Plugin-A Closer Look at The Top Line

2/7/2011
BetterInvesting Stock Curriculum
Class 202
A Closer Look at the Top Line

A. B. C. D.
Sales Growth AGENDA
Class 202
BetterInvesting Volunteer Advisory Board
Revenue/Sales Growth Company and Products Industry & Market Future Sales Growth
Presented by the BetterInvesting Volunteer Advisory Board
Class 202
Class 202
What is normal business?

Rate of growth? Consistent & Predictable? Product Growth Support? Competiveness? Economic resilience?
1. 2. 3. 4.
Income Statement Ideal Sales Growth Consistent Sales Growth Historical Sales Growth First look
PART A. REVENUE/SALES GROWTH

2/7/2011
Class 202
Class 202
Normal Business?
Rate of growth? Consistent & Predictable? Product Growth Support? Competiveness? Economic resilience?
$10,000 - $7,000 $3,000 - $900 $2,100 1000 $2.10 $0.21
Sales - Costs
(1000 items at $10 each) (say, $7 per item)
Pre-tax Profit (PTP) - Taxes

(30%)
Net Profit (i.e., Earnings) Shares Outstanding

e
Earnings Per Share (EPS) Retained Earnings (90%) $1.89

6
(10%) Dividends
Class 202
Class 202
Ideal Sales Growth

Consistent 5-10 years
Sales Pre-tax Profit Earnings Return on Equity Debt
Historical Sales Growth
10-year = 26.5%
5-year = 31.9%
3-year = 33.7%
Recent history very stable! Normal?

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Class 202
Class 202
Historical Results
Past 10 years Sales Growth 26.50% Actual Revenue Growth Recent Past 5 years 31.90% 3 years 33.70% 1 year 47.90% 1 qtr 61.30%
Normal Business?
Rate of growth? 25%+ Consistent & Predictable? YES Product Growth Support? Competiveness? Economic resilience?
Trend? Recent trend? Consistent? Low expectations? High expectations? Normal?

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Class 202
Class 202
Part A. Sales Growth Summary

Income Statement Ideal Sales Growth Consistent Sales Growth Historical Sales
Review
1. What is the difference between sales and revenue? 2. How do you recognize consistent growth? 3. Identify two resources that provide historical sales growth.
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Class 202
Class 202
POLL 1
(Choose all that apply) The SSG helps us understand:
1. Historical sales growth 2. Consistency & predictability of sales growth 3. Product growth strategy 4. Competiveness 5. Economic resilience
1. Lifecycle of a Company 2. Types of Sales Growth 3. Analysts Research
PART B. COMPANY & PRODUCTS

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Class 202
Class 202
Normal Business?
Rate of growth? 25%+ Consistent & Predictable? YES Product Growth Support? Competiveness? Economic resilience?
Speculation
Break Even Point
Best Investment Opportunity
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0%
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2/7/2011
Class 202
Class 202 29%
Deeper analysis requires a review of sales by product line.

Product line
Flagship products? What is the growth rate of each product line?
$70,000 $60,000 $50,000 $ Millions $40,000 $30,000 $20,000 $10,000 $2008 2009 Fiscal Year 2010 $6,742 $14,354 $12,493 $13,033 $13,859 $12,127 $17,479 $25,179 iPAD iPhone Macintosh iPod $13,222 $4,958
34% 37%
Best Investment Opportunity
Speculation
Break Even Point
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0%
20
Types of Growth Strategies
Class 202
Class 202
Organic Growth
What?
Selling more products Selling to more buyers (market segment) Increased innovation
Organic Acquisition & Merger
Advantages?
Disadvantages?
Sustainable Builds on core competencies

