHR)
(Institute for Applied Economics, Global Health, and the Study of Business Enterprise, 2016-07) Canezin, Ashley
This working paper is an in-depth analysis of Whirlpool Corporation. (WHR). Our analysis examines historical performance, important acquisitions, and predictions of future performance. We combine our economic analysis with our proprietary, Hanke-Guttridge Discounted Cash Flow (HG-DCF) model to assess WHR’s financial position. Instead of obtaining a single and static valuation of WHR, Monte-Carlo simulations are used alongside our HG-DCF model to reveal the distribution of probable free cash flows and future earnings. Management compensation is also analyzed in depth to evaluate whether or not management is incentivized to act in the best interest of the shareholders. Our goal is to foster reasonable investment decisions by allowing readers to understand Whirlpool Corporations business plan and financial health.
Investment Thesis for AMG Advanced Metallurgical Group (EuroNext: AMG)
(Institute for Applied Economics, Global Health, and the Study of Business Enterprise, 2016-07) Prokos, Philip
This investment thesis is an analysis of Advanced Metallurgical Group, a global critical materials company. Our analysis examines the economic trends and factors that affect AMG, and how they adjust to these changes. This analysis is then combined with the Hanke-Guttridge Discounted Cash Flow (HG-DCF) model in order to calculate the estimated share price. A Monte-Carlo simulation is presented to show a distribution of possible free cash flows. In addition to this, we also analyze the proxy statements, and management compensation of AMG to verify that management is aligned with the shareholders. This investment thesis will provide the necessary financial information, along with background information to make an investment decision.
Investment Thesis for Pilgrim’s Pride, Corp. (NYSE:PPC)
(Institute for Applied Economics, Global Health, and the Study of Business Enterprise, 2016-07) Bushnell, Charles
This working paper is an in-depth analysis of Pilgrim’s Pride, Corp. (PPC). Our analysis examines the chicken cycle, commodity prices, and the economic factors that impact Pilgrim’s Pride’s underlying business. We combine our economic analysis with our proprietary, Hanke-Guttridge Discounted Cash Flow (HG-DCF) model to assess PPC’s financial position. Instead of obtaining a single and static valuation of PPC, Monte-Carlo simulations are used alongside our HG-DCF model to reveal the distribution of probable free cash flows and future earnings. Management compensation is also analyzed in depth to evaluate whether or not management is incentivized to act in the best interest of the shareholders. Our goal is to foster reasonable investment decisions by allowing readers to understand Pilgrim’s Pride’s business plan and financial health.
Investment Thesis for Galectin Therapeutics, Inc. (NASDAQ: GALT)
(Institute for Applied Economics, Global Health, and the Study of Business Enterprise, 2016-06) Nguyen, Tu
This working paper is an in-depth analysis of Galectin Therapeutics, Inc. Our analysis examines the economic factors that impact GALT’s underlying business and how GALT has adapted to these everchanging factors. This economic analysis is then combined with our proprietary Net present value (NPV) model to determine GALT’s financial position. The NPV model will be presented along-side Monte-Carlo simulations to reveal the distribution of probable free cash flows and the likelihood of future earnings. In addition to these quantitative factors, we also examine the compensation plans of GALT’s executives to assess alignment with shareholders. At the conclusion of this analysis, it is our intention for readers to understand GALT’s business plan and the company’s financial standing to arrive at a sound investment decision.
Investment Thesis for Intel Corporation (NYSE: INTC)
(Institute for Applied Economics, Global Health, and the Study of Business Enterprise, 2016-06) Kumar, Vinitha
This working paper is an in-depth analysis of Intel Corporation. Our analysis examines on the factors that impact Intel’s underlying business. This economic analysis is then combined with our proprietary, Hanke-Guttridge discounted Cash Flow (HG-DCF) model to determine Intel’s financial position. The HG-DCF model will be presented along-side Monte-Carlo simulations to reveal the distribution of probable free cash flows and the likelihood of future earnings. In addition to these quantitative factors, we also examine the compensation plans of Intel’s executives to assess alignment with shareholders. At the conclusion of this analysis, it is our intention for readers to understand Intel’s business plan and the company’s financial standing to arrive at a sound investment decision.
Investment Thesis for Honeywell International, Inc. (NYSE: HON)
(Institute for Applied Economics, Global Health, and the Study of Business Enterprise, 2016-06) Jie, Charles
This working paper is an in-depth analysis of Honeywell International Inc. Our analysis examines the economic factors that impact Honeywell’s underlying business and how Honeywell has adapted to these ever-changing factors. This economic analysis is then combined with our proprietary, Hanke-Guttridge Discounted Cash Flow (HG-DCF) model to determine Honeywell’s financial position. The HG-DCF model will be presented along-side Monte-Carlo simulations to reveal the distribution of probable free cash flows and the likelihood of future earnings. In addition to these quantitative factors, we also examine the compensation plans of Honeywell’s executives to assess alignment with shareholders. At the conclusion of this analysis, it is our intention for readers to understand Honeywell’s business plan and the company’s financial standing to arrive at a sound investment decision.
Investment Thesis for Mohawk Industries, Inc. (NYSE: MHK)
(Institute for Applied Economics, Global Health, and the Study of Business Enterprise, 2016-04) Shin, James
This working paper is an in-depth financial analysis of Mohawk Industries, a US-based flooring company. Our analysis examines the economic factors that impact Mohawk’s underlying business and how Mohawk has adapted to these ever-changing factors. This economic analysis is then combined with our proprietary, Hanke-Guttridge Discounted Cash Flow (HG-DCF) model to determine Mohawk’s financial position. The HG-DCF model will be presented along-side Monte-Carlo simulations to reveal the distribution of probable free cash flows and the likelihood of future earnings. In addition to these quantitative factors, we also examine the compensation plans of Mohawk’s executives to assess alignment with shareholders. At the conclusion of this analysis, it is our intention for readers to understand Mohawk’s business plan and the company’s financial standing to arrive at a sound investment decision.
Investment Thesis for GameStop Corp. (NYSE:GME)
(Institute for Applied Economics, Global Health, and the Study of Business Enterprise, 2016-06) Hubner, Gui
This working paper is an in-depth analysis of GameStop Corporation, a US Based Gaming and Technology retailer. Our analysis examines the economic factors that impact GameStop’s underlying business and how GameStop has adapted to these ever-changing factors. This economic analysis is then combined with our proprietary, Hanke-Guttridge Discounted Cash Flow (HG-DCF) model to determine GameStop’s financial position. The HG-DCF model will be presented along-side Monte-Carlo simulations to reveal the distribution of probable free cash flows and the likelihood of future earnings. In addition to these quantitative factors, we also examine the compensation plans of GameStop’s executives to assess alignment with shareholders. At the conclusion of this analysis, it is our intention for readers to understand GameStop’s business plan and the company’s financial standing to arrive at a sound investment decision.
Investment Thesis for Biogen Inc. (NASDAQ: BIIB)
(Institute for Applied Economics, Global Health, and the Study of Business Enterprise, 2017-06) Serafini, Alex
This investment thesis for Biogen, Inc. is one in a series on Applied Financial Economics that focuses on company valuations. The authors are mainly students at The Johns Hopkins University and The Johns Hopkins School of Medicine in Baltimore, MD who have conducted their work at the institute as undergraduate and graduate researchers.
Investment Thesis for TripAdvisor, Inc. (NASDAQ: TRIP)
(2017-06) Ajani, Arshad
Investment Thesis for Activision Blizzard, Inc. (NASDAQ: ATVI)
(2017-04) Ravan, Andrew