Time to market Cost of new product research & development
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Class 202
Acquisition Growth
What?
Buying new products Buying new buyers (market segment) Buying production efficiency Buying innovation
Summary of sales growth strategies
Class 202
Disadvantages? Advantages?
Organic Acquisition
Not Sustainable May not build on core competencies/deworsification Time to market Cost of new product research & development Diversification Analyst's Research Annual Reports (Goodwill) 23 24
How to Identify?
Class 202
Class 202
Resources
Value Line Standard and Poors Morningstar Yahoo CNN Reuters Manifest Investing
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Value Line Analysis
Increasing market share!
Global market benefits
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Company Analysis
www.morningstart.com (subscription)
Class 202
Class 202
Analysts Sales Grow Expectations

http://www.stockcentral.com/Administration/StockCentralResearch/tabid/155/Default.aspx?ticker=AAPL
Bulls
The iOS ecosystem has likely escaped the reach of any potential competitors. However the smartphone market shakes out, we believe the iPhone will capture a significant part of it. At less than 10% share worldwide, the Mac computer can continue to increase its share as a capable Windows alternative. Apple's retail stores are exposing a new generation of consumers to the breadth of the company's expanding product line.
Bears
Apple's sales are concentrated in the U.S. and must face the headwinds of a secular change in consumer spending habits. While an iconic U.S. brand, the company is less well-positioned in the relatively faster-growing international markets. It may be difficult for the company to sustain innovation across its broad product line simultaneously, making it difficult for Apple to maintain its profitability and growth. Google's Android currently has the advantage of much wider carrier distribution than the iPhone. Apple must reach agreements with additional U.S. carriers to fight off the flood of Android devices.
Source
Current Quarter $18.4B $18.86B 91%
Next Quarter $21.3B $22.22B 41.7%
Current Year $63.3B $63.76B 74.5% 47%
Next Year $78B 23% $81.03B 27.1% 13% $81.7B 74.48% $81.1B 27%
3-5 Years
Value Line (10/8/2010) Yahoo S&P (10/9/2010) CNN Reuters Manifest Investing Morningstar (9/9/2010)
$110B 21.5%
$18.9B $22.3B
$22.3B 20.5% $18.4B
$63.7B $63.7B
14.8% 16%
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Class 202
Class 202
Historical + ACE + Product

Past 10 years Sales Growth Product 26.50% iPod Analyst's Concensus Estimates Near Future Present Future Current Current Next 5 years 3 years 1 year 1 qtr Next Qtr 3-5 years Qtr Year Year 31.90% 33.70% 47.90% 61.30% 61.30% 20-42% 47-75% 13-27% 15-22% iPod iPhone iPhone iPhone iPhone iPad iPad iPad iPad Actual Revenue Growth Recent Past
Normal Business?
Rate of growth? 25%+ Consistent & Predictable? YES Product Growth Support? YES Competiveness? Economic resilience?

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Class 202
Class 202
PART B. Company & Products Summary

Lifecycle of a Company Types of Sales Growth Research Resources
1. Explain the lifecycle of a product and its importance to sales growth. 2. Where would you find the
Review
3. Where would you look to determine if a company is growing organically or by acquisition? 4. Where would you find analysts sales growth history and future estimates? 5. Where would you find analysts comments about a companys growth and future prospects?
product lines of a company? the growth rate for each of those product lines? the geographic growth rate for each product line?
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Class 202
Class 202
POLL 2
(Choose all that apply) Product lifecycle helps us understand
1. 2. 3. 4.
Competitors & Peers Leaders & Laggards Economic Moat Economic Recession Resilience
PART C. INDUSTRY & MARKET

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Class 202
Class 202
Normal Business?
Rate of growth? 25%+ Consistent & Predictable? YES Product Growth Support? YES Competiveness? Economic resilience?
www.morningstar.com (Quote/Industry Peers)
Industry & Market
Industry leader!
All industries
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Class 202
Class 202
Industry & Market

www.standardandpoors.com (subscription)
Flat unit growth
www.morningstar.com/quote (subscription)
Economic Moat?
Lots of detail!
Increasing portable growth
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Class 202
Class 202
Leader or Laggard
Peer Group
$43B vs. $48B 26.5% vs. 8.1%
Competitors & Peers

Competitor selling similar products to the same customer segment vying for market share Peer similar size and industry
Industry
$43B vs. $48B 26.5% vs. 8.1%
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40
Class 202
Class 202
Recession Analysis
2000-2001
-32% revenue drop
History + ACE + Product + Market

Present Current 10 years 5 years 3 years 1 year 1 qtr Qtr 26.50% 31.90% 33.70% 47.90% 61.30% 61.30% iPod iPod iPhone iPhone iPhone iPhone Leader Leader Laggard Laggard Laggard Laggard US/EU US/EU US/EU US/EU US/EU US/EU Organic Organic Organic Organic Organic Organic 8.1% 1.0% (0.0) -5.3% -32% 25.30% Narrow Narrow Narrow Narrow Narrow Narrow Past Actual Revenue Growth Recent Past Analyst's Concensus Estimates Near Future Current Next Next Qtr Year Year 20-42% 47-75% 13-27% iPad iPad iPad Leader Leader Laggard US/EU US/EU US/EU Organic Organic Organic 10% 12% Narrow Narrow Narrow Future 3-5 years 15-22% iPad Laggard US/EU Organic 10% Narrow
2007-2008-2009
+35% and +32%
Sales Growth Product Competitors Geographic Organic? Industry Recession Moat?


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Class 202
Class 202
Normal Business?
Rate of growth? 25%+ Consistent & Predictable? YES Product Growth Support? YES Competiveness? LAGGARD Economic resilience? YES
PART C. Industry & Market Summary

Competitors & Peers Leaders & Laggards Economic Moat Economic Recession Resilience
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Class 202
Class 202
Review
1. 2. 3. 4. How do you determine who the competitors are? How do you determine who is leading and who is challenging to lead? What is an economic moat? How do you find if your companys moat is wide or narrow? How do you evaluate recession resilience?
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POLL 3
(Choose all that apply) Industry and market knowledge helps us most understand
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2/7/2011
Class 202
Class 202
Normal Business?
1. 2. 3. 4. 5. Central Tendency Effect Rule of 5 BetterInvesting Guidance Selecting Future Sales Growth Where to Start Growth Projections
PART D. FUTURE SALES GROWTH

Rate of growth? 25%+ Consistent & Predictable? YES Product Growth Support? YES Competiveness? LAGGARD Economic resilience? YES
Time to predict the future!

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Class 202
Class 202
Predicting the Future

Central Tendency Effect
Tend to over-estimate low performance Tendency to under-estimate high performance 1 of 5 (20%) under-perform (miss expectations) 3 of 5 (60%) perform as expected (meet expectations) 1 of 5 (20%) over-perform (exceed expectations)
Selecting Your 5-year BetterInvesting Guidance

Emphasize recent history and trends Should not exceed the norm Should not exceed analysts expectations Should not exceed 20% GUIDANCE is NOT RULES JUDGMENT and COMMON SENSE ALWAYS APPLY!
Rule of 5
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2/7/2011
Class 202
Class 202
Selecting your 5-yr sales growth
Historical & Future Growth

High risk choice = 25%? Normal = 26-32%? Low risk choice = 15%?
Sales Growth 10-year 5-year 3-year 1-year (TTM) Current Quarter Recession History 26.5% 31.9% 33.7% 47.9% 61.3% 25.3%
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Dont exceed the norm
Future (Analysts) n/a 15-21% 15-21% 23-27% 90% Sales Growth 10-year 5-year 3-year 1-year (TTM) Current Quarter Recession
History 26.5% 31.9% 33.7% 47.9% 61.3% 25.3%

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Future (Analysts) n/a 15-21% 15-21% 23-27% 90%
Class 202
Class 202
Dont exceed analysts
Maximum of 20%
Sales Growth 10-year 5-year 3-year 1-year (TTM) Current Quarter Recession
High risk choice = 25% 20%? Normal = 26-32%? Low risk choice = 15%?
Future (Analysts) n/a 15-21% 15-21% 23-27% 90% Sales Growth 10-year 5-year 3-year 1-year (TTM) Current Quarter Recession
History 26.5% 31.9% 33.7% 47.9% 61.3% 25.3%

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History 26.5% 31.9% 33.7% 47.9% 61.3% 25.3%

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2/7/2011
Class 202
Class 202
POLL 4
What will you choose as your estimated 5year SALES growth rate?
Aggressive 20%+ Conservative 15% or less Between 15% to 20%
Sales Growth 10-year 5-year 3-year 1-year (TTM) Current Quarter Recession
Decision Selecting 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
History 26.5% 31.9% 33.7% 47.9% 61.3% 25.3% 55
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Class 202
Class 202
Where to start your projection

End of last year
To ignore recent quarterly results

End of last quarter
To adjust for current quarterly results
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2/7/2011
Class 202
Class 202

End of trend line
To project the norm
Normal Business?
Rate of growth? Consistent & Predictable? Product growth support? Competiveness? Economic resilience?
Estimate Future Sales Growth? CONFIDENCE IN SELECTION?

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Class 202
Class 202
Part D. Future Sales Growth Summary

Central Tendency Effect Rule of 5 BetterInvesting Guidance Selecting Future Sales Growth Where to Start Growth Projections
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Review
1. Explain what increases your confidence in your future sales growth estimate? 2. How do the following impact your future sales growth estimate?
Historic Predictability? Product Line growth rates? Competition? Economic Moat?
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2/7/2011
Class 202
Class 202
POLL 5
(Choose all that apply) BI guidance helps us
1. 2. 3. 4. 5. Make an aggressive prediction Make a conservative prediction Make an informed decision Avoid emotional decisions Learn from the past
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COURSE SUMMARY
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Class 202
Class 202
Course Summary
A. B. C. D. Revenue/Sales Growth Company and Products Industry & Market Future Sales Growth
POLL 6
(Choose all that apply) Do you feel this material will
1. Help you make BETTER revenue predictions? 2. Help you make more CONFIDENT revenue predictions? 3. Help you make more JUSTIFIABLE predications? 4. ELIMINATE emotional decisions?
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2/7/2011

BetterInvesting Stock Curriculum

BetterInvesting Stock Curriculum

A Closer Look at the Top Line

Sales Growth AGENDA

BetterInvesting Volunteer Advisory Board

Presented by the BetterInvesting Volunteer Advisory Board

Presented by the BetterInvesting Volunteer Advisory Board

BetterInvesting Stock Curriculum

BetterInvesting Stock Curriculum

What is normal business?

PART A. REVENUE/SALES GROWTH

Presented by the BetterInvesting Volunteer Advisory Board

BetterInvesting Stock Curriculum

BetterInvesting Stock Curriculum

$10,000 - $7,000 $3,000 - $900 $2,100 1000 $2.10 $0.21

(1000 items at $10 each) (say, $7 per item)

Pre-tax Profit (PTP) - Taxes

Net Profit (i.e., Earnings) Shares Outstanding

Earnings Per Share (EPS) Retained Earnings (90%) $1.89

Presented by the BetterInvesting Volunteer Advisory Board

BetterInvesting Stock Curriculum

BetterInvesting Stock Curriculum

Ideal Sales Growth

Historical Sales Growth

Recent history very stable! Normal?

Presented by the BetterInvesting Volunteer Advisory Board

BetterInvesting Stock Curriculum

BetterInvesting Stock Curriculum

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

Presented by the BetterInvesting Volunteer Advisory Board

Presented by the BetterInvesting Volunteer Advisory Board

BetterInvesting Stock Curriculum

BetterInvesting Stock Curriculum

Part A. Sales Growth Summary

Presented by the BetterInvesting Volunteer Advisory Board

BetterInvesting Stock Curriculum

BetterInvesting Stock Curriculum

1. Lifecycle of a Company 2. Types of Sales Growth 3. Analysts Research

PART B. COMPANY & PRODUCTS

BetterInvesting Stock Curriculum

BetterInvesting Stock Curriculum

Best Investment Opportunity

Presented by the BetterInvesting Volunteer Advisory Board

Presented by the BetterInvesting Volunteer Advisory Board

BetterInvesting Stock Curriculum

BetterInvesting Stock Curriculum

Class 202 29%

Deeper analysis requires a review of sales by product line.

Best Investment Opportunity

Presented by the BetterInvesting Volunteer Advisory Board

Presented by the BetterInvesting Volunteer Advisory Board

BetterInvesting Stock Curriculum

Types of Growth Strategies

BetterInvesting Stock Curriculum

Organic Acquisition & Merger

Sustainable Builds on core competencies

Presented by the BetterInvesting Volunteer Advisory Board

Presented by the BetterInvesting Volunteer Advisory Board

BetterInvesting Stock Curriculum

BetterInvesting Stock Curriculum

Summary of sales growth strategies

Presented by the BetterInvesting Volunteer Advisory Board